GDP grows by 2.55% YoY in Q4’19 as non-oil sector consolidates gains

Q3’20 GDP Numbers: Glimpse of Hope Amidst the Inevitable?
CardinalStone Research
According to the National Bureau of Statistics (NBS), Nigeria’s economy grew by 2.55% YoY in Q4’19 compared to 2.28% YoY in Q3’19 and 2.38% YoY in the corresponding quarter of 2018. The expansion represented the fastest quarterly growth since the 2016 recession and buoyed 2019 economic growth rate to 2.27% YoY (largely in line with our 2.30% forecast). The performance was supported by strong growth in Services (+2.22% YoY) and Agriculture (+2.31% YoY) sectors. However, Industry GDP growth moderated to 2.31% YoY in 2019 (vs. mean of 3.03% YoY between Q2’19 and Q3’19), but remained significantly stronger than the 0.95% YoY growth reported in 2018. The growth in an industry likely mirrored production-induced growth in Oil GDP in 2019.
Figure 1: Quarterly GDP growth 2016-2019 (%)
Rising telecoms subscriber base and financial activities power non-oil
Contrary to developments in Q3’19, non-oil sector growth was primarily driven by the expansion in Services (+2.60% YoY in Q4’19), with its Telecommunication sub-component accelerating by 10.60% YoY to reflect the material upturn in subscriber growth from July 2019. In addition to this, Financial Services grew by 22.33% YoY in Q4’19 (FY’19: +2.40% YoY), coinciding with a greater effort by the CBN to expand loan growth (such as the new loan to deposit ratio and OMO restrictions). We expect the positive impact of loan growth to persist in the coming quarters given the lower lending base in the first 3 quarters of 2019. Traction on the telecoms and financial services front were enough to offset the impact of declines in Trade (-0.6% YoY) and Real Estate (-3.4% YoY) in Q4’19. The contraction in Trade and Real Estate GDP may be linked to the reduction in reselling activities stoked by the border closure and sustained weaknesses in the high-end property market, respectively. Away from Services, Agriculture GDP also provided some stability to non-oil GDP growth as reduced competition from other African markets (a fall-out of border closure) papered over the cracks of recurrent incidences of herdsmen clashes and banditry across Nigeria. That said, we note that at 2.31% YoY, the sector’s growth is still materially lower than its historical 8-year average of 3.70% YoY despite the plethora of initiatives dedicated to the sector. In our view, to achieve agriculture GDP growth of over 4.30% (highest full-year growth in 5 years), domestic efforts (on funding initiatives and security) may have to be complemented by private capital inflow given the slow pace of fiscal consolidation and fast reserves depletion.
Elsewhere, Manufacturing is yet to materially benefit from strict border enforcements despite initial excitement. The sector’s growth came in at 1.24% YoY in Q4’19 (vs. 1.10% YoY in Q3’19) as weak consumer discretionary income continues to limit scope for significant improvements in capacity utilization across producing plants in the country. In addition to sustained double-digit inflation and high unemployment, rising risks of devaluation is also a significant risk to consumer discretionary income and manufacturing in the coming quarters.
COVID-19 poses a downside risk to 2020 GDP growth
Going by our analysis, the non-oil sector accounted for 1.88% of the 2.27% GDP growth in 2019 (vs 0.40% for the oil sector). We, however, note that further expansions may be threatened by policies which erode the purchasing power of consumers given that consumption accounts for c.76.60% of Nigeria’s overall GDP measured by expenditure approach. In addition to this, the Nigerian economy is also currently reeling from a sharp fall in crude oil prices due to the outbreak of COVID-19 virus[1]. Although oil accounts for c.9.00% of GDP, ‘petrodollars’ have far-reaching impacts on the trade balance, inflation via FX volatilities, and private and public consumption. The bearish commodity price sentiment stoked by the outbreak of the virus is therefore negative for Nigeria’s growth outlook.
All in, we retain our 2020 GDP growth forecast at 2.4% YoY but note that the downside risks to growth are increasing. These increasing risks, higher inflation, current account & fiscal deficits, and weaker commodity price outlook suggest possible temperance in yield moderation in the fixed income market and bearish sentiment inequities.
[1] The virus, which is now a menace across continents, has pegged oil prices at $55/barrel levels