Nigeria - GDP growth loses ground in uphill climb

Proshare

Wednesday, August 05, 2015 10:28 PM / ARM Research

In today’s cut-out of ARM’s core strategy document – Nigeria Strategy Report, they commence the review of key economic indices by  appraising GDP performance in H1 15 as well as delineate their expectations for same over the rest of the year.  

Economic wheel continues to slow
The Nigerian economy expanded 3.96% YoY in the first three months of 2015, the slowest growth since the last quarter of 2012. This marked the third straight quarter of slowdown as lower oil prices and supply constraints dragged the oil sector down. Q1 15 YoY real GDP growth was lower by 198bps and 225bps relative to Q4 14 and Q1 14 figures, respectively. Drilling into components, YoY non-oil GDP growth was the slowest in ten consecutive quarters at 5.6%--260bps lower than growth recorded in corresponding quarter of 2014 and 80bps softer than in Q4 14, whilst oil GDP growth reversed the expansion of Q4 14, falling 5.1% YoY in Q1 15. 

Figure 1: Real GDP Growth


As oil’s lubrication proves short-lived…..
The Q1 15 contraction in oil GDP was largely driven by supply-side constraints. According to OPEC, among member countries, Nigeria recorded the second sharpest drop in rig counts in Q1 15 with production of 1.76 mbpd in the quarter (vs. 1.89mbpd in the corresponding quarter of 2014) representing a 7% drop. The slump in exploration, development, and production activities mirrors the rising insecurity in producing areas (i.e. oil theft and pipeline sabotage) and, more importantly, NNPC’s funding cuts on JV projects (-40% YoY to $8.1 billion for 2015) with the agency’s key partners also forced to scale down on capital expenditure and production. Of particular note, NNPC’s inability to meet cash call obligation to JV partners appears to have been largely tied to the steep slide in oil revenue as Brent crude, at $64.88, continue to trade well below 2014’s $100 average (price as at June 1st, 2015 stood as $64.88). 

Figure 2: Sectoral real GDP growth



And Non-oil GDP becomes an even bigger clog
Touching on non-oil GDP, Q115’s slowdown mainly mirrored contraction in manufacturing as well as decelerations in Agriculture and Services components (which jointly account for 63% of non-oil GDP).  Manufacturing GDP fell 1.8% YoY whilst growth in Agriculture and Services slowed 80bps and 30bps YoY to 4.7% and 7.3% respectively, in the quarter. Contraction in the manufacturing sector stemmed from 54% and 28% YoY declines in oil refining and electricity and gas supply segments, respectively, as well as a 5% slowdown in the textile, apparel and footwear segment. Essentially, we believe the decline in the electricity and gas supply segment cannot be disconnected from the force majeure declared on gas production in January as a result of pipeline vandalisation alongside its attendant effect on power generation. Furthermore the subsector was spontaneously plagued with strikes by prominent labour unions in the industry.


Hinged on improved YoY growth in the crop production, livestock and fishing sub-sectors relative to Q4 14, Agriculture sector output growth in the first quarter of 2015 stood at 4.70% YoY, 106bps above YoY growth reported for Q4 2014 (Q1 14: 5.53%) . Specifically, despite its 29% QoQ dip as we move further away from the harvest season, Crop production was the main driver of growth in the sector accounting for 390bps of sector growth and representing 87% of Agriculture GDP. Still on a QoQ basis, livestock and forestry sub-sectors respectively shrank 9% and 15% in Q1’15.


Although the Services sector withstood exchange rate pressure to post a growth rate of 7.04% YoY, 89bps above the 6.15% YoY growth reported in the preceding quarter, the sector slowed relative to the corresponding quarter of 2014 (services sector real GDP was recorded at 7.6% YoY in Q1 14). The main driver of Q1 15 growth for the Services sector was the Telecommunications and Information Services sub-sector, followed by the “Other Services” sector. Of total real GDP, the Telecoms sector contributed 11.5% in Q1 2015, higher than respective 10.89% and 11% share in Q1 and Q4 2014. Accommodation and food services sub-sector led the services sector growth rate as it more than doubled Q4 14’s 11% growth to record 27% growth for Q1 15. However, the sub-sector’s contribution to Q1 15 GDP (1.2%) is relatively insignificant when compared to telecoms. However, relative to the corresponding quarter of 2014, Services’ slower growth rate was driven by 12.5% YoY contraction in its public administration sub-component. Further decelerations were recorded in the real estate sub-sector as growth halved over the period to settle at 3% while health and social services sub-sector lost velocity with its 2% growth (its lowest since 2010).

More bumps ahead
First quarter real GDP has historically emerged the slowest, reflective of softer growth in the Agriculture sector as the cycle changes from harvest to the planting season. Thus, we expect Agriculture output to ramp up in the course of the remaining quarters, providing some support to GDP growth. Going forward, we think the Services sector could be the main casualty of expected sticky growth in household and government expenditure as softer oil price continues to strain government revenue which remains a significant factor in individual and corporate money supply. This dynamic is reinforced by the relative inactivity of the new government which implies even the available funds are not flowing round. Similarly, Manufacturing which has historically been an important driver of domestic demand, growing at a little over 10% on average from 2011 to 2014, should experience more muted growth as we anticipate increasing sensitivity of investments to continued exchange rate pressures would slowdown manufacturing activity, particularly in sectors that are susceptible to rising import costs e.g. the Construction and Energy sectors. Added to this, production downtime across companies in key sectors such as telecommunications, manufacturing, and banks following the recent fuel scarcity and oil marketers’ strike action also have negative connotations for non-oil GDP with the possibility of the adverse impact extending depending on direction, and implementation manner, of new government’s policies.


For Oil GDP, akin to H1 15, lower oil prices should continue to drive moderation in E&P capital spending as access to financing becomes more difficult under current prices. Furthermore, current production should come under pressure on mounting NNPC receivables to oil producers as the state oil production company is unable to fund JV cash calls for oil production. Compounding an already dire outlook is the increasing difficulty of selling Nigerian crude cargoes which has resulted in shrinkage in Bonny-light’s premiums to dated Brent, with Bonny Light even at a discount at some point, as intense competition for Asian markets emerges from Arab grades. Consequently, we see scope for downtrend in oil GDP over H2 15.


In sum, though 2014 headline GDP growth (5.96%) reading stayed fairly healthy, recent trends across both oil and non-oil sectors point to softening output underbelly, a development likely to be compounded by recent events. This outcome fits our prior expectations for GDP weakness in 2015 and, despite Q1 typically being the slowest quarter, the extent of weakness in the latest numbers motivates a revision of our FY forecast to 4-4.5% range for 2015.

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