Growth has a “soft underbelly”; MPC may maintain status quo

MPC REal gdp Inflation CBN’s PMI report for Sept-2020 brandspurng A hint at recession
Photo by Cleyder Duque

Nigeria’s Q1’21 GDP was released on the eve of the second monetary policy committee (MPC) meeting of the Central Bank in 2021, following prior guidance that there would be an all-out attempt to combat price pressures if inflationary pressures continue and growth momentum improves.

Inflation failed to tick the box in the April release, but GDP sustained its recovery in Q1’21 (+0.51% YoY; -13.93% QoQ) to, in our view, set up an interesting MPC decision on Tuesday.

Given the weak Q1’21 growth (Bloomberg consensus expectation was 0.9% YoY) and recent inflation moderation, we believe the committee will prefer to leave policy parameters unchanged at the end of its two-day meeting to ensure consistency with its guidance.

MPC REal gdp Inflation CBN’s PMI report for Sept-2020 brandspurng A hint at recession
Photo by Cleyder Duque

The decision could be supported by plans to raise c.$6.2 billion in foreign borrowings and boost remittances (both of which could combine with higher YoY oil prices to ease the pressure to more aggressively raise rates to combat the FX crisis).

Observably, notable global apex banks have opted for inertia to allow their recoveries to gain firmer footing before effecting indicative rate hikes despite reports and expectations of Q1’21 growths and inflation increases.

In Nigeria, liquidity pass-through is already driving a repricing of yields in the market and narrowing the negative “real” returns in the fixed income space.

In our view, the reality of low liquidity-induced increases in yields (as macro risks demands) and the lessons from foreign central banks could ease pressure on the MPC to effect any indicative policy change on Tuesday that could charge up the bearish sentiments in the market.

Yet, the outlook for yields remains primarily biased to the upside on the impact of narrowing liquidity (which, for us, has been the biggest driver of domestic rate swings in the last 18 to 24 months).

Delving into the Q1’21 growth dynamics

Nigeria’s 0.51% YoY growth was driven by the non-oil sector, which rose by 0.79% YoY (vs 1.69% in Q4’20) to mask deterioration in oil GDP (-2.21% YoY).

Non-oil GDP growth was primarily supported by 7.69% and 2.28% YoY growth in telecoms and agric GDPs. Telecoms grew at its slowest pace in 12 quarters to possibly reflect restrictions on new SIM registration and fear of NIN-related sanctions in the quarter.

At the same time, agric’s contribution to overall GDP (22.35%) came in at the lowest level in four quarters to indicate the likely impact of a soft base effect. Elsewhere in non-oil, manufacturing (+3.40% YoY) exited recession aided by cement and food, beverage, and tobacco, while real estate output increased by 1.77% YoY.

Financial institution GDP growth also moderated to 0.15% YoY (vs an average of 14.18% across the four quarters of 2020) in line with the milder than expected credit creation in the banking sector.

Even though non-oil GDP came in slightly above the waters in Q1’21, there were significant concerns in trade (-2.43% YoY) and road transport (-23.75% YoY) readings.

Despite some traces of weakness within non-oil, the soft underbelly of the current GDP reading was mainly evinced by sustained recession in the oil sector, which suffered from another contraction in oil output in the quarter (Q1’21: 1.72mbpd; Q1’20: 2.07mbpd).

In December 2020, there were reported shutdowns in Forcados and Okono terminals due to suspected leaks on Trans Escravos Pipeline and Mystras— Okpoho subsea pipeline, respectively. Likewise, Abo, Usan, Ima and Escravos terminals were shut down for maintenance.

Production was also interrupted at Yoho, Agbami, Pennington, Que Iboe and Erha terminals due to planned repairs/maintenance, fire incidence, pump and flare management. We believe these production setbacks may have spilt into the review quarter.

Figure 1: GDP support was primarily from telecoms, agric, and manufacturing

Sources: NBS, CardinalStone Research

We retain a GDP growth projection of c.1.7% for 2021, aided by expected robust outturns in Q2’21 and Q3’21 due to the low base effect from the coronavirus affected quarters of 2020.

In addition, the conclusion of repairs and maintenance activities across key oil terminals is likely to support the “black gold’ sector in the coming quarters. More robust growth recovery is also expected to embolden the monetary authorities to fast-track the normalization of rates in the latter parts of the year.