September 6, 2017
- Africa’s largest economy offers significant potential but it must widen its tax base and broaden its activities away from oil, according to the latest report by UBS Wealth Management’s Chief Investment Office.
- Liberalization of naira exchange rates will be crucial in attracting foreign investment, report finds.
UBS Wealth Management’s Chief Investment Office (CIO) has launched Africa – Cradle of Diversity, a new report on the continent’s economic prospects and challenges.
The report highlights that of the 64 nations the IMF projects to have average real GDP growth of more than 4% in the next five years, more than half are in Africa.
As Africa’s largest country both in terms of GDP and population, Nigeria offers enormous potential for the nation’s domestic market, according to the report’s findings. The UN expects Nigeria’s population to reach up to 1 billion people by 2100, offering unusual potential for growth. At the same time, population growth presents a significant challenge in terms of job creation for new labor market entrants and the nation’s geographic limitations, considering Nigeria’s territory is approximately the size of Texas.
In addition, UBS CIO research shows that indicators relating to governance and ease of doing business are clearly weaker than for peers, thus underpinning the need for reforms as foreseen in Nigeria’s Economic Recovery and Growth Plan.
Decisive factors outlined in the report include efforts to broaden the country’s tax base and to diversify its economy. Nigeria’s revenue base heavily relies on oil-related activities, which exposes the nation’s fiscal balance to energy price shocks and volatility risks.
Nigeria is Africa’s largest oil exporter and while commodity exports remain a major growth driver in many African countries, their importance is slowly declining as domestic demand plays an expanding role in sustaining growth. Some of the continent’s fastest growing economies are concentrated in non-resource-rich countries like Côte d’Ivoire, Senegal, Kenya and Ethiopia, which are expected to grow between 6% and 8% in the next few years.
The report points out that the manufacturing industry is probably one of the most overlooked sectors in Africa, despite the continent’s potential to become the world’s next low-cost manufacturing hub and a leading global player in resource-intensive manufacturing.
Competitive labor costs, abundance of raw materials, convenient transit locations for export and large markets for local consumption position many African countries well to replace Asian competitors as attractive locations to produce goods and draw manufacturing foreign direct investment.
In the short term, further progress toward the liberalization of the Nigerian currency’s exchange rate will have a decisive impact on the inflow of such investment.
Ali Janoudi, Head of Central and Eastern Europe, Middle East and Africa, France and Belgium International at UBS Wealth Management, said: “We see tremendous potential for Nigeria’s economy, which is Africa’s largest, but in order to achieve its potential, current reform programs must be implemented and in some instances, accelerated. The current climate of higher energy prices and relative domestic stability indicate now is the right time to act.”
Michael Bolliger, Head of Emerging Market Asset Allocation at UBS Wealth Management’s CIO, said: “In the near term, oil will remain an important source of income for Nigeria. However, the impressive growth rates of non-resource-rich countries in Africa clearly indicate that development beyond oil is the way forward.”
UBS provides financial advice and solutions to wealthy, institutional and corporate clients worldwide, as well as private clients in Switzerland. The operational structure of the Group is comprised of our Corporate Center and five business divisions: Wealth Management, Wealth Management Americas, Personal & Corporate Banking, Asset Management and the Investment Bank. UBS’s strategy builds on the strengths of all of its businesses and focuses its efforts on areas in which it excels, while seeking to capitalize on the compelling growth prospects in the businesses and regions in which it operates, in order to generate attractive and sustainable returns for its shareholders. All of its businesses are capital-efficient and benefit from a strong competitive position in their targeted markets.
UBS is present in all major financial centers worldwide. It has offices in 54 countries, with about 34% of its employees working in the Americas, 35% in Switzerland, 18% in the rest of Europe, the Middle East and Africa and 13% in Asia Pacific. UBS Group AG employs approximately 60,000 people around the world. Its shares are listed on the SIX Swiss Exchange and the New York Stock Exchange (NYSE).