Tuesday, Nov 21, 2017 8:53PM/ Vetiva Research
· Recovery continues but non-oil sector contracts
· Dark days are a memory as oil volumes climb
· Services sector shrinks 2.4% - depicts economic weakness
Recovery continues but non-oil sector contracts
Registering at 1.4% y/y, Nigeria’s Q3’17 GDP growth came in below Vetiva and Consensus estimates of 2.5% and 1.5% respectively, albeit above the growth recorded in Q2’17 (0.7% y/y) and Q3’16 (-2.3% y/y). Consequently, ytd economic growth stands at 0.4% vs. -1.5% in 9M’16, showing the tepidness of Nigeria’s economic recovery.
Particularly, recovery has also been concentrated in the oil sector (up 25.9% y/y in Q3’17) compared to non-oil sector growth of -0.8% during the quarter. Notably, whilst Nigeria’s underlying economy has been flat in the past two years, the volatility has primarily come from the oil sector amidst sizable fluctuations in oil volumes in recent times.
Nigeria’s economy expanded by 11% y/y in nominal terms in Q3’17, helped by a 9% y/y increase in average prices (as measured by the GDP deflator). On a positive note, the GDP deflator recorded a marginal q/q price reduction, the first since Q3’15, indicating that Nigeria’s inflation woes are receding.
Dark days are a memory as oil volumes climb
Buoyed by stronger quarterly average production of 2.03 mb/d (Q3’16: 1.61 mb/d), the oil sector expanded 26% y/y in the quarter to lift Nigeria’s GDP. Q2’17 oil sector GDP growth was also revised to 4% (previous: 2%) after the National Bureau of Statistics raised its Q2’17 oil production estimate from 1.84 mb/d to 1.87 mb/d.
The outlook for the oil sector is more positive than it has been since 2015, and with October production estimated at 2.03 mb/d, we expect growth to remain resilient here. There is still considerable output upside (2018 Budget benchmark: 2.3 mb/d) although we are cautious about the likelihood of reaching this mark given the renewed threats from militants in the Niger Delta and Nigeria’s possible inclusion in any future OPEC output cut.
The health of the industry should be supported by higher oil
prices – Qtd average: $59/bbl vs. 9M’17 average: $53/bbl. Overall, we estimate
FY’17 growth of 6% for the sector (2017 average production: 1.91 mb/d).
The size of Nigeria’s upstream crude industry hit a quarterly record of ₦3,250 billion in Q3’17 (FY’16: ₦5,367 billion), recovering quickly from a recent low of ₦888 billion in Q1’16. This growth in nominal GDP has been spurred by the impact of naira depreciation, a recovery in domestic oil production, and a recent rally in global crude oil prices.
Dulled silver linings in Agriculture
Though still the sole major non-oil sector to record positive growth, GDP growth in agriculture came in weaker than anticipated at 3.06%, particularly as Q3 is a seasonally-adjusted stronger quarter.
The slower growth was driven by crop production (90% of agriculture GDP), and comes despite Federal Government (FG) and Central bank of Nigeria (CBN) efforts to improve farmers’ access to inputs (through the Growth Enhancement Scheme and the Agriculture Credit Guarantee Scheme Fund) and access to credit (through the Anchor Borrower’s Programme and the National Collateral Registry).
We note that the sector may have been adversely impacted by
improved foreign exchange liquidity in the country – stalling import
substitution – especially considering the rapid rise in domestic food prices in
Refinery shut down plagues industry numbers
Despite strong Manufacturing Purchasing Managers’ Index numbers for the quarter (average: 54.3 – record high), industrial output contracted 2.9% y/y in Q3’17 (Q2’17: 0.6%, Q3;16: -4.4%). Although growth in most manufacturing sub-sectors was flat or negative, cement production (-4.6% y/y) and oil refining (-45.4% y/y) were particular drags on the sector.
Looking at cement industry data, cement volumes were down 11% y/y in Q3’17, so it is unsurprising that the cement sector persisted on its negative growth path (Q2’17: -4.2%, FY’16: -5.4%). Meanwhile, oil refining likely took a substantial hit from the shutdown of the Kaduna refinery (since May 2017) and stoppages at the Port Harcourt refinery in recent months. After an initial improvement at the start of the year, refinery capacity utilization has dropped – last recorded at 9.5% in August 2017.
According to the Nigerian National Petroleum Corporation (NNPC), several firms have registered interest in revamping and maintaining the domestic refineries, and the NNPC may consider this in early 2018.
In addition, the FG has approved a number of modular refineries,
though we highlight that output from modular refineries would be too small to
dent Nigeria’s oil volumes. With refinery downtimes expected to last through
the year, we forecast manufacturing GDP growth of -1.1% y/y for Q4’17,
translating to FY’17 GDP growth of -0.5% y/y.
Services sector shrinks 2.4% - depicts economic weakness
Posting a 2.4% y/y contraction in Q3’17, the weakest since the Nigerian economy took an adverse turn at the start of 2016, the services sector shows the scale of the present slump in the non-oil economy. With consumer belts still tightened, all major sub-sectors contracted during the quarter.
Construction (-0.5% y/y), Trade (-1.7% y/y), and Real Estate (-4.1% y/y), all barometers of confidence and investment, declined during the period. Similarly, ICT (-4.4% y/y) and Finance (-6.0% y/y), previous leading lights, also contracted. However, the trend in Financial Services is not surprising as we have seen negative to flat loan growth across the sector so far in 2017. We expect the recession in services to persist till year-end – 2017 GDP growth forecast: -1.1% y/y.
Mellow outlook for Q4, 2018 much brighter
Given the persistent weakness in the non-oil sector and a higher oil production base from Q4’16 (average production: 1.76 mb/d vs. 1.61 mb/d in Q3’16), we anticipate a slowdown in economic growth to 1.0% y/y in the final quarter of the year, translating to FY’17 growth of 0.6% y/y (2016: -1.5% y/y). We further highlight that as the oil sector is the primary driver of growth here, any negative oil shock would materially alter this view. Nevertheless, we are optimistic about economic developments in 2018.
The combination of still-rising oil production, receding inflation, and strengthening consumer wallets should boost the economy. Meanwhile, as we anticipate monetary easing early in 2018, we see this supporting aggregate demand during the year – propelling the economy to annual growth of 2.0% in 2018 (IMF: 1.9%, MTEF: 3.5%).