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Nigeria vs South Africa

There’s a new leader in Africa, but how do the two economies compare?

Cape Town – On Monday South Africans woke up to a new reality. We are no longer the largest economy on our continent.

This change of fortunes has come about as Nigeria rebased its GDP on Sunday. Essentially this means that it has changed the way its GDP is calculated to better reflect the current levels of output and consumption in different sectors of the economy, even including some areas that had not been considered before.

This should be done every few years. Nigeria has failed to do it since 1990, and that means that the contribution of businesses such as mobile telecommunications have been hugely under-rated, and the entertainment industry was not considered at all.

Nigeria’s newly-calculated GDP came in at $510 billion. This makes it 32.8% larger than South Africa’s GDP of $384 billion.

The change to its GDP also means that Nigeria’s growth rate will change. It will now be slightly lower that the current 7%, probably somewhere around 6%.

No doubt this will put a little dent in our national pride, as South Africans always want to be the best at everything. Being shifted off the top of the pyramid by our west African brethren will leave us feeling a little put out.

But it does also give us an opportunity to consider how our two economies stand in relation to each other. We may now be smaller than Nigeria, but how do we compare in other ways?

Diversification

The economies of South Africa and Nigeria certainly have one thing in common: both rely heavily on commodity exports. But even in this likeness, differences already start to emerge.

In the case of Nigeria, oil comprises more than 95% of its foreign income. For South Africa, commodities make up 65% of exports, but these are quite diversified and not restricted to a single product.

The levels of diversification in the overall economy are also starkly different, as South Africa generates far more through manufacturing, services and consumer products.

“There are few similarities between the South African and Nigerian economies as these countries are at substantially different stages in their economic and institutional development,” says Fatima Vawda, managing director at 27Four Investment Managers. “Nigeria has a long way to go to diversify its economic base.”

But that doesn’t mean that Nigeria relies entirely on its oil and gas fields in the Niger Delta. Nema Ramkhelawan-Bhana from RMB Global Markets says that she was pleasantly surprised by the level of activity in the country’s major cities.

“Within the city centres there is a huge amount of services-related activity driven by consumer demand,” she says. “The growth in ICT is very big for example, and there is quite a lot of diversified activity going on.”

However much of this is still cash-based, and the financial services industry in Nigeria is far from the depth and sophistication one finds in South Africa.

“Most of the population is un-banked,” Vawda says. “So they’re a long way from ATMs and electronic banking.”

Ramkhelawan-Bhana says that Nigeria’s banking industry is however making strides.

“South Africa has set the benchmark in terms of regulation and supervision of the financial services industry,” she says. “But over the last couple of years, the banking sector in Nigeria has come a long way.

“Especially on the part of the central bank they have overhauled regulations, worked to remove graft, and tried to make the sector more accessible to individuals and businesses,” Ramkhelawan-Bhana says. “So although corporate borrowing is low and a far cry from South Africa, it is improving.”

Demographics

A major difference between South Africa and Nigeria is of course the size of the two countries’ populations. South Africa is home to around 52 million people, while Nigeria has a population of over 170 million.

This means that while Nigeria’s GDP is now higher, its GDP per capita is still well below that of South Africa.

The recently published Social Progress Index, which measures the social progress of countries based on 54 wellness indicators, also demonstrates how much better off South Africans are in general. Nigeria placed 123rd out of 132 countries, while South Africa was 69th.

“There is still massive income inequality in Nigeria and many of its human development indicators are still very low in terms of healthcare, education, skills development,” says Ramkhelawan-Bhana. “There is still a lot of work to be done in those basic areas.”

But of course there are two sides to the population story.

“Demographically, Nigeria has a higher proportion of younger people than South Africa and is growing at a higher rate,” Vawda says. “Its population is expected to more than double to 440 million by 2050 while South Africa’s is only forecast to increase by 25% to 65 million. So you’re talking about a hugely populace nation – the India or China of Africa.”

This means that the potential scale for growth in consumer-facing businesses is enormous. And many businesses are looking at Nigeria because of this very opportunity.

“But you do also have to think of the concentration of purchasing power,” Ramkhelawan-Bhana warns. “A large percentage of Nigeria’s population is still living below $2 per day. So you also have to look at income patterns when you look at the potential growth in spending.

“We actually see quite a bit of the same disparities in Nigeria and South Africa,” she adds, “but because of the sheer size of Nigeria’s population, the situation is far graver.” 

Gateway to the continent

South Africa has always been viewed as the logical entry point to the rest of Africa. But how much will this change if the country is no longer the largest economy in the region?

“You can’t discount South Africa, particularly as it provides ease of access to the rest of the continent,” RMB’s Ramkhelawan-Bhana says. “South African businesses have become more adept at doing business in Africa. That human capital and skill is something we can offer.”

So although Nigeria has become a more viable destination, it’s not immediately going to become the preferred destination for everyone setting up businesses.

“People trade in places where it’s easy to trade,” 27Four’s Vawda says. “And if you think of the infrastructure, financial institutions and business environment in Johannesburg, you are talking about a very different place to Lagos.”

She adds that one needs to be aware of the bigger picture in Nigeria, not just a single GDP figure.

“Some of Nigeria’s numbers do look attractive, but they don’t tell the full story,” Vawda says. “The current account surplus, for instance, is almost entirely due to its oil exports.

“And although Nigeria has a lower debt to GDP ratio than South Africa, its credit rating is lower,”Vawda adds. “This is because its tax base is smaller, it is less diversified and its institutional capacities are not as developed.”

So there is unlikely to be a rush for the exits with everyone taking their businesses off to Lagos. But as Investec Asset Management pointed out in a note last week:

“Nigeria’s rebasing of its GDP … may negatively affect perceptions about South Africa’s position on the continent, but it will reflect Africa’s reality far better.

“South Africa was historically the ‘go-to’ country for investment into Africa. However, the reality is that other regions are increasingly asserting their economic voice and this has resulted in several multinational corporations opting to have their Africa base in countries such as Kenya or Nigeria, instead of South Africa.”

And as Ramkhelawan-Bhana suggests, it might be good for South Africans to have a little dose of reality, because there are things we can learn from our counterparts north of the border.

“South Africans can definitely learn from the entrepreneurial spirit Nigerians have,” she says. “They do the best with what they have. It’s very much a market-based economy. People buy to sell to make a living.”

Key economic indicators

 

Nigeria

South Africa

GDP Growth

6.00%

2.50% – 3.00%

GDP Per Capita

* $2 800

* $7 500

CPI

11.50%

5.50%

Trade balance

5.00%

-6.00%

Foreign reserves

$53 billion

$40 billion

Import cover

10 months

5 months

ST interest rate

12.00%

5.00%

Debt:GDP

15.00%

50.00%

Fiscal balance

-2.00%

-4.00%

*circa

Source: 27Four Investment Managers

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