August 31, 2020/InvestmentOne Report

Please click to download NBS Q2 2020 GDP Report

• Last week, the National Bureau of Statistics released the Q2 2020 GDP numbers which showed that the economy fell by 6.10%y/y in real terms (the worst quarterly performance in 15years) compared to a growth of 1.87% y/y in Q1 2020 and a growth of 2.12% y/y in Q2 2019. In line with our expectation, the nation recorded first quarterly decline in three years which puts the country on course for the second recession in 4 years. We highlight that the country recorded declines in both oil (8.93% of the GDP) and non-oil (91.07% of GDP) sector which fell by 6.63% and 6.05% respectively in Q2 2020.

Figure 1: GDP, Oil and Non-oil growth         Figure 2: Contribution of Major Activity Sectors to GDP
                

Source: NBS, Investment One Research          
 

• The decline in the oil sector was due to lower oil production as the nation tried to comply with the recent OPEC cap. We recall that due to the current pandemic OPEC and its allies agreed in April 2020 to cut about 10.0 mb/d which started in May 2020, for an initial period of two months which was later extended to July 2020. Under the OPEC+ agreement, Nigeria’s oil output was capped at 1.41mbpd between May and June 2020, before increasing to 1.50mbpd between July and December 2020. As a result of the OPEC cap and difficulties in selling our crude oil due to supply glut in Q2 on the back of COVID-19, the nation’s oil output fell to a 3-year low of 1.81million barrels per day (including condensates) from 2.07 million barrels per day and 2.02million barrels per day in Q1 2020 and Q2 2019 respectively. Similarly, we highlight that the current production level is below benchmark of 1.9million barrels per day (including condensates) set for 2020 budget.

Figure 3: Oil Output (Crude and Condensates)

Source: NBS, OPEC, Investment One Research

• In the non-oil sector, just as hinted by the CBN’s PMI numbers in Q2, key sub-sectors in the economy recorded significant falls. Although, the Finance & Insurance and Information and Telecommunication sectors were stand-out performers with 28.41% and 18.10% expansion respectively. Clearly, credit growth amid CBN’s LDR policy, increased digital adoption and strategic positioning of these sectors supported their performances. On the contrary, Transport and Storage (-49.23% y/y), Accommodation and Food (-40.19% y/y), Construction (-31.77% y/y), Education (-24.12% y/y), Real Estate (-21.99% y/y), Trade (-16.59% y/y) and Manufacturing (-8.78% y/y) sectors were significantly affected by the pandemic. We recall that due to the impact of the Coronavirus outbreak, major states (Lagos, FCT and Ogun) were locked down in the months of April and May 2020.  This, in addition to other challenges like poor business environment, weak consumer demand, supply chain disruptions and FX scarcity, compounded the woes of the nation’s economy.

• A further breakdown of the non-oil sector showed that only 6 out of the 19 activity sectors recorded positive growth. Specifically, Agricultural output improved by 1.58%y/y albeit at a weaker rate compared to 2.20%y/y in Q1 2020 and 1.79%y/y in Q2 2019. We highlight that this is the weakest quarterly growth in the sector for. Although, there were exemptions for movement of Agricultural products, we believe restrictions on interstate travels still limited agricultural output in Q2 2020.  In the same vein, we believe long term challenges of insecurity in the North, herdsmen attacks as well as crisis in the middle belt (such as Tiv/Jukun crisis in Benue and Taraba States) could have limited agricultural output which is still lagging behind our population growth rate of 2.6%

Figure 4: Growth in Agricultural Output

Source: NBS, Investment One Research

• Output in the Manufacturing sector declined by 8.78%y/y, the weakest in over 10 years, due to the menace of the current pandemic which caused many factories to shut down in the quarter under review. Notably, key contributors like Food, Beverages and Tobacco (-3.01%), and Textile Apparel and Footwear (-14.43%) recorded weak performances in Q2 2020. We believe shut down in Hospitality, Entertainment and general ban on social gatherings in major states could have caused the declines in the sectors as both supply and demand for products from these sectors are negatively affected.

Figure 5: Growth in Manufacturing Output

       Source: NBS, OPEC, Investment One Research

• Construction output fell by 31.77%y/y as economic lockdown as well as weak spending on CAPEX by both public and private sectors led to slow activities in the sector in Q2 2020. With COVID-19 taking Centre stage in the mind of governments and weak revenue limiting government spending, we are not surprised to see slow implementation of the Capital project budgeted in 2020. As such, only about N378billion has been released for CAPEX as at May 2020 out of N1.96trillion budgeted for CAPEX in 2020. For private sector, we believe the challenges associated with current pandemic could have forced some to stop implementation of capital projects as they try to stay afloat in a period like this.

Figure 6: Growth in Construction Output

            Source: NBS, Investment One Research

• In line with our expectation, Information and Communication sector recorded a jump in output by 15.09%y/y in Q2 2020, the highest in over ten years. This was driven by 18.10%y/y jump in Telecommunication and Information Services as demand for both data and voice services increased due to Work from Home structure adopted by most corporate firms. This has caused demand for virtual meeting platforms to increase. Similarly, we believe the need to keep informed and entertained during the lockdown could have caused a spike demand for online entertainment services among others. Looking at the data from the National Communication Commission, total number of active data subscribers rose to 144million from 136million at the end of Q1 2020 and 123million at the end of Q2 2019.  In the same vein, the number of active subscription for telephony services rose to 196million from 189million at the end of Q1 2020 and 174million in Q2 2019.

Figure 7: Growth in Information and Communication

           Source: NBS, Investment One Research

• Trade remains weak as it declined by 16.59%y/y in Q2 2020, the worst performance in over ten years. We believe the continuous land border closure, lockdown measures, FX illiquidity and weak consumer demand could have caused the deeper fall in trade output in Q2 2020

Figure 8: Growth in Trade Output

               Source: NBS, Investment One Research

• The woes of the Real Estate sector continued as it dipped further by 21.99%y/y to sustain its technical recession having fallen for the fifth quarter in a row. We highlight that the sector only recorded one quarter growth since the beginning of 2016. We believe the major challenges to this sector remain lack of cheap credit facilities despite the huge potential of high housing deficit in Nigeria (Estimated at up to 17 million houses, and is growing at about 20% according to World Bank Nigeria Affordable Housing Project 2018), weak purchasing power and lack of proper regulation in the sector.

Figure 9: Growth in Real Estate Sector

              Source: NBS, Investment One Research

• Going forward, we expect oil output to continue to decline as Nigeria complies with OPEC cap of 1.4million barrels per day (excluding condensates). With condensates output at around 200,000 barrels per day (mbpd), oil production may range around 1.6 to 1.7 mbpd for the rest of the year.
• We expect to see the positive impact of harvest season, border closure and ban on agricultural products on agricultural output in Q3 2020 to Q4 2020. However, huge post-harvest losses may still discourage investment and limit output in the agricultural value chain. Similarly, the impact of the lockdown measures put in place in Q2 2020 could limit agricultural output with the National president of All Farmers Association of Nigeria (AFAN) reportedly stating that country is likely going to record 65% productivity, due to planting activities starting late in some areas, farmers struggling with access to the farms, access to the seeds and other inputs.
• Elsewhere, more construction activities should take place in the last quarter of the year to cover for some lost time due to lock down in Q1 2020. Nonetheless, limited revenue from oil and non-oil may limit government’s spending while private sector Capex spending may be limited (except for IT infrastructures) due to changes in work structure as the pandemic reshapes the work environment. We still expect output in the Telecommunication sector to increase albeit at a slower rate due to high base effect especially on a quarter on quarter basis and slower growth in demand due to the easing of the lock down. With the easing of the lock down and potential increase in international trade, we expect to see improvement in trading activities. However, the sector may still show negative performance as FX challenges and border closures continue to limit activities in this sector. We expect activities in the manufacturing sector to start increasing as social distancing measures ease further. This should encourage more production of refined foods, textiles and Apparel especially to produce substitutes for some of the banned items. Nonetheless, we think huge infrastructural deficit may continue to limit Manufacturing output in the medium to long run.
• We believe issues such as FX illiquidity, weak government spending, insecurity, poorer state of infrastructures, weak consumer demand and contagion effect of a potential slowdown in global growth put the country on course for the second recession in 5 years. This accentuates the rising rate of poverty in the country as per capita income continues to fall and the nation’s misery index worsens (Inflation 12.82% + Unemployment rate 27.1%=39.92% from 34.38% two years ago) .This further highlights the need to put in policies that will put the country on a strong foot for quick recovery and sustainable growth and development after the current during and after the current pandemic. While the CBN has put in different measures such as interventions in key sectors, we think government should put more policies in place, through its fiscal measures, to drive sustainable growth in the long run. We believe the economy is still weak for banks to achieve a Loan to Deposit Ratio (LDR) of 65% without a significant deterioration in asset quality. 
• Overall, we expect to see the economy shrinking by 3.6% in 2020. We highlight that our latest projection is better than International Monetary Fund‘s (IMF) estimate of -5.4% but worse than the World Bank’s projection of -3.2% in 2020.

Figure 10: GDP Growth rates (5 years)

  Source: NBS, Investment One Research