February 15, 2019/Coronation Research
Q4 2018 GDP was reported today at +2.38% y/y versus the Bloomberg consensus estimate of +2.10% y/y. Non-oil growth was a respectable +2.70% y/y and has accelerated over the past four quarters.
FY 2018 GDP was +1.93% y/y, compared with +1.76% y/y for 9M 2018 and +0.82% y/y for 2017. The World Bank’s revised estimate for 2018 was +1.90% y/y.
While below trend, growth is on a gentle upward slope. We forecast +2.25% y/y growth for 2019.
Positive implications for equities. Lack of loan growth was the bugbear for listed banks in 2018: more growth, particularly in the Telecoms and Manufacturing sectors, may point to renewed loan demand in 2019, though the large Trade sector (up by just 1.02% y/y) remains essentially weak. Segmental data for construction, +2.05% y/y, bodes well for the cement industry.
Mildly positive for market interest rates. As we argue in Coronation Research, Year Ahead 2019, A tale of two halves, 15 January, market interest rates support foreign portfolio investment, but may be cut in Q4 or even Q3 2019 if inflation moderates. We are already seeing some read-though in 10-year bond yields.
Mildly positive for inflation. The Agriculture segment (26% of GDP) showed improved growth (+2.46% y/y) and to the extent that this reflects improved production, we expect inflationary pressure to moderate towards mid-year, if momentum is sustained.
Nigeria, y/y GDP growth
Non-oil & Gas GDP
Robust Performance in Non-oil GDP
Non-oil GDP accelerated throughout 2018, growing steadily from +0.76% y/y in Q1 18 to +2.70% y/y in Q4 18. We see a pattern emerging as the economy emerged from recession. Whereas GDP was reliant on its oil component to stimulate growth for much of the past, and therefore highly susceptible to volatility in the prices and production, non-oil GDP has become more resilient to such shocks. The Q3 2017 0.76% y/y decline in non-oil GDP now reads as an isolated event post-recession.
This resilience is even more impressive given that Agriculture is not growing as quickly as it did in 2016 and 2017, while Trade and Manufacturing have performed inconsistently. We expect Agriculture to post a very gradual recovery to its trend growth rate of 3%.
Nigeria’s GDP growth y/y, with and without oil & gas
Source: National Bureau of Statistics (NBS), Coronation Research *Q3 16 non-oil GDP was positive at 0.03% y/y.
More recently Telecoms has been the main driver of growth in non-oil GDP. The sector grew 11.33% y/y for FY 2018. it is easily the best performing sector of the top six contributors to GDP well above Agriculture which grew by 2.12% y/y for FY 2018.
On the other hand, Oil & Gas GDP has underperformed in 2018, following one quarter of positive growth (Q1 2018, 14.77% y/y) with three consecutive quarters of year-on-year decline. The volatility of Oil and Gas itself is not surprising – in the last eight years it has recorded growth rates between +24.21% y/y and -23.04% y/y.
Breakdown among the major segments
The top six sectors accounted for 74.10% of the Nigerian economy in Q4 2018, down 406bps from their collective contribution in Q3 2018. In order of size they were Agriculture, Trade, Telecoms, Manufacturing, Oil and Gas, and Real Estate.
In Q4 2018 Agriculture (25.83% of GDP) grew by 2.46% y/y. Trade (16.29% of GDP) grew by 1.02% y/y. Telecoms (9.73% of GDP) grew by 16.67% y/y. Manufacturing (8.75% of GDP) grew by 2.35% y/y. Oil & Gas (6.97% of GDP) contracted by 1.62% y/y. And Real Estate (6.52% of GDP) fell by 3.85% y/y.
Therefore, of the six largest sectors, four grew and two contracted. Agriculture sustained its upward track towards trend growth of 3%, indicating, a slowdown in core inflation is likely in the medium term. Manufacturing performance and PMI data are now showing signs of convergence after a period of disconnect. Telecoms consolidated it status as a core stimulant for non-oil GDP growth having reported double-digit growth over the last three quarters. Oil & Gas recorded a third consecutive quarter of year-on-year decline period post-Q1 17, mirroring the global trend in oil prices. Trading was up for two consecutive quarters. Real Estate remained in a sticky decline, with no clear pattern emerging in its development.
Nigeria GDP, y/y growth in key sectors
The growth in Agriculture remains at just below its 3% long term trend. At 26% of GDP, its provides a defense against the steep volatility that characterizes the Oil & Gas component.
Trade Remains Weak But Positive
While a small percentage of consumers assess short-term unsecured credit for current consumption, most consumers fund consumption from out of pocket appropriations. The effect is some headroom for import-elastic consumption but also more importantly, demand for cheaper substitutes where possible. Trade growth suffers in this regard.
Positive growth in Manufacturing is being sustained by stability in the foreign exchange market, a feat achieved by the CBN’s willingness to supply US dollars to the foreign exchange markets, while offering inflation-adjusted yields in excess of 500bps to foreign investors. The combined growth in both Trade and Manufacturing, two sectors highly responsive to consumers wallet sizes and expectations, point to a pass-through of election-induced spending in the short term and broader recovery in the economy.