Wednesday, November 18, 2015 10:59 AM / ARM Research
Positive movement in oil GDP props headline growth
Yesterday evening, the National Bureau of Statistics (NBS) reported that real GDP expanded 2.84% YoY in Q3 15–a slight improvement from the multi-year trough of 2.35% YoY in the prior quarter. Compared with the corresponding period in 2014, real output growth is 340bps lower.
Parsing through the parts in Q3 15, non-oil GDP growth decelerated further with YoY growth slumping to a new low of 3.1%, (Q1 : 5.6% YoY, Q2: 3.5% YoY). Hence, a positive 1.1% YoY rise in oil GDP, which represents a 790bps swing from Q2 level, was the primary source of QoQ improvement in headline reading.
Figure 1: Quarterly trends in output growth
On-streaming of new oilfields underpins rebound in oil production
Despite extended weakness in crude prices, which weighed on NNPC’s ability to meet funding obligations to JV partners and induced industry wide mothballing of oil exploration activities, the NBS reported that mean oil production rebounded over Q3 15 to 2.17mbpd, from the multi-year low of 2.05mbpd in Q2 15. Nonetheless, the NBS notes that September 2015 production is an estimate, as NNPC is yet to release oil production data beyond August which suggests the bureau made fairly strong oil assumptions, possibly hinged on the on-streaming of Shell’s 50kbp Bonga Phase III which occurred over the month.
Figure 2: Oil prices and oil production
Sustained recession in manufacturing and reduced capital spending weigh on non-oil GDP
Extending negative trends in last two quarters, manufacturing GDP contracted (-1.4% YoY) on account of further weakness in Food, Beverage and Tobacco (FBT) (Q1 15: -0.8% YoY, Q2 15: -5.9% YoY, Q3 15: -8.9% YoY) and Oil Refining among others. The feeble trend in FBT mirrors top-line softness across listed FMCG companies in the Q3 15 results season. The weak reading contrasts with our expectations for modest improvement as energy constraints which impacted Q2 15 eased. Furthermore, considering there has been increased fiscal and monetary stimulus to enable state governments meet their recurrent expenditure needs, the sustained recession in manufacturing speaks to an environment of underlying demand weakness as a consequence of restrained consumer purchasing power.
Elsewhere, reflective of reduced construction activity, cement GDP growth eased for the eight consecutive quarter, sliding 150bps from Q2 15 to 21.2% YoY. Here again, developments track top-line performance for listed cement producers in Nigeria, with sector heavyweight Dangote Cement announcing price cuts over the period to try to stimulate weak cement demand in Q3 15. The feed-through of the shrinking capital spending at federal and state government levels, in response to the tamer fiscal oil receipts, was more visible in Building and Construction GDP which shrank (-0.11% YoY) for the first time since Q4 12.
In line with trends in other non-oil segments, Services GDP growth slid 70bps to 3.8% YoY dragged lower by weakness across its two largest sub-components: communication (-100bps YoY to 5.3% YoY) and real estate (-90bps to 2.1% YoY). In addition, Agriculture GDP growth slowed, albeit marginally, to 3.46% YoY which lends credence to reports of a NAERLS/FEWSNET/FMARD field assessment survey conducted in September, which reported declines in sorghum (-6% YoY), maize (-3% YoY) and millet (-3% YoY) as late rainfall across many areas of the country delayed crop growth. In addition, the agency noted that reduced fiscal spending power drove a moderation in input supply from the FGN Growth Enhancement Scheme which weighed on farming activity across major food producing areas in the north.
Figure 3: Trends in non-oil GDP growth components
Weak economic picture raises prospects policy accommodation
Over Q4 15, the weak oil price environment, which should continue to act as a disincentive to oil exploration, and the absence of any oil projects scheduled for completion should drive a flat YoY (and QoQ) movement in oil GDP as oil production averaged 2.18mbpd in Q4 14.
On the non-oil GDP front, the drivers of the three-quarter recessionary trend in manufacturing continue to remain intact with continued downtrend in FAAC allocations for states and still-weak consumer incomes further pressured by a fresh bout of fuel scarcity. On the services front, recent regulatory activism on the telecommunications sector, which resulted in
N1trillion fine on sector heavyweight MTN Nigeria, and forced disconnection of 5.1 million lines (3.4% of total active lines using latest NCC data as at September 2015) should result in further growth deceleration for the sector in Q4 15. Exacerbating the non-oil picture is FEWSNET reports about a generally weak planting cycle with the agency pointing to a below-average harvest from October 2015 through March 2016. Tying the weak harvest outlook with the earlier cited field assessment reports and input supply chain issues, agricultural GDP should extend recent feeble trend in Q4 15. Balancing the hurdles faced by both oil and non-oil GDP and adjusting for the current run rate, our forecast band for 2015 GDP growth is reduced by another 50bps to 3-3.5% YoY.
For markets, the successive flow of below trend GDP growth over 2015, particularly non-oil, recent pull-back in inflation (which removes an excuse for sustained monetary tightening) and CBN’s reluctance at tamping market liquidity levels lays the platform for the on-set of expansionary/accommodative monetary policy. Whilst the finance minister and her budget & planning counterparts have barely had time to settle in following the swearing-in of ministers last week, reports of Keynesian style stimulus budget for 2016 make easier the argument for a significant base rate cut at next week’s MPC as the CBN seeks to achieve its oft-stated harmony with fiscal side.