Crude Oil Production Cuts Will Spur Nigeria's Negative Growth in Q2 2020 - PFI Capital

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Monday, June 10, 2020 / 10:50AM /PFI Capital Limited / Header Image Credit: Oilprice


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Latest GDP data from the NBS indicates that the Nigerian economy grew at a slower pace of 1.87% YoY in Q1 2020 compared to 2.1% growth in Q1 2019 and 2.55% growth recorded in Q4 2019. This reflects the earliest effects of the global disruptions caused by the COVID-19 pandemic as the non-oil sector grew at a slower pace of 1.55%.

 

We note that Nigeria recorded its index case of COVID-19 on 27th February while the President announced a lockdown to commence for the first time on 30th March, which is about a month after. With Q1 starting from January to March, the lockdown could therefore not have impacted the GDP growth. Oil sector growth printing at 5.06% YoY which is an increase of 6.51% relative to the rate recorded in Q1 2019 also contributed to the positive growth rate recorded in Q1 2020.

 

Fig. 1: Real GDP (N'bln) vs YoY Growth (%) in Real GDP

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Source: NBS, PFI Capital Research

 

Activities that witnessed weaker performance relative to Q1 2019 include Quarrying, Road transport, Accommodation and Food services as well as real estate.


The mining and quarrying sector contributed 9.54% (c.N1.60 trillion) to the real GDP in Q1 2020. Quarrying and other minerals under mining and quarrying sector contracted significantly by -83.03% in Q1 2020 from -5.63% in Q4 2019 and 29.31% in Q1 2019. Coal mining under the mining and quarrying sector also contracted by -43.41% in Q1 2020 from -12.32% in Q4 2019 and 31.10% in Q1 2019. Overall, the mining and quarrying sector grew by 4.58% in Q1 2020 from 6.07% in Q4 2019 and -1.37% in Q1 2019. This was attributed to 5.06% growth in crude petroleum and natural gas (which was the main contributor to the mining and quarrying sector with a weight of 99.51% in Q1 2020) in Q1 2020 from 6.36% in Q4 2019. 

 

 

Fig. 2: Contribution of Oil and Non-Oil Sector to Real GDP

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Source: NBS, PFI Capital Research

 

Accommodation and food services which accounted for 1.07% (N178.33 billion) of the real GDP in Q1 2020, by -2.99% in Q1 2020 compared to growth of 4.15% recorded in Q1 2019 and 2.02% growth recorded in Q4 2019.

 

Although transport and storage sector grew by 2.82% in Q1 2020 and contributed 1.77% (N296.78 billion) to the real GDP, the road transport sub-sector grew at a slower pace of 2.83% relative to 21.48% growth recorded in Q1 2019. Transport services under the transport and storage sector contracted by -1.38% in Q1 2020 from growth of 2.11% in Q1 2019.

 

With 5.21% (N872.53 billion) contribution to the real GDP in Q1 2020, the real estate services sector contracted by -4.75% in Q1 2020 compared to contraction of -1.31% in Q1 2019. The sector grew by -28.10% QoQ in Q1 2020.

 

Fig. 3: Oil Production (Mbpd) Since Q1'17

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Source: NBS, PFI Capital Research

 

Outlook for Q2 2020

We point out that in Q1 2020, oil production was the highest since the last 13 quarters. This contributed majorly to the increased contribution of the sector to the real GDP as well as its 5.06% growth in Q1 2020. However, with the new OPEC quota in place, Nigeria is expected to produce 1.41 mbpd (which is currently in operation and expected to last in June 30, after which the country is expected to produce 1.495 mbpd between July 1 and December 31, 2020) from 1.77 mbpd production level in April 2020. This therefore is expected to reduce the contribution of the oil sector as well as drag the growth of the oil sector in Q2 2020. The addition of this and the continuous slow growth of the non-oil sector, will lead to the Nigerian economy recording a mild negative real GDP growth in Q2 2020.

 

Further, we expect the arts, entertainment and recreation sector to also be among the sectors that will drag down the real GDP growth in Q2 2020. We highlight that the sector grew at a slower pace of 1.53% in Q1 2020 and contributed 0.31% to the real GDP in Q1 2020. With recreational activities grounded and entertainment activities at their lowest levels, we expect the contribution of the arts and entertainment sector to further decline as well as record negative growth in Q2 2020. Also, we expect the Education sector to contract in Q2 2020 from real growth of 0.69% in Q1 2020 as well as contribution of 2.08% (N348.56 billion) to the total real GDP.


 

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