Real GDP Strikes Out Twice to Trigger Recession


Tuesday, September 06, 2016 6.08pm/ ARM Research

Plunge in oil production drags wider GDP contraction: Last week, the National Bureau of Statistics (NBS) reported that real GDP contracted a wider 2.06% YoY in Q2 16 (Q1 16: -0.4% YoY), driving the Nigerian economy into a recession for the first time since 2004. Extending the pattern in Q1 16, both output segments printed red with oil and non-oil GDP sliding 17.6% YoY and 0.4% YoY respectively.

Attacks on oil installations sink oil GDP
Over the period, the security situation in the Niger Delta deteriorated further as various groups stepped up attacks on oil installations, prompting IOCs to declare force majeure along Nigeria’s major oil and gas export terminals.

Consequently, mean crude oil production fell to a 14 year low of 1.69mbpd in Q2 16 (-16% YoY, -19% QoQ) even as NNPC reported a 7% YoY decline in average daily gas production to 7,251mmsfcd in the period.

Real estate and ICT slowdown drag Services GDP lower
In Services, deceleration in its largest sub component (ICT)—where growth slowed to a thirteen quarter low of 1.4% YoY—was key driver of sector contraction. During the period, NBS data shows a 0.6% YoY decline in mobile subscriber base to 150 million (vs. average growth of 8.5% YoY post-rebasing).

Akin to trends in prior quarters, real estate contraction (-5.3% YoY) provided further drag on Services as slowing activities in the luxury real estate market, a fall-out of the on-going anti-corruption crusade and excess supply of office space in urban centres, left sector GDP in the red zone for a second consecutive quarter.

Recession to last a while longer
Going forward, given the unclear security situation in the Niger Delta, we think IOCs are unlikely to sanction full scale repair works on damaged facilities without a lasting cessation of violence in the region.

The foregoing pushes possibility of a recovery in oil production to above 2mbpd levels beyond 2016 and leaves the recessionary picture for the oil sector intact. Elsewhere, the tripod of depressed consumer discretionary income, energy shortages and FX pressures should weigh on manufacturing GDP, while flood shocks to food producing areas points to tamer agricultural GDP in H2 16.

Overall, we see scope for negative GDP growth over subsequent quarters and now forecast a 1.4% YoY (previously -0.8% YoY) contraction for the Nigerian economy over 2016.

Better late than never…authorities have to raise policy game
Following Nigeria’s official slide into recession, the onus now lies on Nigeria’s economic managers to quickly deliver on their cocktail of policy drugs to nurse the economy back to health.

On this wise, with the budget now fully passed, focus shifts to the FG’s financing plans, in particular, the foreign leg where the executive recently approved a three-year external borrowing plan. Whilst increased prospects for a US Fed rate hike points to higher dollar borrowing costs for EM, we think the urgency of economic growth concerns warrant a dive into the Eurobond market.

On the monetary side, the latest GDP contraction should force the CBN to revisit its nascent tightening. That said, the apex bank’s reliance on fleeting FPI for the resolution of FX market challenges could delay onset of easing.

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