Friday, August 31, 2018 11:55 AM / CardinalStone Research
The slowest agriculture sector growth in 14 years (1.50% YoY), weak crude petroleum and natural gas production dampened GDP growth in Q2’18. Although we expect a bounce back in the oil sector and healthy growth in services to spur growth in the final two quarters, we see poor agricultural growth weighing down GDP growth in H2’18. We forecast a further slowdown in growth to 1.4% YoY in Q3’18 and 1.75% YoY FY’18
Non-oil sector drives growth as oil sector contracts
GDP growth in the second quarter printed at 1.50% YoY, underperforming our forecast of 2.02% YoY. Relative to the first quarter, the economy expanded at a slower pace (Q1’18: 1.95% YoY), due to the abysmal growth witnessed in the agricultural sector, as well as the contraction in the oil and gas sector – the first since Q1’17.
Diverging from the postrecession trend, the non-oil sector drove growth in Q2’18, expanding 2.05% YoY (Q1’18: 0.8% YoY), while the oil sector contracted -3.95% YoY (Q1’18: 14.8% YoY). The expansion witnessed in the non-oil sector was principally propelled by the services sub-sector, which grew by 4.1% YoY in Q2’18 (Q1’18: 0.5% YoY), contributing over 37 pps to overall GDP growth.
Services to remain mainstay of non-oil sector growth
Robust growth in the services sector at 2.12% YoY (Q1’18: -0.47% YoY, Q2’17: -0.85% YoY) was driven by an 11.81% YoY expansion in the information and communication sector (which accounts for 13% of GDP). IT growth was in turn driven by growth in the broadcasting and telecommunications space. According to data from the Nigerian Communications Commission (NCC), the number of active subscribers grew by as much as 10% QoQ in the period under review, from 147 million subscribers to c.162 million subscribers.
This also represented a 12.40% YoY growth in active subscribers. Other weighty sub sectors in the non-oil sector, including construction (4.51% of GDP) and manufacturing (9% of GDP) recorded growth of 7.66% YoY (Q1’18: -1.54% YoY) and 0.68% YoY (Q1’18: 3.39% YoY) respectively. The sluggish growth recorded in the manufacturing sector – despite relative stability in the foreign exchange environment – underpinned the fragile nature of the country’s recovery.
The slowdown in the growth in two of the weightiest components of manufacturing is indicative of overall lethargic consumer demand. Food & Beverage output (46% of manufacturing) slowed to 1.2% YoY in Q2’18 (Q1’18: 5.5% YoY); cement production (9% of manufacturing) also slowed to 3.8% YoY in Q2’18 (Q1’18: 5.3% YoY). Regarding cement production, we note the impact of seasonality on the observed slowdown in line with historical trends. We expect sluggish growth to continue in the next quarter as purchasing power remains low.
However, we expect to see improved activity in Q4’18, as the impact of fiscal and pre-election spending buoys demand. Over H2’18, we expect the services sector to continue to play a major part in GDP growth. However, we envisage a slowdown in IT growth YoY (the main driver of growth in services sector in Q2’18) in line with recent historical trend. While growth in the agricultural sector is on the decline, services at 53.97% of GDP has the potential to drive GDP growth.
Herdsmen clashes cripple agriculture sector growth prospects
Printing at 1.19% YoY in Q2’18 (Q1’18: 3.00% YoY, Q2’17: 3.01% YoY), the agriculture sector performed well below historical levels (7-year average: 3.87% YoY), recording its slowest growth in over a decade. The sharp slowdown in crop production growth (which constitutes over 80% of the sub-index) to 1.49% YoY (Q1’18: 3.45% YoY, Q2’17: 3.21% YoY) and the contraction in livestock to -1.95% YoY were the main drags of the limp growth figure.
We attribute the slow growth in the sector to sustained herdsmen-farmer clashes in the Middle-Belt region, as well as the high base observed in the prior year, even as target government initiatives slowed down in 2018. The clashes, which have displaced over 100,000 people (according to the International Committee of the Red Cross), have crippled food production and partly fed into rising prices – as food inflation rose from 0.9% MoM in April’18 to a 12-month high of 1.6% MoM in June 2018. The high base effect of Q2’17 also contributed to the moderated growth in the sector. The base figure recorded in Q2’17 is the highest when compared with the same quarter in the last 7 years. We note that the FG established the National Food Security Council in March 2018 in response to food security challenges.
However, we believe that the effect of these initiatives will only crystalize over the longer term as farmlands in the region have to be rehabilitated and security guarantees provided to farmers. In effect, the prevailing conflict in food producing regions, together with a high base in Q3’17, dampens our outlook for agriculture GDP in Q3’18. In our opinion, the need for initiatives to boost activities within the agricultural space cannot be undermined, if we are to see any significant growth going forward. We highlight the need for wholesale stimulus in the sector, to drive production and ease the high base derived from aggressive government initiatives last year.
The CBN’s recent scheme to incentivize bank lending to the real sector at 9% increases the prospects for the agriculture sector in H2’18. Though, we are wary about the extent to which banks will embrace this initiative.
Oil sector contracts amidst pipeline disruptions
The oil sector contracted for the first time since the country emerged out of recession in Q2’17, to print -3.95% YoY (Q1’18: 14.77% YoY, Q2’17: 3.53% YoY). The slowdown in the sector was underpinned by a reduction in oil production. Crude oil output averaged 1.84 mbpd, down from 2.0 mbpd in Q1’18, representing the lowest output volume since Q1’17. We attribute this to pipeline disruptions experienced during the quarter.
Firstly, the leakages in the Trans Forcados pipeline (TFP) – which took it offline for two weeks (16% of the time in the measurement period) – amounted to an estimated production loss of between 2.8 - 3.4 million barrels during the quarter. Secondly, recurrent vandalism of the Nembe Creek Trunkline (NCTL) led to a shutdown of the pipeline in the month of June, amounting to an estimated loss of 150,000 bpd. We expect improved production in the third quarter as the TFP leakages have since been repaired.
Looking further, an alternative pipeline, the Amukpe-Escravos Pipeline (AEP), is set to open in the last quarter of the year. We expect this to ease the current dependence of major producers on the TFP, and consequently increase scope for greater production. Overall, we envisage oil production to average around 2.0 mbpd over H2’18.
FY’18 forecasts revised due to negative shocks
While we anticipate sustained growth in services and a rebound in the oil sector in the second half of the year, we foresee slower GDP growth in the next quarter in the wake of the shocks to the agricultural sector.
It is our opinion that agriculture growth will print higher to 2.0% YoY in Q3’18 vs 1.19% 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 herdsmen crisis still lingers and we expect lagged recovery even after peace is restored. We also expect the stronger growth in last quarter of the year (driven by pre-lection activities and improved budget implementation) will push FY’18 GDP figures to print at 1.75% YoY.