According to the recently released Q2-23 GDP report by the National Bureau of Statistics (NBS), domestic economic activities improved in Q2-23 relative to Q1-23 as the negative impact of the CBN-induced cash scarcity subsided. However, the growth print was capped by the lingering underwhelming oil sector’s performance. To put it in number terms, real GDP settled higher at 2.51% y/y in Q2-23 (Q1-23: 2.31% y/y), primarily driven by the non-oil sector (3.58% y/y vs. Q1-23: 2.77% y/y) amid a continued contraction in the oil sector (-13.43% y/y vs Q1-23: -4.21% y/y). The growth outturn is 60bps lower than Cordros’ estimate (+3.11% y/y), primarily due to the higher-than-expected oil sector’s contraction. Overall, we revised our growth estimate for Q3-23 to 2.95% y/y and expect the 2023FY growth to settle at 2.67% y/y.

Oil Sector Maintains its Negative Growth, Albeit at a Faster Pace

The oil sector (-13.43% y/y vs Q1-23: -4.21% y/y) posted its 13th consecutive quarter of negative growth in Q2-23, induced by the lower crude oil production in April, of which the recovery so far has not been impressive. Notably, the production decline witnessed in April was primarily due to (1) strike-action-induced shutting down of oil platforms and (2) Exxon Mobil’s declaration of force majeure, particularly at the Qua Iboe oil terminal. Consequently, crude oil production (including condensates) averaged 1.22mb/d in Q2-23 (vs Q1-23: 1.51b/d | Q2-22: 1.43mb/d) – its second lowest on record after Q3-22 (1.20mb/d). The breakdown provided by the Nigerian Upstream Regulatory Commission (NUPRC) showed that the Qua Iboe (-18.0% y/y), Egina (-36.0% y/y), and Agbami (-9.8% y/y) oil production terminals witnessed the most significant crude oil production shortfalls in the review period.

Non-oil Sector Rebounds After the Q1-23 Cash Scarcity Impact

In line with our expectations, the non-oil sector’s growth was better than the prior quarter, underpinned by (1) higher commercial banks’ credit creation, (2) increased trading activities supported by the festivities in the period amid improved cross-border activities, (3) Agriculture sector’s return to growth, and (4) increase in telephone and internet subscribers, although at a moderate pace. Consequently, the Finance and insurance, Trade, Agriculture, and ICT sub-components primarily drove the non-oil GDP growth.

Outlook – Outlook – Oil Sector to Support Overall Growth in Q3-23 

Oil GDP: While progress is still underway as regards the fight against crude oil theft and vandalism, we believe that (1) frequent leaks from pipelines and (2) intermittent oil terminal shutdowns for repairs pose downside risks to crude oil production in the near term. More recently, we understand that an outage in the Forcados terminal after a leak was discovered in mid-July led to a suspension of activities in the said terminal. The preceding induced a 12.6% m/m decline in Nigeria’s crude oil production to 1.29mb/d in July (vs June: 1.48mb/d). On balance, we now forecast crude oil production (including condensates) to average 1.41mb/d in Q3-23, with the favourable base from the prior year translating to a projected 14.50% y/y growth in the oil sector.

Non-Oil GDP: We expect the non-oil sector’s growth momentum to slow in line with the adverse short-term effects of lingering economic reforms on the different economic agents. Based on the preceding, we project that the non-oil sector will grow slowly by 2.08% y/y in Q3-23. 

Agriculture: Gleaning insights from the Famine Early Warning Systems Network (FEWSNET), we understand that food production has been underwhelming so far in Q3-23 because of the (1) below-average cultivation activities, (2) dry spell season in the northern region and (3) flood incidence in the southern region of the country. Nonetheless, we expect September’s harvest season to support agriculture output in Q3-22. On a balance of factors, we estimate that the Agriculture sector will grow by 1.38% y/y.

Services: While the FX reforms favour the Financial Institutions sub-sector, we highlight that sub-sectors such as Trade, Real Estate, and ICT are feeling the negative impact of both the FX and PMS subsidy reforms. Nonetheless, we still think a sustained rise in telephone and internet subscribers will support the growth in the Telecommunications sub-sector. Elsewhere, low demand conditions arising from the lingering reforms are expected to generally constrain the Services sector. Consequently, we expect the Services sector to grow by 3.59% y/y.

Manufacturing: We believe that the dampening impact of FX and PMS subsidy reforms will remain intact for manufacturers in Q3-23. Accordingly, we expect the surge in production costs amid an underwhelming domestic demand to constrain the Manufacturing sector’s growth in the near term. Therefore, we forecast a 1.35% y/y growth in the manufacturing sector.

All told, we now project that the economy will grow by 2.95% y/y in Q3-23 and expect the 2023FY GDP growth to settle at 2.67% y/y.

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