Economy Expands in Line with Forecast …Better Days Ahead?

During the week, the National Bureau of Statistics (NBS) released Nigeria’s Q2:2017 Gross Domestic Product (GDP) report which confirmed consensus view that macroeconomic fundamentals are improving and growth would turn positive after five consecutive quarters of contraction. The report showed GDP expanded by 0.55% Y-o-Y in Q2:2017 - much in line with our estimate of 0.6% - compared to a contraction of 0.9% Y-o-Y in Q1:2017 (revised downward from earlier estimate of –0.55%) and decline of 1.5% Y-o-Y in Q2:2016. The NBS confirmation that the economy is out of recession was largely in line with expectations already formed by analysts from leading macroeconomic and market indicators such as Purchasing Managers Index (PMI) data, oil production volumes, FX liquidity and company earnings in Q2:2017.

Growth Driven by Oil and Non-Oil Sectors
After six consecutive quarters of contraction, the oil sector benefited from the cessation of attacks on oil & gas installations in the Niger Delta region which led to an improvement in oil production to 1.84mb/d in the Quarter from 1.69mb/d in Q1:2017 and 1.81mb/d in Q2:2016. Thus, on Y-o-Y basis, the Oil sector grew 1.6% from a contraction of 15.6% in the prior year on the back of an improvement in oil output. On Q-o-Q basis, Oil sector growth was much stronger at 7.5% due to relatively low base of previous Quarter. Hence, the relative contribution of Oil sector to aggregative Nominal GDP improved to 8.8% in Q2:2017 from 8.2% in the preceding quarter.

Similarly, Non-oil GDP also grew, albeit lower than expected, as growth decelerated 28bps to 0.45% in Q2:2017 from 0.72% recorded in Q1:2017. The deceleration in Non-oil sector growth is attributable to weaker growth in Agriculture sector (3.01% in Q2:2017 vs. 3.39% in Q1:2017) and steeper contraction in Services sector which declined 0.85% compared to -0.37% in Q1:2017. Soft growth in Crop Production (3.0% growth from 3.4% in Q1:2017) and contraction in Telecommunications & Information Services (-1.9% in Q2:2017 from +2.9% in Q1:2017) dragged Agriculture and Services sectors respectively.  The slow growth in Crop Production suggests off-season harvest was not as bumper as expected whilst we suspect the Telecoms sector contraction is a fallout of reduction in telephony subscribers and teledensity. Telephone subscribers fell 6.2% Q-o-Q to 143.0m in Q2:2017, leading to a 6.7 percentage points Q-o-Q moderation in teledensity to 102.2%.

Outlook: We Retain FY: 2017 Growth Forecast at 1.2%
We expect growth to accelerate in Q3 and Q4, driven by improved oil output and anticipated positive knock-on effects of higher crude exports on Non-oil GDP following a boost in FX liquidity and fiscal spending. With Bonga oil field back on stream after a routine maintenance which shut-in production in Q2:2017, coupled with the reopening of the Trans-Forecados terminal in June, we expect oil production to reach pre-crisis level of 2.0-2.2mb/d in subsequent quarters. PMI reports since the start of Quarter 3 have also indicated that Non-Oil activities remain upbeat, with both Manufacturing and Non-Manufacturing PMI data expanding to a 2-year high in July on the back of improved FX liquidity and fiscal spending. Recently released August PMI data affirmed this progress, as both Manufacturing and Non-Manufacturing PMI reported above-50.0 points readings - showing improvements in economic activities.

However, a major downside risk  is the recently reported incidence of flood in the Agrarian North Central region which is strategic agricultural belt. Although government agencies are still taking count of the extent of damage to farmlands and infrastructure, we have prudently taken this into consideration in our growth forecast for FY:2017. Hence, we retain our FY:2017 growth forecast at 1.2% but raise FY:2018 projection by 10bps to 2.6%. Nonetheless the positive broadly positive outlook to growth, we note that GDP growth below 2.7% population growth rate will have little impact on quality of life in Nigeria as per capita income growth is likely to remain negative; hence, the need for more constructive policymaking to address structural constraints to high and sustainable growth which includes high interest rate, FX market distortion and low investment spending.