Wednesday, September 06, 2017 / 12:24 PM /Vetiva Research
· Economy ekes out 0.5% growth in Q2 to exit recession
· Conservative oil volumes cap upstream growth
· Malaise in Services underscores wider economic weakness
· FY growth projections revised, 1.1% growth anticipated
Economy ekes out 0.5% growth in Q2 to exit recession
Second quarter Gross Domestic Product (GDP) data from the National Bureau of Statistics (NBS) registers Nigeria’s GDP growth at 0.5% y/y for the period, significantly behind Vetiva and Consensus estimates of 1.9% and 1.3% respectively. Following up from a downwardly revised contraction of 0.9% y/y in Q1’17 (Previous: -0.5%), Q2’17 growth is the first growth recorded post 2015 and marks the end of Nigeria’s five quarters of contraction.
The improved performance comes on the back of a minor recovery in oil production, as well as sustained growth in agricultural and industrial output over the period. Meanwhile, the Nigerian economy expanded 14.6% y/y in nominal terms, primarily due to high inflation (GDP deflator up 13.6% y/y), but also aided by the marginal increase in real output in Q2’17.
Conservative oil volumes cap upstream growth
In 2017, the upstream oil industry continues to benefit from relatively higher global oil prices and prior domestic currency depreciation. Nominal GDP expanded 144% y/y in the quarter and was only 9% short of sector GDP in Q2’14. Though global oil prices at that time were significantly higher (Q2’14 average: $109.76/bbl, Q2’17 average: $50.79/bbl), c.46% currency depreciation over the period has supported nominal oil GDP.
The upstream oil industry grew 1.6% y/y in real terms (Q1’17: -15.4% y/y), bringing an end to the six-quarter contracting streak. However, this performance came in weaker than our expectation, mainly due to conservative revisions to NBS oil production estimates for 2017. The Bureau revised Q1’17 oil production from 1.83 mbpd to 1.69 mbpd, resulting in a weaker GDP performance of -15.4% y/y (previous: -11.5% y/y), and estimated Q2’17 oil production at 1.84 mbpd, compared to 1.81 mbpd in Q2’16.
We are surprised by the revision to Q1’17 figures as data from the Nigerian National Petroleum Corporation (NNPC) shows a stronger oil production of 1.75 mbpd for that period. Moreover, we foresee possible upward revision to Q2’17 oil production once the NBS takes June production into account, which was estimated as high as 2.05 mbpd by the Department of Petroleum Resources (DPR).
Furthermore, we are relatively bullish about oil production in H2’17 (DPR July estimate: 2.06 mbpd) as prolonged stability in the Nigeria Delta region has allowed a gradual recovery in output. Nevertheless, we adopt a relatively cautious stance here and revise our average FY’17 oil production forecast to 1.92 mbpd (Previous: 1.97 mbpd, 2016: 1.81 mbpd) to bring FY’17 GDP growth to 5.9% y/y.
Industrial expansion slows in second quarter
Growth in industrial production slowed as expected in Q2’17 (0.6% y/y vs. 1.4% y/y in Q1’17), weighed down by a stronger base from Q2’16. The main growth contributor was the Food, Beverage & Tobacco industries (2.7% y/y) but Oil Refining also improved significantly, expanding 11.3% y/y, reflecting recent improvements in Nigeria’s public refineries. However, Nigeria’s manufacturing landscape remains weak, indicated by contractions across 7 of the 13 major sub-sectors.
We expect improved foreign exchange (FX) liquidity to further support recovery in this space but the high-cost environment and anemic aggregate demand would hold the sector back. The sector requires a shot in the arm in the near-term, either through cheaper credit or by improving access to local raw materials given that the Central Bank of Nigeria maintains its 41-items FX-restricted list. Nevertheless, Purchasing Managers’ Indices for July and August suggest further industrial expansion in Q3’17, and we expect 1.1% y/y growth in the sector for 2017, partly supported by the low base of 2016.
Healthy agriculture growth persists amidst elevated food prices
Despite slower real growth – from 3.4% in Q1’17 to 3.0% in Q2’17, the agriculture sector expanded 12.5% y/y in nominal terms, compared to 9.8% in Q1’17, bloated by accelerating food prices (up 7% q/q).
The slight slowdown in the sector, particularly in crop production (3.2% y/y vs. 3.5% y/y in Q1’17) comes as a surprise given the efforts to support the sector by expanding famers’ access to credit (Anchor Borrower’s Programme) and fertilizers (Growth Enhancement Scheme). Notably, agriculture growth so far in 2017 has been unremarkable when compared to previous years and the Federal Government target.
We highlight that agriculture productivity remains low, especially as many smallholder farms are inefficient, and will continue to cap growth in the sector. In addition, smoother access to markets, by easing transport costs and implementing rigorous product quality standards, would lift the growth potential of agriculture. We still anticipate steady growth for the rest of the year, but lower our FY’17 growth forecast to 3.5% y/y (previous: 3.8%) to reflect the weaker run-rate in Q2’17.
1. GDP Growth Up to 0.55% - Too Soon to Cheer
2. Nigeria on a U-Shaped Recovery
3. PMI - Marginally Slower Economic Expansion in August
4. Manufacturing PMI Stands at 53.6% in August 2017 from 54.1% in July 2017 - CBN
5. August 2017 Purchasing Managers' Index: Six Months In Positive Territory
6. Nigerian Economy Emerges from Recession; GDP Grows by 0.55% in Q2’17 from -0.91% in Q1’17
7. Headline Inflation to Slide Marginally to 16.03% In August 2017
8. A Recovery in Capital Imports in Q2 2017
9. We See an Uptick in Headline Inflation to 16.3% YoY in August – FBNQuest
10. Headline Inflation Declined Marginally to 16.05% in July