Monday, January 25, 2016 06:45 PM / ARM Research
Having concluded the evaluation of the domestic environment in ARM’s core strategy document – Nigeria Strategy Report, we now proceed with a review of key economic indices. Today, we set our sights on the appraisal of GDP performance in 2015, as well as delineate expectations for same over the rest of 2016.
In 2015, real GDP growth slowed to 3.96% YoY in Q1 2015 and further to 2.35% YoY in Q2 2015 compared to respective growth of 6.21% YoY and 6.54% YoY in the corresponding quarters of 2014. The plunge in output growth largely reflects pressures on manufacturing GDP which swung into recession as a combination of negative real wage growth and energy shortages impacted the sector. Though real GDP picked up marginally to 2.84% YoY in Q3 15, gains were on the back of improved oil GDP (+1.1% YoY) as non-oil GDP growth decelerated further slumping to a new low of 3.1% YoY, (Q1: 5.6% YoY, Q2: 3.5% YoY).
Going into 2016, interplay of expansionary monetary and fiscal policies should boost economic output over the year. Starting off with the fiscal side, the recently announced 2016 budget showcases an attempt to stimulate aggregate expenditure with the FGN seeking to raise total spending 22% from 2015 to
N6 trillion. The increased fiscal spending which includes 38% YoY expansion in capital expenditure and N500 billion welfare spending should drive an upswing in construction & cement GDP and consumer spending respectively. On the monetary policy front, fiscal reluctance over devaluation has resulted in a focus on FX demand management measures which, in stifling import demand, pares impact of the export contraction on net exports—and GDP growth.
Overall, ARM estimates that aggregate expenditure could be boosted by 3.5% (+/-50bps) from 2015 levels, with their forecasts particularly sensitive to successful transmission of government stimulus to the economy.
Delayed policy direction amidst weak oil prices weighs on Nigeria’s output growth
In 2015, real GDP growth slowed to 3.96% YoY in the first quarter and further to 2.35% YoY in Q2 2015 compared to respective growth of 6.21% YoY and 6.54% in the corresponding quarters of 2014. This was largely due to tempered activities in the manufacturing sector as the effect of the February 2015 devaluation of the Naira kicked in, with expensive imports resulting in inflated operating costs. Aside the higher costs, the Central Bank of Nigeria’s (CBN) decision to bar many importers from accessing foreign exchange at the official rate also limited the quantity of raw materials they could procure, exacerbating declining output for manufacturers. The trend of depressed economic activities continued into the second half of the year, as uncertainty over economic direction reigned despite hints as to the new government’s plans.
Aside devaluation, other sources of pressure contributed to the economic doldrums. Despite the relative stability early in H2 2015, oil prices remained 43% lower YoY, with Brent crude averaging $63.75/bbl for the month of June 2015. Further into H2 2015, prices kept tanking to hit a 7-year low of $36.88/bbl in December with the sharp decline mounting severe pressure on currencies and economies of major oil exporters, with Nigeria not being an exception. Thus, whilst real GDP picked up marginally in Q3 2015 at 2.84% YoY, a closer look at the Q3 15 output numbers however, showed the improvement had at best a tentative basis.
Non-oil GDP growth decelerated further slumping to a new low of 3.1% YoY, (Q1: 5.6% YoY, Q2: 3.5% YoY). Similarly, for the three quarters available, real GDP growth for the manufacturing sector declined consecutively (-0.70%, -3.82% and -1.75% YoY), compared with growths of 15.41%, 14.01% and 16.00% YoY in the corresponding quarters of 2014. 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 Q3 15 headline numbers.
Figure 1: Trends in YoY growth in Real GDP, Oil GDP and Non-oil GDP
Oil GDP swings positive even as industry reforms gathers steam
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, mean oil production rebounded over Q3 15 to 2.17mbpd, from the multi-year low of 2.05mbpd in Q2 15. Nonetheless, the NBS data for 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 assumptions1, possibly hinged on the on-streaming of Shell’s 50kbpd Bonga Phase III which occurred during the month.
Figure 2: Crude oil prices and production
Beyond the fundamentals front, two developments over 2015 with impact on oil sector GDP are worth noting. First, to tackle the persistent problem of funding for JV cash calls, the Buhari administration granted approval to the NNPC to convert JV assets into corporate entities called Incorporated JVs (IJVs) which can raise money to execute projects, control own budgets and share profits to shareholders under an operating model similar to the NLNG. Under this new system, IJVs have the flexibility to raise money to meet cash calls without recourse to parliamentary approval, as in the old regime, which eliminates the impact of delayed cash payments on production. At inception, the model will be trialed for six JV assets between indigenous companies and NPDC, thereafter it would be extended to other assets.
Table 1: NPDC JV Assets for conversion to IJV
In a related development, the draft copy of a new petroleum industry bill (PIB) proposes splitting the NNPC into two (vs. 12 entities under old PIB) successor companies – the Nigeria Petroleum Assets Management Company (NPAM) and a National Oil Company (NOC) with the latter to be a fully integrated oil and gas company run on a commercial basis while the former would manage O&G assets run under newly created IJV and PSC agreements where upfront funding is not required from the FGN. The NOC would be provided start-up capital of $5 billion or at least the five-year average of the amount of money NNPC requires for joint venture operations and partly privatized with at least 30% of shares divested in six years.
Importantly, the new PIB avoided mention of the adjustment to fiscal terms on oil production under the old PIB which generated opposition from the IOCs, perhaps reflective of the adverse impact of depressed oil price outlook on exploration activity. Whilst the draft does not provide clear visibility over long term outlook for regulation in the oil industry, we see increased prospects for this simplified version to gain legislative approval with minimal controversy than the last bill.
Negative wage growth drives manufacturing GDP into recession
In contrast to the oil GDP picture, the slowdown in non-oil GDP continued with manufacturing GDP contracting for the third consecutive quarter (Q3 15 -1.4% YoY), on account of further weakness in Food, Beverage and Tobacco (FBT) (Q115: -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. However, the weak Q3 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 incomes. From Figure 4 below, co-movement is evident between real wage growth and expansion in manufacturing GDP with negative growth in the former over 2015 coinciding with a slide into recession in the latter.
Figure 3: YoY growth in employee compensation and manufacturing GDP
ICT and Real Estate underpin Services GDP slowdown
Similarly, Services GDP growth slid 70bps to 3.8% YoY dragged lower by weakness across its two largest subcomponents: communication (-100bps YoY to 5.3% YoY) and real estate (-90bps to 2.1% YoY). On the latter, slowdown reflects impact of political cycle as financing for real estate development shrank in the run-up to the elections. Post the elections, fund flows to the sector remain tepid as the changed political landscape induced caution following the commencement of anti-graft investigations by the new administration. Elsewhere, extended deceleration across ICT reflects impact of declining telecommunications subscriber growth which firms hints about a sector approaching maturity. Further slowdown should emerge in Q4 15 reading following recent regulatory activism on the telecommunications sector, which resulted in N1 trillion 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).
Figure 4: Subscriber growth and Telecoms GDP growth
Constrained capital spending budget drives muted construction activity
Largely reflecting the cutback in capital spending in the FGN 2015 budget (Proposed: -35% YoY to N722 billion, 9M 15 Actual: N194 billion) and similar moderation at state level in response to the tamer fiscal oil receipts, Building and Construction GDP contracted for the first time in three years (-0.11% YoY) over Q3 15 (Q1 15: +11.2% YoY, Q2 15: +6.4% YoY). The reduced construction activity weighed on cement GDP growth, which eased for the eight consecutive quarter, sliding 150bps from Q2 15 to 21.2% YoY. Here, 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.
Figure 5: YoY growth in Construction and Cement GDP
Lower fiscal spending and weather shocks weigh on agricultural output
Rounding up our review of the sectors, Agriculture GDP growth, in line with trends in other non-oil segments, slowed, albeit marginally, to 3.46% YoY. That outcome lends credence to a FEWSNET 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 6: YoY growth in Non-oil GDP segments
Growth deceleration essentially a story of weaker exports and declining real wages
Recasting GDP data using the expenditure and income approach provided by the NBS for the first two quarters of 2015 sheds greater clarity on the issues the Nigerian economy grappled with over 2015. Disaggregating GDP growth via an attribution analysis using the expenditure approach, current growth slowdown largely stems from negative net exports growth (Q4 14: -41.6% YoY, Q1 15: 39.4% YoY, Q2 15: -33.2% YoY) which emits impact of the oil price plunge on export growth despite import demand contraction. In addition to export contraction, slowdown in fiscal expenditure, in Q2 15, itself a derivative of the oil price weakness supported slide in GDP growth over Q2 15. The developments across net exports and government spending overrode the impact of mean, low base driven, double-digit growth in consumption expenditure, which accounts for 64% of GDP on average, during the first half of 2015.
Replicating an attribution analysis on GDP figures under the income approach isolates contraction in employee compensation (27% of GDP) over the first half of 2015 and slow growth in corporate profits (66% of GDP) as the drivers of GDP growth deceleration.
Figure 7: Disaggregation of GDP growth by expenditure approach
Figure 8: Disaggregation of GDP growth by income
Economic policy holds ephemeral promise for GDP uplift
Incorporating insights gleaned from our analysis of GDP using alternative approaches, we frame our growth outlook for 2016, by considering interplay of monetary and fiscal policies and how developments on these fronts can shape the economic direction.
Starting off with the fiscal side, the recently announced 2016 budget showcases an attempt to stimulate aggregate expenditure via a stimulatory budget with the FGN seeking to raise total spending 22% from 2015 to N6 trillion. Given that ~38% of the increment in 2016 budget stems from expansion in capital expenditure on critical economic overheads, we see some immediate scope for improvements in fortunes for construction and cement GDP which cumulatively account for ~4% of GDP (using mean contribution since start of rebased series in 2010). On the planned N500 billion welfare spending we envisage some upside to consumption expenditure as most of the social spending for the poorest Nigerians should filter into staple foods. This is not only positive for consumer goods companies, especially the food producers, but also for the agriculture sector which should benefit significantly from the increase in demand required to meet the one meal per day program for primary school pupils.
On the monetary policy front, fiscal reluctance over devaluation has resulted in a focus on FX demand management measures which, in stifling import demand, pares impact of the export contraction on net exports—and GDP growth. While the tilt to incentivize import-substitution manufacturing should ultimately help extend this trend of limited impact of export weakness on output, infrastructure bottle-necks and, perhaps more importantly, reliance on foreign inputs tempers scope, in the near-term, for any gains to manufacturing GDP and outrightly dampens expectations for Trade output, from the policy move. In a nutshell, we see the current monetary policy focus (easing & demand management) as being beneficial to output via boost to corporate earnings, from lower interest costs, and also via supporting net exports.
Scanning through the sectors, for Oil GDP, akin to FY 15, lower oil prices should continue to drive moderation in E&P capital spending as access to financing becomes more difficult under current price environment. On production, whilst 2016 budget projects unchanged JV cash calls from 2015 levels, the depressed oil price outlook implies that the problem of elevated NNPC receivables to JV partners should persist over 2016 leading to pressures on production. Whilst the establishment of the IJV structure provides reprieve on this front, the fact that it is still being test-run, on smaller oil fields with combined capacity of 87.5kbpd, limits scope for feed-through of gains from the new structure on 2016 production.
Nonetheless, as in Q3 2015, when on-streaming of new oil fields provided a boost to production, EIA reports of two projects by Chevron (the 70kpbd Dibi field and 30kpbd Sonam natural gas field), coming online over 2016, suggest some upside to production. Though continuing difficulty selling Nigerian crude cargoes to traditional markets on increasing global oversupply should pose further headwinds, on balance, we see oil production staying flat to positive over 2016.
For non-oil GDP, as earlier discussed increased capex and introduction of welfare program in 2016 budget should provide upside to construction and agriculture GDP. Elsewhere, increased regulatory scrutiny which has resulted in telecom operators disconnecting lines over Q4 15 due to incomplete registration should pose hurdles to subscriber growth over 2016 and by extension drive further deceleration in telecommunications GDP. In addition, the continued anti-graft investigations should continue to deter private capital flows to real estate which should create further drag on that sector’s prospects.
In sum, though 2016 seems set to be a tough year given the headwinds hinted above, we expect headline GDP growth to slightly improve on 2015 numbers. However, output reading will likely pale in comparison to the immediate five-year average of 5.3% YoY given recent trends across both oil and non-oil sectors. In distilling our thoughts to a number, we project the increased government spending numbers which accounts for ~7% of nominal GDP, assuming no leakages, and calibrate impact of forecast decline in crude prices over 2016 on net export growth. Furthermore, we assume depressed real wages and shrinking FDI prospects should drive sub-trend growth in consumption and investment expenditure over 2016.
Given this backdrop, we estimate the aggregate expenditure could be boosted by 3.5% (+/-50bps) from 2015 levels, with our forecasts particularly sensitive to successful transmission of government stimulus to the economy.
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