Reviews & Outlooks | |
Reviews & Outlooks | |
4614 VIEWS | |
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Monday, January
22, 2018 /10:20 AM /ARM Research
We
expect a juggling act between recovery and headwinds in the near term. However,
we hold the view that economic direction will be more tilted towards a
recovery. Tying our views on both oil and non-oil component of growth, we
forecast a real GDP growth of 1.9% YoY as our base case in 2018.
Domestic economy back from the brink
After
four consecutive quarters of contraction, Nigeria’s economy recovered in the
second quarter (0.72% YoY) and sustained momentum in the third quarter (1.4%
YoY) with combined GDP growth of 0.4% YoY as at 9M 17. Much of the growth
reflected higher oil production (26.1% YoY to 2.03mbpd in Q3 17) while the
performance of the agricultural sector remained robust. Consequently, oil and
agriculture GDP expanded by 25.9% and 3.1% YoY respectively over 9M 2017.
Despite the growth in agriculture, non-oil GDP swung into a contraction in the
third quarter (Q3 17: –0.8% YoY; 9M 17: +0.1% YoY) underpinned by deceleration
in services, manufacturing and trade sectors1 which printed at -3.1%, -2.9% and
-1.7% YoY respectively in the review period.
Over
the fourth quarter, we project production at 2.05mbpd (+16.5% YoY), which
translates to a 48% YoY growth in Oil GDP. For non-oil, despite the resilience
in Agriculture which we expect to grow 3.2% YoY, sustained deceleration in
Services (-4.7% YoY), Manufacturing (-1.8% YoY) and Trade (-2.8% YoY)
translates to a 2.3% contraction in non-oil GDP. Consequently, we forecast Q4
17 real GDP to print at 1.1% YoY which translates to 2017 real GDP growth
estimate of 0.6% YoY.
Upturn in crude production boosts Oil GDP
Pertinently,
oil production which expanded by 26.1% YoY to 2.03mbpd2 in the 3rd quarter
received major boost from the lifting of force majeure on the Brass terminal
(February 17) and Forcados terminal (May 17). Accordingly, extending the trend
in the second quarter of the year where oil GDP expanded for the first time in
seven quarters, oil output grew by 25.9% in Q3 17.
Agriculture sector proves its resilience
As
earlier stated, the only positive on the non-oil leg was the Agriculture sector
which proved resilient despite economic recession. In the third quarter, the
sector grew by 3.1% YoY reflecting growth in its largest component - crop
production3 (3.21% YoY) even as livestock grew by 2.5% YoY. The growth was
buoyed by increased access to inputs during the growing season, cultivated land
as well as favourable rainfall distribution in the southern region.
Over
the last quarter of the year, we still expect a sturdy growth of 3.2% with
support largely from the main harvest season which started in September with FEWSNET
noting average to above average harvest in the quarter. Notably, benefits from
favourable rainfall and increased cultivated land during the growing season
would also filter into the fourth quarter.
Services thrusts Non-Oil GDP into negative territory
Starting
off with the largest component of non-oil GDP, Services slipped back to
negative territory in the prior 2 quarters (Q2 17: -0.5% Q3 17: -3.1% YoY)
after recording its first growth in Q1 17 (1.0% YoY). Our attribution analysis
further reveals that the non-oil GDP would have remained positive4 if we assume
no growth in services GDP whilst leaving the other components unchanged.
The
contraction in Services was largely driven by a deceleration in ICT as well as
the real estate sector which jointly accounts for 50% of the output in the
services sector. The ICT sector contracted for the second consecutive quarter
due to slower activities in the telecoms industry. Pertinently in Q3 17, the
NCC reported a decline of 8.3% YoY in subscriber base (Q2 17: -1.92% YoY). For
context, MTN, the largest player in the industry reported a 5% decline in its
voice calls which accounts for over 70% of total output.
Furthermore,
across board, telecom subscribers have continued to switch from customary
cellular services5 to data bundles. On the other hand, the persisting downtrend
in luxury building activities and urban office rentals against a backdrop of
shrinking corporate profitability continued to weigh on real estate to a
decline of 4.1% YoY in the third quarter of 2017. To add, the financial
services bucked the positive trend in Q3 17 printing at -6%YoY which we
attribute to the high base in 2016 stemming from the impact of NGN devaluation
on its loan books.
Elsewhere,
after reporting two consecutive quarters of growth on the back of improved FX
liquidity and economic recovery, the manufacturing sector turned the corner in
Q3 17, declining 2.9% YoY. Though the major drivers of growth for the sector
slowed (Q3 17; FBT6 0.6% YoY and TAF7 0.2% YoY), much of the weakness is
attributed to a 45% YoY decline in oil refining as well as the cement sector
(-4.6% YoY). The downtime in refinery operations, reflects ongoing maintenance
on two refineries, as reported by NNPC.
Elsewhere
lower output on cement continues to reflect weak sales, a pass-through from
subdued purchasing power and higher cement prices. Furthermore, notwithstanding
the support from stable FX environment which boosted non-oil imports by 10.6%
YoY in Q3 17, lower consumer demand underpinned by the sustained contraction in
wage growth8 (Q4 16: -2.03% YoY) as well as higher unemployment rate (Q3 17:
18.8% Q2 17: 16.2%) further exacerbated weaker demand in the FBT and textiles
segment.
For
the rest of the year (Q4 17), we do not expect the drastic decline in oil
refining to subsist even as gains from strengthening of the currency as well as
festivities is expected to drive a slight pick-up in consumer demand. Thus, we
project a smaller decline in growth which is estimated at - 1.8% YoY.
Oil and Agric Output to support 2018 GDP growth story
Notwithstanding
the recovery in crude oil production and resilience in Agriculture which lifted
the domestic economy, we believe the structural headwinds in the Services and
Manufacturing segment—a good proxy for economic productivity—serves as a
caution to the
optimistic outlook for the economy.
Starting
off with Oil GDP where higher crude production remains the mainstay, we do not
see room for any disruptions as government continues to make efforts to ensure
peace and security in the Niger delta region9. Though the OPEC decision to cap
the country’s crude production level limits any room for expansion beyond
current levels, we expect crude oil production to peak at 2.2mbpd and forecast
an average crude oil production of 2.04mbpd in 2018 which is 6.7% higher
relative to 2017 average of 1.91mbpd. Consequently, we forecast oil GDP growth
of 8.4% YoY.
On
the non-oil side, we start off with the Agriculture sector. The agriculture
sector is in the middle of a mid-cycle renaissance, both structurally and
politically. FX-induced concerns on importation combined with the clamour for
economic diversification and self-sufficiency in food production have laid the
foundation for a self-sustaining recovery that could last for a while.
Consequently, we expect the sector’s performance to remain robust stemming from
increased government support and incentives10. Elsewhere, FEWSNET noted that
rainfall levels in 2018 would be average to normal and the pest infestations
are expected to have minimal impact on aggregate staple production. On this
premise, we forecast a 3% YoY growth in the Agriculture sector over 2018.
Away
from the agriculture sector, we also see room for a soft growth of 0.9% and
0.8% YoY in the manufacturing and trade sector accordingly underpinned by
currency stability as well as the prospects for a wage increase in the coming
year which points towards an improved consumer demand and spending. On oil
refining and cement, increased FG commitment to revamp the local refineries as
well as lower cement prices, higher gas supply and spending by both state and
federal government remain the crux for growth in the two subsectors.
Given
the low base in Services over 2017 and accelerated pace of internet
penetration, we look for a mild growth of 0.6% YoY over 2018. This is premised
on the expectation that the government would bring in more initiatives in
achieving its 30% broadband penetration in the coming year which is aimed at
accelerating speed internet11. The tele density for internet users as at Q3 17
is currently at 66%12, which means there are more opportunities for growth and
increased likelihood of the government prioritizing growth driven policies in
that segment of the telecoms business.
Also,
we expect a slower contraction in the real estate sector premised on our
expectations for a mild pickup in demand for properties designed for middle
income earners, while demand at the luxury end is expected to remain depressed.
Tying our views on both the oil and non-oil component of growth, we forecast a
real GDP growth of 1.9% in 2018 which is the base case.
In
playing out other scenarios, we assume a real GDP growth of 2.9% as the bull
case based on the expectation that oil production touches the 2.2mbpd and
government fuels its spending with constructive sector-specific initiatives in
Agric, services and Manufacturing sector. In terms of the downside, we
presuppose the resumption of rebellious activities from the Niger delta
militants in lieu of the 2019 elections and sustained deceleration in output
from the services sector feeding into the negative forecast of -1.6%.
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