May 28, 2020/United Capital Report

Earlier, the National Bureau of Statistics (NBS) published Nigeria’s Q1-2020 GDP numbers. According to the report, real GDP growth slowed to a 2-year low of 1.87% y/y from 2.55% y/y in Q4-2019 and 2.10% y/y in Q1-2019, respectively. The acceleration was driven by the continued expansion in the Oil, Agriculture, Information & Communication, Financial sectors, among others. Meanwhile, Trade which contributes c. 16.0% to GDP remained contractionary for the fourth successive quarter, down 2.82%y/y (vs. 0.85% in Q1-2019 and -0.58% in Q4-2019) and continued to weigh on the gross outcome in Q1-2020. Notably, the outbreak of COVID-19, decline in crude oil demand, and the social distancing measures announced to curb the spread of the virus, were limited to the end of March-2020 and had little impact on the Q1-2020 outcome.

Oil GDP: Nigeria maintains an above 2.0mb/d production level in Q1-2020

The Oil sector expanded by 5.06% y/y in Q1-2020, which is an improvement relative to Q1-2019’s -1.46% y/y but slower when compared to Q4-2019’s +6.36% y/y. Notably, the y/y expansion was fueled by a 4.5% y/y increase in oil production to 2.07mbpd in Q1-2020 – the highest level since 2015 while the relatively lower price that characterized the period (Q4-2019: $62.4/b vs. Q1-2020: $50.81/b) led to the slight moderation.

In terms of contribution to overall GDP, the oil sector contribution remained at 9.5%, (an improvement when compared to Q4-2019’s 7.32% and Q1-2019’s 9.22%).

Non-Oil GDP: A broad based slowdown

The non-oil real GDP growth slowed from 2.26% in Q4-2019 and 2.47% in Q1-2019 to 1.55% y/y in Q1-2020. This was on the back of slowdown in the Agriculture sector which grew 2.20% (vs 2.36% in Q4-2019 and 3.17% in Q1-2020), Services sector (1.57% in Q12020 vs 2.60% in Q4-2019 and 2.41% in Q1-2019) and the Industrial sector (excluding oil) to 0.46% (vs 0.81% in Q4-2019 and 1.67% in Q1-2019). However, contribution of the Non-oil sector to GDP remained significant at 90.5% in Q1-2020.

Outlook: Q1-2020 is as good as it gets for 2020

Looking ahead, we expect economic performance to transition from the broad-based slowdown we saw in Q1-2020 to a broad-based contraction in Q2-2020. Clearly, extreme measures implemented in April and May is expected to obliterate output growth in Q2-2020.

Again, the oil sector is expected to contract from Q2-2020, due to partial compliance with OPEC+ production cut agreement and the plunge in average crude oil price in Q2-2020. Under the OPEC+ agreement, Nigeria’s oil production is capped at 1.41mbpd between May and Jun-2020, before increasing to 1.50mbpd between July and Dec-2020. Also, with the significant decline in crude oil demand witnessed in April-2020 which was confirmed by the fall in total domestic rig count in Apr-2020 (down 23.8% m/m to 16), we have modelled a deep contraction in oil sector GDP in Q2-2020. Notably, we expect crude oil production to gradually pick-up from Q3-2020 as the global economy begin to reopen for business. However, we do not expect production or demand to return to pre-COVID19 levels in 2020. Thus, we have modelled a contraction in oil GDP from Q2-2020.

Elsewhere, we assume the non-oil sector will contract between Q2 and Q3-2020, with possibility of recovery by Q4-2020. This assumption is predicated on the expectation that the implementation of social distancing measures, supply chain disruptions, FX scarcity, and rising unemployment will negatively reflect on the Industrial (ex, Food, Beverage and Tobacco as well as Oil sector), and  Services (ex. ICT and Healthcare) sectors during the period. Specifically, we believe sectors like ICT, Agriculture, and Food, Beverage and Tobacco, which contribute c. 40.0% to GDP, will continue to stay resilient during the dark times in Q2 and Q3-2020. However, spurred by the easing of economic restrictions from Q3-2020 as well as liquidity injections from both the monetary and fiscal sides, we expect the non-oil economy to marginally expand by 0.3% y/y in 2020 (vs. 2.1% in 2019).

Overall, we expect the Nigerian economy to enter a technical recession by Q3-2020 (after two consecutive quarters of contraction in Q2 and Q3-2020), with a chance of early recovery by Q4-2020 or Q1-2021. Accordingly, we have lowered our real GDP growth forecast for 2020E from 2.3% to -2.69% in 2020. The biggest downside risk to the above projections remains the possibility of a second round of lockdown, especially if the virus continues to spread rapidly. Thus, this might delay the possibility of an early recovery or a V-shape recovery to a more strenuous U-shape or W-shape recovery.

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