Sluggish Agricultural Output and Contracting Oil Sector Weigh on Growth

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Wednesday, December 12, 2018 12:37 PM / CardinalStone Research

 

Non-Oil Sector drives growth while Oil sector contracts 

GDP growth in the third quarter printed at 1.81%, underperforming our expectation of 2.00% and consensus forecast of 1.90%. The underperformance in the quarter was due to sluggish growth recorded in the agricultural sector (1.91% YoY), as well as a second consecutive contraction in crude petroleum and natural gas output (-2.91%). 

Like the previous quarter, Q3’18 GDP was driven by the non-oil sector, which grew by 2.32% YoY (Q2’18: 2.05% YoY), while the oil sector contracted -2.91% YoY (Q2’18: -3.95% YoY). The expansion witnessed in the non-oil sector was principally propelled by the services sub-sector, which grew by 2.64% YoY in Q3’18 (Q2’18: 2.12% YoY). 

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Sluggish agricultural output and contracting oil sector weigh on growth 

For the second consecutive quarter, the agricultural sector recorded growth well below historical levels (7-year average: 3.87% YoY), printing at 1.91% YoY in Q3’18 (Q2’18: 1.19% YoY, Q3’17: 3.06% YoY). We highlight that the growth was in line with our expectation of 2.00%. Robust harvests in the quarter led to improved crop production from the previous quarter. 

According to Famine Early Warning Systems Network (FEWSNET), major cereals like millet and maize harvest this year is 17% and 15% higher than the five-year average respectively. In the final quarter of the year, we expect improved harvest in Q4’18 to further consolidate growth in crop production. 

We forecast agriculture growth above 2.0% YoY in the next quarter, however we expect the lagged impact of herdsmen clashes on farmlands to prolong sluggish agricultural growth next quarter, sub 3.0% YoY levels witnessed in the past decade. Lastly, we envisage the widespread floods witnessed in September to impact early year harvests in 2019, which would further delay robust growth in the agriculture sector.

 

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In addition to slower agriculture sector growth, the contraction in the oil sector also weighed on the quarterly GDP performance. Crude and natural gas output contracted in the period despite the fact that the disruptions which led to the contraction in Q2’18 had been addressed. 

The leakages in the Trans Forcados Pipeline (TFP)—which took it offline for two weeks in the second quarter was repaired. Similarly, the Nembe Creek Trunk Line (NCTL), which was shutdown in June, returned to operation in the third quarter of the year. 

These developments culminated in oil production of 1.94mbpd (Q2’18: 1.84mbpd), on track to meet our 2mbpd estimate for H2’18. However, as Q3’18 crude oil production fell short of the Q3’17 production of 2.02mbpd, real GDP in the sector recorded a contraction. 

Notwithstanding, we expect to see a return to growth in the oil sector in Q4’18, with crude oil production currently at 2.1 mbpd, as disclosed by the Federal Ministry of Petroleum Resources. Given that crude oil production in Q4’17 recorded at 2.0mbpd, sustained production at 2.1mbpd fourth quarter should be enough to reverse the recent contractions in real oil sector GDP. 

However, Nigeria’s pledge to cut production by c. 2.5% at the latest OPEC meeting threatens to our production outlook for the quarter.

 

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The information and communication sector sustained its impressive growth from the previous quarter, as it grew by 12.09% YoY (Q2’18: 11.81% YoY), to spur non-oil growth in the quarter. The robust growth in the IT sector was driven by a 14.97% YoY expansion in the telecommunication and information services sector (which accounts for c. 7% of GDP). 

Subscriber data from the Nigerian Communications Commission (NCC) shows the number of active subscribers grew by 16% YoY to c.162 million in Q3’18. The number of active subscribers has consistently been around 160 million in the last six months. Subscriber data at similar levels in Q4’18 will bode well for yet another double-digit growth in the sector on a year-on-year basis. 

FY’18 Outlook revised downwards We foresee consolidated GDP growth in the next quarter as we anticipate sustained growth in services sector, a pickup in crop production and continued improvement in the oil sector. It is our opinion that agriculture growth will print above 2.0% YoY in Q4’18 vs 1.91% Q2’18 YoY (buoyed by the effect of harvest season and a slowdown in herdsmen-farmer clashes), but well below its 7-year average of 3.87% as we expect lagged recovery even after relative peace in the affected regions. 

We also expect that stronger growth in last quarter of the year (driven by pre-election activities and improved budget implementation) will push Q4’18 GDP figures to print at 2.0% YoY, while we maintain our FY’18 growth forecast of 1.75%. 

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