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Nigeria: 2Q17 GDP, A Pedestrian Recovery

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Recession exit: South-Africa-based don makes case for sustainable growth

Nigeria grew 0.5% YoY in 2Q17 vs -1.5% YoY a year earlier. The oil & gas and financial services sectors pulled the economy out of recession. Outside agriculture, the non-oil sector remains weak. This is mainly because real estate and trade, which account for 25% of GDP, are still in recession. Owing to a more favourable outlook for oil output, we revise our 2017 growth forecast up, to 0.7% vs 0.5% previously. However, sluggish demand leads us to believe the recovery will be pedestrian.

Oil sector pulls economy out of recession

Nigeria’s oil & gas sector grew in 2Q17, after contracting for six quarters. The extractive sector grew 1.6% YoY vs -11.6% YoY a year earlier, on the back of an increase in oil production to an average of 1.9mn b/d, vs 1.8mn b/d over the same period (Figure 4). We think the repair of the Trans-Forcados pipeline, which led to output of c. 200k b/d coming back onstream in June, and the tripling of the budget for the amnesty programme for Niger Delta militants, partly explain the improvement in oil output. We think it is too early to say whether the oil sector’s return to growth is the start of a trend; the last time the oil sector grew for longer than a quarter was in 2011.

Manufacturing’s modest recovery

The non-oil sector grew by a modest 1.1% YoY in 2Q17, compared with -0.4% YoY a year earlier. The sector continues to be weighed down by the underperforming services sector. Agriculture is the staple contributor to GDP growth, due to its size (23% of GDP) and consistent 3-4% growth. Manufacturing’s moderate recovery in 2017, following almost two years of decline, has been led by food and beverages. The sub-sector grew by 2.7% YoY in 2Q17 vs -5.5% YoY a year earlier. We believe the improvement in FX liquidity has contributed to the pick-up in activity in the manufacturing sector. Textiles has also shown modest growth YtD after declining for most of 2016. However, the cement sector continues to underperform; it declined by 4.2% YoY in 2Q17, vs a contraction of 5.5% YoY a year earlier.

Services weigh on the non-oil sector

Finance is the outlier from the services sector; it grew 11.8% YoY in 2Q17, vs a decline of 13.2% a year earlier. This made it the second-biggest contributor to GDP growth in 2Q17. This we partly attribute to banks investing in high-yielding government securities, which is profitable on a risk-adjusted basis. Finance’s performance was not strong enough to counter the decline in trade and real estate. Trade (a good gauge for the consumer – see Figure 3) contracted by 1.6% YoY in 2Q17 vs zero growth in 2Q16. The real estate sector declined by a slower rate of 3.5% YoY vs 5.3% YoY over the same period. On the upside, public administration – the government – grew for the first time since 4Q14, when the oil price collapsed.

A pedestrian recovery

We are revising our 2017 GDP growth forecast up, to 0.7% vs 0.5% previously, owing to a more favourable outlook for oil output. However, we believe the non-oil sector’s recovery will be constrained by sluggish demand, which is reflected in YoY credit growth of -0.1% in July, vs 19.9% a year earlier (Figure 5). The downside risk to our growth outlook is a resumption in attacks on oil facilities that results in output falling.

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