According to a research report by Renaissance Capital, “Nigeria’s economy contracted by 1.5% in 2016 vs 2.8% growth in 2015. The oil and real estate sectors, and the food and beverage manufacturers led this decline. Our 2017 growth projection of 0.5% is premised on oil output stabilising and capex improving.”
Oil’s decline may have bottomed
Nigeria’s oil and gas sector contracted by 14% in 2016 vs 5% in 2015. The sector has been contracting since 2012. This explains the decline in its GDP share to 8% in 2016 vs 15% in 2010. However, in 4Q16 the oil sector’s rate of decline slowed to -12% YoY, from -22% YoY in the previous quarter. This reflects the improvement in production to 1.9mbd in November, from the 2016 low of 1.5mbd in August. Should ongoing talks between Acting President Yemi Osinbajo and Niger Delta stakeholders result in production stabilising at these improved levels, then the oil sector could be at a turning point.
Agriculture, telcos are the hardy sectors
Agriculture’s (real) growth actually strengthened in 2016 to 4.1% vs 3.7%, in spite of the recession. This is largely because 90% of production is due to smallholder farmers, who have little exposure to the oil sector. Agriculture is rain-fed and Nigeria’s rainfall tends to be regular, unlike Kenya’s. Telcos growth slowed to 2% in 2016 vs 4.5% in 2015. However, it was the only one of Nigeria’s four biggest non-agriculture sectors (trade, telcos, oil & gas, real estate) that grew in 2016. Telcos is evidently a service consumers will try to maintain in their basket of goods and service during challenging economic times.
Trade, real estate weigh down services
Wholesale and retail trade (trade), respectively Nigeria’s second-biggest economic sector (17%) and biggest services sector, stopped growing in 2Q16, and thereafter contracted. This fall in the supply of goods handled by traders was in part due to FX restrictions. Real estate, the third-biggest services sector after trade and telcos, started contracting in 1Q16. The sector is made up of agents and intermediaries that charge fees for selling and renting property. Their fees amount to about 5-10% of the transaction value, by one estimate. Real estate’s contraction is in part due to falling incomes constraining demand. As we expect the consumer to remain challenged in the short term owing to little prospect of wage increases, we do not expect a significant recovery from the trade and real estate sectors. FX restrictions will also continue to undermine trade.
Outlook still hinges on FX policy and the Niger Delta
Our 2017 growth projection of 0.5% is premised on an improvement in capex, agriculture sustaining c. 4% growth, and oil output stabilising at c. 2mbd. The $1.5bn in foreign loans that the government has secured since November for the budget, and those to come suggests we should see a lift in capex in 2017, compared to 2016. The recent narrowing of the spread between the official and parallel FX rates is positive. However, this policy is premised on the central bank sustaining sizeable net FX inflows. For a sustained improvement in liquidity, we believe the central bank needs to ease FX controls, unify the FX rates and allow for price discovery. This would help key sectors like trade and manufacturing recover. We think a resolution in the Niger Delta would allow for oil output to stabilise at c. 2mbd and support a recovery in FX liquidity.
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