Nigeria vs South Africa – size matters, but so does development

Flag-Pins-Nigeria-South-AfricaWhat matters more: the size of the pie or how many mouths it has to feed? It depends whether you’re eating pies, or selling them.

Most of Nigeria’s 170-million people live below the poverty line, so many complained they didn’t feel any richer when the oil producing nation’s statistics bureau announced on Sunday the economy had replaced South Africa as the continent’s biggest. Nigeria’s 2013 GDP was rebased up to an estimated nearly $510-billion – a “pie” one and half times the size of South Africa’s, but feeding more than three times as many people.

But development economists argue that their attention should be on improving the health, education and incomes of ordinary Nigerians, many of whom struggle to feed their families. In 2013, the Economist Intelligence Unit rated Nigeria the worst place for a child to be born out of 80 countries surveyed.

“Really what matters in the end is per capita, how well our individuals are doing,” World Bank chief Africa economist Francisco Ferreira said after the statistical change in Abuja.

“I don’t want to rain on Nigeria’s parade … but what matters are living standards for everyone.”

In GDP per capita terms, Nigeria is looking healthier than before rebasing: per capita GDP was $2 688 last year, from an estimated $1 437 in 2012. Yet that masks growing inequality: at around 60%, absolute poverty in Nigeria is stubbornly high despite five years of average 7% annual GDP growth.

But are better living standards for all really what matters to investors looking to cash in on a big economy? On a per capita basis, Botswana, Mauritius and Seychelles are among Africa’s top five richest states. None has a population of more than two-million, so they are admired but cannot claim heavyweight status when it comes to competing with other African countries for the attention of foreign investors.

“Seychelles is the only African country listed under ‘very high human development’. But when did you last hear Seychelles mentioned during discussions on global political economy?” commentator Azuka Onwuka wrote in Nigeria’s Punch newspaper.

“A high GDP means external … investors pay more attention. The US and Europe no longer look down on China and India.”

Population Power

Nigeria’s potential is predicated on its large population. Economist Jim O’Neill notably included it in his MINT group of countries, alongside Mexico, Indonesia and Turkey, which he thinks will join the BRICs (Brazil, India, Russia, China) he named as the emerging economies shaping the world’s future.

All have large, swelling populations, with a demographic bulge around the soon-to-be-most-productive younger generations. For businesses deciding where to invest next, a consumer market of 170-million beats the Seychelles’ 85 000.

“Size matters,” Oscar Onyema, chief executive of the Nigeria Stock Exchange, said. “Size means you will be able to do … projects you would not have considered in smaller economies.”

For retailers targeting customers at the bottom of the socioeconomic pyramid, a national income spread around more households – lower GDP per capita, in other words – might actually be a good thing, many economists argue. If you are selling washing powder or fizzy drinks, better a large number of consumers on modest incomes than a small number of wealthy. There is only so much cola most people can drink.

For Kenyan industrialist Manu Chandaria, chairperson of Comcraft Group, which sells ironware, including corrugated roofs and pots and pans, Nigeria has massive potential. Comcraft is in 18 locations there, despite the fact that its Nigeria manager has been kidnapped three times by criminal gangs – a common risk facing businesses in southern Nigeria.

“Nigeria is just colossal,” he told the Reuters Africa Summit in Nairobi. “Everybody needs to eat. Everybody needs shelter … Anybody that brings in money needs a pot to cook in, they need a roof – so we are in the right place.”.

Inequality is Risky

Higher up that pyramid, living standards matter more. In this regard South Africa, which still has poverty but also a big middle class and an advanced consumer society, beats Nigeria.

Africa’s top energy producer relies heavily on oil, which tends to concentrate wealth in an elite at the top of the social scale – good for luxury goods firms like LVMH and Porsche, both of which have thriving operations in Nigeria.

But retailers targeting a broader consumer class say Nigeria still needs better infrastructure and a more diversified economy to achieve its full potential as a mass market.

“Until the country invests more in infrastructure, invests more on other activities outside of oil, until that starts to develop the economy … I think the potential is not like it is in South Africa,” said Mark Turner, Africa Director for Massmart Holdings, a unit of US retailer Wal-Mart. Massmart currently has two stores in Nigeria, with another opening in the coming weeks – compared with 300 in South Africa.

Turner said he could see the company opening as many as 15 stores in Nigeria, if the country could deepen development. Yet the market attraction of Nigeria’s growing middle class is already there – Shoprite just opened a store in Kano, despite the threat of an insurgency in the north, and a Massmart ‘Game’ store will soon join it there.

But Nigeria’s growing inequalities add to “political risks, as a result of perceived marginalisation,” said Razia Khan, chief Africa economist at Standard Chartered Bank. Unless something is done to lift the impoverished masses, the risk of social unrest, already being reaped in a bloody insurgency in the destitute northeast and oil theft in the south, will grow.

She said: “The pressure on the authorities to create some sort of social safety net in response will be significant.”

Source: Engineeringnews.co.za

Crossing the SACU bridge

600px-Flag_of_Swaziland.svgMartin Gobizandla Dlamini, the new Minister of Finance, is aware of the challenges of the country’s economy in case South Africa pulls out of the Southern African Customs Union (SACU).

However, the minister warned against pressing the panic button. He said there were no pellucid pointers that South Africa might pull out of the union.

Asked what measures were in place to sustain the country economically if South Africa pulled out or reviewed the revenue sharing formula to the negative, he said: “Let us cross the bridge when we get there. I am aware that South Africa calls for changes in the revenue sharing formula. This is a matter that has been on the table for quite some time.”

“I can’t comment now on how to survive with or without SACU receipts but I can mention that we are a sovereign state.” He did not expand on the sovereignty of Swaziland. Dlamini said SACU member states would meet in February 2014 for a strategic session.

These are South Africa, Namibia, Swaziland and Lesotho. “We were to meet in February in the first place, to discuss strategies on how to modernise SACU and make it relevant to our needs. It’s not like we are going there for shocks or breaking news about South Africa’s position on SACU,” said Dlamini, the former Governor of the Central Bank of Swaziland.

The country’s Gross Domestic Product (GDP) stands at E37 billion for 2012 while that of South Africa is E3.8 trillion as at 2012. In the absence of SACU, Swaziland is left with a few companies that add value to the economy in terms of taxes. They include among others Conco Swaziland which is understood to be contributing 40 per cent to the GDP, which translates to E14.9 billion and the sugar belt companies; Royal Swaziland Sugar Corporation (RSSC) which makes a turnover in excess of E1 billion and Illovo Group’s subsidiary Ubombo Sugar Limited (USL). Illovo Sugar has a 60 per cent shareholding at Ubombo Sugar while the remaining 40 per cent is held by Tibiyo Taka Ngwane, a royal entity held in trust for the Swazi nation. To Illovo Group’s profits, Ubombo Sugar contributed E272 million.

Bongani Mtshali, the acting Chief Executive Officer (CEO) of the Federation of Swaziland Employers and Chamber of Commerce (FSE&CC), said the country could be in a very bad economic situation if South Africa were to pull out of SACU. He said the economic problem could still persist even if the revenue derived from the union was decreased. Mtshali advised Swazis to expand the revenue base and work hand in hand with the Swaziland Revenue Authority (SRA) in its collection of domestic taxes.

The taxes include company tax, pay-as-you-earn, sales tax, casino tax and value added tax. He said people and companies should be encouraged to honour tax obligations. He also called for business innovation. “We will be able to produce and sell if we innovate,” he said. He said there was a need to have an innovation institution of some sort to produce talent, nurture and release it for productivity.

As it were, he said, it was suicidal to depend entirely on SACU revenue. It can be said that over 60 per cent of the country’s budget comes from the union. The SRA collects over E3 billion and this money cannot finance the national budget of E11.5 billion.

Ministries that can save Swaziland from an economic crisis are the Ministry of Commerce, Trade and Industry; Ministry of Agriculture, Ministry of Natural Resources and Energy and the Ministry of Economic Planning and Development.

It can be said that Swaziland is an agricultural economy but the closure of the factory at SAPPI Usuthu and destruction of timber at Mondi by veld fires, spelled doom to the economic outlook of the country. It can also be said that the country’s mainstay product is now sugar.

Despite maize being the country’s staple food, government spent E123 million on maize imports from South Africa last year. This year, preliminary figures indicated that government could spend E95 million on maize imports.

The import price has decreased because the country recorded a higher maize harvest of 82 000 metric tonnes compared to 76 000 tonnes recorded the previous year.

Swaziland is still clutching at straws in terms of food security. The unemployment rate is also high as there had been no massive investments witnessed on the shores.

Jabulile Mashwama, Minister of Natural Resources and Energy, said there were plans to expand the mining sector and reopen closed ones like Dvokolwako Diamond Mine.

There are only two official mines currently operational; Maloma Colliery, which made an export revenue of E126 million in the 2011/2012 financial year and Salgaocar which extracts iron ore from dumps at Ngwenya Iron Ore Mine.

Mashwama, the minister, said she would give details on the programme to revive the mining sector at a later stage. She hinted that the nation could also bank its hopes on her ministry for job creation and revitalisation of the economy.

Gideon Dlamini, the Minister of Commerce, Trade and Industry, has been given a task to industrialise the economy as one of the five-point plan by SACU. The industry minister was reported out of the country and was not reachable through his mobile phone. Source: Times of Swaziland

The Top 5 Largest Economies in 2020

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), International Financial Statistics (IFS)Note: Purchasing Power Parity has been used as this is a method of measuring the relative purchasing power of different countries' currencies over the same types of goods and services, thus allowing a more accurate comparison of living standards.

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), International Financial Statistics (IFS)Note: Purchasing Power Parity has been used as this is a method of measuring the relative purchasing power of different countries’ currencies over the same types of goods and services, thus allowing a more accurate comparison of living standards.

By 2020, three of the world’s five largest economies will be emerging countries, accounting for 30.4% of global GDP in PPP terms. Advanced economies are being displaced by emerging market superpowers, notably the BRIC countries, which has been accelerated by the seismic effects of the global economic downturn of 2008-2009. Euromonitor International predicts that China will become the world’s largest economy in PPP terms in 2017.

Additionally, Russia will overtake Germany as the fifth largest economy in 2016. These shifts will influence global politics, business environments and investment flows while consumer markets in developing countries will rise in importance as the middle class expands.

1. China: Set to become world’s largest economy in 2017

A large manufacturing base, cheap labour costs, the world’s largest population and economies of scale have resulted in unprecedented economic growth in China. Although growth is slowing, the delayed recovery in advanced economies from the global economic downturn means China will overtake the USA as the world’s biggest economy in 2017, and account for 19.0% of global GDP in PPP terms by 2020. Challenges loom large, however, including rising labour costs, pollution, a potential real estate bubble and rapid ageing arising from the government’s one child policy. Euromonitor predicts that China’s working age population (aged 15-64) will decline from 2014.

2. USA: End of the American dream?

The USA will lose its position as the world’s number one economy in 2017. In 1990, the USA accounted for a quarter of global GDP in PPP terms but we forecast this to plummet to 16.0% by 2020. The country was where the global financial crisis began in 2008 and it has failed to recover to its potential while also slipping in global competitiveness rankings. Although the government avoided the “fiscal cliff” in 2012, one of the biggest challenges remains a budget deficit reduction strategy, without the ensuing political gridlock. Nevertheless, the USA retains advantages, namely as the world’s largest consumer market and a leader of technological innovation.

3. India: Demographic dividend to benefit country beyond 2020

India overtook Japan as the world’s third largest economy in PPP terms in 2011 and its demographic advantage means the country could become the world’s biggest economy in the coming decades. India has a young population where it is benefitting from its demographic dividend (when there are more people of working age and the proportion of the child population declines). Euromonitor forecasts that India will become the world’s largest population by 2025 and that its working-age population will increase by 11.6% in 2013-2020 compared to -3.1% in China. However, India lags in major indicators including educational attainment and infrastructure development.

4. Japan: Paying the price for decades of economic stagnation

Structural problems beset Japan, with decades of weak economic growth and deflation while it has totalled the highest proportion of public debt in the world at 235% of GDP in 2012. Although the country has not yet suffered a eurozone-style sovereign debt crisis, as the majority of its debt is domestically-owned, an increase of foreign debt could trigger a Japanese debt crisis. It has the oldest population globally (mean age of 44.7 in 2012) and a shrinking labour force which will add considerable strain on government finances, while a strong currency makes its exports uncompetitive. Yet Japan’s location within Asia means it can take advantage of cheaper production costs in the region and growing demand for its high-tech products from a burgeoning Asian middle class. Like the USA, it is a global technological leader, giving it a competitive edge over its emerging neighbours.

5. Russia: Overtakes Germany as fifth largest economy in 2016

Russia will become the world’s fifth largest economy in 2016 in PPP terms, driven by its energy sector, as one of the top oil and natural gas producers worldwide. It also offers potential in its rapidly expanding consumer market, which Euromonitor forecasts will be the ninth largest globally in real terms in 2020. Its accession to the World Trade Organisation in August 2012 further cements its integration into the global economy. The lack of economic diversification and modernisation remain key long-term challenges with government policy aiming to tackle this, for example, by investing in the Skolkovo Innovation Centre Project, Russia’s equivalent to Silicon Valley. Corruption, state control and bureaucracy also hamper the business environment in Russia. Like elsewhere in Eastern Europe, the Russian working-age population is in decline (-4.5% in 2013-2020) despite a short-term baby boom, which will pose a demographic challenge to sustaining non-oil economic growth. Source: Euromonitor.com