A survey funded by the Office of National Statistics in the UK has given us some depressing findings about the familiarity of the public with economics and statistics. Less than half those surveyed understood that GDP measures the size of the economy and would not therefore appreciate the significance of one percent growth. Older people were better informed than the young.
This is a very recent survey. It may be therefore that respondents, bruised by the endless stream of facts emanating from their government in this topsy-turvy year of COVID-19, have come to mistrust official data although they might understand the basic concepts. We can forgive the cynicism. First the virus surged, then it appeared to fade in strength and finally it came back with a vengeance. Our politicians struggled at each stage of the sequence in this new environment.
Against this background we offer some commentary on the national accounts for Q3 2020. We can confirm that the -3.6 percent contraction of GDP, an improvement from -6.1 percent, means that the economy has shrunk for the second quarter in succession! It is therefore now correct to talk of a recession although tabloid commentators and self-publicists on social media deployed the term after one quarter’s data.
While fuel subsidies have ended and there has been movement on electricity tariffs, the pace of change has to be quicker. We were a little dismissive of the African Continental Free Trade Area but now see some opportunities.
The data are not as bad as those for advanced economies and most emerging markets. Nigeria’s large informal economy in agriculture and other sectors lies outside the global economic village. Furthermore, the formal economy produces little for the outside world other than oil and is less vulnerable to the collapse in external demand than most peers. When the recovery comes however, these factors and the accompanying structural flaws become constraints for Nigeria.
The IMF’s latest World Economic Outlook has South Africa recovering by 3.0 percent in 2021 after a forecast contraction this year of -8.0 percent, compared with -4.3 percent and 1.7 percent respectively for Nigeria. It is far more integrated within the global economy. Its pivotal tourism industry and international transport networks also help to explain why South Africa has taken a far larger hit from the virus than any other economy on the continent. Mining is an exporting industry and South African manufacturing has some segments such as automotives that serve international markets.
Kenya also has better recovery prospects as we emerge from life under the virus. The Fund sees modest growth of 1.0 percent this year, and an acceleration to +/- 5 percent is not far off despite soaring external indebtedness. Its national accounts by economic activity run through to Q2 2020. They are not seasonally adjusted like Nigeria’s. Several sectors have grown y/y for the past four quarters including the last (which roughly coincided with lockdown). These include agriculture (by over 6 percent in Q2), information and communications, financial and insurance, and real estate. We should add the turnaround potential of the tourism sector.
Nigeria has three sectors of size that pass the test over four quarters through to Q3: agriculture (averaging just 1.9 percent), information and comms (11.5 percent), and financial and insurance (15.7 percent). The growth of finance has been driven by the healthy expansion of banks’ loan books under pressure from their regulator (the CBN) but has tailed off in the latest quarter to 3.2 percent.
The sole star performer has been information and comms (telecoms essentially). It has consistently attracted sizeable FDI, unlike other sectors. The latest example is the acquisition in October of Paystack, a Lagos-based supplier of payment systems, for a reported $200 million. The combination of market size, innovation, relatively light regulation and a foothold in the sub-region makes a compelling investment story. It is close to becoming the second-largest sector of the economy after agriculture and trade, which it may well overtake in Q4.
There has not been real growth per head since the 2.8 percent y/y posted in Q3 2015, i.e. before the previous recession. For Nigeria to return to rates of +/- 5 percent, we present a few items from a longer shopping list. Because diversification of the economy remains work in slow progress, it requires a higher oil price so that the FGN can allocate funds to priority projects and reforms.
While fuel subsidies have ended and there has been movement on electricity tariffs, the pace of change has to be quicker. We were a little dismissive of the African Continental Free Trade Area but now see some opportunities. Nigerian manufacturing may not meet the standards demanded in advanced economies but stands out in the sub-region and should be able to supply West African markets with its consumer goods. Agriculture has benefited in cash terms from the CBN’s many credit interventions but flaws in storage, rural roads and marketing together mean that the boost to output is yet to materialize.
Above all, direct investors of all sizes are looking for a government that understands their needs, speaks with one voice to them, acts quickly on approvals and permits, and delivers on its commitments to them without delay. This has been the winning formula in Ethiopia and Rwanda, which is borne out by job creation and the growth record.
Kronsten is the head, of macroeconomic and fixed income research at FBN Quest Capital
