Non-oil economy off the floor

The national accounts for Q3 2016 from the National Bureau of Statistics (NBS) show a headline-making, third successive quarter of recession. The contraction of the economy picked up from -2.1% y/y in the second quarter to -2.2%. Not for the first time, the swings in oil sector output make the more striking headline.

So the oil economy shrank by -22.0% y/y in Q3. We had not thought the figure could be worse than the previous quarter (-17.5%) but then we made the mistake of taking at face value one-off official statements about the level of crude output. We recall a series of suggestions that pipeline sabotage had peaked in June and July. A lesson has been learnt.

A different take on the direction of oil output has been provided by an indigenous producer. The managing director of Shoreline Natural Resources told the local media last month that production of 2.20 mbpd would only be attained if the industry made new annual investments of US$14bn for five years. He added that it is currently investing about US$9bn. The macro significance of the statement to us is that the 2016 budget is based on an assumption of average production of 2.20 mbpd.

The GDP figures on the oil sector tell us again what we already know: that the FGN has to find a way of ending the sabotage and restoring production to earlier levels so that the additional tax revenues are generated to fund infrastructure spending and other measures (which are designed to bring about the diversification of the economy away from oil).

In contrast, the non-oil figures surprised a little on the upside. The non-oil economy was flat y/y, compared with contraction of -0.4% the previous quarter. Drilling down to sectors, we see steady growth of 4.5% y/y in agriculture for the second successive quarter. Reforms initiated by this and the last administration are paying dividends. There has been a pick-up in investment in commercial agriculture, not least by manufacturers in pursuit of backward integration, and we also note initiatives by the more forward-looking state governments.

Government at all levels can help to revive construction, which contracted by -6.1% y/y, in the capacity of customer/consumer. The FGN has recently said that it has released N800bn year-to-date for capital projects, most of which will have a construction component. While far short of the projection for the full year of N1.6trn, the releases are ahead of N660bn in 2015 (according to CBN data). We would expect a gathering of momentum as earlier capital releases are translated into orders for construction companies.

For manufacturing, the impact of FGN policy is its capacity to boost household demand. (The latest national accounts from the NBS on an expenditure basis show private consumption growth of 1.0% q/q and -6.0% y/y in Q2 2016.) Manufacturing segments tell different stories. The largest is food, beverages and tobacco, which contracted by -5.8% y/y in Q3. It has a high import requirement, and its operators are struggling to access the necessary fx for imported inputs.

In contrast, textiles, apparel and footwear contracted by -0.9% y/y in Q3. The second largest segment has outperformed the largest for seven successive quarters. An obvious explanation is elusive. We suspect that the pressure on incomes has led more and more Nigerians to buy products made from domestic materials such as cotton and leather. Rather than buy an imported product, for example, they could employ a tailor to make a suit. Anecdotal evidence points to the growth and success of unlisted manufacturing companies. These companies have the advantage of private operations across the world: less regulation, less scrutiny and more flexibility. In Nigeria they are responding to the new realities of the market in recession better than their listed competitors.

The fourth segment we cover is education. It was the fastest growing segment y/y throughout 2015 on the back, we assume, of new private universities and schools. In Q3 2016 it contracted by -0.1% y/y as parents have fallen behind on payment of fees and the expansion has ground to a halt.

Finally we turn to the government’s own contribution. Public administration contracted for the seventh successive quarter. Last year the decline was consistently double digit, and has improved to -3.6% y/y in Q3. In principle, we welcome the shrinkage in government for fiscal reasons. We just have to hope that its lower output is more productive. This is critical since we see the FGN’s expansionary fiscal stance as the largest single driver of Nigeria’s emergence out of recession.

We see that step in Q4, for which we forecast GDP growth of 0.6% y/y. In addition to the fiscal stimulus, we view positive base effects for the oil sector and the usual seasonal boost to household demand for the holiday season, albeit more subdued than usual, as reasons for the tentative recovery.

Gregory Kronsten