The Economics of Rebasing – Implications for Nigeria’s Investment Case


Tuesday, August 26, 2014 1:23 PM / ARM Research


We turn our attention to the next section of our core strategy document – Nigeria Strategy report which is examines trends across domestic macro-economic variables. Today’s piece reviews the outcome of the GDP rebasing exercise, its implications for the Nigerian investment case and outlook for output growth over the rest of 2014.


Nigeria Strategy Report H2 2014 Excerpts - Rebasing unveils Africa’s largest economy

NBS released estimates of the rebasing/re-benchmarking exercise which conveyed nominal GDP for the new base year (2010) rose 61% from previous—in line with our projections—to N54.6trillion ($363billion). The revisions to output numbers show a deceleration in growth rates with rebased 2011 and 2012 figures on average 240bps lower than previous at 5.3% and 4.2% respectively. At 5.5% YoY, 2013 GDP growth implies nominal GDP at N80.1trillion (($510billion) which places the Nigerian economy as the 24th largest in the world and 3.4 times the joint economy of the other ECOWAS countries The output adjustments  also unveil significant changes to the economic structure with higher weight to sectors most favoured by Nigeria’s demographics but also those more impacted by reform initiatives embarked upon since 1999 as against marked tilt in favour of natural resources under the old series.  

In contrast to the paradox that existed under the old series where nominal and real GDP pointed to different sectors, the rebased series both confirm Services of  the economy at ~36% vs. 20% under the old series. The sizable expansion in Services, which we anticipated on account of various reform initiatives across Telecommunications and Real estate over the past decade, resulted in Services GDP accounting for 75% of the jump in the base year. Using an attribution analysis, Services contributed 45pps to the 61% rise in base year GDP—driven largely by ICT (Telecommunications, motion picture, publishing and broadcasting). This development provides evidence of the success of reform initiatives that allowed greater private investment into the telecommunications sector, resulting in exponential growth in tele-density. Real estate, public services, professional scientific and technical services and finance also worked to bolster Services GDP reflecting modest improvements in legal rights, financing and government regulation.

In other sectors, Manufacturing GDP share accounted for 14% of the rise in base year GDP (9pps) largely reflecting issues with weak infrastructure and financing. On this front, despite the entrenchment of vast protective barriers across most industries and a large populace,  inadequate investment in energy and transport infrastructure have resulted in less competitive domestic manufacturing. Exacerbating the problem is the generally high domestic interest rate environment and absence of longer tenured financing options due to weak financial intermediation which tilts the scale more markedly towards trading companies as opposed to manufacturing concerns. Thus, it was unsurprising that Trade GDP accounted for 21% of the rebase gains reflecting rapid expansion in retail trade infrastructure and logistics. 

In the same vein, Agriculture accounting for just over a tenth of the overall rebase ‘jump’ is in line with general perception that sizable weight of the former growth ‘powerhouse’ in the old series would limit scope for sizable gains post-rebasing. Lastly, the inability of the Ministry of Petroleum Resources to hold OML auctions since 2007, which would have expanded reserves and production, appears to explain why our attribution analysis traced a negative contribution (18pps) to oil GDP. In this light, the implications of continued delays in PIB passage, which still clouds medium to long term outlook for oil production, are easy to see. Overall, the rebasing exercise, which was notably supported by the IMF, World Bank and AfDB, reveals an economy that is effectively non-oil driven given the sizable investments inflows into other sectors of the economy in the last decade-and-a-half.

GDP growth rebounds in Q1 2014
In its first quarterly release post rebasing, NBS reports that headline GDP grew 6.2% in Q1 14 tracking 180bps higher than rebased Q1 13 numbers (Q4 13: 6.8%). This upswing partly reflects sustained strength in non-oil GDP which rose 8.2% (+80bps YoY) and a slower YoY contraction (-6.6%) in oil GDP relative to Q1 13 (-11.4%). The weak trend in oil GDP continues to reflect disruptions to oil exports with the NBS reporting mean production of 2.26mbpd vs. 2.29mbpd in Q1 2013. Improvement in non-oil GDP reflect the new dynamics post-rebasing with Services GDP rising 7.6%--70bps higher YoY driven by gains in telecommunications (+230bps YoY) and financial services (+40bps YoY). In contrast to muted contribution to rebasing, Manufacturing GDP rose 14.9% YoY which amounts to ~25% of increase in overall headline GDP growth. Gains here reflect improvement in heavy weighted sub-sectors: cement, beverage, food and tobacco (BFT) and textile, apparel and footwear (TAF) which cumulatively contributed 11pps to expansion in Manufacturing GDP. Further parsing other non-oil GDP components reveals equal contribution of 1.1pps from both Trade and Agriculture which respectively grew 6.3% and 5.5%. Overall, growth remains anchored on robust non-oil GDP led by services with oil GDP maintaining its negative trend on account of sustained oil theft.

In all, fundamental changes from the rebasing exercise underscore its importance as more than just aesthetics. The new numbers indicate a transformation of the Nigerian economy from being primary output driven—Agriculture and crude oil—to a Services oriented one and provide enough scope for a re-assessment of the economy from a policy and investment viewpoint given the resulting changes to various macroeconomic indicators.

Improved clarity to embolden recent reform thrusts

In as much as the sizable expansion in output reflects the broad impact of reform progress, the revisions equally showcase shortcomings from a policy standpoint across several fronts which recent initiatives suggest awareness by policymakers. 

On a quantitative note, the rebased GDP numbers trigger an instant improvement in fiscal indicators with total debt to GDP ratio and fiscal deficit to GDP contracting 8pps and 1ppt to 11% and 1.4%. In particular, the contraction in external debt-to-GDP post-revision dovetails into DMO’s 2013-2017 debt strategy for FGN to increase its foreign borrowing component from under 20% currently to 40% further dimming outlook for local paper issuance. The compression in both broader metrics should also sit favourably with credit rating agencies. Nonetheless, the higher GDP denominator reveals a fairly small government revenue base with fiscal revenues to GDP 11pps lower than previous at 8%. Perhaps more worrisome is the 4pps contraction in tax revenues to GDP to ~3% of GDP which aside highlighting continued over-exposure to negative oil price shocks points to institutional weakness in tax collection. On this front, recent FGN initiatives such as the engagement of McKinsey suggests the GDP numbers will strengthen policy thrusts around closing leakages in the tax collection process and driving greater inclusion of the informal economy.

On the monetary policy front, the rebasing saw 13pps and 24pps decline in financial deepening indicators like M2/GDP and CPS/GDP ratios to 20.9% and 11.9% respectively which compare less favourably with EM peers. The evidently lower engagement with the real economy further entrenches the dynamic that domestic capital mobilization by financial intermediaries remains largely fixated on risk-free government assets, highlighting the broken monetary policy transmission mechanism. Coinciding with the CBN’s thrust to pivot the banking system towards the real sector amid plans to lower FGN fixed income issuance, the larger GDP base and implied greater absorptive capacity of the economy remove one more excuse for weak financial intermediation. To the point, amid a structurally benign inflation outlook, receding liquidity fears and dovish forward guidance by the new apex bank helmsman regulatory policies should thrust more pointedly towards acceleration in credit growth over the medium term.

Poor integration with the economy is also reflected on the market front where the 9pps reduction in market capitalization to GDP to 13% post rebasing highlights the narrow nature of NSEASI without taking anything away from recent SEC and NSE initiatives. Nonetheless, it highlights the need to double down on market initiatives aimed at driving greater inclusion of economic segments while simultaneously improving liquidity and fostering best practices.

On more qualitative footing, the GDP revisions reveal a deviation from conventional structural growth theories that posit any nation’s emerging output structure evolves from a primary extractive-based economy to an industrial one and on to services dominant economy. The ‘skip’ in Nigeria’s case largely reflects capital/resource allocation problems and sizable infrastructure deficit in the broader economy which essentially cuts out the labour intensive secondary stage, the leapfrogging of which helps explain the paradox of rising unemployment rates and robust GDP growth reported between 2000 and 2010 (average: 9%). This jump is not without side-effects. Whilst the rebasing exercise showcases a larger economy, the ‘skip’ of the infrastructure-developing and manpower-skills-enhancing phase questions the sustainability of economic growth in the long run. Thus, as with the quantitative issues, the rebasing exercise highlights the need for a more co-ordinated approach to economic reforms between Nigeria’s economic managers to rectify this deficiency.

In addition to the likely policy ramifications on the domestic front, investors’ attention will also likely be focused on possible changes to investment perceptions for Nigeria in relation to the upstaging of South Africa, which historically received more than half of portfolio flows into Africa. More so as the release of the rebasing estimates coincided with adverse sentiment about South Africa’s economy due to continued labour unrest around its mining industry, currency weakness and political infighting within the ruling ANC. Nonetheless, as with the actual rebasing itself, we believe the follow up debate on implications for preferred investment destination is not a foregone conclusion.

Preferred investment destination status cannot be hinged only on size
Whilst immediate investor attention following the rebasing focused on Nigeria’s toppling of South Africa, a reassessment of the investment outlook for both countries inevitably involves growth sustainability.  On this front, at 7.1% in 2014 (World Bank estimates), Nigeria’s potential GDP (a proxy for trend macroeconomic growth) is 430bps higher than South Africa’s. This higher trend GDP growth combined with sizably larger GDP suggests more investment opportunities lie in Nigeria relative to South Africa. However post rebasing, Nigeria’s even lower market cap-to-GDP ratio relative to South Africa would appear to limit capital market based investment interest pending crystallization of diverse initiatives aimed at driving greater listings with a tilt in favour of FDI in the interim. Over time, we see increasing inflows to sectors unfurled by the rebasing as providing underlying support for greater representation of the economy on the capital markets which should ultimately favour FPI activity also. 

Similarly, the improvement in debt and fiscal metrics should position Nigerian debt assets more positively relative to South Africa which had its rating cut twice in the last two years by S&P to a notch above junk. On this front, the greater potential GDP growth and implicit high credit quality for Nigerian fixed income instruments should encourage more bond index listings as incomes rise in the future and reform initiatives crystallize. For equities, the bigger nominal GDP size and faster future growth suggest a greater scope for earnings expansion attractive valuations further firming a positive long-term outlook.


Already, Nigeria’s potential is not going unnoticed as recent media reports on frontier market investing increasingly pose comparisons between Nigeria and China given the sizable demographic advantages and large reform agenda being served up all of which naturally whet FPI appetite.

In particular, Moody insisted that Nigeria’s economic positives and negatives balance out as it joined S&P and Fitch in highlighting falling crude oil output, dwindling external reserves, increasing vulnerability to adverse changes in oil prices, uncertainty evoked by the apex bank crisis, and continuing infighting within the country’s ruling party and delays in the release of new economic information as justifications for an unimproved rating. Worse still, S&P downgraded its ratings outlook for Nigeria to negative– a decision which increases the risk of an eventual long term credit rating downgrade and prompted an appeal from FGN.

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