Nigeria’s Q2 GDP performance was released this morning, with GDP down 6.10% year-on-year and non-oil GDP down 6.05% y/y. This was not a surprise (although one forecast poll predicted a 4.05% decline), given that in June the World Bank forecast a 3.2% contraction and the IMF forecast a 5.4% contraction for full-year 2020, suggesting that some poor quarters lay ahead.
After growth of 1.87% y/y in Q1 2020, the Q2 2020 data are consistent with Nigeria experiencing a significant recession in 2020. Q2 was weak and Q3 is likely to be weak, too. Even then, the volatility of some of the moves in GDP sub-sectors (notably Trade and Telecoms) during Q2 was surprising.
There are few occasions when not being an industrialised nation looks like an advantage. One of them is during a global recession when a high proportion of GDP anchored in Agriculture (24.6% of Nigerian GDP) acts as a brake on economic calamity elsewhere.
Nigeria’s economy contracted by 6.1%, year-on-year (y/y), in Q2 2020, but this actually looks good when compared with an industrialised nation like Germany whose economy contracted by 10.1% y/y in Q2; or a services-led economy like the UK whose GDP contracted by 20.4% y/y in Q2; or the USA whose economy is estimated to have contracted by 32.9% y/y in Q2.
The quarterly data from the National Bureau of Statistics (NBS) is eagerly awaited by analysts as it provides reliable and long-term data. We tend to concentrate on the top six sectors (Agriculture; Trade; Telecoms; Manufacturing; Oil & Gas; Real Estate) as these account for 76.3% of total GDP, but there is a wealth of other data on industry trends unavailable elsewhere.
As with almost all economies around the world (China is an exception), the scale of the GDP chart must be re-drawn to accommodate the most recent data.
Is there anything surprising?
We were expecting mild and continued growth from the Agricultural sector (24.6% of GDP) and it grew by 1.58% y/y. We were expecting a contraction from Trade (14.3% of GDP) and some growth from Telecoms (also 14.3% of GDP), but the volatility of these sectors surpassed our expectations. Trade fell by 16.59% y/y (a savage correction, presumably exacerbated by the shortage of foreign exchange) while Telecoms grew by 18.10% y/y (far above its trend growth rate, helped by the rise of remote working).
We also thought that Manufacturing (8.8% of GDP) would suffer very badly, but it contracted by 8.78% y/y (rather than the double-digit percentage decrease we expected), suggesting that Manufacturing is either less reliant on imported raw materials than we thought, or that manufacturers were able to use old stocks of supplies. Oil & Gas (8.9% of GDP) fell by 6.63% y/y, again less than we thought but likely reflecting the benefit of selling oil forward at prices available earlier in the year. Real Estate (5.3% of GDP) fell by 21.99%.
What does this mean for Q3?
Despite the easing of lock-down (which we think was not very severe) and government efforts to stimulate the economy (but the government is only a small part of the economy), we think that broadly speaking, these trends will continue.
The NAFEX rate (also known as the I&E window rate and the interbank rate quoted on
Bloomberg) closed at N386/US$1 last week. In the parallel market US dollars were
offered at N477/US$1. The CBN is reported to soon start supplying US dollars to Bureaux
de Change (BDC), though we expect the CBN to guard its US$35.6bn reserve position
carefully. Given reasonably liquidity in the parallel market we only expect slight pressure
on the N477/US$1 rate over the coming weeks.
The price of Brent crude decreased by 1.00% last week to US$44.35/bbl. The average price, year-to-date, is US$42.52/bbl, 32.80% lower than the average of US$64.20/bbl in 2019. Last week, the OPEC+ Joint Ministerial Monitoring Committee met virtually to discuss compliance with production cuts among member countries.
The need for 100% was stressed by Saudi Arabia in order to compensate for non-compliance in May, June and July. A determined move to control supply suggests that OPEC+ is concerned about downward pressure on prices in the light of renewed fears about global Covid-19 outbreaks.
Such concerns indicate that the market is a little weaker than previously thought. We think that the bounce back towards US$50.00/bbl may be delayed for several weeks if not longer.
CORONATION MERCHANT BANK