Nigeria is turning into the toast of investors globally as South Africa (Africa’s historical investor magnet), struggles with a weak currency, labour unrest and economic uncertainty, casting doubt on the ability of Africa’s largest economy to retain its role as a major economic force on the continent.
While Nigeria steadily becomes the beautiful bride on the African continent, analysts say investors are not so enthusiastic about South Africa and worry the African National Congress (ANC) that country’s ruling party, is not pushing reforms as successfully as Nigeria.
“We believe Nigeria will be the unrivalled dominant country on the continent over the coming decades, and financial markets appear to be investing on that assumption too,” Charles Robertson, economist and head of macro strategy at Renaissance Capital tells BusinessDay.
“Fund managers globally are excited by Nigeria, and no longer feel that way about South Africa.”
The NSE, the main stock market index in Nigeria, is up 18 percent year to date, compared to a 2.72 percent gain in the FTSE/JSE all share index, South Africa’s main stock index.
The rand’s 8.2 percent fall against the dollar this year is the worst of 25 emerging markets monitored by Bloomberg.
The naira has outperformed the rand on a relative basis weakening 1.7 percent against the dollar this year.
South African bonds face the risk of a sell-off by foreign investors as the rand’s plunge dims the allure of the nation’s debt, according to Societe Generale.
Risks for foreign investors have increased as South Africa posted a current-account deficit close to a four-year high in the fourth quarter after mining strikes and slower growth in Europe cut exports.
The current-account gap reached 6.5 percent of gross domestic product (GDP), down from a revised 6.8 percent in the third quarter, which was the biggest shortfall since the same period in 2008, the Reserve Bank said on March 12.
The nation’s debt of all maturities longer than one year has lost 7.4 percent for dollar investors this year, while Nigeria’s bonds have gained 19.38 percent in dollars for the same period, according to data from Access Banks FGN bond index.
Investors are impressed by an excellent reformist team including Ngozi Okonjo-Iweala, the finance minister and Lamido Sanusi, the Central Bank governor, and see that Nigeria’s economy will double in size every ten years due to its higher growth rate, Robertson said.
Nigeria’s economy expanded by 6.5 percent in 2011 compared to 3.1 percent for South Africa, according to World Bank data. Growth averaged 8.8 percent in the past decade, compared to 3.5 percent in South Africa.
South Africa’s $390 billion economy is 43 percent larger than Nigeria’s whose economy is estimated at $272 billion by the IMF, however both countries may be contending with a looming role reversal akin to China and Japan.
“There are probably similarities in the sense that Nigeria has a much larger population than South Africa and her potential is still largely untapped, as was the case with China 30 years ago, “ said Samir Gadio, an emerging markets strategist at Standard Bank London, in a response to questions.
The rebasing of Nigeria’s GDP this year will bring both economies closer and Nigeria may snatch South Africa’s crown as the continent’s economic champion within two years, just as China eclipsed Japan in 2010.
Nigeria’s dollar reserves have increased 39 percent to $48.4 billion in the past year, compared to flat gross reserves of $50.4 billion, in South Africa, at the end of February.
The rand also faces threats from labour disputes, a widening budget shortfall and a potential credit-rating downgrade, Peter Attard Montalto, a London-based emerging- markets economist at Nomura International Inc., said in a note released March 18.
South Africa’s credit outlook was kept at negative by Standard & Poor’s (S & P) this month. Fitch Ratings cut the debt rating one level to BBB in January, following downgrades by Moody’s Investors Service and S&P last year.
Nigeria was upgraded to BB- with a stable outlook, by Standard & Poor’s last year.
Nigeria’s budget deficit will narrow to 1.85 percent of GDP in 2013, from 4 percent in 2009, while total debt to GDP ratio stood at 18.8 percent, compared to 35.6 percent for South Africa.
The country attracted $8.9 billion of FDI in 2011, the largest in Africa.
S & P released a bullish note on the nation’s banks this month and as diverse global investors from first rand to P&G rush in, Nigerian conglomerates like Dangote Cement are expanding rapidly across the continent.
No wonder at a recent conference in Lagos, the minister of trade, industry and investment, an ex Goldman Sachs banker brimming with confidence said, “We have taken our investment case to 31 countries around the world, and they are buying our story, Nigeria is open for business.”