25 July 2018( Lagos ) : Amidst improved activities in the oil sector and resilient growth in Agric, the Nigerian economy grew by 1.95% YoY in Q1 18 (Q4 17: 2.1% YoY). The reported numbers missed analyst's estimate of 3.1% hinged on the surprising contraction in trade and construction sectors. Drilling to the sub components, oil sector growth (14.8% YoY) was a core component in driving growth, accounting for 64.5pps. On the non-oil leg, the Agric (3%), Manufacturing (3.4%), and Services (0.5%) sectors led the improved picture in the non-oil domain to drive a 0.8% growth YoY.

Over 2018, contrary to the oil led growth seen in Q1 18 – analysts foresee the non-oil sector to be the major driver for growth over the rest of the year and thus revise their growth projection for 2018 to 2.1%. First off, analysts revise their oil sector growth to 5.8% (previously: 8.5% YoY) due to revised volumes for Q2 2018 to 1.89mbpd due to temporal closure of trans-forcados in May. On the non- oil leg, analysts now revise their forecast higher to 1.8% (previously: 1.3% YoY), hinged on development mainly in the Agric, Services and Manufacturing subsectors. Thus, given the rosy picture in the non-oil domain and its contribution1 to overall economic activities – the Nigerian economy is set to ride on the wings of non-oil growth in 2018.

From where analysts stand, the economic picture looks bleak in 2019 as growth is expected to slow relative to current year. First off, their expectation of crude production (2mbpd) sets a high base for oil sector growth in the coming year – leaving the non-oil as pioneer for 2019 growth. That said, as with prior years, analysts are majorly positive on Agric in the short term. Hence, with little government support to the other non-oil sectors, growth in that territory would be slow. Given its contribution to overall economic growth, the year 2019 economic picture holds little promises relative to current year.

Q1 18 GDP growth pivoted on oil and Agric Output

Amidst improved activities in the oil sector and resilient growth in Agric, the Nigerian economy grew by 1.95% YoY in Q1 18 (Q4 17: 2.1% YoY). The reported numbers missed analyst's estimate of 3.1% hinged on the surprising contraction in trade and construction sectors. Drilling to the sub components, oil sector growth (14.8% YoY) was a core component in driving growth, accounting for 64.5pps. On the non-oil leg, the Agric (3%), Manufacturing (3.4%), and Services (0.5%) sectors led the improved picture in the non-oil domain to drive a 0.8% growth YoY.

A quick dive on crude oil shows crude production maintained its uptrend, with Q1 18 output printing at 2mbpd (+14.3% YoY) hinged on base effects from low production in Q1 17 (1.75mbpd) as well as resumption of export activities at the trans forcados pipeline. According to the NNPC (monthly report for Q1 18), the increase in production reflects efforts put in place to resuscitate vandalized pipelines. Accordingly, the oil sector reported a growth of 14.8% YoY in the period under review.

Herders conflict muddles growth in the Agric Sector

As earlier stated, growth in the non-oil sector was braced by sustained growth in Agriculture and Manufacturing sectors, as well as recovery in Services sector. On Agriculture, which grew by 3% YoY, growth reflected increase in crop production (+3.5% YoY). According to FEWSNET, improved crop production is largely hinged on government support through the Anchor Borrowers Program which has contributed to farmers access to improved inputs. 

More so, fishing and forestry subsectors expanded by 4.2% and 2.9% YoY respectively. On the flip side, livestock subsector contracted by 1.9%, the first in 20 quarters. In analyst's view, the contraction resonates with worsening pastoralists conditions borne out of cattle rustling and dry spells in the north – with Benue, Kaduna, Nasarawa, plateau and Zamfara being the most affected states as revealed by FEWSNET.

The manufacturing sector grew by 3.4%, buoyed by the robust growth reported in the food beverage &tobacco (FBT), Textiles, Apparel & Footwear (TAF) and cement subsectors. For us, analysts believe the improved dollar liquidity reinforced activities in FBT and TAF subsectors as the strain on consumer spending still exists whilst improved private spending buoyed demand for cement sub sector. For context, industry cement volumes rose by 7% YoY based on analyst's estimate. 

On another end, the services sector grew by 0.5% YoY, reversing the contractionary trend which started since Q2 17 hinged on higher output in ICT (1.6% YoY), Finance & insurance (13.3% YoY), and transport (14.4% YoY) sub sectors, which accounts for a combined 57.9%. Firstly, within ICT, telecommunication subsector was the major driver as the growth in data services (+11.2% YoY to 100 million subscribers) offset the impact of a downturn in voice calls (-3.6% YoY to 148 million active subscribers). On financial services, output growth is explained by higher revenue from non- core banking operations such as fee income.

Again, Trade and construction plummets to Negative Territories

The trade sector contracted by 2.6% after reporting a robust growth of 2.1% in Q4 17. Whilst the dollar availability had enhanced trade with foreign countries, analysts perceive a slowdown in domestic demand was a major driver for the contraction in this sector – a reflection of the strain on consumer income. On other font, activities in the construction sector decelerated by 1.5% YoY owing to muted government spending in the review period.

Non- oil sector- front runner for 2018 growth

At the start of the year, analysts had maintained a cautious stance on growth with a forecast of 1.9% over 2018 hinged on the expectation of improved activities in the Agric and Oil sectors despite headwinds in services and muted growth in the manufacturing sector. However, the numbers reported in Q1 18 reveal the headwinds previously captured has gradually fizzled out. Consequently, contrary to the oil led growth seen in Q1 18 – analysts foresee the non-oil sector to be the major driver for growth over the rest of the year and thus revise analyst's growth projection for 2018 to 2.1%.

Starting off with the oil sector, while there was a slowdown in production in Q2 18 hinged on temporal closure of trans-forcados in May—commencement of production activities at the egina oil field3 as well as the re-opening of trans-forcados which occurred in June—is expected to boost production in the second half of 2018. Consequently, analysts forecast an average crude production of 2mbpd for FY18 which translates to a growth of +5.8% YoY (previously: 8.5% YoY). For clarity, analysts estimate the country’s crude production would print at 1.94mbpd in H1 18 and 2.06mbpd in H2 18.

On the non-oil sector, wherein analysts forecast a growth of 1.8% YoY (prior: 1.3% YoY), Agric and Services are set to be the major driver for growth in coming quarters. On the former, analysts expect a sector growth of 3.3% YoY for FY 18 hinged on continuous support from the government directed towards farmers and favorable rainfall, with limited impact of flooding as reported by FEWSNET. 

However, their estimate is slightly lower than FY 17 growth of 3.4% as analysts expect a sustained contraction in livestock this year. For context, while the start of the rainy season has welcomed availability of water and pasture, the incessant cattle rustling and conflict between the herdsmen & farmers guides to a more cautious outlook in the sub sector. 

The services sector at the other end would likely benefit from improved activities in both the ICT and financial services subsector via increased data penetration and non-interest revenue on financial transactions. For context, with tele-density for data services currently at 73%, relative to voice calls of 116.26%, the sub sector growth is likely to stem from improved data penetration. Consequently, analysts expect a sector growth of 1.3% YoY. Elsewhere, the manufacturing sector is expected to grow by 2.6% YoY, hinged on improved FX availability as the apex bank continues to take actions to avoid any currency shock.

Notwithstanding the contraction seen at the start of the year in construction and trade, analysts expect a mild pick up in activities. First off, the passage of the 2018 budget is expected to aid payments for ongoing construction projections which should help spur activities in the sector which combined with improved activities in the private sector drives their view of +0.5% YoY growth in the sub sector.

  Away from construction, trade sector is expected to grow by 0.1%, hinged on a mild pick up in domestic demand even as analysts do not expect any currency shock over the rest of the year. Coalescing their expectation for each sector translates to a non-oil sector growth of 1.8% for FY 18. Given the rosy picture in the non-oil domain and its contribution to overall economic activities – the Nigerian economy is set to ride on the wings of non-oil growth in 2018.

Having examined different scenarios, analysts forecast an economic growth of 2.9% YoY under their bull case hinged on production estimate of 2.1mbpd and increased government support to major sectors, such as Agriculture, Services and Manufacturing sectors. However, the downside to the forecast remains the resumption of militant activities, muted government support to the farmers as well as sustained deceleration in services sector which forms their bear case estimate of -0.7% YoY.

From where analysts stand, the economic picture looks bleak in 2019 as growth is expected to slow relative to current year. First off, their expectation of crude production (2mbpd) sets a high base for oil sector growth in the coming year – leaving the non-oil as pioneer for 2019 growth. That said, though the government has shown more interest in diverting funds to other sectors of the economy – as with prior year it’s the Agricultural sector that has enjoyed the benefits so far. Hence, with little government support to the other non-oil sectors, growth in that territory would be slow. Given its contribution to overall economic growth, the year 2019 economic picture holds little promises relative to current year.

Reporting for EasyKobo on Wednesday, 25 July 2018 in Lagos, Nigeria

Source: ARM Securities Limited

NOTE - THIS ARTICLE PUBLICATION IS COPYRIGHT OF ARM SECURITIES LIMITED AND NOT TO BE REPRODUCED OR REPRINTED IN ANY FORM WITHOUT THE EXPRESS PERMISSION OF ARM SECURITIES LIMITED.