Wednesday, June 28, 2017 10:27 AM /BMI Research
BMI View: Improved oil production, higher oil prices and greater exchange rate flexibility will all contribute to a return to positive real GDP growth in Nigeria in 2017. Growth will remain far off pre-2015 highs, owing to ongoing structural impediments, not least continued manipulation of the currency and a risk of oil infrastructure sabotage in the Niger Delta.
There are some promising signs of recovery in the Nigerian economy, and we have made a moderate upward revision to our 2017 real GDP forecast for the country, from 1.7% to 2.0%. This compares to the Bloomberg consensus forecast of 1.5%.
While this would mark a vast improvement on the 1.5% contraction in 2016, there remain structural issues in the Nigerian economy, which will keep growth from the levels enjoyed prior to the oil price slump in 2014, and there are salient security risks which could derail the economy once more. The outlook is altogether more positive than it was 12 months ago.
This is driven by two primary factors: a recovery for the oil industry and some greater exchange rate flexibility.
First quarter growth results for Nigeria have not yet been released, but we expect they will have improved dramatically on the average 1.9% contraction seen over the past three quarters, and might even have turned marginally positive.
The National Bureau of Statistics' Statistician General, Yemi Kale, said in the press the figures are looking better than those in 2016 and we expect growth will strengthen over the remainder of 2017, owing to base effects (following the larger contraction in Q216 and Q416) and ongoing improvements in the oil sector and manufacturing.
In April, the Central Bank of Nigeria's Purchasing Managers' Index turned came in at 51.2, above the 50 level which denotes expansion for only the second month since December 2015.
Oil Recovery Will Boost Growth
While the oil sector only accounts for a little more than 10% of the Nigerian economy, it is vital given it is the primary source of foreign exchange and government revenues, and is a major determinant of investor sentiment.
Following the 2016 recession, when the slump in global oil prices which began in H214 was compounded by a series of production outages caused by saboteurs in the Niger Delta, we expect an improvement in both in 2017.
Our Oil & Gas team forecasts that Brent crude will average USD57.0 per barrel (/bbl), compared to USD45.1/bbl in 2016, and that production will rise by over 15.0%. We acknowledge the truce agreed between the government and the Niger Delta Avengers is tentative, but our core view is it will hold.
The frequent absence of President Muhammadu Buhari on medical visits to London, leaving Vice-President Yemi Osinbajo in charge is a positive for relations between the two. Following the president's bellicose language about the issue in H116, he has taken a back seat during negotiations, leaving it in the hands of his deputy who has had far greater success in quelling the vandalism by adopting more of the carrot than the stick approach.
While higher oil prices do not necessarily translate into greater real GDP growth, they will bolster the Nigerian economy by enticing investment in the oil sector and by enabling greater government spending.
Although constrained revenues and ongoing delays to the Nigerian budget mean the expansionary spending plan will not be achieved for the second year in a row, higher oil prices should mean greater success in this regard than seen in 2016.
Partial Exchange Rate Liberalisation Will Encourage Investment
The other primary factor behind the growth recovery in 2017 will be greater flexibility in exchange rate policy. Government attempts to keep inflation in check by maintaining a currency peg at an overvalued rate has caused a sharp drop-off in investment over the past two years, as foreign investors worried over a potential loss in value following what was seen as an inevitable devaluation.
This resulted in not only weak investment, but also a shortage of dollars in the Nigerian economy which stifled the manufacturing sector. We had long maintained there would be a devaluation in H216, which would (along with greater oil revenues) help alleviate liquidity issues and give a boost to the economy.
While we now see the likelihood of a devaluation to the official rate in 2017 as unlikely, there have been a series of measures which should alleviate some of the negative effects of the peg.
In April, the Central Bank of Nigeria introduced a new exchange rate – the Investors' and Exporters' FX Window – which has created a market for investment transactions.
Designed to be used by banks, portfolio investors, exporters and the central bank, the CBN has until now been true to its word it will not interfere and this rate has depreciated to about NGN385/USD (compared to the official rate of NGN315/USD). This is in line with the parallel market rate, that it has found a bottom.
Crucially, the parallel market rate has itself come in considerably over the past several months after falling below NGN500/USD in February. The introduction of this new rate, and the appreciation on the parallel exchange rate, is the primary reason behind our upward revision to our growth outlook as we expect there will be an uptick in investment inflows on the back of it.
Further, by controlling inflation through currency manipulation and keeping fuel prices relatively stable, the central bank will be able to cut rates in the second half, supporting an uptick in consumption.
That said, the growth will remain off pre-2014 levels while the authorities continue to operate the current convoluted exchange rate policy. There does appear to have been an improvement in access to dollars following the shortages which crippled businesses in 2016
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