Q4 2016 GDP Expectation: Another Quarter of Decline


Wednesday, February 22, 2017 2:18 PM / Meristem Research

The Q4 2016 GDP report is expected to be released on the 28thof February 2017. We expect a further decline in output, though at a declining rate. We put our growth forecast at -1.14% for the period based on the following premise:

Our expectation of a decline in GDP is based on the reduction in economic activities when compared to the corresponding quarter of 2015. Manufacturing activities, as measured by the Purchasing Managers Index, showed that the performance of the sector remained below the benchmark of 50 in the period under review, though activities in Q4:2016 were better than Q3:2016, when compared to Q4:2015, it showed a marginal decline.

We note that there still remains some shortfall in the FX market, as the gap between the Interbank and parallel market continued to widen such that the naira closed at NGN490/USD at the end of 2016. This also impacted businesses and other sectors of the economy (real estate, construction etc.), as inflation rose to a year high of 18.55% in December 2016.

We also note that government expenditure in the period was below budget, however, relative to Q4:2015, which was characterized by cabinet onboarding and preparation of the 2016 budget, government spending appeared higher, and thus, it might not have been a drag on growth in 2016.

Persistent, though declining, attacks in the Niger Delta saw crude production below the benchmark of 2.2mbpd. However, we expect average crude production to come in at c.1.8mpd, according to NNPC figures, a 0.36mpd decline from the same quarter of 2015, but an increase of 0.17mbpd when compared against Q3:2016.

However, we note the variations between the NNPC and OPEC figures from the period under review (OPEC Q4:2016 at 1.57mbpd). Also, in the last quarter of 2016, OPEC and Non OPEC members agreed to cut crude production by 1.8mbpd.

This saw crude prices rise to new levels, now ranging between USD53 and USD57 per barrel. This increased the level of revenue of the government when compared to Q3:2016.

Although the non-oil sector contributes c. 90% to the GDP, this sector does not act independently of the oil sector, as FX generated from crude sales is the bedrock of imports for the non-oil sector. Despite the forecasted increase in Crude production, we expect the oil sector and the non-oil sector to decline marginally by 1.84% and 0.78% respectively.

Considering the declining rate of attacks in the Niger Delta, negotiation with the militant groups, and the reconstruction of some oil pipelines, which should come onboard soon, we expect crude oil production to improve in 2017.

Also, the CBN has made modifications to the FX policy which should improve liquidity in the market and reduce the gap between the interbank and parallel markets. Also, we anticipate that the directive for DMBs to open retail outlets, in combination with improved liquidity, should reduce the demand pressures in the parallel market thus pressuring down the FX rate in that segment of the market and consequently exert downward pressure on imported inflation.

In the Fixed Income space, we expect that as the conditions in the FX market improve, and the government is able to generate more revenue, there would be a correction in the yield curve.

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