Friday, September 02, 2016 5:37pm / Cordros Capital
Earlier this week, the National Bureau of Statistics (NBS) released Nigeria's Gross Domestic Product (GDP) report for the second quarter ended June. According to the report, real output growth within the three months period slumped by 2.06% y/y (largest contraction in 49 quarters), representing 170bps and 441bps declines from growth rates of -0.36% and 2.35% recorded in the previous quarter and Q2-2015 respectively.
Although widely expected, the insipid growth came in much more disappointing, overshooting Bloomberg-compiled median estimate of -1.6%, and consequently heralding an official recession for the economy (the first since the second quarter of 2004).
Suffice to say that the sombre performance of the economy in the review period broadly accentuates the fact that most of the negative growth drivers in the first three months of the year were not proactively responded to; in fact, structural and systemic challenges were elevated, transiting from mild to severe.
As known, the economy grappled with
(1) record low crude oil and gas production owing to upsurge in pipeline vandalism and theft;
(2) weak government spending, occasioned by the tardy passage of the 2016 appropriation bill and fiscal tightening measures;
(3) depressed aggregate demand, driven by falling disposable personal income amid unpaid salaries of civil servants, private sector lay-offs, pay cuts, and record high inflation rates;
(4) persistent fuel scarcity which mostly lasted through the first half of the period under review;
(5) low growth of credit to private sector (over rising NPLs) which undermined employment and productivity -- unemployment rate rose to 13.3% y/y in Q2-2016 from 12.1% in the preceding quarter, while labour productivity contracted by 12.8% y/y despite a 5.3% q/q improvement;
(6) forex scarcity owing to weak oil revenues (due to low crude oil prices) and capital controls;
(7) significant drop in electricity supply and distribution -- albeit with slight improvement towards the tail end of the reported quarter -- following elevated gas pipeline attacks; (
8) insecurity concerns, particularly incited by Boko Haram attacks and herdsmen-farmers clashes (although at reduced levels), in some parts of the country.
The breakdown of the growth figures, from a closer look, reveals that the negative growth of 17.48% (from -1.89% in Q1-2016 and -6.8% in Q2-2015) in the oil sector, especially, combined with the 0.38% contraction (from -0.18%in Q1-2016 and a growth of 3.46% in Q2-2015) in the non-oil sector to usher the economy into its first recession in twelve years.
For information, the historic decline in the oil sector GDP is the most disappointing on record (from available data), and equally marks the third successive negative growth which started in Q4-2015; while the non-oil sector books its first recession since 2004.
Oil Sector GDP Contracts Further
The oil sector remained strained as it struggled with lower average crude oil prices, and most especially, domestic production headwinds. Specifically, the NBS report shows that oil production was lower both on q/q and y/y bases -- the bureau estimated crude oil production at 1.69mbpd during the reference period, 0.42mbpd lower than Q1-2016's output of 2.11mbpd, and compared with output level of 2.05mbpd in the corresponding quarter of 2015, production was down by 0.36mbpd.
Worthy of mention, however, is the fact that the NBS' reported output -- usually from the Nigerian National Petroleum Corporation (NNPC) -- is 0.15mbpd higher than the 1.54mbpd estimate posted by the apex bank and the Organization of the Petroleum Exporting Countries (OPEC) during the same period.
Oil production during the period was scuttled by major blows from (1) vandalism and theft which left most fuel pipelines and depots idle; (2) failed government attempt at dialoguing with the Niger Delta Avengers; (3) deceleration in capital investment in the sector; and (4) lack of executive-legislative commitment over pushing reforms -- most especially the Petroleum Industry Bill (PIB) -- through in this segment.
Non-Oil Sector Lost the Battle Against Recession
The non-oil sector slid (-0.38% y/y) into its first recession in over a decade. The downward growth trajectory in this segment (which started in the last three months of 2014) continues to agree with our assertion that, there is, albeit in part, a strong linkage between output growth performance in this sector and the flow of oil revenue. Clearly, the slow pickup in government spending combined with other systemic challenges to paint a bleak picture of the policy environment.
Consequently, business investment decisions were clouded in uncertainty amid (1) foreign exchange crisis; (2) persistent fuel supply shortages; (3) sizable drop in electricity power supply and distribution; and (4) insecurity apprehensions (e.g. rampaging activities of herdsmen and boko haram menace) in some parts of the country. Note that only a quarter of constituents of this sector recorded positive growth.
Weaker Fundamentals; Bleak Prospects
In our 2016 Half Year Outlook, "Clear Picture; Dim Outlook", we noted that recovery in economic activity is likely to be modest over the second half of the year, but not without significant downside risks.
We forecasted 0.08% growth over the year, premised on expected recovery in the second half, noting the progress recorded with some of the systemic and structural issues that contributed to the lull in productive activities in the first half. That said, the contraction in Q2 beat our estimate by 106bps while the q/q growth was 109 behind our estimate.
Whilst growth q/q should strengthen over Q3 and Q4, there is now greater possibility of output over H2-16 lagging equivalent 2015 level. Overlaying our expected -1.8% growth in H2-16 over the -1.2% recorded in the first half equates to a revised -1.5% growth for 2016 fiscal year.
Oil Sector: Dim Outlook as Domestic Crisis Remain Unresolved
The current environment of supply imbalance (with OPEC members failing to reach output freeze agreement) remains a major threat to the recent episode of advancement in oil prices ($42.38/bbl average in Q2-2016 vs. $30.16/bbl average in Q1-2106).
The International Energy Agency (IEA) had forecast that stockpiles will continue to build until the end of 2017, with the Organisation for Economic Cooperation and Development, OECD's energy arm of the IEA confirming that current global production outstrips supply by around 2mbpd.
Added to this risk to prices is the hanging prospect of a return to normal production. While the spate of militants' attacks on oil and gas facilities has relatively tapered in the last one month, four months is a long period within which the group should return to the creeks in the event that the ongoing secret dialogue fails.
Weak Sub-sectors to Constrain Non-Oil Sector Growth
Revisiting our outlook on the non-oil sector, it comes out clear that the risk matrix in the macroeconomic environment remains elevated, albeit with some hope of modest improvement.
We would expect the impact of government spending, howbeit marginal, to start trickling in following the recent release of N253 billion for capital projects (with additional disbursements to follow).