What have exchange rates done to your GDP ? SA is “apparently” third in Africa…

January 27, 2016

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A couple of years ago – I did a summer mash-up comparing continental, country and US state GDP. I argued that even with a US recession in 2016, still Russia’s GDP would not exceed California’s until 2029. This is a very preliminary update on how the EM and Frontier worlds stack up against each other and the US after a pretty volatile 18 months in commodity and FX markets.

There are now 22 US states (including Arizona) that in 2014 had a bigger GDP than South Africa does today. At official exchange rates, Nigeria’s economy is nearly twice the size of South Africa.

We do not have firm dollar GDP estimates for 2015. What we have done is compare 2014 dollar GDP (from the IMF), with the IMF’s nominal local currency GDP estimates for 2016 divided by today’s exchange rate. The two obvious problems with this is that 2016 local currency GDP estimates will change and that exchange rates will change. This is very far from perfect. To take one example, using this methodology, we reckon the Russia numbers are 20% below Oleg Kouzmin’s most recent estimate for 2016 GDP. This methodology overstates Nigeria’s GDP by 10% relative to the Nigerian government’s estimate for 2016 GDP.

But it shows that in 2014 – MSCI EM GDP was $25.8 trillion and in 2016 it could be $24.6 trillion. Not as big a fall as I’d have expected. World GDP for reference is around $76 trillion in 2016. So EM is about 1/3. In actual cash. And it is actual cash not PPP dollars that buys you a barrel of oil or an imported BMW (an old petrol engine VW in my case).

Over two years – China is still up a lot, as is India. Russia and Brazil have taken a beating.

Source: IMF, Bloomberg, Renaissance Capital

Below we compare 2016 GDP figures against a very crude estimate of US state GDP (for US states, we’re assuming just 4% nominal growth from 2014 figures released by the BEA).

Brazil was 15% bigger than India in 2014 but at today’s exchange rate, it may be just 2/3 the size of India. Note the MSCI weight for Brazil at 6% is also smaller than the 8% weight for India.

Russia was 20% smaller than California in 2014, but is 43% smaller in 2016, and indeed is smaller than New York state. For this calculation we’re using RenCap’s own estimate of GDP – which is quite different from the $1.1 trillion derived by the methodology described above. I trust Oleg Kouzmin’s methodology.

Egypt is much bigger than South Africa – using today’s spot rate – but 6% smaller if we use our REER implied fair value of EGP10.5/$.

Nigeria (see next section) is now double the size of the SA economy – if we use the official NGN rate.

Source: IMF, Bloomberg, Renaissance Capital, BEA

The change in frontier markets is positive for some of the top picks of FM investors. It is Kazakhstan that is hit most – followed by Argentina that had a currency valuation in 2014 that no-one believed in. We include Saudi because it is a large off-index exposure for most FM funds.

Source: IMF, Bloomberg, Renaissance Capital

If we look at the spot rates – we see that Nigeria officially may have an economy that is $515bn. This is the second country we have used a different methodology for. The shaky methodology gives a figure of $564bn. We are instead taking the Nigerian 2016 budget estimate for GDP (NGN102 trillion) at NGN198/$. Still this is nearly double the size of the SA economy. It also suggests that Nigeria’s economy is bigger than Taiwan or Poland.

If instead we use NGN300/$ (close to the unofficial currency rate), we come up with a figure of $376bn. That brings it closer to (but still 30% above) Pakistan – which has more people, a larger manufacturing sector, and three times the electricity per capita.

Overall FM GDP (excluding Saudi Arabia) has shrunk from $3.1 trillion to $2.9 trillion, using the official exchange rates. Again, not too much.

CONCLUSION: An eyeball comparison shows that Nigeria’s currency is overvalued at 200/$ (especially if we compare to Pakistan, let alone SA). SA is also far behind Egypt, based on the official EGP and spot ZAR rates. In the long-run, those who’ve been hit most, from Russia to Brazil to SA to Kazakhstan do look pretty cheap.