Oil-Driven Recovery Will Be Muted in 2017, Investment Lustre Will Be Slow To Return


Thursday, December 29, 2017  06.48PM / A BMI View

Nigeria will return to growth in 2017 as oil prices rise and production picks up once more, but the recovery will be weaker than we previously anticipated. Negative investor sentiment and delays to government-supported infrastructure will keep real GDP growth far from pre-2014 levels over the course of our 10-year forecast period.

The economic recovery in Nigeria will take longer than we had previously anticipated, owing to ongoing investor caution towards the country which we do not expect to ease within the next 12 months. We had previously forecast that following a projected 0.8% contraction in 2016, real GDP growth would rebound to 4.7% in 2017 as oil production and prices recovered, investment picked up, and the government implemented an infrastructure spending stimulus. While we do believe that the economy bottomed out with the 2.1% contraction recorded in Q216, risks to oil production abound, investor sentiment remains negative and there is as yet no sign of major government projects getting underway. As such, we have downgraded our forecast to growth of just 2.8% in 2017, rising to 4.0% in 2018.

Oil Will Be Key Driver Of Recovery
A recovery in both oil prices and production in 2017 will be the major contributor to improving growth next year. The primary source of Nigeria's macroeconomic woes over the past two years has been the fall in the global oil price from an average USD99.5 per barrel (/ bbl) in 2014 to a projected USD45.5/ bbl in 2016, according to BMI's Oil & Gas team, and a drop in production owing to both lower prices and political unrest. We forecast that Brent crude will average USD55.0/bbl in 2017 and USD68.0/ bbl in 2018, while Nigerian production will expand by 19.0% following a 10.4% decline in 2015 and a projected 21.5% slump in 2016. Although higher prices do not affect the real growth rate directly, they encourage investment and increase fiscal revenues, enabling the government to boost expenditure.

However, while this recovery in hydrocarbon prices and production is a positive for the economy, it will not be sufficient to return Nigeria to pre-2014 real GDP growth levels, which averaged 7.4% over the decade. The oil price slump has highlighted how structurally dependent on the sector the Nigerian economy is, despite its accounting for less than 15% of GDP. Oil has traditionally been the primary source of foreign exchange and government revenues, such that the commodity bust has had a significant knock-on effect on the rest of the economy.

Our forecast for 19.0% production growth in 2017 will still leave oil output 16.3% below its pre-2014 highs. Moreover, the risks to our oil production outlook are heavily skewed to the downside. Production fell in 2016 largely as a result of pipeline attacks by the militant group the Niger Delta Avengers (NDA). The group has currently ceased its attacks, but the risk of further escalations by it or other groups remains pertinent (see 'NDA Ceasefire Holds Little Upside To Output', August 31)

Investment Lustre Will Be Slow To Return
With the oil sector's recovery expected to be gradual at best, Nigeria's attractiveness as an investment destination will continue to be limited, especially as the government pursues policies likely to deter potential investors. The oil sector will be directly affected by the Buhari administration's crackdown on perceived transgressions, as it was reported in September that the federal government had filed court cases against Total E&P Nigeria Limited and Nigeria AGIP Oil Company Limited with others likely to follow. The two companies stand accused of not declaring crude shipments out of Nigeria during the period 2011-2014.

Whatever the legal validity of these accusations, the court cases are poorly timed, with investor sentiment towards Nigeria's hydrocarbon sector having been severely weakened in 2016 due to increased deterioration of the security environment in the Niger Delta. The court actions will weigh on investor sentiment towards the country in the near term, and jeopardise future oil output over the longer-term time horizon (see 'Deteriorating Relations Threaten Production Outlook', September 21). While on the face of it this is a sector-specific development, it follows on from the issuance of a major fine against South African telecoms company MTN in 2015, and will raise fears among multinationals across sectors that the government will seek to plug its finances through seeking remuneration from companies in the courts (see 'MTN Nigeria Fine Within BMI's Core Scenario', June 13).

Aside from direct attacks on companies, ongoing confusion over the direction of monetary policy will remain a red flag for many investors. Following the relaxation of exchange rate policy announced on June 20, we had expected that investor sentiment would improve. However, the relaxation appears to have been only partial, with bans still in place on the importation of 41 imports including rice, cement and steel pipes, and the central bank has been intervening to keep the naira below USD320/USD – compared to the parallel market rate of NGN422/USD at the time of writing on September 22 (see 'NGN: Currency Depreciation Will Resume With Limited Respite', July 18). The overvalued exchange rate is leading to a liquidity crisis in Nigeria, with many businesses unable to access the dollars they need to operate.

Most recently, local media sources have begun to call the central bank's independence into question after it maintained the key policy rate at 14.00% at its most recent monetary policy meeting even as rising inflation has seen real interest rates becoming increasingly negative. Finance minister Kemi Adeosun has publicly called on the central bank to reverse its July interest rate hike in order that the government might borrow more cheaply. With ratings agencies downgrading Nigeria – S&P was the most recent to do so, citing the 'restrictive exchange rate policy' weighing on growth and downgrading it further into junk status – many international funds will not be able to invest in the country.

Infrastructure Boost Increasingly Unlikely To Materialise In 2017
Finally, the boost to the economy through increased spending on infrastructure projects promised by the government in its 2016 budget has yet to materialise, and we now do not expect that this will come through to a sufficient degree to achieve the real GDP growth we had previously projected in 2017. The 2016 budget was beset by problems, resulting in a prolonged delay before it was signed in to law. Moreover, even after it has been passed, the continued low oil prices have curtailed the government's ability to follow up on proposed projects. The government has indicated that in the current lower-than-anticipated oil price environment, it intends to borrow in order to fund its capital expenditure plans – there is talk of a new eurobond issuance before end-2016, and of sizeable borrowing from China – but with no indication of significant progress in terms of infrastructure spending plans as yet, it appears that the government is struggling to get the rates at which they are prepared to borrow.

As such, we do not anticipate that government capital expenditure will provide the growth stimulus we had previously expected. With little scope for private companies to pick up the slack given ongoing liquidity shortages in the economy (unlikely to be resolved while the naira is held at NGN320/USD), infrastructure sector growth will remain subdued.

Oil Market Outlook

BMI holds on to their current oil price outlook in the wake of the US election: We forecast an annual average price of USD55.0/bbl and USD53.5/bbl for Brent and WTI, respectively, in 2017. Gains are based on expected demand growth in emerging markets and continued pullback in non-OPEC supply, with the exception of the US. However, the downside risks to this forecast have materially increased following the election of Donald Trump. This is due to the potential for a stronger recovery in US shale, and weakened prospects for a coordinated OPEC cut on November 30. Trump has suggested supporting US oil production by relaxing industry regulations, including drilling restrictions.

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