In April 2014, Nigeria officially overtook South Africa as the continent’s largest economy when its National Bureau of Statistics (NBS) updated the base year for calculating its GDP – from 1990 to 2010. The rebased GDP figure revealed the West African country to be almost 90% larger than previously thought – standing at US$509.9bn in 2013 compared with South Africa’s $350.6bn.
But, just three months after Nigeria’s rebased GDP was revealed, global oil prices began to decline, which would see them lose almost 60% in value over the following two years. In Nigeria, oil exports make up the majority of government revenue, and the collapsed crude prices quickly led to a shortage of dollars in the country.
Since March 2015, the Central Bank of Nigeria (CBN) pegged the local currency at just below 200 naira to the US dollar in an attempt to protect its local population from inflation. But the scarcity of the US currency prompted it to halt dollar sales to non-bank foreign exchange operators and investors became wary as news circulated of foreign companies struggling to convert earnings into US dollars.
According to the NBS, capital inflows in the first quarter of this year plummeted to $711m – a year-on-year decline of 73.79%.
In June, the CBN was forced to unpeg the naira and adopt a market-driven exchange rate system. The naira has since lost over a third of its value to the US dollar, and as a result Nigeria lost its title as Africa’s largest economy (measured in US dollars) to South Africa.
The South African rand has gained over 16% against the dollar this year – partly a result of investors turning to liquid emerging market stock exchanges after Britain’s vote to leave the EU. The naira’s devaluation, combined with the rand’s current strength, means that when the IMF’s GDP figures for the end of 2015 were recalculated, the size of South Africa’s economy was $301bn, compared to Nigeria’s $296bn.
But what does this mean?
According to Ecobank’s head of economic research, Gaimin Nonyane, GDP size does have some impact on foreign investment as investors are generally attracted to larger economies. But South Africa’s current domestic challenges have done little to instil investor confidence, and its Reserve Bank has forecast 0% growth for 2016.
“At the moment confidence in both markets are weak. South Africa is going through some structural, as well as leadership, problems. So that is going to have some outside impact,” she told How we made it in Africa.
“At the same time Nigeria has this exchange rate hurdle to get over. So they are both in very critical positions at the moment where they aren’t really appealing to investors to put their money into economies.”
However, she believes Nigeria will regain its title as Africa’s largest economy in the near future.
“Over the long term period I think that the fundamentals are still good in Nigeria. There is a lot of room for optimism in Nigeria so I think it’s just in the short term things are going to continue to remain bleak. And yes, in terms of market size South Africa will temporarily be bigger than Nigeria because of the exchange rate effects. But I think in the long run Nigeria will take back that position.
“I don’t see it coming out of the woods in the next two years – or 18 to 24 months. In terms of liquidity risk and foreign-exchange challenges for businesses, it’s still going to be very difficult – which of course will continue to put pressure on the naira. So we are looking at the medium term… in the next three to five years.”