Economic Recovery: Flash in the Pan?


Monday, Nov 20, 2017 3:43PM/ ARM Research

Data released this morning by the National Bureau of Statistics (NBS) showed Nigeria’s economy grew by 1.4% YoY in the third quarter of 2017, in sync with our estimate of 1.1%. Much of the growth came through a sustained boom in the oil sector which grew by 25.9% YoY on the back of higher oil production to 2.03mbpd (+8.9% YoY). Also, Agriculture sector sustained its resilience, for the 8th consecutive quarter, recording a growth of 3.06% YoY to moderate the weak numbers from the non-oil leg.

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However, not all data in this release was positive buttressing our call for fragile growth and possibility of negative growth in 2018. Aside from Agriculture, other notable sub-sectors in the non-oil segment recorded deceleration in the review quarter. Consequently, non-oil GDP decelerated by 0.76% YoY, after two consecutive quarters of growth.

First off, Services sector, the largest component of non-oil GDP, sustained its deceleration for the 2nd consecutive quarter (-2.7% YoY) on the back of weaker output in the ICT sub-sector (-4.5% YoY) coupled with a further contraction in the real estate subsector (4.1%). Furthermore, financial services reverted to deceleration (-5.96% YoY), after two consecutive quarters of growth.

The contraction in ICT largely reflected activities in the Telecommunications subsector where active lines declined (-8.2% YoY to 139 million), which we believe lowered the revenues of telecoms companies. Meanwhile subdued activities in luxury real estate segment extended the pressures for the sixth straight quarter in the real estate sector.

Elsewhere, the manufacturing sector, after recording two consecutive quarters of growth, reverted to deceleration in the 3rd quarter (-2.85% YoY). The deceleration in manufacturing sector, which negates the PMI reading in the period, was largely due to 45% and 5% YoY deceleration in oil refining and cement even as Food, Beverage, & Tobacco, and Textile, Apparel & Footwear sub-segments recorded slower growth.

Overall, despite the increased momentum in economic recovery, the underlying numbers gives a little cause for optimism and suggests the economy can easily revert to a negative growth in 2018. Given the high base in oil GDP over 2017, due to higher production and muted growth expectation for oil in 2018, the movement in non-oil GDP will be key to overall economic growth.

For non-oil, we a hold a pessimistic view driven by the high base in Agriculture and a sustained slack in Services. On Services, with tele density over 100%, tepid subscriber growth should continue to underpin deceleration in telecommunications GDP. Consequently, ICT GDP growth should remain slack in 2018. Elsewhere, we see limited respite for real estate which is already grappling with oversupply across most segments. On balance, we think a slower growth in the oil sector and Agriculture front holds a fragile view on overall GDP in 2018.

In terms of impact, juxtaposing the fragile growth picture with expected downtrend in inflation and improved FX picture because of rising dollar inflows with a subsisting CA surplus, we see more scope for the apex bank to ease gradually to support the slow pace of economic recovery. In the interim however, we expect the MPC to keep rates unchanged while assuming a less aggressive stance at its weekly OMO auctions leading to lower rates on government securities. Farther out, we forecast a cut in monetary policy rate (MPR) from Q2 18 and expect the MPR to be at 12% by year-end 2018.

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