A Postmortem Of The Latest GDP Report Shows 2017 Might Be Better

Nigeria: 3Q16 GDP – Oil’s decline masks pick-up in non-oil

The oil sector’s deeper decline in 3Q16 was expected by us, as attacks on oil facilities heightened in the period. This masked the non-oil sector’s improvement to zero growth following two quarters of contraction. While we expect FX restrictions to have weighed heavily on growth in 4Q16, we expect them to be mitigated by a shallower contraction in the oil sector, due to a low base effect. For this reason, we maintain our -1.4% growth forecast for 2016. We project a recovery to 0.5% in 2017, mainly on the assumption that we will see a pick-up in public capex spending compared with FY16.

Financial services end the non-oil sector’s decline

Nigeria’s non-oil sector saw zero growth in 3Q16, following YoY contractions of 0.2% and 0.4% in 1Q16 and 2Q16, respectively. Crop production – the economy’s anchor – grew by a faster 4.9% in 3Q16, vs 3.3% a year earlier. Financial services led the non-oil sector’s emergence from negative growth. The sector grew for the first time this year, by 2.8% in 3Q16, following 13.2% contractions in both 1Q16 and 2Q16. This corresponds with stronger credit growth in 3Q16, in naira terms, to 21% in September vs 6% a year ago, on the back of naira depreciation. The small transport sector also saw an improvement to modest 0.7% growth in 3Q16, following a 5.3% contraction in 2Q16. Its recovery was led by road transport. Conversely, air transport – where a couple of foreign players suspended operations due to FX shortages – saw its decline deepen.

Oil’s decline deepens

The intensification of attacks on oil facilities explains the sharp 22% YoY contraction in the oil & gas sector in 3Q16, vs growth of 1.1% YoY in 3Q15. Oil production dropped to 1.63mn b/d in 3Q16, vs 2.15mn b/d a year earlier.

FX restrictions weigh heavily on the economy

The naira depreciated by 60% vs the dollar in 3Q16, to NGN315/$1 on the interbank market. However, FX restrictions persisted, and the interbank market became increasingly fragmented and opaque. We think this explains the continued decline of some key non-oil sectors, including trade, manufacturing and construction. Trade contracted for the first time this decade, by -1.4% YoY in 3Q16 (vs 4.4% YoY a year ago). This reflects traders’ inability to import merchandise, resulting in a decline in goods handled. Construction is undermined by low public investment – the federal government has only spent 20% of its FY16 capex target. Manufacturers can only get a fraction of the FX needed to import inputs and capital equipment.

Outlook hinges on FX policy and the Niger Delta

We expect a shallower contraction of c. 1.0% YoY in 4Q16, mainly because of a low base for the oil sector, which contracted by 8.3% YoY in 4Q15 vs growth of 1.1% YoY in 3Q15. Our 2017 growth forecast of 0.5% is partly premised on a pick-up in public investment in 2017, on the back of foreign loans that have started to come through (e.g. $600mn in early November from the African Development Bank). FX restrictions and militant attacks on Niger Delta oil facilities are the biggest risks to our growth outlook.

Nigeria: 3Q16 GDP – Oil’s decline masks pick-up in non-oil

The oil sector’s deeper decline in 3Q16 was expected by us, as attacks on oil facilities heightened in the period. This masked the non-oil sector’s improvement to zero growth following two quarters of contraction. While we expect FX restrictions to have weighed heavily on growth in 4Q16, we expect them to be mitigated by a shallower contraction in the oil sector, due to a low base effect. For this reason, we maintain our -1.4% growth forecast for 2016. We project a recovery to 0.5% in 2017, mainly on the assumption that we will see a pick-up in public capex spending compared with FY16.

Financial services end the non-oil sector’s decline

Nigeria’s non-oil sector saw zero growth in 3Q16, following YoY contractions of 0.2% and 0.4% in 1Q16 and 2Q16, respectively. Crop production – the economy’s anchor – grew by a faster 4.9% in 3Q16, vs 3.3% a year earlier. Financial services led the non-oil sector’s emergence from negative growth. The sector grew for the first time this year, by 2.8% in 3Q16, following 13.2% contractions in both 1Q16 and 2Q16. This corresponds with stronger credit growth in 3Q16, in naira terms, to 21% in September vs 6% a year ago, on the back of naira depreciation. The small transport sector also saw an improvement to modest 0.7% growth in 3Q16, following a 5.3% contraction in 2Q16. Its recovery was led by road transport. Conversely, air transport – where a couple of foreign players suspended operations due to FX shortages – saw its decline deepen.

Oil’s decline deepens

The intensification of attacks on oil facilities explains the sharp 22% YoY contraction in the oil & gas sector in 3Q16, vs growth of 1.1% YoY in 3Q15. Oil production dropped to 1.63mn b/d in 3Q16, vs 2.15mn b/d a year earlier.

FX restrictions weigh heavily on the economy

The naira depreciated by 60% vs the dollar in 3Q16, to NGN315/$1 on the interbank market. However, FX restrictions persisted, and the interbank market became increasingly fragmented and opaque. We think this explains the continued decline of some key non-oil sectors, including trade, manufacturing and construction. Trade contracted for the first time this decade, by -1.4% YoY in 3Q16 (vs 4.4% YoY a year ago). This reflects traders’ inability to import merchandise, resulting in a decline in goods handled. Construction is undermined by low public investment – the federal government has only spent 20% of its FY16 capex target. Manufacturers can only get a fraction of the FX needed to import inputs and capital equipment.

Outlook hinges on FX policy and the Niger Delta

We expect a shallower contraction of c. 1.0% YoY in 4Q16, mainly because of a low base for the oil sector, which contracted by 8.3% YoY in 4Q15 vs growth of 1.1% YoY in 3Q15. Our 2017 growth forecast of 0.5% is partly premised on a pick-up in public investment in 2017, on the back of foreign loans that have started to come through (e.g. $600mn in early November from the African Development Bank). FX restrictions and militant attacks on Niger Delta oil facilities are the biggest risks to our growth outlook.