The rally, sparked by increased sales of foreign-exchange forwards and looser capital controls, is contingent on…
Nigeria Set to Lose Africa’s Biggest Economy Crown
In April 2014, Nigeria proudly declared that, as a result of a statistical revision, its economic output in 2013 had hit $509bn, almost twice as high as previously thought. With South Africa’s gross domestic product coming in at just $372bn, Nigeria had taken pole position as Africa’s largest economy. A year later, the gulf had grown wider still, with strong growth propelling Nigeria’s GDP to $568bn, even as South Africa, undermined by weak growth and a falling rand, saw its GDP, in dollar terms, slip to $352bn.
With a fast-growing population of 187m, compared with South Africa’s much more slowly rising 55m, Nigeria looked set for a long reign as the continent’s largest economy.
“With the size of population Nigeria had, the slowing growth in South Africa and the population trends it seemed [South
Africa] had permanently lost its first place,” says Charles Robertson, global chief economist at Renaissance Capital, an investment bank focused on emerging markets.
By 2015, South Africa, for long the region’s dominant industrial power, had slipped to third in the pecking order as Egypt, another country with a much larger and faster-growing population, eased into second. South Africa’s exceptionalism seemed over, as a perhaps more natural order asserted itself but, just two years later, South Africa is widely tipped to once again reclaim top spot: by one measure at least it has already done so. “I’m going to be talking to clients about South Africa being number one this year,” Mr Robertson says.
It is not the case that South Africa has been a glittering success story in recent years, however, just that it has done less badly than its rivals. Beset by political scandals and a reliance on commodity exports, South Africa’s economy contracted in the fourth quarter of 2016, meaning it chiseled out-growth of just 0.3 per cent during the year as a whole. While most analysts expect growth to return during the first quarter, the IMF is pencilling in a full-year return of just 0.8 per cent.
With the rand averaging 15.26 against the dollar last year, 52 per cent weaker than in 2011, the country’s GDP, in dollar terms, fell from a peak of $417bn in 2011 to $280bn last year. However, factoring in the modest growth and 6 per cent inflation forecast by the IMF for this year, and the partial recovery in the rand to 12.95 to the dollar, that figure could rise to $354bn in 2017.
Nigeria has also endured a difficult period since becoming Africa’s top dog, assailed by the jihadis of Boko Haram in the country’s north and militants in its oil-producing south, sabotaging oil production. In conjunction with weaker oil prices, this has led to a shortage of dollars, shredded government finances and a recession, with the economy contracting last year for the first time in 25 years, by 1.5 per cent.
The central bank bowed to the inevitable and devalued the naira from 199 to the dollar to 305 last year. Using this official exchange rate, and factoring in the IMF’s forecasts for tepid GDP growth and 17 per cent inflation this year, Nigeria’s economy will still be larger than that of South Africa, at $410bn, even if that is a far cry from its 2014 peak, as the first chart shows.
However, the official exchange rate is not available to all people and businesses, due to a severe shortage of dollars. Moreover, foreign currency cannot be used at all to import 41 banned categories of goods, totalling 700-800 items, known as the “toothpick ban”.
A truer picture may be given by the black market, or “parallel”, exchange rate that many Nigerians are forced to turn to. This currently has a midpoint of 460 naira to the dollar, according to AbokiFX, which monitors rates at Lagos’ bureaux de change. Based on this exchange rate, Nigeria’s GDP is likely be around $272bn this year, comfortably below that of South Africa, as the second chart, based on calculations by John Ashbourne, Africa economist at Capital Economics, shows. Indeed, using this measure, South Africa regained its crown in the third quarter of 2016, Mr Ashbourne says.
Some argue that this black-market rate understates the true value of the naira, as it is determined by a market with a chronic shortage of dollars and poor liquidity.
One counter-argument, as Mr Robertson points out, is that people said the same about Egypt’s black-market rate. Yet when that country allowed its pound to float freely in November, “the exchange rate blew out to below the black-market rate,” he notes, suggesting such a parallel rate does have validity.
But even if we were to generously grant Nigeria a stronger exchange rate, it might still lose top spot. Last month Nigeria did indeed create a new rate: wealthy Nigerians can now pay foreign school fees and medical expenses at a rate of 366 naira to the dollar.
“It may be that that [rate] is closer to the median and that is a reasonable number,” says Mr Ashbourne.
Using the 366 rate, and feeding in the IMF’s assumptions for this year, Nigeria’s GDP will be $342bn, some $12bn behind South Africa’s. “It really will be very, very close [depending on the exchange rate used],” Mr Ashbourne says. “But Nigeria used to be hugely ahead of South Africa, so the fact that it’s down to being close is a pretty big shift.”
Mr Robertson adds: “Unless oil goes up and therefore the exchange rate, I think it would be hard for [Nigeria] to argue they will be in first place this year”.
He argues that South Africa has regained its mantle “partly because it did not interfere in the exchange rate,” when it was plummeting between 2011 and January 2016.
“They stood back and that helped with the worst pain, and as a result South Africa is already bouncing back because it embraced the free market on the currency. Nigeria is struggling to bounce back because it has not,” says Mr Robertson, who notes that other oil exporters that let their currencies slide, such as Russia and Kazakhstan, are also now on the recovery trail. One legitimate question is how much it really matters that Nigeria, in particular, has seen its GDP in dollars fall sharply, and will seemingly be overtaken by South Africa.
“From an economic perspective it doesn’t really matter that much,” says Mr Ashbourne. “It’s not as if in real terms Nigeria produces a third less than it used to, it’s just that the value in dollars is different. On a day-to-day basis it doesn’t really matter, except for imported goods.”
Nevertheless, he adds: “It’s a status thing. I think it will be seen as a symptom of Nigeria’s decline after a period being this investor darling.”
There is also a belief that Nigeria’s demotion will prove short term, and that the continent’s most populous country will ultimately reclaim its position as its economic kingpin.
“It’s temporary. You can’t escape the demographic trends and the fact that Nigeria should be growing faster than South Africa for years ahead,” Mr Robertson says.
“Over the longer term Nigeria will be the largest economy in Africa. It has so many more people and it’s difficult to imagine that growth in real terms will be higher in South Africa over a long period of time,” adds Mr Ashbourne.
“Its growth potential is so much higher because of lower incomes and it doesn’t have some of the structural problems that South Africa has.”