Higher Crude Oil Production Propels GDP Growth; Real GDP Expands 1.40% y/y – Cordos Research

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According to data released by the National Bureau of Statistics (NBS), growth strengthened in the domestic economy in the three months to September, with real GDP growth of 1.40% y/y (Q2-16: -2.34% y/y; Q2-17: +0.72 y/y, revised from 0.55% y/y) during the period, heralding the second consecutive expansion in output growth following the five successive contractions which started in the first quarter of 2016. The GDP figure was 15 bps higher than our projected 1.25% and 13 bps below Bloomberg’s compiled average estimate of 1.53%. Largely, the sustained growth was powered by notable expansion in the Oil Sector (25.89% y/y), augmented by resilience in Agriculture (3.06% y/y) and Other Services (1.7% y/y), which masked weakness in Manufacturing (-2.85% y/y), Services (-3.0% y/y), and Trade (-1.7% y/y). Quarter-on-quarter, real GDP growth was 8.97%, reports BrandSpur Nigeria.

Oil is Everything; Everything is Oil

The strong growth of 25.89% (4,892 bps and 2,236 bps ahead of Q2-16 and Q2-17 figures respectively) recorded during the review period wholly reflects the jump in crude oil production to an estimated 2.03mb/d, compared to 1.81mb/d in the corresponding quarter of 2016 and 1.87mb/d in the previous quarter (revised from 1.84mb/d)). Suffice to say that government efforts at ensuring peace in the Niger Delta region, in addition to the resumption of activities at major terminals (particularly Forcados) and the extension of Nigeria’s exclusion from the OPEC/NonOPEC output cut, yielded desirable results – with the weak base of 2016 providing a soft landing. For information, total vandalized points, from available data, declined 65% y/y to 186 points in July and August, from 532 points during the corresponding period last year. Accordingly, oil contribution to overall real GDP increased to 10.04% in Q3-17 (vs. 8.09% and 9.04% in Q2-16 and Q2-17 respectively), with the sector’s q/q growth registering at 21.10%.

Notable Weakness Across Major Sub-Sectors Pressures Non-Oil GDP

Non-oil GDP disappointed, contracting by 0.76% y/y (Q2-16: 0.03% y/y; Q2-17: 0.45% y/y) after two consecutive quarters of growth, shrugging off notable improvements in the macroeconomic landscape during the period, including

  1. Improving FX conditions amid the apex bank’s continued intervention in the currency markets
  2. Strengthening consumer confidence, occasioned by declining pressure (albeit at a marginal pace) on the general price level, and
  3. Rebounding business activities, as revealed by encouraging PMI and business expectations data during the quarter.

Clearly, the performance of the non-oil sector has fallen short of expectation so far this year – particularly considering the vapid base throughout 2016, with the Q3-16 number missing contraction only by a whisker – implying slower-than-expected pace of economic recovery. Shifting focus to the individual components of the non-oil GDP, the drivers of the lacklustre performance come to the fore, being declining activities in Services (-3.0% y/y), Manufacturing (-2.85% y/y), and Trade (-1.7% y/y), which more than outweighed the continued growth in Agriculture (+3.06% y/y). On a q/q basis, however, non-oil GDP grew 7.8%.

Services in Recession
Services, the biggest component of non-oil GDP, slipped into recession, contracting by 3.0% y/y (vs. -1.1% y/y in Q2-16 and -0.1% y/y in the preceding quarter) in Q3-17. Quarter-on-quarter, output in the sector declined by 3.6%. The weak performance in Services is traceable to contractions in Information & Communication (-4.5% y/y) and Real Estate (-4.1% y/y) – collectively accounting for c.50% of services GDP. On ICT, we note the 5.7% y/y descent in Telecommunications (the largest component of ICT), which is consistent with the 8.3% y/y fall in total number of subscribers to 418.49 million (from 456.36 million in Q3-16) during the review period, and suggesting lower top line for telcos. The unimpressive performance of telecommunications is not unrelated to unresolved legacy issues in the sector including willful destruction of telecoms facilities particularly in the northeast, difficulty in obtaining the right of ways (RoWs), and theft of batteries at various base stations, among others. The negative growth (for the seventh successive quarter) in Real Estate further corroborates lingering low demand for properties, especially for non-residential and prime residential buildings across major commercial centers in the country. Unlike in the previous quarter, Finance (-6.5% y/y; +11.8% y/y in Q2-17) and Insurance (Q3-17: -1.9%; Q2-17: +3.8% y/y) deepened the contraction in Services, despite still elevated interest rate and asset yields

Manufacturing Shrugs Off Broad Macroeconomic Improvement

Output growth in the Manufacturing sector contracted 2.85% y/y (-4.38% y/y in Q2-16), after growing 0.64% y/y in the preceding quarter, despite (1) continued improvement in foreign exchange conditions, (2) positively changing consumer and business confidence, (3) increasing backward integration, (4) strengthening import substitution, (5) relative step-up in power generation, thanks to the cessation of hostilities by militants in the Niger Delta and longer rainy days, and more profoundly (6) the weak base of 2016. Drilling down component activities in the sector, Oil Refining (-45.4% y/y; Q2-17: +11.3% y/y) and Cement (-4.6% y/y; Q2-17: -4.2% y/y) constituted the major drags, and subdued the tepid growth recorded by the two biggest components which collectively account for c.68% of manufacturing — Food, Beverage & Tobacco (0.6% y/y, compared to 2.7% y/y in Q2-2017) and Textile, Apparel & Footwear (unchanged at +0.2% y/y). On the contraction in Oil Refining, we note specifically the 50% y/y decline in refinery capacity utilization in August, following downtime at KRPC and PHRC during the month, in addition to a top official of the Nigerian National Petroleum Corporation (NNPC) revealing that the Kaduna and Warri refineries had been shut down indefinitely due to increasing in their operating costs and several maintenance interventions. The decline in cement is attributable to tempered volume growth, on (1) longer rainy days and (2) private sector demand still grappling with the impact of price increase actions taken by cement producers while public sector demand
remained low, reflecting weak implementation of CapEx budget. Quarter-on-quarter, output in the sector grew 2.6%.

Trade Deepens Recession

Elsewhere, Trade (18% of non-oil GDP) extends recessionary trend, contracting for the sixth straight quarter, with a GDP growth of negative 1.7% y/y (vs. -1.4% y/y in Q3-16 and -1.6% y/y in the preceding quarter). Activities in the sector partly reflect the difficulty in accessing credit for meeting transaction obligations, amid the high-interest rate environment, with prime and maximum lending rates ranging between 17.69% and 31.20%.

Agriculture: Still in the Spotlight

Agriculture (32% of non-oil GDP) fired on, growing by 3.06% y/y, compared with 4.54% in the corresponding quarter of 2016 and 3.01% in Q2-17. Quarter-on-quarter, growth was stronger at 38.6%. Indeed, the sustained growth in this sector continues to reflect the knock-on effect of renewed government commitment – in its diversification campaign – to the sector, evident in increased funding and support in the form of improved supply of seedlings, insecticides, and fertilizers. To mention, the Central Bank of Nigeria’s Anchor Borrowers’ Programme (ABP) remains crucial to access to Agric credit, coupled with continued gains from the Agricultural Credit Guarantee Scheme Fund (ACGSF). Also, prevailing import restriction on certain agricultural products, which has supported import substitution and backward integration, has further led to the expansion of area planted. The aforementioned more than assuaged the impact of flooding incidence in major parts of the country, including Benue, Kogi, Niger, Ebonyi, and the Delta States. That said, it is worth noting that most of the growth in the sector remained driven by Crop Production (92% of agriculture GDP), which grew by 3.19% y/y during the reference period, compared with 3.20% y/y in Q2-17.

Non-Oil Sector Rebound to Complement Continued Growth in the Oil Sector 

We anchor growth in Q4-2017 on further expansion in the oil sector (on stable output) and a rebound in the non-oil sector (on stronger impact of foreign exchange stability, higher capital releases by the FGN, and continued growth in agriculture). Overall, we estimate GDP growth of 2.26% y/y in the fourth quarter of the year and revise our 2017FY estimate slightly lower to 0.92% (previously 0.97%).

Over Q4-2017, oil sector GDP will reflect improved and stable production. For instance, earlier in October, Shell Petroleum Development Company (SPDC) lifted force majeure on exports of Bonny Light crude, barely two days after Aiteo Eastern Exploration and Production Company announced the completion of repairs of the Nembe Creek Trunkline (NCTL). While we acknowledge recent threats by a militant group, Niger Delta Revolutionary Crusaders (NDRC), to scuttle oil production to zero barrel per day should the federal government fail to implement the various agreements reached with leaders of the region, we think the ongoing peace deal between the FGN and the various stakeholders will not be compromised – as evident in recent engagements. That said, beyond the near term, we believe oil sector growth will largely be supported by massive capital investment (currently lacking) in the sector, particularly to unlock potential offshore values. A case insight is a significant discovery with a potential recoverable resource of between 500 million and 1 billion barrels of oil on the Owowo field offshore Nigeria by
ExxonMobil last year. Thus, we think a swift passage of the Petroleum Industry Bill (PIB) – which has been shifted to Q1-18 – among other relevant reforms, cannot be overemphasized.

Higher oil prices (up 29% y/y to USD63.06/barrel, from USD48.95/barrel) and continued healthy production should combine to benefit the non-oil sector by way of higher revenue which will further support FX stability and improved dollar liquidity for large scale businesses and retail users. In addition, as a leading indicator, PMI data released by the CBN for the month of October suggest improving business conditions during the period, with manufacturing and nonmanufacturing
PMIs strong at 55.0 and 55.3 respectively. Still supporting positive developments in the domestic economy is the World Bank’s Ease of Doing Business Report for 2018 placing Nigeria in the 145th position (169th position in 2017), and ranking the country among the top 10 countries that improved on reforms. We look for further expansion in agricultural output over Q4-17, particularly crop production. Granted, the impact of the flooding incidence across major parts of the country may likely deepen into the main season harvest which commenced in October. For insight, a recent report by FEWS NET asserts that the main season harvest, despite near-normal progression of the rainy season, is expected to be average to above-average, with below average output expected in areas affected by communal conflict, as well as in parts of central states affected by pest infestations and areas in central and southeastern states that earlier experienced flooding.
Notwithstanding, our view is that overall output will be relatively higher on a year-on-year basis, considering expanded cultivated area owing to elevated staple food prices (reflected in higher food inflation rate: 20.31% y/y in October) and increased government funding and support.

It is compelling to expect a rebound in manufacturing GDP over Q4-17, with expectation hinged on

  1. The CBN’s sustained commitment to forex stability
  2. Additional fiscal stimulus from the 2017 budget,
  3. Improved consolidated refinery capacity utilization, with ongoing revamping of the refineries
  4. Sustained improvement in power generation, on the back of improved gas supply following the cessation of hostilities by militants in the Niger Delta
  5. Strengthening consumer and business confidence, further boosted by the recent positive ranking by the World Bank on the ease of doing business in Nigeria, with continued effort at the ranking, and
  6. Festivity-fuelled aggregate demand (with purchasing power gradually picking up), which will likely spur higher output by most manufacturers.

It is difficult to expect a significant rebound in services GDP, as activities in the largest subsector, telecommunications (23% of services GDP), may likely stagnate at current levels or decline further as limited scope for expansion exists in the segment. That said, we think other subsectors in the sector will benefit from continued government effort at improving the ease of doing business and the CBN’s sustained commitment to forex stability.

 

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