NIGERIA GROSS DOMESTIC PRODUCT
Economy underperforms in first quarter of 2018
The Nigerian economy grew by 2.0% y/y in the first quarter of 2018, boosted by a recuperating oil sector, moderating inflation, and stable exchange rate. However, growth came in behind Vetiva (3.4% y/y) and Consensus (2.6% y/y) expectations and was lower than 10 of 12 analyst predictions (as surveyed by Bloomberg). This quarter’s economic performance was better than Q1’17 (-0.9% y/y) but worse than Q4’17 which was revised higher to 2.1% on the back of a higher oil production estimate (from 1.91 mb/d to 1.95 mb/d). This underperformance was driven by the non-oil sector, which grew at 0.8% y/y (Vetiva: 1.8% y/y, Q4’17: 1.5% y/y) as the oil sector expanded by 15% y/y. Furthermore, the slowdown was driven by weaker agriculture growth and a slump in services as industrial output picked up in the period.
Oil sector – What a difference a year makes
The sharp turn the oil sector has made in the last year can be seen in the fact that nominal GDP, grew 84% y/y to ?4.0 trillion, a record quarterly output from Nigeria’s oil sector – thanks to the impact of devaluation. The sector also grew 14.8% y/y in real terms, contributing 10% to overall GDP in the quarter. Recorded oil volumes stood at 2.00 mb/d in the period, in line with Vetiva forecast but slightly below the 2.07 mb/d reported by the Ministry of Petroleum Resources (MPR). Although Q1’18 oil production is at a 2-year high (per NBS data) and MPR & OPEC estimates suggest continued stability in production, it remains well below the budget target of 2.30 mb/d and a 5- year average of 2.28 mb/d before the 2016 militant uprising. Given that production disruptions have been kept to a minimum, Nigeria’s oil sector may be suffering from legacy damage and under-investment as a result of the 2016 debacle. Meanwhile, recent challenges pose an intermittent threat to production. Force Majeure was declared on Bonny Light exports in mid-May following a shutdown on the Nembe Creek Trunk Line stream, shutting in almost 200,000 barrels a day, whilst the Trans-Forcados pipeline was also shut down as a result of a leak. We are yet to get clarity on when Bonny Light and Forcados liftings would resume as normal and have marginally reduced our Q2’18 oil production forecast from 2.00 mb/d to 1.95 mb/d to account for this. This equates to a GDP growth forecast of 4.3% y/y for Q2’18.
Agriculture – Worrying dip may show cost of insecurity
Agriculture GDP growth came in at 3.0% y/y, the lowest quarterly real GDP growth since Q2’13. We point to recent challenges plaguing the sector in the form of the August 2017 Benue flooding and ongoing farmer and herdsmen clashes across the Middle Belt region and believe these could be taking their toll on the sector. Notably, Livestock GDP growth turned negative (-1.9% y/y) for the first time since Q4’12. Our outlook for the agriculture sector would have been positive given the support from moderating food inflation and Central Bank of Nigeria development finance initiatives. However, the Q1’18 slowdown and prevailing threats to food security compel us to adopt a more cautious stance on the sector. As such, we revise our Q2’18 agriculture GDP forecast downward to 3.3% y/y (previous: 3.5% y/y) and our FY’18 forecast to 3.4% y/y (previous: 3.7% y/y).
Manufacturing – a real plus, led by Food & Beverage sector
The manufacturing sector was the brightest positive in the Q1’18 numbers, beating our estimates – 3.4% y/y vs. 2.3% y/y. Most of the joy came from the Food, Beverage & Tobacco sector (5.5% y/y) which accounted for 67% of the growth in manufacturing. We attribute this to strengthening consumer wallets, stable and improving FX liquidity, and marginal price cuts at the start of the year which would have supported demand. We note that the impending implementation of excise duties on alcohol and tobacco may weigh on demand here, but expect the impact to be mild as alcohol and tobacco are a relatively small portion of the Food & Beverage sector. We also saw strong growth in Cement (5.3% y/y) and Textile, Apparel & Footwear (1.9% y/y). However, this sharp growth in industry must be put into context as it pales in comparison to pre-recession growth levels. Nigeria’s manufacturing sector was growing so fast pre-2015 that the sector’s GDP doubled between 2009 and 2014. Nevertheless, we are confident that the sector would continue to benefit from foreign exchange stability and liquidity, as well as moderating price pressures and market interest rates. Amid this, we increase our GDP forecasts to 4.0% y/y and 3.9% y/y for Q2’18 and FY’18 respectively (previous: 1.9% y/y and 2.2% y/y).
Services – a return to negative growth
Services (-0.5% y/y) was the biggest drag on growth, lagging both Q1’17 (- 0.3% y/y) and Q4’17 (0.5% y/y) growth. The silver lining is that only seven out of twenty-five sub-sectors contracted in the period; the negative is that these seven make up 56% of the services sector. This group is led by Real Estate (9% down y/y) and Trade (2.6% down y/y). Meanwhile, Finance & Insurance (13% y/y) and Transport (14% y/y) expanded in the period. Despite the weak Q1’18 performance, we are cautiously optimistic that the sector will avoid a double-dip recession as aggregate demand strengthens and inflation continues to moderate. Thus, we maintain our expectations of flat y/y GDP performance in the next quarter.
Assessing the link between employment and output in Nigeria
The weakness in agriculture seen in the past quarter is worrying given that it accounts for 48% of Nigeria’s employment. Meanwhile, the improvement in the oil & gas sector is unlikely to permeate through the economy as the sector employs 0.2% of Nigeria’s working population. Furthermore, the low proportion of industrial workers in the country (7%) shows that Nigeria is not industrialized enough and explains why the sector contributes just 9% to GDP. In contrast, Trade and Real Estate alone account for 14% of employment, a frightening prospect considering the persisting weakness in those sectors of the economy. Overall, there is a disjoint between employment and output in the Nigerian economy. Even apart from the concentration of labour in the agriculture sector (25% of GDP), areas such as education, health, and profession services contribute 13% of employment but only 5% of economic output. It may be that these labour-intensive industries are in a low productivity trap and targeted policy measures are required to address this.
2.1% GDP growth expected for Q2 and FY
Nigeria’s economic performance in the first quarter of the year was disappointing, but there are still signs that the recovery could accelerate from this point. Stronger oil prices, further strides taken in the fight against inflation, and strengthening industrial output offer hope for the future. Driven by downward revisions to our expectations for agriculture and services, we forecast 1.8% y/y GDP growth for Q2’18 (previous: 2.1% y/y) and FY growth of 2.1% y/y (previous: 2.4% y/y).
SOURCE - ANALYSTS AT VETIVA CAPITAL MANAGEMENT IN VICTORIA ISLAND
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