April 7, 2014 4:51 pm

Nigeria: Size matters

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Investors must balance the growth potential with economic stability

Bigger is better. And in Africa the biggest is now Nigeria after the government nearly doubled the estimate of the country’s gross domestic product to $509bn. The jump comes due to a different reckoning of the size of its services sector, now more than half of output. Despite the lift, Nigeria’s per capita output (roughly $5,300) still sits at less than half of South Africa’s of $11,500 – in constant US dollar purchasing parity terms.

Nigeria has revisited its base of calculation, from 1990 to 2010, which has given more weight to recently successful service sectors, such as banks. Investors in Nigeria’s stock market have focused on these sectors representing 70 per cent of the MSCI Nigeria index, itself up 57 per cent in dollar terms over the past three years. Emerging (down 9 per cent) and world (up 29 per cent) markets trail this gain by some margin. Note that Nigeria’s stock market is still less than a tenth that of South Africa’s in dollar terms.

And yet doubts persist. Standard & Poor’s last month put the sovereign rating under negative watch and the GDP revision has not changed that view. Potential disruption ahead of nationwide elections next year has S&P concerned. Bank of America has noted the growing discount of the Nigerian naira versus the dollar on the black market (versus the interbank rate), now nearly 5 per cent from parity last summer.

Yes, size matters to national pride but it is growth that investors admire. Estimated earnings growth for the MSCI constituents is in the low teens, supporting a price to forward earnings multiple of 10 times – the three-year average. However, given the new, higher base for GDP, investors could find that the growth rate necessarily slows. As with most frontier markets, the big issue for investors in Nigeria will be balancing the growth potential with economic stability.

Email the Lex team in confidence at lex@ft.com

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