Monday, August 24, 2020 / 06:20PM /PFI Capital
/Header Image Credit: PFI Capital
Earlier, the National Bureau of Statistics (NBS) published Nigeria's Q2-2020 GDP numbers showing a contraction of 6.1% y/y in real GDP, compared to 2.12% in Q2-2019 and 1.87% in Q1-2020. Quarter on quarter, real GDP decreased by -5.04% in Q2-2020.
The decline came on the heels of a contraction in the oil sector (6.6% y/y in Q2-2020 vs 1.64% y/y in Q2-2019 and 1.55% y/y in Q1-2020), and non-oil sector (6.05% y/y in Q2-2020 vs 7.17% y/y in Q2-2019 and 5.06% y/y in Q1-2020) which shrunk for the first time since Q3-2017.
Agriculture contributed 24.65% to GDP in Q2-2020 from 22.78% in Q2-2019 and 21.96% in Q1-2020. Industries contributed 21.87% in Q2-2020 from 23.34% in Q2-2019 and 23.65% in Q1-2020 while Services share stood at 53.49% in Q2-2020 from 53.87% in Q2-2019 and 54.39% in Q1-2020.
Roughly 52% of the activity sectors contracted, led by Trade (14.28% of GDP), Mining and Quarrying, Manufacturing and Real Estate. Sectors like Information and Communication, Agriculture and Financial and Insurance were resilient.
Only 13 activities recorded positive real growth in Q2-2020 compared to 30 in Q1-2020.
We note that the decline in output, which is the largest in over 60 quarters, reflects the impact of disruption to economic activities following lockdowns in key states and restriction of inter-state movements in the quarter together with external shocks from COVID-19.
Notably, Lagos, Ogun and Abuja went into lockdowns on March 30, and an interstate travel ban (except for food and medical supplies) followed shortly. While the ban on interstate travel was lifted on July 1st, 2020 to permit movements outside curfew hours, the return to normalcy and full reopening of the economy is still ongoing as the pandemic persists.
Trading fell by 16.59% y/y in Q2-2020 compared to -0.25% y/y in Q2-2019 and -2.82% y/y in Q1-2020 reflected the impact of COVID-19 on domestic trade and Nigeria's international trade, adding to pressures from on-going land border closure with neighboring countries.
Mining and Quarrying GDP tanked (-6.6% y/y in Q2-2020 vs 7.0% y/y in Q2-2019 and 4.58% y/y in Q1-2020 on depressing activities in the Crude Petroleum and Natural Gas sub-sector (98% of total Mining and Quarrying GDP) as global oil and gas market suffered a low level of demand with entire countries isolating and international linkages dislocated.
Manufacturing GDP fell by 8.78% y/y in Q2-2020 compared to 0.13% y/y decline in Q2-2019 and 0.43% y/y growth in Q1-2020. As expected, manufacturing activities were affected by the interruptions to international trade which affected Nigeria's trading partners, low consumer demand, FX-scarcity among other things. The decline in the sector was broad-based including in sub-sectors; Cement, Food, Beverage and Tobacco and Clothing, Textile and Apparels.
On the other hand, Agriculture showed resilience as it remained positive albeit slow growth. The sector's GDP slowed to 1.58% y/y in Q2-2020 from 1.79% y/y in Q2-2019 and 2.20y/y in Q1-2020. This is below the 5-year average of 2.4% for the Q2 since 2016. We believe the result mirrors challenges farmers faced in linking farms to markets as transportation activities slowed even though the movement of food was allowed during the interstate lockdowns. Also, some reports suggest farmers faced difficulties in accessing their farms due to insecurities in some parts of the country. Notwithstanding, the sector saw overall positives with crop production growing by 1.44% y/y in Q2-2020 from 1.94% in Q2-2019 and 2.38% in Q1-2020.
The information and Communication sector grew 15.09% y/y in Q2-2020 compared to 9.01% in Q2-2019 and 9.99% in Q1-2019. Notably, the telecommunication sub-sector lifted the sector, nearly doubling its growth in Q2-2020 to 18.10% compared to 11.34% in Q2-2019, the best since 2011 at least. The growth aligns with expectations that data and voice service providers would gain as remote-working gained grounds and digital communications replaced physical mobility amid mandatory social-distancing. According to data from the Nigerian Communications Commission (NCC) GSM subscribers rose 5.54% from January to June.
In the second quarter of 2020 daily oil production average declined by 0.21 million barrels per day mbpd y/y to 1.81 was mbpd and was 0.26mbpd lower than the first quarter 2020 production volume of 2.07mbpd. This is the lowest output record since Nigeria slipped into a recession in Q2-2016.
Consequently, the real growth of the oil sector was -6.63% y/y in Q2-2020 indicating a decrease of -13.80% points relative to growth in Q2-2019. In Q1-2020 growth was 5.06% y/y, thus on a q/q basis, the oil sector recorded a growth rate of -10.82% in Q2-2020.
The Oil sector contributed 8.93% to total real GDP in Q2-2020, from 8.98% in Q2-2019 and 9.50% in Q1-2020 respectively.
Notably, during the quarter marked by a depressed global oil market, oil rigs in the country operated below normal capacity and the multiplier effect of the downturn in the international markets affected oil fields productions.
In April, OPEC+ agreed on a record production cut of a tenth of global supply to balance the market. The record 10 million barrels per day (mbpd) which took effect in effect in May and June (an effective cut of 12.5 mbpd) required around 23% cut from Nigeria's quota.
We note that Nigeria did not fully comply and has committed to extra cuts in August to compensate for previous overproduction while discussions around Agbami as condensate is on the table, according to some reports.
For Q3-2020 we expect the economy to contract albeit less steeply than in Q2-2020, noting the ongoing ease in lockdown since May. We note that some firms have resumed activities although at a subdued level due to cautionary measures as the pandemic persists.
We note that disposable income has been affected by the impact of COVID-19 on jobs and this could adversely affect manufacturers.
Trade is expected to improve following the resumption of activities in the domestic transportation sector.
Globally, economies are reopening and cross-border travels and trade have slowly started to pick up.
Plans to resume International flights on August 29, 2020, could signal improved confidence.
For the oil sector, we have seen a steady improvement in the international market since April and expect the price to remain at $44-$46 per barrel by the end of 2020 on demand and supply support. For Nigeria, however, we are aware of commitments by the country to compensate for its non-compliance with OPEC+ agreed quota by cutting production further in August 2020.
Overall we see some improvements in Q3-2020 and marginally positive or perhaps flat growth in Q4-2020.
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