What Nigeria’s GDP Rebase means for your business

 

After Nigeria finally announced its rebased GDP calculations, the economy grew by 89% to US$ 509 billion, far more than expected. Nigeria is now the largest economy in Africa as it has overtaken South Africa’s US$ 345 billion economy.

Nigeria’s GDP rebase enhances Africa’s attractiveness as a place that holds significant opportunity because of its size, not just because of its growth rate. There are 24 other African markets planning to recalculate their GDP by 2016. As a result, we expect the overall economy of Sub-Saharan Africa to soon be much larger than currently assumed.

FSG’s report on what the GDP rebase means for your business remains relevant:

  • Brace for increasing competition: Nigeria is now more attractive in every financial and economic model worldwide, luring companies to invest locally. The size of Nigeria’s economy is now larger than that of Poland, Thailand, and the UAE.
  • Recalculate your targets: As the composition of the Nigerian economy has changed, some sectors are now much larger or smaller than previously assumed, altering the addressable opportunity for different industries. Efforts to make the case for additional resources will become easier in sectors that are larger than previously estimated, such as business services.
  • Prepare for rising government spending: The Nigerian government is expected to increase spending as the GDP rebase improved its ability to borrow on global financial markets. Public spending will focus on education, healthcare, transportation, housing, and infrastructure.

The operating environment will be negatively affected this year by heightened volatility in light of upcoming elections in 2015. However, the GDP rebase highlights why it’s important to stay focused on the country’s long-term opportunity.

Businesses Need to Prepare for a Tough Year in Nigeria

Despite a positive medium-term economic outlook, Nigeria is struggling with various challenges that undermine its economic potential: These challenges are coming to the forefront as the country prepares for presidential and national assembly elections on February 14, 2015. Executives should expect political volatility to hinder policy-making, fuel inflation, and currency depreciation. Business customers, partners, and government agencies will be in a wait-and-see mode up to elections. This could have implications for demand, investment plans, and the speed of moving through regulatory processes.

Power struggles ahead of the 2015 elections hinder the passage of important legislation and weaken investor confidence: Political infighting is undermining the current administration’s ability to pass policies. After various high-profile defections from the ruling People’s Democratic Party (PDP) to the newly formed All Progressive Congress (APC), the APC now forms a strong opposition. It is blocking all legislations including the 2014/2015 budget. President Goodluck Jonathan’s politically motivated decision to oust widely respected Central Bank Governor Lamido Sanusi weakened investor confidence significantly. In past months, the president also fired various ministers, including the ministers for information, environment, and foreign affairs. 

Inflation is expected to rise, and the naira is expected to depreciate in 2014. Both trends will put downward pressure on consumer and business demand: Inflation will likely rise to double digits because wealthy individuals are flooding the economy with cash to back candidates and the government is increasing spending. In past elections, an influx of cash into the economy led to currency depreciation and inflationary pressure. Capital outflows as a result of the US Federal Reserve’s quantitative easing program, losses in government revenue because of oil theft and corruption, uncertainty over monetary policy, and weakening investor confidence have led the naira to depreciate. The power sector is undergoing major reforms that also increase prices. Electricity is now more expensive as the state-owned power company privatizes its distribution operations and hikes prices. Moreover, the worsening security situation in parts of the country is leading to higher distribution costs of consumer goods. Businesses producing locally will pass on rising production costs to consumers, who will, in turn, prioritize non-discretionary purchases.

The security situation is worsening ahead of the elections: Nigeria’s security challenges include bombings by Boko Haram and ethno-religious clashes in the northern and central areas, oil theft and piracy in the Niger Delta, and kidnappings in the Southeast. Election-related violence has hit Rivers State as skirmishes erupted between APC’s Governor Rotimi Amaechi’s supporters and his opponents. Boko Haram’s attacks have increased in recent months despite heightened military response.

Unemployment, poverty and corruption remain high and are the real drivers of criminal activity: Although Nigeria’s economy expanded an average of 7.2% per year between 2004 and 2010, the proportion of Nigerians living in poverty is still 62.6%, down only slightly from 64.2% in 2004. Social inequality and theft by powerful elites aggravate the dissatisfaction of ordinary Nigerians, who are then easily drawn into criminal activities because of lack of perspective. Oil theft by criminal gangs costs Nigeria US$ 8 billion per year. Corruption within the state oil company led to the loss of between US$ 10 to 50 billion of oil revenue from January 2012 to July 2013.

Companies should monitor developments closely to get ahead of risks and opportunities: Executives should monitor the pre-election period closely and manage corporate expectations regarding demand. Less risk-averse executives should consider strategic investments now as their competitors are in a wait-and-see mode. Details for what to monitor and which strategies to implement to protect and grow your business despite the worsening environment can be found in our latest report ‘Market Spotlight: Nigeria’.

Despite the tough environment this year, Nigeria’s solid growth will prevail: Nigeria’s medium-term macroeconomic outlook remains positive because of rising private consumption by the country’s 170-million-strong population, the economy’s diversification away from oil, and its attractiveness for investors. The GDP rebasement will also have a positive economic impact. A significant boost to total GDP figures will make Nigeria more attractive in every financial and economic model worldwide, luring more companies to invest locally.

Nigeria poised to be largest economy in Africa following GDP rebase

Nigeria Currency Picture

The Nigerian government is adjusting the way it measures GDP to account for the true size of the economy. Expected to be completed at the end of 2013, Nigeria will become the largest economy in Africa, surpassing South Africa.  This will undoubtedly have an impact on the opportunity for MNCs and foreign investors seeking high growth rates in Africa.  I cover the rebase and its implications for MNCs in my latest podcast with FSG’s CEO, Richard Leggett, following the publication of our recent Quarterly Market Review of Nigeria (Q3 2013).

As it currently stands, Nigeria’s GDP is based on figures from the 1990s which excludes the emergence of new industries  such as the booming film industry, Nollywood, and the emergence of the telecommunications and services sectors. Nigeria’s economy is heavily driven by private consumption, and the GDP rebase will not affect this, but the rebase will fundamentally change the makeup of industries. The services sector is expected to comprise a much larger share of GDP as current figures indicate, as will wholesale and retail trade. The natural resource sector instead will decrease in terms of its share in GDP. Once the GDP is adjusted to reflect new realities, FSG expects the size of the economy to increase anywhere from 40% to 60%.   Though the exact timing for the rebase remains unknown, Nigeria is expected to release preliminary numbers by the end of November 2013.  Skeptics can rest assured; the fickle timeline for the rebase is likely caused by the complexity of collecting statistics and not an indication of the data’s reliability.  Ghana’s GDP rebase in 2010, an exercise that increased the size of the economy by 60% overnight, took 8 years to be completed.

The imminent rebase is expected to also lead to an increase in government spending as improved debt ratios are likely to make Nigeria one of the least leveraged countries in the world.  The spending is expected to go into the government’s priority sectors including infrastructure, housing, education, and healthcare.  MNCs should monitor where new funds will be allocated to and take advantage of Nigeria’s improving economic indicators to make the case for resources and stay ahead of the competition as Nigeria becomes too large for companies around the world to ignore.

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Adapt to Nigeria’s Changing Business Environment

Nigeria is changing rapidly. The size of the economy may expand 40-60% overnight, new online sales channels are booming, and the security situation is deteriorating:

  • Rebased GDP figures, to be released later this year, are likely to make Nigeria the largest economy in Sub-Saharan Africa, surpassing South Africa. While the increased size of the economy makes the country more attractive on paper, performance targets may become harder to reach as growth rates slow because the economy is expanding from a larger base
  • Ecommerce is booming on the back of Nigeria’s large consumer base increasingly shopping online. MNCs should tap into this fast growing channel to reach consumers
  • A new militant Islamist group emerged in the North of Nigeria, changing the security situation for MNCs, as foreigners are now being targeted. Companies operating in the North have to implement strategies to mitigate risks. Companies operating in Lagos and the South are not in danger from this group

Trend #1: GDP Rebase to Impact MNCs Performance Targets

Nigeria will surpass South Africa as the continent’s largest economy when GDP is revised upwards between 40-60% in October 2013. If GDP increases by 40%, Nigeria’s economy would swell from US$275bn to US$385bn. South Africa’s economic output is US$378.9bn. New GDP figures will be calculated by using prices of goods and services from a 2008 base year. Currently, Nigeria’s GDP is calculated by using 1990 figures, which do not account for the rapid development of the services, telecoms, and entertainment industries. While the increased size of the economy makes the country more attractive on paper, performance targets may become harder to reach if they are calculated on a GDP multiplier basis. Executives must communicate changes in GDP forecasts to corporate to set expectations about performance in the Nigerian market. Companies should consider revising growth targets down to reflect revised GDP growth rates. Targets should be revised down using a new GDP growth multiplier, but not in real dollar terms.

Trend #2: Ecommerce Is Growing – Get Ahead of the Curve

Nigeria’s Ecommerce market is expanding rapidly: Online sales grew 25% in 2011 to N62.4bn, up an additional N12.5bn from N49.9bn in 2010. Total investment in the sector is estimated at N2.4bn, but this figure is expected to double by 2014 as Nigerian consumers shop more online. The trend is fueled by deepening internet penetration and an uptick in purchases made with mobile phones. In Mastercard’s 2012 online shopping behavior survey, the share of purchases made with mobile phones increased to 30.3% up from 8.0% in 2011.

Ecommerce allows companies to reach a wide consumer base, even without having a local presence in the market. It also makes buying global brands more accessible for consumers in tier 1 but also in lower tier cities.

MNCs can capitalize on growing online sales by partnering with local Ecommerce providers and by offering internet shoppers exclusive deals and differentiated products.

What you need to know when building an Ecommerce platform for Nigeria

  • Payment methods and cash-on-delivery: Despite attempts to reduce Nigeria’s reliance on cash, the economy is still very much cash-based as credit card penetration remains limited. Allow customers to pay cash on delivery alongside other payment methods
  • Human contact: Nigerians value human interaction when shopping. They like to touch, feel, and speak about the product. Have customer relations managers call customers after the item has been reserved online to make sure the customer really wants the product. Allow customers to touch and see the product on delivery
  • Online deals: Offer good online deals to highlight the appeal of online shopping and build recurring customers as Nigerians are very price sensitive and will compare prices
  • Trust: Nigerians are very suspicious of buying online considering high levels of cybercrime. Once trust is established through the steps outlined above, customers will shop online for your products with fewer reservations
  • Challenges: Nigeria’s Ecommerce industry faces various challenges including poor infrastructure, road congestions, power blackouts, the high cost of internet, and cybercrime

Trend #3: The Security Situation in the North Is a Threat to MNCs

A new militant Islamist group called Ansaru emerged in the North of Nigeria, changing the security situation for MNCs in the region for the worse. Companies operating in Nigeria’s commercial centers including Lagos and the South are not in danger from this group.

Ansaru, a more radical breakaway group of Boko Haram, came to the forefront in 2012. The movement is heavily influenced by Al-Qaeda in the Islamic Maghreb (AQIM) and motivated to fight French and Nigerian military intervention in Mali. Ansaru’s agenda is far more international than Boko Haram’s. It is being manifested for the first time with the systematic kidnapping of foreigners. Boko Haram’s grievances are primarily local and come down to skyrocketing unemployment and poverty in the North of the country (60-70+%). It primarily aims to weaken the government which it blames for the precarious economic situation. But as security forces vehemently cracked down on Boko Haram militants, weakening its leadership, the movement fractionalized, creating a more radical offshoot. Companies should monitor closely whether attacks against foreigners are increasing and prepare for insecurity in hot spot regions.

 

The Key Trends that will shape Nigeria in 2013

Nigeria in 2013 will provide a mixed picture for investors. While the government’s 2013 budget promises to open new investment opportunities, challenges lie ahead. Renewed fuel subsidy reductions will impact consumer purchasing power while the security situation in Nigeria’s hot spot regions is likely to deteriorate.

Trend #1: The Proposed 2013 Budget Creates Investment Opportunities
The Federal Government submitted the budget proposal to the National Assembly for approval. An increase in spending means opportunities in sectors that have received budget allocations or investment incentives. Focus areas for the economy in 2013 are security, education, infrastructure and healthcare. The 2013 budget aims to create long-term macroeconomic stability through continued investment in capital expenditures, deficit reduction, and the development of non-oil revenue sources.

Trend#2: New Fuel Subsidy Reductions will Impact Consumer Purchasing Power
The government launched a new campaign to remove the fuel subsidy in the medium-term, a year after the attempted removal caused widespread protests. New plans will see the fuel subsidy gradually reduced through 2015. Consumers will be hit hardest by the fuel subsidy reduction as purchasing power for non-essential goods is likely to decrease. This comes after consumers were strained in 2012 when fuel subsidies were reduced for the first time. The initial impact of the subsidy reduction will be felt in early 2013. As a result, renewed protests are likely to hit the country once the new reductions are announced. Companies have to reach new customers to compensate for any potential decrease in consumer purchasing power.

Nigeria

Trend #3: The Security Situation is Likely to Worsen
The government allocated the lion’s share of the budget (668.51 billion Naira) to security, indicating that tackling Nigeria’s many security challenges is a key priority. However, companies should prepare for increasing insecurity in hot spot regions as violence is likely to increase if the budget is spent on recruiting more personnel into badly managed security forces that crack down brutally on dissent rather than on investing in better management and training.

Nigeria’s security challenges include bombings by Boko Haram and ethno-religious clashes in the northern and central areas, kidnapping, oil theft and piracy in the Niger Delta, and kidnappings in the Southeast. But the violence is about Nigeria’s acute social disadvantages and widening wealth gap.

  • Boko Haram: The group’s frequent attacks cannot simply be attributed to Islamist militancy, but rather longstanding socio-economic grievances and skyrocketing unemployment. The group is fighting the government which it blames for the precarious economic situation. As a result, the group wants to install Sharia law because it believes secular law is too corrupt and only religious law can establish order. The security forces’ vehement crackdowns and resulting civilian casualties contribute to an expanding base for recruitment.
  • Niger Delta: Similar to the situation with Boko Haram, unemployment and poverty is driving crime in Nigeria’s main oil producing region. In 2009 the government issued an amnesty to all militants with the failed promise to create employment. Instead, criminal activity has increased, specializing in oil theft (150,000 b/d, worth US$7bn annually) and kidnappings.

Having a contingency plan allows companies operating in these regions to manage risks and seize opportunities as they materialize.

*Editors Note: Don’t miss Anna Rosenberg’s latest article on managing distributors in sub-Saharan Africa

Nigeria: Higher Electricity and Fuel Prices Increase Operational Costs

Nigeria

Getting electricity in Nigeria can be very difficult. The World Bank ranks the country 176 out of 183 as one of the worst places in the world to get electricity. Electricity supply is unreliable and power outages are frequent numbering more than 320 days per year.

As a result, businesses largely generate their own power from diesel generators which run on fuel. Both the outages and the generators increase operational costs as blackouts harm machinery while the cost of generators, including maintenance, fuel, and its transport, is high.

Already in January, with the reduction of fuel subsidies, the cost of fuel increased 50%. But now, businesses will again be hit by higher operational costs as the government increased electricity tariffs on June 1. Large businesses will see their electricity bills increase up to 50%, depending on geographic location.

Consumers are also impacted by the new tariffs as they will face higher prices as increased production costs are passed down. Coupled with the reduction of the fuel subsidy in January, this will cause consumer purchasing power to decline further, forcing consumers to be more cautious with discretionary purchases.

Electricity prices will continue to rise, with new price increases planned for early 2013. The prices of both, electricity and fuel, are distorted by government subsidies. The subsidies are likely to be further reduced in the short-term and removed altogether in the medium-to-long term.

The reductions of subsidies are part of the government’s plans to attract private investors to the power sector. If successful, this could benefit businesses operating in Nigeria as market-rate prices will allow private competition to enter, ultimately increasing the consistency of energy supply and bringing down prices as the market matures.

Regional Insecurity in Northern and Central Nigeria Impacts Local Operations

Africa

While Nigeria remains one of the most attractive long-term investment destinations in Sub-Saharan Africa, companies operating in the northern and central regions are facing operational risks resulting from increasing insecurity and revenue losses as consumers are staying at home.

Contrary to mainstream media coverage; the frequent attacks in northern and central Nigeria cannot only be linked to Islamist Group Boko Haram. The escalation of violence is born out of socio-economic grievances and longstanding tribal, ethnic, and religious animosities.

While the south is experiencing an economic boom, the northern and central areas are not. Instead they are struggling with staggering poverty levels of 60-70+%. Attacks have so far mainly targeted government officials and churches – both representatives of the wealthy south.

As violence increases, businesses divert investments southwards contributing to economic decline in northern and central Nigeria. However, companies that maintain a presence in affected regions can increase customer loyalty and gain market share by highlighting their commitment through tough times. Having a contingency plan allows companies operating in the area to manage risks and seize any opportunities as they materialize.

Some companies already see investment opportunities in affected areas. Considering the risk level relatively low compared to other dangerous areas such as the Niger Delta, Dufil Prima Foods, part of the Singapore-based Tolaram Group, recently opened a manufacturing site in the northern city of Kanu to save on transportation and distribution costs. South African telecoms provider MTN is also making major investments in radio and transmission to increase its capacity and offer improved services to customers.

A Tale of Two Regions: Southern Investment, Northern Insecurity in Nigeria

Nigeria

Nigeria is a tale of two regions as city-level opportunities in the south overshadow widespread insecurity in the north. Companies must overcome corporate HQ fears regarding operational risks to position for long-term success in Nigeria, which remains the most attractive long-term investment destination in Sub-Saharan Africa.

Last month ethnic conflict ravaged northern Nigeria, leaving 150 dead and 100 injured. This continues a troubling trend of violence in 2012. From an investment perspective, this has rattled foreign companies that are wondering if Nigeria is becoming too risky. However, halting or drastically scaling back investment plans would be a mistake for senior executives.

Much of the violence is isolated in the economically underdeveloped north. The total GDP of 7 attack locations between April 5 and May 4 is US$25 billion, which represents less than 10% of Nigeria’s economy. On the other hand, the total GDP of 7 top investment destinations in the south is US$80 billion. This represents more than 30% of Nigeria’s economy.

Nigeria’s five largest cities, all of which are located in the south, have a combined GDP exceeding US$75 billion. This is surpassed only by Angola and South Africa.  City GDP in Nigeria’s south is set to expand significantly this quarter, even if only on paper, because the government is shifting the base year for real GDP to 2009 from 1990. The result will be an overnight gain of 40% that closes the overall economy size gap between Nigeria and South Africa to only 10%.

Southern cities represent great opportunities for companies targeting emerging consumer classes, public sector projects, and other private sector companies flocking to urban areas. Companies should establish good relationships with distributors that know the southern part of the country well. Much of your sales opportunities are likely to be concentrated in this region for the foreseeable future.

Nigeria: Government Credibility Weakened As Reforms Agenda Stalls

Nigeria Government

On January 1, the Nigerian government removed the long-standing subsidy on fuel, increasing prices from 65 to 150 naira per liter. Following local protests and negotiations, President Jonathan reduced the increase to 97 naira per liter, a 50% increase

While some view this as a clever strategic move, the haphazard implementation (including using the military to quell protests) has called into question the government’s ability to implement other much-needed reforms

Drivers

Reduced Political Capital: The new president’s “honeymoon” has officially ended. The president can no longer count on broad-based political support, and has recently been stymied by state governors, unions, state legislators, and religious leaders

Poverty and Inequality: A perception that reforms favor elites and businesses will continue to plague the president. Critically important will be future implementation of the president’s “jobs agenda” for generating employment, especially among youth

Fighting Corruption: Recent anti-corruption moves, such as dismissing state governors, are largely symbolic and the president’s policies must succeed where others have failed

FSG View

The fuel subsidy removal is unlikely to be repealed. Higher local fuel prices and reduced consumer discretionary spending should be priced into operating budgets immediately

The next three months will be critical to bolstering government credibility and preparing for upcoming economic improvements

Preparing Your Business for Inflation in Nigeria

Nigeria Checklist

Trend

  • Nigeria’s underlying growth trajectory continues to be strong, with 6.6% GDP growth forecast for 2012
  • A recent uptick in inflation is likely to accelerate, with inflation forecasts increasing from 10% to 14-15%
  • Core inflation (which excludes volatile components food and energy) has remained steady at 10.8%

Drivers

  • Fiscal Policy Expansion Continues Unabated: The new government’s 140% increase in the minimum wage and partial removal of the fuel subsidy will cause a significant increase in prices in Q1
  • Limited Monetary Policy Options: The Central Bank instituted a number of anti-inflationary measures in Q4 2011: devaluing the naira to ₦155/USD, increasing the benchmark interest rate to 12%, and eroding its foreign reserves to 6 months of imports from 17 months. Though foreign reserves have since recovered, the Central Bank has few tools available to aggressively stem inflation

Frontier Strategy Group View

  • Inflation is likely to rise significantly in the next two months. Operating costs, particularly transportation and input prices, are likely to increase through summer 2012
  • Ongoing fiscal outlays to support the fuel subsidy regime will also weigh on local prices
  • With few monetary policy tools available to support the naira, currency volatility will be a concern. The naira will remain stable if oil prices remain moderate (US$100-120/bbl) and the partial fuel subsidy removal is not reversed. Otherwise, the Central Bank will be under significant pressure to further devalue