Wednesday, October 11, 2017 03:38 PM / ARM Research
After five quarters of negative growth, Nigeria’s recession ended in the second quarter of 2017 (0.5% YoY) majorly driven by growth on the oil front (1.6% YoY) that was hinged on improved crude production (Q2 17: 1.84mbpd). Irrespective, optimism over the reading was weak as non-oil GDP (91% of overall GDP) recorded a slower pace of growth (0.4% YoY) relative to prior quarter (Q1 17: +0.7% YoY).
A breakdown of the non-oil GDP into its underlying components showed that growth deceleration in Q2 was led by Services, its largest component, which reverted to negative growth (-0.5% YoY) after coming out of recession in the prior quarter. The decline in services was due to weaker output in the ICT sub-sector (-1.2% YoY) – the first time in 21 quarters—coupled with further contraction in the real estate sub sector. On the former, the contraction in ICT largely reflected activities in the telecommunications subsector where active lines declined (-4.7% YoY to 143 million).
Meanwhile subdued activities in luxury real estate segment extended the sector’s pressures for the sixth straight quarter to leave related output lower by 3.5% YoY (vs Q1 17: -3.1%). Consequently, though non-oil GDP remained upbeat on the surface, sustaining its expansion at 0.4% YoY (Q1 17: 0.7% YoY), the growth was disappointing and pointed to a slower recovery than expected.
Oil production rebound leads to cautious optimism.
Going forward, given the relative stability in the Niger delta region coupled with the reopening of the Forcados pipeline, we expect higher oil production over the last two quarters of 2017. Extrapolating oil production for July using an average 28-month spread between NNPC and OPEC production data, we think production printed around 1.93mbpd in July.
That said, we estimate Q3 and Q4 2017 crude oil production at 1.9mbpd and 2.0mbpd consecutively. The foregoing brings H2 17 average crude production to 1.89mbpd taking our full year crude production estimate to 1.86mbpd (+1.5% YoY). Consequently, we now expect oil GDP of 0.7% and 1.5% YoY for Q3 and Q4 17 respectively – with the latter bolstered by the weak base in the corresponding period of 2016.
Services contraction sets hurdle for faster recovery.
For the rest of the year, we expect sustained pressures in the Services sector as we believe the largest sub sector (telecommunications) appears to be at its peak which should leave growth at current or even lower levels. Elsewhere, irrespective of the high interest rate environment and the decline in consumer purchasing power which should ordinarily remain a drag on output, improved FX liquidity coupled with continued efforts by the FG to ease the business environment should still sustain the expansion in manufacturing sector.
For evidence, the manufacturing PMI survey for the month of September already revealed further progress in manufacturing with 15 of its 18 sub-sectors reporting expanded activities (vs. 12 in the prior two months). On other fronts, subdued demand from high-end users should leave construction GDP relatively flat while the end of the lean season, improved access to inputs, continued government support and cheap financing should sustain the growth in the Agriculture sector.
On balance, we now look for non-oil GDP growth of 0.4% and 0.5% YoY in Q3 and Q4 17 respectively. Tying our views across oil and non-oil GDP, we forecast real GDP growth for Q3 17 and Q4 17 of 1.1% and 2.0% YoY accordingly. On this basis, we revise our 2017 real GDP forecast slightly lower to 0.7% YoY (previous: 0.8% YoY).
Over 2018, we think the movement in non-oil GDP will be key to overall economic growth. The increase in crude oil production over 2017 brings a high base for oil GDP and thus guides to a slower growth on that font. More so, given weak investment in the oil sector, we think Nigeria’s crude oil production will peak at 2.2mbpd. For non-oil, we a hold a pessimistic view driven by the high base in Agriculture and a sustained slack in Services.
On Services, with tele density over 100%, tepid subscriber growth should continue to underpin deceleration in telecommunications GDP. Consequently, ICT GDP growth should remain slack in 2018. Elsewhere, we see limited respite for real estate which is already grappling with over-supply across most segments. On balance, we think a slower growth in the oil sector and Agriculture front holds a fragile view on overall GDP in 2018.
From ARM’s H2 2017 Nigeria Strategy Report
1. NSR Q4 2017 - Crude Oil: Will Crude Oil ‘Roller Coaster’ Linger?
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