28 June 2018 ( Lagos ) : Nigeria’s 2018 economic performance has been weaker than expected (Q1’18: 2.0% y/y vs. Vetiva and Consensus expectations of 3.4% y/y and 2.6% y/y respectively), albeit dragged by a few key sectors. Consequently, analysts downgraded their growth expectations for 2018 (2018F GDP growth: 1.9% y/y vs. previous: 2.4% y/y; 2017: 0.9% y/y) on weak Q1’18 performance and concerns over oil production. 

Nevertheless, analysts are cheered by moderating inflation (2018 revised average inflation forecast: 12.0% y/y vs. previous: 12.8% y/y), stronger than expected oil prices, and anticipated robust aggregate demand spurred by pre-election activities. However, analysts have altered their policy outlook for the year; they foresee only a constrained fiscal stimulus this year in light of the late passage of the 2018 Budget, and they no longer expect monetary easing in 2018 given their concerns that fiscal injections in H2’18 would pressure inflation. 

Meanwhile, analysts highlight a downturn in the oil sector (price or volume), fiscal slippage, and insecurity as the primary near-term risks to the economy. Overall, they retain their positive economic outlook – albeit slightly dampened – for the rest of the year. Furthermore, contingent on a smooth electoral process, they are more positive about the post-2018 economy as wider aggregate demand recovers, and forecast GDP growth of 1.9% and 3.2% y/y in 2018 and 2019 respectively. 

Ongoing violence threatens sector growth 

The agriculture sector underperformed in Q1’18, posting GDP growth of 3.0% y/y, the lowest since Q2’13. The sector had previously been propped by government policy to encourage import substitution and Central Bank of Nigeria development finance initiatives, but has suffered negative shocks in recent times. 

First, the Benue flooding in late August 2017, then a severe increase in the spate and severity of violent Herdsmen activities in the Middle Belt and North Central. The latter could be particularly damaging to agriculture output given the span of the affected area, and could worsen in the build-up to the 2019 elections. The Federal Government has taken some action, initiating a National Food Security Council in March 2018 and launching a military operation in May 2018 to defuse the situation. 

However, analysts do not expect the issue to be quelled in one fell swoop given its scale and dispersion. The President also produced a National Livestock Transformation Plan to address longstanding issues around grazing and farmland in the country and they are hopeful that astute execution of the plan would move the region towards long-term peace and stability. 

All in all, the insecurity situation dampens their outlook for agriculture and analysts forecast GDP growth of 3.4% y/y in 2018, down from their 3.7% y/y expectation coming into the year. Despite this, analysts still expect agriculture (25% of GDP) to be one of the main drivers of GDP growth this year. 

Bullish outlook dampened by leaky pipes 

The recovery in Nigeria’s oil production as a result of the calm in the Niger Delta region has been a huge plus for Nigeria in the past 18 months. Oil production has risen from a low of 1.61 mb/d in Q3’16 to 2.00 mb/d in Q1’18. Analysts envisage oil output holding around these levels amid the constraint of the OPEC output cap (1.8 mb/d excl. condensates). 

Analysts are aware of recent production issues; namely, the continued shut-in of the Nembe Creek Trunk Line and its effect on Bonny Light exports, as well as the delays to Forcados loadings as a result of pipeline leaks. Production should take a hit from these developments, but they anticipate resolutions to these challenges in the coming months as pipeline operators continue to take decisive actions, even as oil majors explore alternative routes to ensure production is not too affected. 

On another note, analysts are cautiously optimistic that the calm in the Niger Delta would persist through to the 2019 elections as they anticipate the Federal Government doing its utmost best to ensure that attacks are kept to a minimum – given the political and fiscal severity of a negative shock here. 

Finally, analysts expect the sector to further benefit from healthy oil prices – which may support investment – but note that legislative reprieve is still required to unlock long-term growth prospect. Their FY’18 average oil production forecast is 2.00 mb/d (2017: 1.89 mb/d), translating to GDP growth of 5.8% y/y (Q1’18: 14.8% y/y). 

Industrial activity finding form 

The manufacturing sector rebounded from three consecutive years of contraction to post impressive GDP growth of 3.4% y/y in Q1’18. The outlook for the sector is modestly positive, in line with the cyclical recovery in the wider economy. 

Firstly, strengthening consumer wallets and pre-election spending should support aggregate demand. In addition, analysts envisage manufacturers benefitting from continued foreign exchange stability and liquidity on the cost side, and see them being shielded from excessive import-switching because consumer wallets are still not strong enough to support substantial import expansion. 

The sector would also be boosted by moderating inflation, but would not cheer likely Central Bank of Nigeria decision to maintain the monetary policy status quo. Amid all these, analysts forecast annual growth of 3.9% y/y, making it the fastest growing non-oil sector in the economy, albeit a far cry from pre-2015 growth rates. 

Flat growth expected in services sector 

Growth in services was disappointing in Q1’18 (-0.5% y/y) and the sector was the primary drag on economic performance in the quarter. Notwithstanding the negative performance, looking at services sub-sectors is informative. A number of sectors have performed well recently – Transport, ICT, Finance – and should continue to benefit from stable foreign exchange, moderating inflation, and improving business environment. 

On the other hand, key sub-sectors are faring much worse, with Trade, Real Estate, and Construction playing the role of ugly ducklings. These three sectors are key – account for over 25% of the Nigerian economy and 16% of employed workers – so weakness here has material repercussions. Analysts are hopeful that pre-election spending provides a temporary boost to the services sector and project mild growth of 0.3% y/y in 2018.