South Africa released its Gross Domestic Product (GDP) for the fourth quarter of 2018 on Tuesday, March 5, 2019, with figures showing it has overtaken Nigeria as Africa’s biggest economy in actual dollar terms.
A report by Renaissance Capital, a leading emerging and frontier markets investment bank, showed that South African economy grew to US$368 billion in 2018 in GDP terms compared to Nigeria’s US$357 billion, using the N362 per dollar Nigerian Autonomous Foreign Exchange Fixing (NAFEX) window.
“The market average from January 1 to December 13, 2018, as per Bloomberg – which is ZAR13.2/$ (13.2497/$ if you want to be unnecessarily accurate). So ZAR4871.784bn (up 220bn from the previous year) divided by 13.2497 = $367.69bn,” Charlie Robertson, Rencap’s global chief economist and one of the writers of the report, explained regarding the calculations.
Nigeria’s economy, which is tied to crude oil price, grew sluggishly in 2018. This was despite a higher oil price of $70 per barrel as against the all-year highest of about $52.51 per barrel in 2017, figures by OPEC show.
Nigeria emerged from its first recession in 25 years, largely caused by low oil prices and militant attacks on energy facilities, in the second quarter of 2017. The nation’s GDP grew by 1.93 percent for the full year 2018, compared to its 0.82 percent in rate in 2017, data by the National Bureau of Statistics (NBS) show.
The figure aligns with the projection of the World Bank Group and International Monetary Fund, which had projected that Nigeria’s economy will grow by 1.9 percent in the review year.
According to the report, the 2018 fourth quarter GDP grew by 2.38 percent as against the 1.81 percent recorded in the third quarter. The figure is 1.6 percentage points less than the 3.0 percent projected by the Federal Government in the 2019-2021 medium-term expenditure framework and fiscal strategy paper (MTEF).
Going by the IMF estimate using the mixture of official and NAFEX exchange rate windows, Nigeria’s GDP stood at US$397 billion in 2018.
“This is complicated in Nigeria’s case because what exchange rate do you use? The 306.9 rate on the CBN website or the NAFEX rate? Or a mix of the two? IMF has chosen a mix of the two for 2018 giving $397bn – we chose the NAFEX rate giving $357bn. We prefer the market rate because otherwise governments could all decide to make up any rate they like and say that is the ‘right rate’. South Africa could introduce a new exchange rate of ZAR10/$ and say its GDP is $470bn. It is the market rate which is most realistic,” Robertson said.
“With some rapid reforms, a better value currency, accelerating growth – Nigeria could become an overweight again,” he said.
Nigeria makes too little from mineral resources to have this option. The analysts estimate the average Nigerian (children included) makes just over $0.30 per day from oil revenues, which accounts for over 90 percent of exports. The 2 million bpd is sold at $65/bl, worth $130m, to be divided between 197m people, giving $0.65 a day.
“But if we assume half of this is accounted for by costs (exploration, investment in pipelines and rigs, and labour), this leaves just $0.33 a day per person,” Rencap analysts said.
But Rafiq Raji, chief economist at Macroafricaintel, said it is the quality of growth that matters more.
“South Africa is undoubtedly the more advanced economy. However, both leading African giants have been growing far below potential lately,” Raji said.
“In any case, it is not something to celebrate when Nigeria surpasses South Africa in economic output. We should only celebrate when we equal or surpass it in the other metrics that matter, like infrastructure, rule of law, power supply and so on,” he said.
Nigeria collects very little in the way of other government revenues. As a consequence, it has little to spend, and most of that is accounted for by recurrent spending (e.g., wages) rather than investment.
In fact, rather than do all it can to lift investment, all governments in recent times have done the reverse by supporting a fuel subsidy which supports consumption. IMF estimated the implicit fuel subsidy would cost N633bn ($2bn) in 2018 and N597bn in 2019 (0.4 percent of GDP).
The Russia-headquartered investment bank outlined the 2019-23 outlook for Nigeria as it tries to regain the top spot.
For Nigeria to get real per capita GDP growth up to 4-6 percent (i.e., headline GDP growth of 7-9 percent) requires either a doubling of the oil price, or industrialisation. Without it, per capita GDP growth may be around zero percent which implies headline GDP rising at roughly 3 percent annually.
To achieve industrialisation, Nigeria needs to raise the adult literacy rate from 60 percent to 70-80 percent, which the analysts at Rencap think can happen from 2024 onwards. An adult literacy campaign could accelerate this, copying what the super-poor, war-torn state of South Korea did in the 1950s.
Nigeria needs to treble electricity consumption, which is assumed requires at least a doubling of the electricity tariff. Buhari’s team has not forced through any of the annual increases due since 2016. As a result, Nigeria has three times more installed generating capacity than actual distribution.
“We are too glib to suggest it is just about the electricity price – but a big hike will surely be part of the solution,” Rencap analysts said.
Also, Nigeria needs to double the investment rate from 13 percent of GDP to 26 percent – or triple it, to match what Ethiopia is doing.
“If we assume inflation of 9 percent more than the US in 2019, and in each subsequent year, then to maintain its value in real terms, the naira needs to be NGN476/$ by end-2019, NGN672/$ by the end of 2023 and so on,” they said.
To put this into context, on average the naira has moved by 6 percent in the Bureau De Change offices since 1995, while the current NAFEX rate has moved by an average 12 percent vs the WDAS/RDAS rate in 1995, hence the rough estimate of 9 percent. If Nigerian inflation actually averages 2 percent annually, the currency could still be NGN437/$ even in 2030, they said.
Nigeria needs to lift its investment rate. The government has limited resources to do this. It may need to consider cuts in the implicit fuel subsidy, while also lifting taxes to reduce medium-term debt sustainability risks. This leaves a dependence on foreign investors, but FDI inflows have slumped to the lowest level in a decade. After some high-profile clashes with MTN and others, foreign investors will need wooing. Domestic investment is likely to remain low until interest rates come down.
“We think the currency is now around 20 percent overvalued,” said Rencap analyst.
GDP is generally measured in a country’s own currency, but for comparing different countries’ economies, one must convert to a common measure (in this case the US dollars).
The concept of Purchasing Power Parity (PPP) was therefore used in this analysis and the aggregate GDP of both Nigeria and South Africa were converted to US dollars using their various exchange rates in 2018.
Figures compiled from Stat SA showed that South Africa’s economy grew at 0.8 percent in 2018, slightly beating estimates. Economists and analysts expected the country’s GDP figures to be around 0.6 percent and 0.7 percent.
Following a technical recession in 2018, most forecasts were revised down from the 1.2 percent-1.5 percent range, as the economic realities set in despite upbeat talk around political change in the country.
According to the Stat SA, the country’s nominal GDP at market prices in 2018 was R4.9 trillion, which is R220 billion more than in 2017.
Using N360/$ to divide Nigeria’s aggregate GDP at N127.76 trillion, as compiled from NBS figures, the country’s GDP size stood at $354.91 billion. This is $16.3 billion less than South Africa’s GDP size at $371.21. When the same calculation was done using N362/$ and N365/$ to divide Nigeria’s aggregate GDP, it was less than South Africa’s with $18.27 billion and $21.8 billion, respectively.
If the CBN official rate of N306/$ is used (which virtually no one has access to), Nigeria’s economy is larger than South Africa’s, but using the market rate which is different across various change rate window, South Africa is bigger.
•Sourced from a Businessday report