Nigeria’s uneven recovery a downside risk to growth in 2018, Rencap says

Despite Nigeria’s growth strengthening to 1.4 percent year on year in Q3 2017, analysts at Renaissance Capital are concerned that the unevenness in the growth may provide downside risks to growth in 2018.

According to NBS data, Nigeria’s gross domestic product (GDP) grew 1.4 percent in the review period against -2.3 percent in Q3 2016 on the back of the rebound of the oil sector, which grew 26 percent against -23 percent year on year.

The non-oil sector specifically slipped into negative territory, which according to the Rencap analysts is a cause for worry.

“Outside of agriculture, the remaining two-thirds of the economy remains sluggish. Manufacturing’s return to negative growth territory highlights the fragility of this recovery. That said, we think GDP growth remains on track to meet our 0.7 percent forecast for 2017.

“We expect the stepping up of government capex and pick-up in demand, on the back of improved FX liquidity, to help lift growth to 2% in 2018. The consumer confidence index’s YtD upturn, since it bottomed in Q4 2016, suggests demand is picking up, albeit off a low base,” they highlighted in an economic research note released Tuesday.

Specifically, manufacturing growth slipped back into negative territory in the review period, declining by 2.9 percent year on year as against a contraction of 4.4 percent in Q3 2016.

The services sector also recorded negative growth for the sixth consecutive quarter at 2.7 percent vs a decline of 1.2 percent a year earlier.

“As the sector accounts for half of GDP, this has meaningful implications for growth. Services’ deepening decline was largely due to telcos, real estate, trade, finance, and road transport,” the analysts noted.

Equally finance sector contracted by 6.5 percent year on year in the quarter against 2.8 percent a year earlier.

In line with the sharp slowdown in year-on-year credit growth to -2.9 percent in August, from 22 percent a year earlier, telcos – the third biggest sector – recorded its worst performance this decade as it declined by 5.7 percent against growth of 0.9 percent year on year in Q3 2016.

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“It concerns us that the non-oil sector’s growth slipped back into negative territory; -0.8 percent year on year vs zero growth a year earlier, despite agriculture’s consistent growth.”

They said the uneven growth explains why Nigeria’s growth recovery is fragile.

“The lopsidedness of the recovery implies downside risk to growth,” they pointed out, adding that the oil sector is single-handedly driving the recovery.

The oil sector bounced back in Q3 2017, off a low base, which corresponds with the recovery in oil production to 2Mb/d in July from 1.6Mb/d in Q3 2016.

This rebound in production followed the repair of pipelines in 2Q17, which led to more than 200k b/d of crude oil production coming back on stream, and the conclusion of an amnesty programme for Niger Delta militants, which resulted in the cessation of attacks on oil facilities.

“The downside risks to 2018 growth will increase in the run-up to the February 2019 elections. Typically, economic activity slows in the months leading to the polls, particularly as the private sector adopts a wait-and-see approach because of uncertainty regarding policy continuity.

“Nigeria’s electoral history also shows that troublemakers tend to stoke tensions in sensitive regions, such as NorthEast Nigeria and the Niger Delta, for political ends. Instability in the latter region could have material implications on oil production, and by implication, GDP growth,” they said.