Several sore thumbs sticking out
The most recent data on Nigeria’s national accounts released by the National Bureau of Statistics show another dismal figure, as there was a third successive contraction in GDP. Although the oil sector contributed just 8.2% to total GDP in Q3, it contracted by -22% y/y and the impact was felt broadly across the economy, given that it is the country’s primary source of revenue.
The non-oil economy managed to remain flat. A bright spot that stuck out was agriculture, which expanded by 4.5% y/y.
Clearly, the FGN’s import substitution strategy has had a positive effect on the country’s agriculture sector. There was increased investments in crop production such as rice, sugar and cassava farming. The public sector provided a few incentives to promote these investments. For instance, the zero percent import tariff on agricultural machineries as well as the CBN’s anchor borrowers’ scheme which was developed to create an economic linkage between smallholder farmers and reputable large-scale processors. Additionally, the FGN is in the process of importing 110 rice mills, which it will supply at a discount. Crop production accounts for 92% of the agriculture sector and the subsector grew by 5% y/y in the third quarter of 2016.
Another sector which posted growth was finance and insurance, it expanded by 2.6% y/y after contracting by -10.8% the previous quarter. This growth could be linked to fx revaluation gains on foreign currency denominated assets, following the devaluation of the naira in June 2016.
However, within the non-oil economy several sectors performed poorly, particularly those which account for at least 1% of total GDP. Trade, which is regarded as the most reliable measure of demand across all income levels, contracted by -1.4% y/y; the current squeeze on household wallets most likely led to this.
Meanwhile, the contraction in manufacturing worsened from -3.4% y/y to -4.4%. Food, beverages and tobacco which accounts for over 40% of manufacturing contracted by -5.8%. The obvious reason for this underperformance is scarcity of foreign exchange as most segments within the manufacturing sector are highly dependent on imports for input / raw material requirements.
Real estate also declined (by -7%y/y). On the supply side, there was a slowdown in commercial development; demand was also relatively low and in some cases, resulting in subdued prices for rental accommodation.
Construction contracted again, but by 6% y/y. Infrastructure construction is the largest segment within Nigeria’s construction industry. One of the country’s construction giants reportedly laid off at least 5,000 employees over the past two years due to the general slowdown in the economy.
Last year’s approved capital expenditure was N1.8trn; from this year’s proposed budget it increased to N2.2trn. However, it is worth noting that as at October 2016, just 50% of funds for capital expenditure had been released. The sector stands to benefit from the planned acceleration in capital releases.
The squeeze on personal income has had an adverse effect on food and accommodation (formerly, Hotel and Restaurants) as well. The sector has contracted steadily since Q2 2015; the lingering fx sourcing issues continue to strain the restaurant and food services industry as a significant proportion of food products used in preparing meals are imported. However, a gradual shift to locally sourced food products will bring some respite over time. In November, the inflation report showed that prices in the Hotel and Restaurant sector rose by 9.4% y/y compared with 8.1% recorded in the corresponding period of 2015.
The health sector has been neglected with very minimal investments from both the public and private sector; as such it is not surprising that the sector contributed a minuscule 0.7% to GDP and declined by –2% y/y in Q3. About N262bn was allocated to the sector by the FGN last year, representing just 4.4% of the total budget. Low budgetary allocation, brain drain, medical tourism and incessant strikes by health workers are a few roadblocks the sector currently faces.
The macro challenges are to blame for the poor performance of the aforementioned sectors, segments and industries. Given that oil remains the country’s primary source of revenue, the FGN needs to stabilise production within the country as oil prices cannot be controlled. An obvious priority for the FGN is to tackle the sabotage and insecurity in the Niger Delta. It has little choice but to make concessions for the sake of peace and improved oil production for exports.
Nigeria’s exit from recession depends heavily on its expansionary fiscal stance. The headline figure in the proposed budget for 2017 is total FGN spending of N7.30trn compared with N6.06trn in the 2016 budget. This expansionary budget is expected to jumpstart the economy. However, the onus should be on the government to drive the country towards inward development and promoting the ‘made in Nigeria’ initiative – that is, through agriculture (by ultimately boosting agribusiness and pushing Nigeria towards self-sufficiency in its food requirements) and manufacturing (by accelerating growth in petrochemicals, cement and light manufacturing production.)
Additionally, through public-private partnerships, the country needs to actively build industries to be competitive globally as this will promote non-oil exports and serve as an alternate revenue source. The ease in doing business will push this narrative. Power shortages remain one of the chief culprits hindering the expansion of multiple sectors across the economy.
As at June 2016, Nigeria was ranked 169 out of 190 on the World Bank’s Ease of Doing Business Survey. The survey also captured ease of getting electricity in which Nigeria ranked poorly as well, at 180 out of 190. Meanwhile, in terms of starting a business, Nigeria ranked 138 out of the total.
Looking forward, in the short term a positive outturn is not far-fetched if the FGN achieves a lasting settlement in the Niger Delta, and if the National Assembly facilitates a smooth and prompt passage of the 2017 budget. In the Q4 data, when released, there is the possibility of a token return to positive territory for GDP as a whole; this would probably be on the back of positive base effects for the oil sector and a small seasonal boost to household consumption.
Egwim is Macro-Economist & Fixed Income Securities Analyst at FBN Capital