Improved clarity from GDP rebasing holds promises

Proshare

Friday, March 07, 2014 14:46 PM / ARM Research

We turn our attention to the next section of the Nigeria Strategy report which is focused on broad based Economic Review and Outlook. Today’s piece reviews output growth in 2013 and outlook for same in 2014. In addition, we provide key insights into the likely outcomes and impact of the planned GDP rebasing exercise, taking a cue from the Ghanaian experience.

 

GDP growth rebounds on agriculture

In 2013, GDP growth recovered from the tame readings in 2012 driven by an uptick in agriculture amidst the continued weak trend in oil GDP. After a 38bps QoQ slump in Q2 to 6.18%, the NBS reports that headline GDP recovered in Q3 13, rising 63bps QoQ to 6.81% (+33bps YoY).

 

The rebound in overall GDP owes much to the recovery in non-oil GDP with its Q3 reading 40bps higher than in 2012 at 7.95% (+60bps QoQ). Growth in the latter was led by agriculture which recorded its fastest growth in 7 quarters with the NBS reporting YoY growth of 5.1%. Coming after a period of declining growth and contribution, agriculture’s renaissance reflects both a recovery from the flood-laden base of 2012 as well as crystallization of initiatives by the FMARD to increase agricultural productivity. FEWSNET reports that preliminary estimates of a multi-agency field assessment show that 2013 national cereal and tuber production was 20% and 14% higher YoY at 24.4million MT and 91million MT respectively. These agencies cite greater accessibility of agricultural inputs on account of improvements in the supply chain as the reason for the gains in food production.

 

Oil GDP extended its contractionary trend for the fourth consecutive quarter with a sharp decline in Q2 13  (-1.2% YoY) on account of several force majeure across the Bonny, Brass and Qua Iboe streams which resulted in average oil production plunging to its lowest levels since 2009 at 2.11mbpd.  The re-opening of these platforms following repairs supported an increase in production to 2.29mbpd in Q3 and helped narrow oil GDP contraction (-0.53% YoY).



Elsewhere, Telecommunications GDP growth continued to decelerate with the NBS reporting a 24.6% YoY growth--~7pps slower than in Q3 12, extending the softening growth trend thus far in 2013 as mobile penetration saturates. Similarly, Wholesale and Retail trade growth extended the pattern of softening growth in Q2 by growing 7.06%--its lowest since 2003—before rebounding to 9.6% in Q3 13, in part, reflecting the improving food supply given its linkages to Agriculture and the relatively lower security related disruptions over the period.

 

Overall, the emerging growth picture continues to reflect how structural changes to agriculture and services have continued to reduce the role of the oil sector in real GDP growth. These changes appear to be driven by reform initiatives around improving access to farm inputs and expanding domestic production of key components of the consumption value chain. In particular, the several backward integration plans across sugar, rice, cassava, fish etc as well as efforts to provide low cost financing are initiatives that must be preserved if the trend of jobless growth that has plagued Nigeria in recent years is to end. Although the NBS is yet to release Q4 13 GDP report, preliminary estimates provided to the CBN indicate that the economy expanded by 7.67% which indicates the 2013 mean GDP growth rate ~30bps higher than 2012 at ~6.8%. 

 


We expect agriculture GDP to continue to be the main driver of non-oil GDP at least until the release of the new rebased GDP series. These expectations are premised on continued progress on initiatives by the agricultural ministry to increase access to inputs, expand grain storage, dry season farming among others to sustain the momentum in agriculture GDP; aided by several backward integration plans already enumerated.

 

Although the Q313 readings indicated an 8% QoQ rise in oil production to 2.29mbpd, outlook for 2014 remains less upbeat as the inability of the Ministry of Petroleum Resources to hold a licensing bid round to expand reserves (despite its oft stated intentions) constricts sector growth to the on-streaming of deepwater projects from the last bid round. Adding to our caution about improvements in oil GDP is the idling of the PIB in the parliament even as there appears to be an indiscernible policy response to sustained illegal bunkering as the 2015 elections approach. The latter concern is put in relief by loading schedules for Q4 13which were 7% lower YoY (2013 average: 8%).

 

In contrast, we expect the looming 2015 elections and associated increased political spending to result in some pick-up in trading activity. Furthermore, as security conditions appear to have improved relative to the pre-state of emergency period, trade GDP should improve on account of its linkages to the rebounding agricultural sector. We forecast GDP growth at 7.0-7.5% (using the old series) as improvements on burgeoning non-oil GDP via agriculture and trade should sustain the recovery momentum.

Rebasing to reveal snapshot of evolving economic structure

The NBS postponed the planned release of the preliminary estimates of the GDP rebasing for the umpteenth time with the results now expected in March 2014. Ahead of the planned release, we attempted to uncover possible pointers as to the potential changes in growth drivers going forward.

 

This is important in the light of the several paradoxes that could emerge with a distant base year. For instance, while crude oil has seen its share of real GDP decline 24pps to ~14% (2012) in the over two decades since 1990, it remains the largest segment of the economy in nominal terms due to the significant increase in oil prices since. This significant price effect means that the weight of such a sector is understated in real terms, and, in this particular instance, does not capture the economic reality that a significant segment of the economy remains crude oil ‘lubricated’. 

 

The second aspect of the rebasing—reweighting—captures a similar effect and is perhaps best understood in the context of a documented inverse relationship between sectoral volume growth and price changes in rebasing literaturewhere those segments of an economy that have experienced faster ‘real’ growth have been shown to be those whose prices have changed slowest. Thus, an older weight, again, may be incompatible with current economic reality especially if significant expansion has occurred in that sector over time—Telecommunications would be a good example here. These inconsistencies illustrates a limitation with focusing on real GDP growth rates when the base year for both prices and volumes becomes far removed from the present—the rate of growth is likely to be over/under stated. Before proceeding to decompose potential sectoral impact on the Nigerian economy, we explore cues from other climes.




Ghana’s experience provides pointers

The Ghanaian rebasing experience which resulted in a 60% increase in its GDP involved the adjustment of volume weights of the economy from 1993 to 2006. Although, Ghana and Nigeria do not appear to share many features, as with most African economies they remain broadly similar: they are major commodity producers – Gold and Cocoa (and recently oil) for the former vs. Oil for the latter. Similarly, as with Nigeria, agriculture is the dominant sector accounting for ~37% of Ghanaian GDP prior to rebasing (Nigeria: 40%). However, post-rebasing, the services sector emerged as the largest with ~49% of GDP ~15pps higher than previously estimated with an increased role particularly for Trade/Repair of vehicles, household goods; Hotels and restaurants; Transport/storage and ICT.


 

Bringing it home

In a trend similar to Ghana, the services component of Nigeria’s GDP has expanded fastest since 1999 (7pps to 20% in 2012) closely followed by Wholesale and Retail trade (8pps to 20%) and agriculture (3pps to 39%) whilst crude oil contracted 17pps to 14%. These changes largely materialized on structural reforms across sectors such as liberalization in telecoms, consolidation in finance, amongst others, all resulting in increased investment flows into these sectors, crystallizing in growth. The slowdown in crude oil, on the other hand, largely reflects lack of progress in expanding production and reserves as no oil mining or production licenses have been granted since 2008.

 

The liberalization of the telecommunications sector resulted in an expansion in telecoms providers from the sole state monopoly NITEL, which existed prior to 2000, to four sizable private GSM providers and several other smaller players. This has resulted in a significant improvement in tele-density from <1% in 2001 to 81% in 2012 (NCC) in addition to driving down cost of communication and enabling the development of the adjacent ICT sector. Consequently, sector GDP growth rose from 4% on average in the decade prior to 2000, to 34% on average in the period between 2001-2012—and has driven communications GDP from less than 1% of services GDP in 1999 to 37% in 2012. However, the real point is that its impact in terms of contribution might be even bigger if the base year had been updated.

 

 In the financial sector, the two phases of banking sector reforms: the 2004 capitalization and the reforms post the 2009 NPL saga resulted in higher financial intermediation with CPS-to-GDP rising 28pps between 2000 and 2012 to 36%. In addition, this supported the development and expansion of financial markets with bond and equity markets with Nigeria now recognized as a leading frontier market. Finance GDP growth has expanded 1pps from its mean over the 1990s to 5% obtained on average over 2000-2012. By extension, the improvements in finance amidst gradual improvements in property rights regime, following the return to democracy, have supported similar expansions in real estate, building and construction and hospitality sectors. However, as with Telecoms, the real issue is what might have been if the base year were closer to current realities.

 

Overall, the reforms since 1999 have allowed the possibility of greater investment into the non-oil sectors of the economy from private domestic and/or foreign capital resulting in exponential productivity gains given the generally deficient state of these sectors.  Thus, the ‘real state of affairs’ in these sectors given the substantial structural growth is less likely to have been reflected in the current GDP. Hence, as in Ghana, the rebasing exercise is likely to uncover the extent to which these reforms have underpinned the substantial growth recorded across these sectors with Services likely to benefit the most. At least, more so than for manufacturing which, though much expanded from 1999 levels, has witnessed slower growth than in services due to the slack pace of reforms in the ancillary power and transport sectors. Nonetheless, improvements in the cement sub-component which has seen Nigeria become a net-exporter of cement are likely to drive mild improvements in manufacturing GDP in the rebased series. However, although agriculture has also experienced some expansion from 1999, we see its significant weight in the current series as likely to curtail any possible re-basing gains similar to Ghana.




Overall, we expect the rebased series to show a significantly larger services sector as in our H2 13 report which we estimate will account for ~30% of GDP driven by the much bigger weight for telecommunications and financial services.




Broadly favourable economic metrics to drive attraction to naira assets

Against this backdrop, it is easy to see why the NBS drive is not just for aesthetic purposes but rather a long-overdue accounting for the changes in the Nigerian economy—an updating that is a regular, often five-yearly feature  in other economies. The clarity obtained about Nigeria’s economy on account of the rebasing exercise should drive a re-appraisal among domestic and foreign investors about trends in certain sectors especially those with less visibility than oil—even as triggers to unlock value within them in the shape of reform initiatives are quite evident. For instance, in a tack similar to the telecommunications reform, the recent power sector reforms that has seen the unbundling of the state PHCN monopoly and the construction of several NIPPs is likely to be viewed as positive for domestic manufacturing. Another dimension is the ongoing capital projects around rail transportation that could prove pivotal to future trade GDP growth.

More broadly, the increased nominal GDP which could see Nigeria become Africa’s largest economy should enhance international visibility, perhaps lending more credibility to already concluded improvements in equity and bond markets and further improving liquidity. In light of recent hype about newly-emerging MINT countries, on one hand, and capital inflow challenges facing the broad EM/Frontier space, the timing of the rebasing appears to be quite auspicious. For debt markets, in particular, the broadly favourable debt and fiscal metrics that will likely occur post rebasing provide scope for further index listings and, possibly, investment ratings upgrades which should prove positive for FPI sentiment to naira debt. 


We estimate that the GDP redenomination could result in ~5-7pps contraction in debt to GDP ratios from ~20% with the higher denominator also possibly driving moderations in fiscal deficit to GDP ratio to < 2% well below the statutory 3% limit. These improvements could provide greater impetus for the FGN to undertake its touted plan to lower debt service costs by increasing foreign borrowings which greatly raises the scope for further Eurobonds issuances over the medium term. Overall, the improved visibility and higher supply of debt should result in an increase in the depth and breadth of the domestic bond market.


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