December 2, 2020/InvestmentOne Report

Please click to download NBS Q3 2020 GDP Report

• Last week, the National Bureau of Statistics released the Q3 2020 GDP numbers which showed that the nation’s economy has officially entered into a recession, for the second time in 5 years. In line with our expectation, the country recorded a lower output as GDP fell by 3.62% in Q3 2020 compared to a decline of 6.10%y/y recorded in Q2 2020 and a 2.28% increase in Q3 2019. We highlight that the country recorded declines in both oil (8.73% of the GDP) and non-oil (91.27% of GDP) sector, which fell by 13.89% and 2.51% respectively in Q3 2020.

Source: NBS, Investment One Research                                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, the nation’s oil output fell to a 4-year low of 1.67million barrels per day (including condensates) from 1.87 million barrels per day and 2.04million barrels per day in Q2 2020 and Q3 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 Q3, key sub-sectors in the economy continued to record lower output albeit better than Q2 2020. Out of the 19 broad activity sectors, only 7 (6 in Q2 2020) sectors recorded growth while the rest recorded declines in Q3 2020. Notably, Agriculture (+1.39%), Finance & Insurance (+3.21%) and Information and Telecommunication (+14.56%) sectors continued to grow but at a slower pace compared to Q2 2020. We believe CBN’s drive to boost credit to the real sector and increased digital adoption could still be supporting growth in the in Finance and Insurance and the Telecommunications sector. Also, the essential nature of agricultural products coupled with recent FG initiatives towards aiding production could still be driving growth in the sector.

• On the contrary, Transport and Storage (-42.98% y/y), Accommodation and Food Services (-22.61% y/y), Education (-20.74% y/y), Real Estate (-13.40% y/y) and Trade (-12.12% y/y) sectors were yet to show any sign of a major recovery. 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.  We believe continued restrictions and weak travel appetite could have trickled into the quarter under review. 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.
• In the agriculture sector, growth continued to slow down to 1.39%y/y from 1.58%y/y in Q2 2020 and 2.28%y/y in Q3 2019. We highlight that this is the weakest quarterly growth in the last 9 quarters. Nonetheless, we believe the slow pace of growth in agriculture may not be unconnected to poor state of road networks, high rate of insecurity, and low use of advanced technology which may have limited growth in the sector despite the closure of land border. We believe these factors, in addition to the COVID-19 related challenges, may still be causing high post-harvest losses in the sector.  In the same vein, we believe long term challenges of 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 continued to decline, albeit at a slower pace, as it fell by 1.51% compared to a decline of 8.78% in Q2 2020 and a growth of 1.10% in Q3 2019. Despite the recovery in Cement (+11.96%) and Food, Beverage and Tobacco output (+5.57%), declines in Textiles, Electronical and electronics and others caused the sectors’ output to remain negative. We believe the slow pace of recovery in this sector may be due to weak consumer demand, FX illiquidity and other production related bottlenecks.

Figure 5: Growth in Manufacturing Output

       Source: NBS, OPEC, Investment One Research

• Positively, Construction output rose by 2.84% in Q3 2020 from -31.77%y/y in Q2 2020 and +2.37% in Q3 2019. We believe the resumption of some construction activities, especially from government in terms of key projects which have been delayed to due to COVID-19, may have been supportive of quarterly growth.  Nonetheless, we believe slow construction activities from the private sector could be limiting the recovery in the sector. 

Figure 6: Growth in Construction Output

            Source: NBS, Investment One Research

• Output in the Information and Communication sector continued to increase as the sector grew by 14.56%. This was driven by a 17.36%y/y jump in Telecommunication and Information Services as demand for both data and voice services continued to accelerate on the back of continuous adoption of Work from Home structure by most corporate firms. This has caused the use of virtual meeting platforms to increase. We highlight that this growth in Q3 2020 is slower compared to Q2 2020 as the demand for online and internet services could have slowed down on a quarter on quarter basis as lockdown measures eased. Looking at the data from the National Communication Commission, total number of active data subscribers rose to 151million at the end of Q3 2020 from 144million at the end of Q2 2020 and 123million at the end of Q3 2019.  In the same vein, the number of active subscription for telephony services rose to 205million from 196million at the end of Q2 2020 and 179million in Q3 2019.

Figure 7: Growth in Information and Communication

           Source: NBS, Investment One Research

• Trade output continued to fall as the sector declined by 12.12% in Q3 2020 compared to a decline of 16.59%y/y in Q2 2020 and 1.45% in Q3 2019. We believe the continuous land border closure, FX illiquidity and weak consumer demand could have continued to drag trade output in Q3 2020.

Figure 8: Growth in Trade Output

               Source: NBS, Investment One Research

• Real Estate remains in negative territory as the output from this sector fell by 13.40% in Q3 2020 though better than a decline of 21.99% in Q2 2020, it is worse than 2.31% fall recorded in Q3 2019. 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 1.5million barrels per day (excluding condensates). With condensates output at around 200,000 barrels per day (mbpd), oil production may range around 1.7 to 1.8 mbpd for the rest of the year.
• While output in Agriculture sector should continue to grow (at a slow pace), we think the continuous weak state of insecurity, as highlighted by the recent killings of Farmers in the North, may limit agricultural output in the near term. In the same vein, due to the disruption caused by COVID-19 on planting activities (National president of All Farmers Association of Nigeria reported that the country is likely going to record 65% productivity due to COVID-19 factors) , we do not think current harvest may be sufficient for the growing populace. While the border closure and ban on agricultural products should support local farming activities, we believe more policies have to be put in place to address the challenges of players in the sector in order to drive the self-sufficiency target of the government.
• Elsewhere, more construction activities should take place in the last quarter of the year to cover for some lost time in Q1 2020 and Q2 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 Internet demand as people return to pre-COVID-19 lifestyle. With the easing of the lock down in major trading partners 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 land 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 and festive demands kick in. 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 revenue, high level of insecurity, poorer state of infrastructures, weak consumer demand and recent civil unrest may limit growth in the near term. We still expect GDP growth to remain negative in Q4 2020 and Q1 2021 on the back of high base effect. We expect the country to come out recession from Q2 2021 due to low base effect. Nonetheless, the level of recovery depends on the implementation of certain reforms which have started in the Oil and Gas and Power sector. We still expect government to make policies that will attract investments from both local private sectors and foreign investors. In the same vein government should position the country to take full advantage of the benefits associated with the Africa Continental Free Trade Area while supporting local producers to be competitive in the Africa region in the areas where the nation has comparative advantage. 
• Elsewhere, with the rising rate of poverty in the country as per capita income continues to fall and the nation’s misery index worsens (Inflation 14.23% + Unemployment rate 27.1%=41.33% 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 recession. 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.
• Overall, we still maintain our projection of -3.6% in 2020. We highlight that our latest projection is better than International Monetary Fund‘s (IMF) estimate of -4.3% 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