March 6, 2017/Cordros Research

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Last week, the National Bureau of Statistics (NBS) released Nigeria’s Gross Domestic Product (GDP) report for the fourth quarter ended December 2016. According to the report, the economy contracted by 1.3% y/y during the three months period, wherein the oil sector extended contraction to the fifth quarter in a row while the non-oil sector relapsed to negative growth, after exiting recession with a negligible growth in the previous quarter. Having declined in each of the three previous quarters, the decline in the final quarter of 2016 marked Nigeria’s first year round negative growth since 1987 (prior to rebasing). Notably, the 1.51% contraction recorded in the 2016 fiscal year is the country’s first in 25 years (-0.6% in 1991) and the biggest since 1983 (-7.6%).

The Oil Sector – Slower Contraction

The oil sector recorded a negative growth of 12.4%, and as stated earlier, extending contraction to the fifth quarter in a row. Over the three months period, output from the sector was affected by relatively lower domestic crude oil production as the effects of militants’ attacks on crude oil & gas facilities in prior quarters lingered. The NBS estimated crude oil production during the three months period to be 1.90mbpd, although a marked improvement from the 1.63mbpd reported in Q3-16, but much lower than the 2.16mbpd achieved in Q4-2015 and the 2.2mbpd budgeted. Ironically, despite the gain on production during the quarter, the oil sector still contracted by 9.1% on q/q basis, after growing by 8.1% q/q in the third quarter. Quite instructively, the domestic crude oil production figures reported for the quarter varied with OPEC’s estimates based on direct communication (1.43mbpd) and secondary sources (1.57mbpd).

The Non-Oil Slips Back to Negative Growth

After exiting recession with a marginal 0.03% growth in Q3-16, the non-oil sector slipped back to negative growth, declining by 0.33% y/y in the final quarter of the year. Also, compared to Q3-16, the non-oil sector grew by 5.27%, down 381bps from the 9.08% q/q growth recorded in the previous quarter. While agriculture grew at the slowest pace since the second quarter, other major non-oil subsectors – manufacturing, trade and services – all furthered their negative growth.

Agriculture – Weakened Growth

Growth in agriculture moderated to 4.03% y/y, from 4.54% and 4.53% respectively in the third and second quarters. On quarterly basis, agriculture actually contracted by 7.4%, after growing by 38.5% and 11% q/q respectively in the third and second quarters. During the period, slower growth in Crop Production — accounting for about 90% of output from the subsector — to 4%, from 5% in the previous two quarters, dragged down growth in this segment.

Manufacturing Still in Slumber

Manufacturing extended negative growth to the fourth quarter in a row. In the review period, output from this segment contracted by 2.5% y/y and ended 2016 with 4.32% negative growth, the highest since 1998 (-12.3%). Output from this subsector has contracted in two straight years, the first since the stretch of negative growth experienced between 1992 and 1995.

Food, Beverages and Tobacco, the biggest component of the manufacturing segment (c.47%) contracted by 2.7% in the fourth quarter. Negative growth in this category has now lasted for two years in a row and, considering its size, is largely responsible for the underperformance of the broader manufacturing subsector.

Textile, Apparel and Footwear (TA&F), the second largest component of the manufacturing subsector, exited recession with a 1.08% y/y growth in the fourth quarter. Overall however, the TA&F segment contracted by 1.09%, slightly higher than the 1.07% in 2015, following the robust expansion witnessed between 2011 and 2014.

Cement, the third largest component of the manufacturing sector contracted by 5.4% in 2016, following negative growth in all quarters of the year. The contraction, following two years of declining growth which started 2014, mirrors the growing pressure on oil and non-oil revenues and the consequent slow down of capital expenditure projects across all tiers of government.

Services – Drags from Real Estate and ICT

Services contracted (1.6% y/y vs. 1.1% y/y in Q3) at a faster pace in the final quarter, closing the year with all round negative growth. Growth in this segment, accounting for c.37% of the economy, has equally been on the decline since 2014. As stated earlier, Real Estate, the second largest component of this subsector, contracted by 6.9% in 2016, following sharply weakened growth in 2014 and 2015 on low demand for properties, especially for non-residential and prime residential buildings.

Information and Communication, the largest component of the services subsector, grew by 1.4% y/y in Q4, from 1.1% y/y in Q3. Aggregate growth in 2016 was 1.95%, helped by the strong start (4.1% y/y) in the first quarter. That said, growth in 2016 (c.2%) was the lowest since 2011 (2.2%) and was dragged by the significant underperformance in Broadcasting, the second largest component of this segment.

Trade – The Pain of FX and Import Policy

Trade contracted by 1.44% y/y in Q4-16 and 0.24% in 2016 fiscal year. This subsector, the third largest component of the non-oil economy, has significant linkage with imports, thus suffering from the massive depreciation of the naira exchange rate and the FGN’s import substitution policies in 2016.

2017 – After the Recession

We look for growth in 2017, hinged on recovery in both the oil (on less disruptive output) and the non-oil sectors (on less disruptive impact of forex shortages, acceleration of capital releases, and continued growth in agriculture).

On the future view, the oil sector is poised to benefit from improved and stable production. The peace deal between the FGN, and Niger Delta stakeholders and representatives of disaffected youth groups, if not compromised, has the potential of ending pipeline vandalism and similar acts of sabotage of oil and gas installations in the Niger Delta region. The Nigerian National Petroleum Corporation (NNPC) stated recently that the restoration of peace to the oil-producing communities has enabled the organization to fast-track the repairs of all pipelines vandalized last year, and thus targets to ramp up output above the budget benchmark of 2.2mbpd by the end of Q2-2017.

The non-oil sector, as stated earlier, should benefit from improved flow of crude oil revenue and continued growth in agriculture on increasing focus from both private sector and the government. Stable crude oil production and relatively higher average prices, while bolstering the spending capacity of the fiscal authorities, should provide the monetary authorities (to a certain degree), the buffer to confront forex scarcity challenge.

The achievement of government’s plans to invest heavily on critical infrastructures will also be key to the recovery of the economy. The latest 2016 budget implementation report shows that N870 billion had been released for capital projects (vs. N362 in 2015). Despite potential challenges with achieving revenue targets (especially the non-oil component), we expect the FGN will continue to prioritize capital expenditures as demonstrated with the ongoing pace of projects in the works and transportation ministries.

Continued growth in agriculture, in addition to the factors mentioned above, will support the recovery of the non-oil sector. The pronounced commitment by the FGN on diversifying the economy through the Agriculture Promotion Policy (i.e. The Green Alternative), the N92 billion historic high allocation to agriculture in the proposed 2017 budget, the proposed recapitalization (c.N750 billion) of the Bank of Agriculture, and increased intervention funding at single digit interest rate (under the Anchor Borrowers Programme, commercial agricultural credit scheme and the Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending of the Ministry of Agriculture and the CBN on agricultural productivity) are initiatives having the capacity to improve agricultural output.