May 24, 2023/Cordros Report

According to the recently released GDP report by the National Bureau of Statistics (NBS), domestic economic activity maintained its positive growth path in Q1-23. However, the growth momentum slowed compared to the prior quarter, settling lower at 2.31% y/y (Q4-22: 3.52% y/y). In our view, the slow growth was primarily due to the impact of the cash scarcity that accompanied CBN’s naira redesign drive. Asides from that, we think the moderate growth was also partly driven by election uncertainties in the review period and the lingering increase in production costs. The growth outturn is 42bps higher than Cordros’ estimate (+1.89% y/y) but 54bps lower than Bloomberg’s median consensus (+2.85% y/y) estimate. Decomposing the breakdown provided, we note that the oil sector contracted by 4.21% y/y (Q4-22: -13.38% y/y) while the non-oil sector grew slower by 2.77% y/y (Q4-22: +4.44% y/y).

The oil sector remains in a contraction territory despite higher oil production 

While the oil sector remains in the woods, we highlight that the decline moderated for the second consecutive quarter (Q1-23: -4.21% y/y vs Q4-22: -13.38% y/y). The moderate contraction was because crude oil production settled higher at 1.51mb/d in the review period (Q4-22: 1.34mb/d | Q1-22: 1.49mb/d), reflective of the impact of the government’s recent efforts to curb crude oil theft and vandalism. Indeed, since reaching a record low of 1.14mb/d in September 2022, crude oil production has maintained a steady up till March 2023. Remarkably, our analysis of the data from the Nigerian Upstream Regulatory Commission (NUPRC) showed that crude oil production increased across the Escravos (+24.4% y/y), Odudu (+44.8% y/y), and Bonga (+23.1% y/y) production terminals, while it declined modestly in the Forcados (-1.9% y/y) terminal.

CBN’s naira redesign drive exerted pressure on the non-oil sector

Unsurprisingly, the non-oil sector’s growth eased to 2.77% y/y in Q1-23 (Q4-22: 4.44% y/y) primarily due to the (1) disruptions to economic activities induced by the CBN’s naira redesign drive, (2) election uncertainties, and (3) high statistical base effects from the prior year. Notably, the Agriculture sector (-0.90% y/y vs Q4-22: +2.05% y/y) recorded its first contraction since the NBS started keeping current data series. Asides from the existing challenges hampering the sector, we think the adverse impact of the cash crunch witnessed in the review period contributed significantly to the sector’s negative growth. According to the NBS, the informal sector’s share of sectoral GDP is highest in the Agriculture sector as the informal sector comprises 91.85% of the Agriculture sector as of 2015. Elsewhere, the Manufacturing sector’s growth eased to 1.61% y/y (Q4-22: 2.83% y/y) likely driven by the lingering impact of increased production costs and elevated price pressures. Finally, the Services sector grew by 4.35% y/y relative to the 5.69% y/y growth recorded in Q4-22.

We expect the economy to grow by 3.11% in Q2-23 

While crude oil production dipped in April primarily due to the strike-action-induced shutting down of oil platforms, we understand that the NNPCL has intervened, subsequently resolving the issues that led to the strike. On balance, we expect crude oil production to average 1.46mb/d in Q2-23, translating to a 1.34% y/y oil sector growth estimate. Elsewhere, with the worst of the adverse impact of the cash crunch behind us, we expect non-oil GDP to grow higher by 3.18% y/y in Q2-23, in the absence of significant shocks to the economy. Nonetheless, we expect the planting season to limit the Agriculture sector’s growth while the lingering increase in borrowing costs and higher taxes are likely to weigh the Manufacturing GDP, albeit slowly. On balance, we expect overall growth to settle at 3.11% y/y in Q2-23 and revised our 2023FY growth to 2.92% y/y (Previously: 2.77% y/y).