November 29, 2022/United Capital Research
Last week, the National Bureau of Statistics (NBS) released the Q3-2022 GDP figures showing the Nigerian economy expanded by 2.3% y/y in real terms, printing below consensus expectation. The expansion in Q3-2022 was despite the continued headwinds in the global economic environment, including persistent global and domestic inflationary pressures, higher importation costs (due to extended disruption in the global supply chain), natural disasters, and geopolitical uncertainties. The real GDP expansion recorded in Q3-2022 makes it the eighth consecutive quarter of growth in the aftermath of the economic recession during the peak of the coronavirus pandemic, indicating the economy’s resilience in the post-covid era. As expected, the non-oil sector continued to drive GDP growth in Q3-2022, with sectors such as Agriculture (+1.3% y/y), Construction (+5.5% y/y), Trade (+5.1% y/y), Information & Communication (+10.5% y/y), Accommodation & Food Services (+6.7% y/y) and Real Estate (+4.6% y/y) experiencing real growth, offsetting drags from contracting sectors such as Mining & Quarrying (-21.3% y/y), Electricity, Gas, Steam & Air Condition Supply (-3.7% y/y) and Manufacturing (-1.9% y/y). Notably, of the nineteen (19) sectors in the NBS’s classification, fifteen (15) expanded while four (4) contracted.
Oil GDP Sector: Contraction extends into the 10th consecutive quarter
The oil & gas sector continued to underperform the broader economy in Q3-2022 as the crude oil petroleum and Natural Gas sector contracted further. In Q3-2022, the oil sector fell 22.7%, broadly due to weaker crude production during the period. The contraction in Q3-2022 extends the sector’s woes into the 10th consecutive quarter. In addition, the persistent weakness in the sector has meant its contribution to overall economic activities has continued to pale, with a real GDP contribution of 5.7% in Q3-2022 declining when compared to a 6.3% real GDP contribution recorded in Q2-2022. According to the NBS’ GDP report, Nigeria’s average crude oil production in Q3-2022 was 1.2mb/d (including condensates), lower than Q3-2021’s 1.6mb/d, a 23.6% decline. Interestingly, Nigeria’s crude oil production remained well below OPEC+’s quota for Q3-2022 (c.1.8mb/d excluding condensates), despite quota cuts by the oil cartel. The sustained downturn in the sector remains underpinned by perennial concerns of oil theft and pipeline vandalism. In addition, years of underinvestment in upstream infrastructure continue to weigh on output.
The Non-Oil Sector: A resilient growth story
The non-oil sector continues to be the key driver of the nation’s growth since the start of the post-covid economic recovery. In Q3-22, the non-oil sector expanded by 4.3% y/y in real terms, underperforming its Q3-2021 growth rate of 5.4% y/y and its Q2-2022 growth rate of 4.8% y/y as signs of slowing growth persists.
The slower performance observed in Q3-2022 is mainly attributable weaker growth in Agriculture (+1.3% y/y), and contraction in the Manufacturing sector (-1.9% y/y). Clearly, issues such as rising energy costs, FX-related pressures (including Naira depreciation and FX illiquidity), lingering supply chain issues, elevated global inflation and legacy bottlenecks are issues that have hampered the manufacturing activities. Notably, FX-related pressures intensified significantly within this period owing to electioneering activities, increased FX demand for summer vacations, and CBN’s announcement to redesign the Naira which sparked speculative activities on the dollar, with the Naira trading at an average value of N680.8/$ in the period under review compared to an average value of N599.2/$ in Q2-2022. In addition, weaker consumer demand within the quarter weighed on sub-sectors like Food, Beverage, & Tobacco (-4.1% y/y).
However, the observed growth in the non-oil sector was largely driven by the Information & Communication (+10.5% y/y), reflecting the sustained broad-based improvement in telecoms fundamentals such as recovery in data and voice subscribers, increased voice and data traffic, as compliance rate of subscribers to the FG’s NIN-SIM linkage requirement increased tremendously. In addition, the Trade sector (+5.1% y/y) contributed to the growth still riding on the low base from Q1-2021 (-2.4% y/y). The Financial and Insurance (+12.7% y/y), Agriculture (+1.3% y/y), and Real Estate (+4.6% y/y) sectors also showed decent Q3-2022 growth, contributing significantly to the non-oil sector growth. Overall, sustained loan growth from Deposit Money Banks and Consumer lenders, rising yields in the fixed-income market, CBN interventions and incentives, and early harvest season all contributed to moderate growth in the earlier mentioned sectors, respectively.
Agricultural Sector: Early harvest season lifts sector output
The agriculture sector grew by 1.3% y/y in Q3-2022, up from the 1.2% y/y growth recorded in Q3-2021, and 14bps higher compared to a growth rate of 1.2% y/y recorded in Q2-2022, reflecting the seasonal impact of the early harvest season in the period under review. We consider the growth in the agriculture sector in Q3-2022 decent and reflects the positive impact of sustained CBN intervention in the sector, increased commercial private sector presence, and the likelihood that the increasing supply gap in the global agriculture market may have created opportunities for more robust output. That said, the sector remains highly vulnerable to insecurity issues as the farmer-herder crisis and banditry activities in key food-producing states continue to hamper production and discourage farming activities. Furthermore, we note that the impact of the recent flooding crisis will reflect in the sector’s output in the post-harvest season. Across sub-sectors, the Crop Production, Livestock and Fishery sector grew by 1.3% y/y, 1.3% y/y and 1.6% y/y, respectively.
Manufacturing Sector: Manufacturing activities contract for the first time in six quarters
The manufacturing sector contracted by 1.9% y/y in Q3-2022, 620bps lower than the 4.3% y/y growth recorded in Q3-2021 and 490bps lower than Q2-2022’s growth rate of 3.0% y/y. The decline was primarily driven by contraction in the Food, Beverage, and Tobacco sub-sector. The sub-sector, which contributed 48.8% of the total, fell by 4.1% y/y in Q3-2021, down 916bps and 1012bps relative to Q2-2022 and Q3-2021. In addition, negative y/y performances in Oil refining (-44.7% y/y), Textile, Apparel & Footwear (-4.0% y/y) and Plastic & Rubber products (-3.9% y/y) further weighed on the manufacturing sector’s growth. The contraction in manufacturing output was broadly down to rising energy cost, weaker consumer demand, persistent FX pressures, and lingering supply chain concerns.
Outlook & Forecast: Sustained growth expected albeit at slower pace
Looking ahead to the last quarter of the year, we retain upbeat expectations for the Nigerian economy. Although our forecasts see further slowdown in economic growth, we expect the economy to close the year strong. Our optimism stems from a positive outlook for the services sector which accounts for c.57% of real GDP. The Information and Communication sector will continue to be at the forefront of the growth as gradual spread of 5G technology, growing internet penetration, rising data & voice traffic, impact of electioneering on broadcasting growth, year-end festivities impact on movie & sound production are all factors that will propel the sector in Q4-2022. In addition, the Financial and Insurance services sub-sector will provide further boost as credit creation (consumer & commercial credit) by banks continue to improve due to attractive lending rates relative to inherent economic risk.
Furthermore, the Agriculture sector will be another positive influence on economic growth, albeit at a slower pace to recent fourth quarter performances. The recent flooding that impacted 32 states in the country (many of which are key food producing states) will upend hopes of robust harvests during the harvest season. In addition, we remain concerned that legacy issues around insecurity, farming methods and route-to-market will remain substantial stumbling blocks to rapid growth. Nevertheless, robust food demand due to year-end festivities will help counterbalance these headwinds. As a result, we estimate the Agriculture sector will continue to expand but will lose c.2.0ppts of growth from recent fourth quarter growth rates.
We anticipate a moderate rebound in the Manufacturing sector after a disappointing Q3-2022 growth performance. We expect the rebound in this sector to be primarily supported by reversal of fortunes of the Food, Beverage & Tobacco sub-sector (which accounts for c.49% of total manufacturing sector real GDP), hinged on improved demand from year-end festivities. That said, we retain expectations that recent headwinds including FX illiquidity, elevated global inflation, rising energy cost and persistent supply chain disruptions will remain hindrances to manufacturing output growth. Overall, an expectation of rebound in consumer demand (due to year-end festivities) will be the silver lining for the Manufacturing sector in Q4-2022 as we project marginal output growth.
Amidst the positives, we continue to express worry over the oil sector. We expect crude oil production to rebound in Q4-2022 relative to Q3-2022 as the Nigerian National Petroleum Limited (NNPC) continue to announce uncovering illegal pipelines that vandals have used to sabotage the sector’s output. Truly, recent production figures indicate some recovery in crude oil production but continues to remain far-off 2021’s production levels. We project average crude oil production of c.1.25mbpd (including condensates) in Q4-2022, implying a 16.7% decline from Q4-2021’s production figure. That said, we expect the Oil sector to continue to contract at double-digit count, albeit slower than the Q3-2022 decline.
Putting these factors together, we project the Nigerian economy will record real GDP growth of 2.0% y/y in Q4-2022, thus bring FY-2022 growth numbers to 2.7% y/y.
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