07 February 2012
Size matters, growth less so in 2012: Renaissance Capital issues Nigerian GDP and economic outlook

Lagos, 7 February 2012 – Renaissance Capital, the leading emerging markets investment bank, has issued its 2012 outlook for the Nigerian economy, arguing that GDP rebasing could make Nigeria the biggest economy in Sub-Saharan Africa (SSA) by 2016.

According to the report, Size matters, growth less so in 2012, authored by Renaissance Capital’s SSA economist, Yvonne Mhango, the country’s GDP is widely expected to be upwardly adjusted in 2012, following its rebasing to 2008, from 1990. Renaissance expects this to override concerns about the dampening effect of a 50% petrol price hike and escalating security costs on the economy. On Renaissance estimates, if Nigeria’s GDP is upwardly revised by the same magnitude as Ghana’s was in 2010 (60%) the Nigerian economy could potentially surpass the size of the sedately growing South African economy as soon as 2014. However, analysts highlight that conservative estimates suggest only a 20% upward adjustment can be expected, and based on those estimates Nigeria is likely to become SSA’s biggest economy by 2016.

The cost of insecurity slows infrastructure development, the report notes. Nigeria’s federal government plans to spend a considerable 20% of its 2012 budget on security – equivalent to the share the US spent on security following the 11 September terrorist attacks, in 2001. As the economic impact of Boko Haram’s terrorist attacks includes long-term indirect costs (security) and direct costs, the cost to Nigeria is at least the security cost of NGN1trn, or 2% of GDP, on Renaissance estimates. The impact of the terrorist attacks on financial markets will be small, in Renaissance’s view, unless oil facilities are attacked. Analysts note that the government’s huge security spend has an opportunity cost – it implies less spending on power infrastructure, education and healthcare, which combined have been allocated a smaller budget than security in 2012.

The piece also highlights that another challenge for the country government is to prioritise job-creating investments in the north and build infrastructure to attract private investors. Doing so, it concludes, will also help to address the government’s significant security problem.

Renaissance Capital expects Nigerian inflation to accelerate in 2012, on the back of the petrol price hike. Renaissance analysts are concerned about secondary effects on the supply chain, expecting businesses to pass on their higher energy costs. Renaissance believes that the other risks to inflation are stronger-than-programmed fiscal spending, accelerating credit growth and higher duty on food imports.

The halving of the government’s petrol subsidy expenditure is expected to reduce arbitrage opportunities in the oil marketing sector, the report notes. This is expected to allow FX reserves to accrete in 2012, following zero growth in 2011. If FX reserves continue to increase at the rate they did in January, then Nigeria is likely to have a stronger FX position in 2012, which is positive for the naira. If the oil price remains resilient, as it has in early 2012, and stays above Renaissance Capital’s projection of an average price of $100/bl, Renaissance analysts see clear upside potential for Nigeria’s external sector.

About Renaissance Capital (www.rencap.com)

Renaissance Capital is a leading investment bank focused on the emerging markets of Russia, the CIS, Eastern Europe, Asia and Africa. The Firm also offers its clients access to these markets through financial centres such as London, New York and Hong Kong. Renaissance Capital has market-leading positions in each of its core businesses - M&A, equity and debt capital markets, securities sales and trading, research, and derivatives. The Firm is building market-leading practices across emerging markets globally in metals & mining, oil & gas and agriculture. Renaissance Capital is part of Renaissance Group.