Last Friday’s (11 July) first release of Nigeria’s growth rates under the rebased GDP reveal that growth is 2 percentage points lower. An analysis of the growth drivers shows that telecoms is a maturing and slower-growing sector. The growth sectors are manufacturing – particularly food, cement and textile producers – and real estate.
Nigeria’s real GDP growth strengthened to 5.5% in 2013 (vs 6.9% under the old GDP series), from 4.2% in 2012 (vs 6.6%). The downward growth revision, which we expected, is in part the result of better measurement of previously understated but fast-growing sectors, such as telecoms.
Under the new series, telecoms accounts for 9% of GDP (vs 5% previously) and grew by 4.7% in 2013 (vs around 25%). The rebased growth numbers confirm that telecoms’ rapid growth is in the past and the sector has matured.
The decline of oil and gas partly explains the lower growth, particularly in 2013 when the sector contracted by a sizeable 13% and shaved 1.5 percentage points off total growth.
Manufacturing growing strongly, despite power deficit
Manufacturing is a much bigger, faster-growing sector under the new series (9% of GDP vs 4% previously). In 2013, it recorded substantial growth of 22% (vs 14% in 2012), comprising one-third of total growth. Food, beverage and tobacco producers account for half of the manufacturing sector. The sub-sector’s growth accelerated to 12% in 2013, vs 7% in 2012.
We believe Nigeria’s large population of upwardly mobile consumers, particularly in the south-west, coupled with investments in power, implies the strong growth of manufacturers, including food producers and breweries, is sustainable.
A country under construction – positive for cement
Several of the smaller manufacturing sub-sectors are growing even faster than food producers. Cement, which only comprises 1% of GDP, grew by a sizeable 39% in 2013, up from a strong 14% in 2012. This is consistent with a fast-growing construction sector (14.2% in 2013, vs 9.4% in 2012) and real estate sector (12% vs 5.6%). Nigeria’s cement stocks give exposure to strong expansion in the building material itself, as well as the construction, real estate and infrastructure sectors.
Upside for finance given lower penetration, lower rates outlook
The decline in agriculture’s growth contribution in 2013 was partly due to the floods in the third quarter of 2012. The upside is a smaller agriculture sector (23% vs 36%) that reduces the economy’s exposure to it.
Financial services’ share of GDP was unchanged at 3% post-rebasing. The sector’s growth contribution fell in 2013 because of high interest rates and tight liquidity. We think Nigeria’s low banking penetration and the likelihood of lower rates from the second half of 2015 imply significant growth potential for banks.
The oil and gas sector is in decline
The oil and gas sector’s GDP share – 11% – is more or less the same as it was under the previous series. Because the sector has been contracting since 2012, its GDP share has dropped by 4 percentage points under the rebased series, from 15% of GDP in 2011. The oil and gas sector contracted by an alarming 13% in 2013, following a decline of 5% in 2012.
The decline in recent years of oil and gas’s importance as an economic sector is largely attributed to industrial-scale oil theft. Preliminary oil output data suggest that the rate of decline in the oil and gas sector has slowed in the first half of 2014. Output was at 2.15 million barrels per day in June, according to a Bloomberg survey of OPEC producers. However, output remains volatile and there has been little in the way of reforms to suggest that there will be a material increase in output over the medium term.
The passage of the long-delayed Petroleum Industry Bill (PIB), which we believe is not going to happen before the February 2015 elections, is seen by experts as a potential positive trigger for improved production.
Upside to 2014 growth outlook with some moderation in 2015
We expect a moderate improvement in growth in 2014 to 5.7%, partly due to a boost from higher election-related fiscal spending, including potential wage hikes for civil servants. Some sectors that are likely to gain from a looser fiscal policy include trade, financial services and telecoms. Also, preliminary oil output numbers for the first half of 2014 suggest a slowdown in the rate of the decline of the oil and gas sector, which is positive for growth. We expect growth to moderate in 2015, particularly in the second half of 2015 – as the largesse that typically surrounds elections dissipates. However, this time around, we expect any fiscal stimulus related to elections to be much more moderate than that of 2010/2011.
Yvonne Mhango is Renaissance Capital’s sub-Saharan Africa economist.