Larger, More Diversified Economy To Continue Robust Growth

  • Nigeria's economy was the world's 24th largest economy in 2013 after the results of a recalculation of GDP were announced in early April 2014.

  • The change represents the evolution of Nigeria's economy over recent years with secondary and tertiary industries now contributing a larger share of GDP.

  • The agriculture sector is not only smaller relative to GDP than previously thought but is also growing more slowly suggesting that agricultural reforms have not been as successful as many assumed.

  • Despite being measured from a much higher base, we believe that the economy will continue to expand by around 7.0% per year over the next few years as the contribution of the sluggish oil sector has been taken up by more dynamic industries such as manufacturing and services.

Nigeria officially became Africa's largest economy when the national statistics office released newly-calculated GDP figures on April 6. The figures show that in the new base year of 2010, total output equalled USD358.9bn, a near 60% increase on a previous measure of USD228.4bn. Economic growth since 2010 means that the GDP expanded to reach USD503.8bn in 2013, some 89% greater than the previously reported figure of USD266.2bn and 43.6% larger than the USD350.8bn of output produced by South Africa, Africa's erstwhile largest economy. According to BMI data, the revision made the Nigerian economy the world's 24 th largest economy in 2013, a similar size to Belgium and larger than countries such as Iran, Norway, Thailand and Austria.

A Great Deal Has Changed But Much Has Also Stayed The Same

Moving Up The Rankings
GDP Of Global Economies, USDbn
  • Nigeria's economy was the world's 24th largest economy in 2013 after the results of a recalculation of GDP were announced in early April 2014.

  • The change represents the evolution of Nigeria's economy over recent years with secondary and tertiary industries now contributing a larger share of GDP.

  • The agriculture sector is not only smaller relative to GDP than previously thought but is also growing more slowly suggesting that agricultural reforms have not been as successful as many assumed.

  • Despite being measured from a much higher base, we believe that the economy will continue to expand by around 7.0% per year over the next few years as the contribution of the sluggish oil sector has been taken up by more dynamic industries such as manufacturing and services.

Nigeria officially became Africa's largest economy when the national statistics office released newly-calculated GDP figures on April 6. The figures show that in the new base year of 2010, total output equalled USD358.9bn, a near 60% increase on a previous measure of USD228.4bn. Economic growth since 2010 means that the GDP expanded to reach USD503.8bn in 2013, some 89% greater than the previously reported figure of USD266.2bn and 43.6% larger than the USD350.8bn of output produced by South Africa, Africa's erstwhile largest economy. According to BMI data, the revision made the Nigerian economy the world's 24 th largest economy in 2013, a similar size to Belgium and larger than countries such as Iran, Norway, Thailand and Austria.

Moving Up The Rankings
GDP Of Global Economies, USDbn

A Great Deal Has Changed But Much Has Also Stayed The Same

The recalculation of Nigeria's GDP has garnered a lot of attention from media across the globe and, for many reasons, rightly so. However, we believe that several points of clarification are warranted amid the hoo-ha. Firstly and perhaps most obviously, Nigeria's economy has not abruptly surged in size thanks to a sudden economic boom. What has changed is the method by which the authorities count and present economic data. This method incorporates informal and newly-formed industries that were not previously included in the national accounts as discussed below. The new data represent the evolution of the structure and size of the economy over time rather than a sudden surge in economic activity. In other words, in practical terms not much on-the-ground has changed, the data simply now reflect that on-the-ground situation more accurately.

Nigeria - Key Economic Metrics In 2013, % of GDP Unless Otherwise Stated
New GDP data Old GDP data
GDP per capita, USD 2,984 1,611
Domestic debt 8.9 16.4
External debt 1.7 3.2
Total debt 10.6 19.6
Current account 4.0 7.5
Fiscal revenue* 15.0 25.9
Source: Central Bank of Nigeria, National Bureau of Statistics, BMI. *2012 revenue figures.

This issue is perhaps best exemplified by the GDP per capita measure. As the table above shows, the revision has almost doubled GDP per capita to USD2,984 from USD1,611 previously. This does not mean that every Nigerian has suddenly got richer. It only serves to highlight that inequality is more acute than the old data suggest. The segmentation of the consumer market between a large pool of low-income consumers and a small pool of luxury goods consumers remains unchanged as a result of the adjustment.

There are other notable changes: the country has a lower debt load as a percentage of GDP although we note that a 19.6% debt-to-GDP ratio was hardly alarming before the revision. The current account balance is also smaller as a percentage of GDP than previously estimated, but so is the proportion of GDP that is being lost to capital flight (see 'Capital Flight Placing Pressure On The External Accounts' from April 4). Perhaps more worryingly, the amount of tax that the Nigerian government collects has fallen from 26% of GDP to just 15% (2012 data) indicating the challenges the authorities are facing at a time when spending pressures are building with the approach of elections.

Services And Manufacturing To The Fore

A breakdown of the headline GDP figure shows that the structure of the Nigerian economy has altered dramatically over time with secondary and tertiary industries playing a far greater part in economic output than the old figures suggest.

Primary Sectors No Longer Dominant
Nigeria - Composition of GDP In 2010 (LHS) & 2013 (RHS), %

According to those figures, which used a base year of 1990, the oil industry made up around a third of output in 2013 and over 40% in 2010. The new figures show that hydrocarbons only contributed 14.4% to GDP in 2013, down from 15.5% in 2010. A similar dynamic can be seen for agriculture: according to the old data, farming's contribution increased from 30.3% in 2010 to 34.7% in 2013. However the new figures show that it actually decreased from 24.0% to 22.0% over that time period.

Resources Losing Sway
Nigeria - Contribution of Agriculture & Oil Sector To Nominal GDP, %

The new data show that manufacturing is a far more important industry than the old numbers indicated. According to those old figures, manufacturing's share of GDP remained stagnant at 1.9% between 2010 and 2013 when in fact this increased from 6.6% to 6.8% over that period. The telecoms industry has also seen its importance affirmed by the new data. Rather than making up less than 1.0% of GDP, the sector contributed around 9.0% in each year between 2010 and 2013. Most of the rest of the increase in output has come from other services such as real estate, finance and insurance and professional services.

Manufacturing And Telecoms On The Rise
Nigeria - Contribution of Manufacturing & Telecoms To Nominal GDP, %

The new official statistics do not yet include a breakdown of GDP by expenditure but we assume that when they are made available, the figures will show a greater share for private consumption and investment. This is evident not only by the fact that sectors such as manufacturing, construction and telecoms - all associated with investment and consumption - are far more important than previously assumed, but also by a process of elimination. Balance of payments and budget data suggest that net exports and government consumption are likely to have seen their shares of the newly-rebased economy decline, leaving only private consumption and investment. The latest full-year old data suggest that private consumption made up 47.0% of nominal GDP in 2012 while investment contributed a paltry 8.2%. Our back-of-the-envelope calculations lead us to believe these are likely closer to 70% and 20% respectively.

Economic Engine Running On Different Fuel

The new data also show some interesting trends in real GDP and sector-specific growth. Despite the economy being much larger than previously assumed, growth has remained high over the years for which new data are available. The economy expanded by 5.1%, 6.7% and 7.4% in 2011, 2012 and 2013 respectively compared to respective old-data figures of 7.4%, 6.6% and 6.9%.

Although the headline growth rate has remained similar to that implied by the previous figures, the drivers of this growth are slightly different according to the new figures. Most notable is the contribution of agriculture, which is not only smaller as a proportion of total GDP but has also been growing more slowly than formerly indicated. This means that the sector has been contributing far less to headline growth than previously believed. It also seems to suggest that agriculture reforms carried out by Agriculture Minister Akinwumi Adesina have not been as effective as many (including ourselves) had assumed them to be.

Sector Growth: Oil Sector Volatile, Agriculture Lethargic
Nigeria - Real Growth Rates Of Agriculture (LHS) And Oil Sectors (RHS), % y-o-y

Also notable is the fact that the new data show that the oil sector has not been as stagnant as the old data suggested. Indeed, oil sector growth was previously shown to be hovering around 0% over the last three years. However the new data illustrate that the sector expanded by 3.4% in 2011 before contracting by 2.3% in 2012 and then rebounding by 5.2% in 2013. These are more in line with production figures published by BMI's Oil and Gas team, which are compiled from a range of national and international sources. The only exception is in 2013: production data used by our Oil and Gas team suggest that oil sector growth was probably lower than the new GDP figures imply. We therefore expect the GDP oil sector figure to be revised downward in the future.

Manufacturing Surging, Telecoms Robust
Nigeria - Real Growth Rates Of Manufacturing (LHS) And Telecoms (RHS) Sectors, % y-o-y

Although the growth rate of the telecoms sector is lower according to the new data, its larger size means that its weighted contribution to headline expansion is likely to have remained relatively steady. Manufacturing on the other hand is larger and has seen its growth rate increase in the new figures meaning that the sector has made a far greater contribution to headline real GDP expansion than was previously assumed.

Growth To Remain Robust

Given that the size of the economy has been so substantially increased, it might be assumed that long-term economic growth should be downgraded due to base effects. However, at this stage we have decided to leave our growth forecasts unchanged, for several reasons. For one thing, growth rates since 2010 have remained close to those that were reported prior to the recalculation, indicating that the economy is capable of expanding at robust rates.

Growth Foreacasts Remain Around 7%
Nigeria - Real GDP Growth, % y-o-y

Furthermore, the changed structure of the economy bodes well for GDP expansion. Our Oil and Gas team have, for some time, forecast stagnant oil production over the years ahead and this has always been factored into our headline growth forecasts. With oil now making up a smaller share of the economy, the drag that the sluggishness of the sector will place on headline economic expansion will be lower than previously anticipated. Indeed, oil's share of the economy has been taken up by more dynamic sectors such as telecoms, manufacturing and services, which we believe will grow far more robustly than oil. Our optimism for these sectors, manufacturing in particular, is underpinned, among other things, by a belief that productivity will improve with ongoing power sector reforms.

Finally, although both the size and recent growth rates of agriculture have been downgraded in the recent data, we believe that reforms, which include tax breaks for farming equipment purchases and the improvement of a fertiliser subsidy program, will see the sector, which remains the largest, eventually begin to grow more quickly.

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This article is tagged to:
Sector: Country Risk
Geography: Nigeria
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