Culled—-Proshare
Sept 6, 2016/BMI Research
BMI View: Nigeria will endure an economic contraction in 2016. Despite some improvement in the second half of the year, declining oil production and manufacturing will weigh heavily on the headline growth figure.
Nigeria will endure an economic contraction in 2016 as external and domestic challenges, exacerbated by a series of controversial monetary and fiscal policy developments, have led to a fall in manufacturing activity, declining oil production, a delayed implementation of an expansionary budget and reduced inflows of investment.
We believe the economy bottomed out in the second quarter of 2016. However, despite some limited improvement ahead, any positive growth over the next two quarters will not be sufficient to offset the poor H116 and we forecast a 0.8% real contraction this year as a result.
The outlook for 2017 is brighter, as the long-delayed expansionary budget will come to be implemented, oil prices will rise and oil production will return to growth. Furthermore, a more flexible exchange rate regime will encourage some foreign direct investment to return.
However, at 4.7%, growth will still be far below that enjoyed over the 10 years prior to the oil price-slump in H214, when the average annual expansion rate was 7.4%. Numerous security issues will continue to weigh on growth and investor sentiment.
A Bad Q116 Leading To A Worse Q216
Nigeria underwent a 0.4% contraction in Q116 and the indications are that the economy will have fared even more poorly in Q216. Nigeria’s Purchasing Managers’ Index (PMI) report for manufacturing sank once more in June, coming in at 41.9 compared to the 45.8 recorded in May, and we expect only slow gains for the sector over the next several months.
The sector has not actually been in positive territory (50+ on the PMI) since December, and has had only six positive readings over the past 18 months.
There are a number of factors which have undermined Nigeria’s manufacturing sector in the last few quarters. One of the most damaging has been the controversial naira peg and related capital controls.
The government had maintained the exchange rate at an overvalued level of NGN197-199/USD for 16 months (between February 2015 and June 2016), leading to a severe shortfall of US dollars, as oil exports – a key source of foreign exchange – fell.
Meanwhile, foreign investors were loath to put money into Nigeria and risk a subsequent loss in value when the inevitable currency devaluation took place.
An inability to source dollars meant businesses were unable to pay suppliers, stifling production. A further blow for the sector has come from intermittent electricity outages over H116, which have been exacerbated over the past several months by attacks on gas infrastructure by the Niger Delta Avengers (NDA), a terrorist group seeking secession for the Niger Delta region from Nigeria.
Lowest Oil Production in Decades
It is not only manufacturing that has declined, however the oil sector has also seen a massive drop in production. The deteriorating security situation in the Niger Delta has prompted our Oil & Gas team to downgrade their projections for Nigeria’s oil production for the third time this year in June.
We now forecast oil production to be 1.70mn barrels per day (b/d) in 2016, down from our original estimate of 2.30mn b/d, a 26.0% decrease and a y-o-y decline of 21.5%.
Since attacks against oil & gas installations started at the end of January we have seen oil production increasingly eroded.
Nigerian National Petroleum Corporation (NNPC) data shows total crude and condensate production for February and March were 2.02mn b/d and 1.85mn b/d respectively, down from 2.20mn b/d in January 2016.
However since March, the sabotage efforts of the NDA have intensified, forcing temporary force majeure to major crude grades such as Escravos, Bonny Light, Brass and Qua Iboe.
This has severely hampered production efforts, pushing output even lower. Nigeria’s oil minister Immanuel Kachikwu stated at the start of June that production was just 1.60mn b/d.
We expect the NDA to continue to scale up attacks on terminals and pipeline infrastructure in the region, with the group viewing this as the most effective means to shut in production.
Budget Implementation Delayed Through H216
With regards to the budget, this had been one of the factors which had previously kept our real GDP growth forecast for Nigeria positive. Since it was announced in 2015, the budget was rewritten thanks to the renewed oil price slump which made its basic assumptions unworkable, was lost, and when it was resubmitted it was found to have serious irregularities therein, with many cases of ‘budget padding’.
It was eventually passed in May and we expected the record NGN6.1trn budget, with one-third dedicated to capital spending would result in the implementation of a number of infrastructure projects in H216.
Although government revenues have been severely constrained by lower oil prices, huge borrowing from China would have funded many projects. However, to date there has been no indication that any major state-driven projects have been put in progress, so it is unlikely a poor H116 for government spending will be offset by a stronger H216.
Finally, despite the fact the long-awaited relaxation of exchange rate policy will encourage investment, we do not expect any rapid return in positive sentiment towards Nigeria.
The controversial naira peg was only abandoned on June 20, meaning its adverse effects on investment – detailed above – will have continued to exert negative pressure through H2. In Q116, capital importation was USD711mn, the lowest level since the central bank began tracking it in 2007.
Within this, foreign direct investment was just USD175mn, a y-o-y decline of 54.3%, and we expect Q216 will have been even worse. The naira peg’s removal should see some investors come off the sidelines, but we expect this return will not be rapid and will be insufficient to keep full-year growth positive.
