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Nigeria’s economy in recession: GDP shed -1.5% in 2016, the lowest since 1991
Nigeria’s economy shrank -1.5% year-on-year (YoY) in 2016 (2015: 2.79%) mainly due to weak oil output and broadly as a result of the persistent weakness in industries. This is in line with our 2016 full year forecast of -1.5% and it’s the first full year of negative growth since 1991 (-0.51%).
The economy had slid into recession mid-2016, with consecutive negative growth of -0.36% and -2.06% in the first and second quarter respectively, mainly due to depressed oil prices in the first half of 2016 and lower oil output. GDP growth weakened to -2.24% in the third quarter due to further weakening in the macro-economy as a result of the aforementioned factors,.
Overall in 2016, the harsh impact of lower government revenues and export earnings which had persisted since the fall in oil prices in 2014 dominated. Protracted issues around foreign exchange policy such as the combination of illiquidity, controls and frequent tinkering also exacerbated the fragile fundamentals of the economy.
Households groaned under these conditions due to a decline in purchasing power, caused by job losses wherein unemployment rose to 13.9% and consumer prices spiked to 18.6%. Businesses were no better off either; the salvo of rising cost of raw materials and intermediate items (imported and locally sourced) and lower sales created a vicious cycle of low profitability, low investment and ultimately low growth in 2016.
Recession for how long? Rising Optimism
In Q4 2016, Nigeria recorded a negative growth rate of -1.30% (Q3 16:-2.24%) slightly higher than our forecast of -1.4%. This shows that Nigeria endured negative quarterly growth rates throughout 2016.
However, despite the slump deepening in Q2 (-2.06%) and Q3 (-2.24%) the modest improvement in Q4 was due to improved oil output to 1.90mbpd in the fourth quarter as the FG reached agreement for a ceasefire with the Niger Delta militants whom had wreaked havoc on oil assets and cut oil to 1.63mbpd in Q3.
With a sharp and stable recovery in oil production early in 2017, and improving business and consumer sentiment, there are signs that the economy might see green shoots as early as Q1 2017. Escalated efforts in the fiscal (foreign borrowing, Capex) and monetary policy space (improved foreign exchange liquidity) are key pointers in this regard.
Broad weakness in Oil and Non-Oil
The weakened macroeconomic backdrop cut sideways in Nigeria’s economy in 2016.
The non-oil sector which makes up 93% of Nigeria’s GDP shrank -0.82%, lower by 4.57% points when compared with the 3.75% growth recorded in 2015. This is due to weakness in Real estate (-6.86%), trade (-0.24%), construction (-5.95%) and manufacturing (-4.32%), even though agriculture growth remained strong at 4.03%.
In the oil sector, output growth slumped by -13.65%, 8.2% points worse than in 2015. This is unsurprising and was due to the decline in oil production caused by militancy in the oil rich Niger Delta region of Nigeria. Oil production averaged 1.83 million barrels per day (mbpd) in 2016, 310 thousand barrels per day short of the 2.14mbpd average recorded in 2015.
The Agriculture sector, with a real growth rate of 4.03% YoY in 2016 (2015: 3.72%), was the bright spot. The sector also regained top spot as the fastest growing sector since losing ground to the service sector in 2013. Buoyant harvests ensured that growth averaged 4% in all quarters of the year.
Crop production, which accounts for more than 80% of the sector’s total output and grew by 4.34% in 2016 (2015: 3.49%) was mainly responsible for the strong performance in agriculture. Meanwhile, output growth in Livestock (’16: 2.94%, ’15: 5.93%), forestry (’16: 2.62%, ’15: 3.67%), and fishing (’16: o.72%, ’15: 5.89%), though positive, declined in 2016.
The agriculture sector’s share of the GDP increased slightly to 24.43% (2015: 23.11%).
Warning Signs, Services in Recession
The so far robust and resilient service sector flashed warning signals in 2016. Starting off on the wrong footing but managing to stay afloat with a growth of 0.8% in Q1, the sector entered a recession with a growth rate of 1.17% in Q3 (Q2: -1.25%). There was no let-off in Q4 as growth worsened to -1.52%. We believe that the challenging macro-economic environment is starting to take its toll and the rapid descent is an indication of negative consumer and business sentiment in the economy.
On an annual basis, the service sector which is Nigeria’s largest declined by -0.82% YoY in 2016 (2015: 4.78%), the first negative growth since the rebasing of Nigeria’s GDP. Weaker output growth in construction (2016: -5.95%, 2015: 4.35%), real estate (2016: -6.86%, 2015: 2.11%), financial services (2016: -4.54%, 2015: 7.12%) and trade (2016:-0.24%, 2015: 5.14%) sub sectors were responsible.
In spite of these, the sector’s share of total GDP slightly increased to 53.55% (2015: 53.18%) as the industrial sector faltered.
Output growth in the industrial sector, which has been in recession since 2015 declined by -8.30% in 2016 (2015: -4.4%). Weaker output growth in Mining and Quarrying (’16: -13.66%, ’15: -5.27%) and the Manufacturing (’16: -4.32%, ’15: -1.46%) sub sector were responsible for the slump.
The challenging business environment, wherein sourcing of foreign currency remained difficult and devaluation of the Naira caused a spike in costs of inputs was inimical to growth in the manufacturing sector.
This is in spite of the moves of the CBN to prioritize sale of foreign currency to the industrial segment through a 60:40 rule, sale of currency forwards and the ban on 41 items which was expected to boost production and to, at least, serve the sourcing needs of industries. Rather, production costs increased both for imported and locally sourced inputs. The existing interest rate of 14%, where even the government borrowed at c.18% was unfavorable as financing costs spiked. This partly slowed business investment and expansion.
The industrial sector’s contribution to GDP fell to 22.02% (2015: 23.71%).
What next for Growth in 2017?
The continued weakness in the macro economy, particularly in the industrial and service sectors call for an improved business environment in 2017. Much of our thoughts on the direction of the economy and critical factors to consider are contained in our 2017 Economic Outlook report where we projected the economy to return to positive growth in 2017 and grow 0.82%.
So far in 2017, improving variables such as oil prices of $55.bbl, oil production at 2.1mbpd and foreign currency reserves at $29bn suggest the possibility of a positive growth as early as Q1 2017. Other leading indicators, as seen in the economy’s Purchasing Managers Index (PMI), are also starting to pick up.
The CBN enabled by improved oil export earnings as grown reserves to a twelve month high of $29bn. Though there was lack of clarity on policy direction as at mid-February, it has recently taken steps to increase foreign currency supply to the interbank for retail users. The maximum days for forex forwards have also been decreased to 60 days from 180 days so as to enable quick access to foreign currency.
Though the CBN seeks to increase efficiency and transparency in the foreign currency market, there are still grey areas. The foreign exchange market, wherein there are about six different rates for various purposes, is further fragmented by its latest policy move of supplying Forex to retail users at about N375/$. In the aftermath of its recent measures, the Naira has gained 18% in the parallel market, though still at a premium of 35% to the interbank rate of N315/$.
In our view, the massive gains in the Naira might be unsustainable as economic fundamentals remain unchanged. Productivity in the non-oil economy remains disappointing, thus the country remains susceptible to external shocks in the oil market. Aside from this, we believe the CBN risks emptying its reserves. As it supplies foreign exchange for cheap, this is likely to cause a spike in foreign currency demand and imports which is adverse to the country’s current account balance. Though the External debt issuance by the Federal Government will support existing reserves, creating a policy environment that will boost business and investor confidence is more likely to encourage investments and sustain the economy long term.
So far, a $1bn Eurobond has been raised and the FG is looking to source another $2.5bn in external loans as it seeks to cover a fiscal deficit of N2.36trn in 2017. Improved government spending will be an added impetus to the economy. However, to avert the situation in 2016 wherein the budget was not well implemented, the FG will do well to hasten budget passage in the National Assembly.
Aligning the various market rates and ending subsidies in the market now, through incremental pricing and adjustment when needed, rather than later will prevent shocks that could cause imbalances in the economy. The present petrol pricing template which is based on the assumption of an exchange rate of N285/$ is an example.
Nonetheless, we believe present measures will serve to boost output growth even if in the short term.
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