Nigeria vs. South Africa: Much to like, much to monitor

Morgan Stanley's recent note extolling Nigeria's potential to economically outmaneuver South Africa by 2025 doesn't strike us as particularly riveting, if for no other reason that the terms of trade/consumption thesis upon which both ‘top down' pictures presumably rest underpins fundamentals in one (per its 2011 projections Barclays writes that Nigeria's current account–15.8% of GDP estimated, up from 8.2 last year–is “likely to record a healthy surplus in 2011 [while] FX reserves, at $38USDbn, are still comfortably above 10 months of imports”) while seemingly undercutting them in the other (fickle, portfolio funded C/A deterioration).  With massive inequality in both countries still the elephant in the room vis a vis inflation expectations going forward, ample reserves also leave the CBN with more arrows in its currency-defense quiver; CBN Governor Sanusi's emphasis on an enduring 3% band of USD/NGN150 for the naira looks reasonable, though a growing fiscal deficit (still muted given overall, low debt levels of just below 20% of GDP) and the planned removal of fuel subsidies mean that even an anticipated further 75bp of rate hikes by year's end could be inadequate.  Yet unlike in South Africa, where unrest feeds increasingly spiraling wage demands (which in turn supports real purchasing power and thus consumer spending, wears on the supply side and capacity utilization rates) and “dictator[s] in waiting”, social reform in Nigeria may have the potential to leverage an already buoyant informal economy and accelerate the contribution from increasingly important non-commodity sectors (Absa Capital wrote this week, for instance, that the National Bureau of Statistics (NBS) now expects average real GDP growth to increase from 7.9% in 2010 to 8% in 2011 largely as a result of increased activity in the non-oil sectors, particularly from trading, construction, finance and telecommunications).  That said, while social reform hitherto in Nigeria has been more than vote-snaring lip service (analysts maintain that the Niger Delta's improvement to well over 2mn barrels over the past year are proof-positive that unemployed, restive youths have been allayed), cynics argue that promises aside, President Goodluck Jonathan is destined to feel the effects of North-South instability inherent to the latest governors' row relating to implementation of the Minimum Wage Act.