Last week Nigeria rebased its GDP to become the largest
economy in Africa. It went from $264Bn to $509Bn, an increase of 89%,
overtaking South Africa’s $384bn and just ahead of fellow Petro-state Norway’s
$499Bn.
Kenya is undergoing a similar exercise, and preliminary
estimates suggest their economy is 20% bigger at around $50Bn.
10 years ago, China carried out a major review of GDP that
added 16.8% to its GDP, and many commentators at the time “guessed” that they
were still underestimating GDP by at least 10%.
It will be interesting to see the effects of Purchasing
Power Parity adjustments on these new numbers.
It’s not that these countries have previously been dishonest
about their GDP, but that economies change over time and that changes to
Government statistics always lag the economy.
When I was a medical student, I was taught “you can’t find a
fever without taking a temperature”; you can’t estimate a sector’s growth
without first identifying that sector. The census that increased China’s GDP
had found $284Bn worth of companies that the central Government did not know
existed, mainly in the service sector.
Prior to 1985, China didn’t even calculate but used the
system that completely disregarded service
industries. Even after they started to calculate it, China didn’t fully adopt
GDP until 1993. Incidentally, the former Soviet States didn’t abandon the
measure until 1991.
Telecoms, and especially mobile telecoms, are common areas
Governments have underestimated GDP. Many countries, of which India is possible
the most well known, decided NOT to regulate mobile telecoms in the same way
they regulated fixed-line; since the poor would never be able to afford mobile
phones, they would never require the same degree of protection!
As we now know, freed from Government protection, consumers
were able to get a plethora of “value added” services from their mobile
providers – not least actual working lines. In the African context, Kenya’s
Safaricom introduced M-Pesa that is often regarded as the world’s most
successful mobile payment system. I suspect the upcoming revisions will show a
dramatic increase in this category.
The recent revision in Nigeria took Telecoms and IT from
0.9% of GDP to 8.7%! My Nigerian friends tell me that the networks are still
highly congested – to put up a cell tower you often need to provide a generator
to ensure uninterrupted power and a guard to make sure the generator does not
get removed, then fuel for the generator, etc, so the roll out continues to be
slower than possible. The dead hand of Government still manages to hold things
back.
There were several sectors that were going completely
unmeasured. The previously unmeasured entertainment industry that includes
Nigeria’s famous Nollywood film industry added an estimated 1% to GDP.
Ironically, the increased size of the economy only goes to
show how totally inept the Government sector is. Taxes/ GDP, already low in
Nigeria, are now half as much, likewise the power generation deficit is twice
what it was!
But let’s focus on the positive.
This “hidden” growth explains why firms like Dangote and the
various banks have done so well. They have not been taking inordinate risks,
but merely responding to market growth. Some of the revised indicators I am
looking to see broken out are various types of loans to GDP as they would show
how much more growth the banks can finance without excessive credit risk.
Each of these increases slowly but surely rebalances the
global economy towards where the majority of the people live. This slow process
is the raison d’être of Emerging Markets investing.
As countries move into Middle Income status, they tend to
attract more Foreign Direct Investment as Multinationals firms seek out new
markets, particularly in the consumer discretionary sector. The sheer size of
the market becomes too big to ignore. Consumers in these countries may not have
money to burn, but they certainly have increasing amounts to be spent on
branded products. Indeed the consumption of internationally branded goods can
become status symbols.
As the markets grow, local entrepreneurs rather than rent
seekers tend to take a larger share of the economy, meaning that regulations
become less about protecting insiders and more about the fair functioning of
markets. Meanwhile the rent seekers themselves focus less on hiding their
wealth abroad and actually start reinvesting it domestically.
For stock market investors, despite these GDP adjustments,
Nigeria will remain a Frontier Market for quite a few more years. Liquidity
will remain low, access limited, and too many fund trustees have received
pleading letters from the bereaved relatives of recently deceased ex-Ministers.
20 years ago, no one would take Brazil seriously, whilst
today it is firmly on everyone’s radar and they have to have a genuine reason
for not investing there. Today it is acceptable to dismiss investing in
Nigeria, but give it a few years.
