Reviews & Outlooks | |
Reviews & Outlooks | |
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Tuesday, January
15, 2019 03:12 PM / ARM
Research
Executive Summary
For the first nine-month in 2018, the Nigerian economy
grew by 1.76%, up from 0.3% reported in a similar period of 2017 – with support
stemming largely from the services and agriculture sector. On the Q3 18
numbers, while the oil sector remained in contraction, though moderate,
increased output from the services, agriculture and manufacturing sectors
pushed economic growth to 1.8%. Over the fourth quarter of 2018, we expect a
stronger growth in the economic activities stemming largely from rebound in in
the oil sector (4.7% YoY) following higher oil production which we estimate to
print at 2.01mbpd (Q4 17: 1.96mbpd). On the non-oil leg, our estimated growth
in Agriculture (3%), Services (3.5%) and Manufacturing (1.4%) informs a non-oil
sector growth of 2.5%. Consequently, we project a stronger growth in Q4 18 of
2.7% YoY. On balance, full-year 2018 growth estimate stands at 2% relative to
0.8% in full-year 2017.
Over 2019, we are projecting expansion in growth by 10bps to 2.1% YoY as our views on FX stability for most of the year and expected calmness in the polity post-election is expected to support growth in the economy. Basically, with oil production at 2.0mpd, nearing its peak of 2.3mbpd, economic growth will be largely hinged on the non-oil sector, wherein the need for investment friendly policies will be required to provide fresh impetus for sustained growth. Thus, while we expect the absence of herdsmen conflict, normalcy in the oil producing region, and relative stability in the FX market to support growth in the agriculture, oil and manufacturing sector over 2019, we highlight the risk to growth in our scenarios.
2018: Non-oil masks underlying weakness in Oil Sector
Following the recovery in 2017 (+0.8%), Nigeria’s economic gained momentum in 2018 on the back of strong growth in the non-oil sector – precisely agriculture and services – which offset slower growth in the oil sector, with our 2018 growth estimate printing at 2.0% (IMF & World bank: 1.9%). In terms of actual, economic expansion in the first nine-months of the year settled at 1.76% YoY relative to 0.3% YoY growth recorded in the corresponding period of 2017. Unlike in 2017, in which the rebound in oil sector supported growth, improved activities in the Services and Agriculture Sectors – both of which triggered expansion in the non-oil sector by 1.7% YoY (9M 17: 0.1% YoY), were the drivers of growth. On the other hand, growth in the oil sector slowed in the period at 2.6% YoY (9M 17: 3.7%), reflecting lower oil output in the late quarters of the period.
Parsing through the quarterly breakdown reveals varying movements and drivers across the period. First quarter 2018 growth was welcoming at 1.95% due to improved output in the oil sector (14.8% YoY) and resilient growth in Agriculture (3% YoY) even as Manufacturing (3.4%), and Services (0.5%) also supported improved picture in the non-oil domain to drive a 0.8% growth YoY. In the second quarter, the agriculture sector was impacted by herdsmen conflict in food producing areas (1.2% YoY) while a decline in oil production which led to a contraction in the oil sector (-4.0% YoY) drove a slower growth in the quarter of 1.5% YoY. Following the efforts put in place to curb the impact of conflict on crop production as well as the re-opening of the transforcados pipeline, economic activities picked up in the third quarter of 2018 – with growth expanding by 1.8% YoY.
Over the fourth quarter of 2018, we expect a stronger
growth in economic activities. In the oil sector, production is expected to
print at 2.01mbpd (Q4 17: 1.96mbpd) which translates to a 4.7% YoY growth in
oil GDP. On the non-oil leg, our estimated growth in Agriculture (3% YoY),
Services (3.5% YoY) and Manufacturing (1.4% YoY) informs a non-oil sector
growth of 2.5% YoY. Consequently, we project a stronger growth in Q4 18 of 2.7%
YoY. On balance, full-year 2018 growth estimate stands at 2% relative to 0.8%
in full-year 2017.
Recession hits the oil sector
After a strong first quarter in the oil sector (+14.3%
YoY), due to low base in Q1 17 of 1.75mbpd – a reflection of militant attacks
and subsequent recovery in crude oil production to 2.0mbpd, the oil sector
contracted in the second quarter by 3.95% YoY. The contraction was due to
temporary closure of the transforcados terminal for repairs, due to a leakage
discovered in May that occasioned a 1.6% YoY decline in crude oil production to
1.84mbpd. In the third quarter, crude oil production picked-up mildly to
1.94mbpd, which is lower than 1.98bpd recorded in Q3 17, thus propelling the
sector into recession with the second consecutive quarter of contraction of
2.1%.
Non-oil sector comes to the rescue with a slight improvement
In the Non-oil space, the services sector was the
front runner for growth, supported by robust output in the information &
technology subsector (ICT). Coming from the high single digit growth reported
between 2013 and 2015, activities in the ICT sector slowed in 2016 to 2% YoY as
the sector approached its mature phase. Further amplifying the downtrend was
the restructuring exercise carried out by the key sector player in 20171, which
drove the sector into recession. However, in 2018, the sector recovered, hinged
on increased promotional offers by key sector players as well as improvement in
quality and capacity of data networks – with both voice subscribers growing by
8.1% YoY to 157 million subscribers, while data subscribers increased by 8.3%
YoY to 99.5 million over 9M 18. Consequently, the sector grew by 15% in Q3 18,
up from 11.5% in Q2 18 and 1.6% in Q1 18. Elsewhere, financial services
sub-sector also supported the growth over the nine-month period, up 3.3% YoY,
with support stemming from increased activities in the non-core banking
operations. Overall given the contribution of these two subsectors2, services
sector expanded by 2.7% YoY over 9M 2018 (9M17: -0.9% YoY). Looking at the
quarterly breakdown, the services sector grew by 3.4% YoY in Q3 18, 4.1% YoY in
Q2 and 0.5% YoY in Q1 18.
Agriculture Output pulled by herdsmen conflict
Activities in the agriculture sector slowed over the
first nine-month in 2018. The slow-down mirrors the impact of the herdsmen
conflict which intensified in 2nd quarter. According to FEWSNET, the conflict
between farmers and herdsmen led to the destruction of many farmlands and
invariably the farm yields which was evident in reported numbers for growth in
crop production – 1.5% in Q2 18 (Q1 18: 3.5%). However, coming into the third
quarter wherein relative calmness occurred in these areas, both crop production
and livestock subsectors picked up by 1.9% YoY and 2.6% YoY respectively.
Consequently, activities in the third quarter expanded by 1.9% YoY.
Manufacturing sector recovers, thanks to FX availability
Manufacturing sector was strong over 9M 18, printing
at 2% relative to a contraction of 0.3% in the corresponding period of 2017.
Drilling down, the food, cement and textile production supported the sector
output. We perceive the FX availability as well as lower cement pricing as the
harbinger of the improved production in these subsectors. Buttressing our view,
food and cement companies across our coverage universe reported mid to high
single digit growth in volumes over the review period. Looking at the quarterly
breakdown, the manufacturing sector expanded by 1.9% YoY in Q3 18, up from 0.7%
YoY in Q2 18.
2019 Outlook: Moderate Growth, Great Risks
Over 2019, we are projecting expansion in growth by
10bps to 2.1% YoY as our views on FX stability for most of the year and
expected calmness in the polity post-election is expected to support growth in
the economy. Basically, with oil production at 2.0mpd, nearing its peak of
2.3mbpd, economic growth will be largely hinged on the non-oil sector, wherein
the need for investment friendly policies will be required to provide fresh
impetus for sustained growth. Thus, while we expect the absence of herdsmen
conflict, normalcy in the oil producing region, and relative stability in the
FX market to support growth in the agriculture, oil and manufacturing sector
over 2019, we highlight the risk to growth in our scenarios.
Oil sector growth gradually peaks
Starting with the oil sector, while we see limited
room for disruptions to crude oil production from the militants, we see limited
scope for growth in the sector as production is nearing its peak even as the
production cap recently placed by OPEC further caps growth. For clarity, OPEC
and Non-OPEC members agreed to cut 1.2mbpd from global crude supply, with
Nigeria expected to reduce its production by 40-50kbpd, using October
production as the reference level. That said, as oil production begins at Egina
oil field, production for FY 2019 is expected to print at 2.08mbpd (FY 18E:
1.95mbpd), suggesting sector output growth of 8.0% YoY. For clarity, the Egina
oil field is a new offshore development by Total Upstream, in partnership with
CNOOC, Sapetro and Petrobras. Towards the end of 2018, Total announced first
production from the field with an estimated production capacity of 200,000bpd.
Non-Oil sector on a cruising altitude
In the non-oil sector, we expect activities to expand
by 1.6% YoY over 2019. Starting off with the Agric sub-sector, while favorable
rainfall and support initiatives implored by the government would likely
support output, the downside risk remains ongoing conflict between herdsmen and
farmers. However, given the critical nature of the sector to the country’s
growth, we are positive on increased deployment of military personnel to the
north with the aim of curbing the ongoing resource-based conflict. According to
FEWSNET, pasture availability is expected to be slightly above average due to
the abundant rainfall in most areas that support the livestock grazing, which
guides towards improved livestock conditions and a moderation in the conflict.
Furthermore, off season activities which began in December 2018 is expected to
yield average to above harvest, with more population engaging in dry season
cultivation of rice, maize and vegetables to recover the crop losses
experienced during the widespread flooding observed across the country in summer/fall
2018. The foregoing combined with the low base observed in the prior year
guides to a sector growth of 3.3% YoY over 2019.
On services, we expect a sector growth of 1.1% (lower
than 2018E: 2.9% YoY) – with ICT driving the moderation. In the ICT territory,
we see less room for significant growth as the voice output seems to be nearing
its peak at 162 million subscribers and a substantial growth in data output
would require significant long-term capital investment. Consequently, we expect
a sub-sector growth of 2.4% YoY (FY 18E: 8.4% YoY). Elsewhere, with our
expectation of relative stability in the currency for most part of the year, as
well as approval of the new wage bill (given the ongoing discussion between the
government and the labour union), we expect an increase in the manufacturing
sector output over 2019. Consequently, we expect a sector growth of 2.7% YoY,
underpinned by improved output in FBT3 and TAF4 subsectors. Overall, coalescing
our expectation for each sector translates to an economic growth of 2.1% for FY
18.
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