Five things learnt from Nigeria’s disappointing Q2 GDP

Asides needing to grow 7 percent in each of the third and fourth quarters of 2019 to attain the Federal Government’s 4.5 percent full-year target, there are four other implications of Nigeria’s disappointing second quarter GDP numbers.

Read More :  Nigeria’s GDP grows slower than population for 10th straight quarter


Nigeria faces impossible ERGP target after disappointing Q2

Africa’s largest economy slowed to 1.9 percent in the second quarter of 2019 from a revised 2.1 percent growth in the first quarter, the state-statistics agency, National Bureau of Statistics (NBS), said Tuesday.

The Q2 performance turned out worse than expected and now means the economy must grow by 7 percent in Q3 and another 7 percent in Q4 to achieve the 4.5 percent full-year target set by the Federal government in the Economic Recovery and Growth Plan (ERGP).

Analysts laughed off the chances of meeting the target, not when it’s barely four months to the end of the year, where if anything, the economy could fare worse in subsequent quarters this year.

“We are already in the last month of Q3 and there is nothing to suggest the economy performed better or that we can achieve the lofty target set in the ERGP,” said Wale Okunrinboye, head of investment research at Lagos-based fund manager, Sigma Pensions Limited.

The economic targets in the ERGP have often come under criticism for lacking the fundamentals to support it.

The below par economic performance in the first half of the year, heaps more negative light on a plan that has always looked like wishful thinking.

It would appear the government is developing a penchant for failing to meet set targets whether it be revenue or oil production.

Downside risks to growth

The lower than expected Q2 report is beginning to spur a full-year downgrade for the economy from a consensus estimate of 2.5 percent to around 2.0 percent, in what deals a blow to already fickle investor confidence.

The 1.9 percent Q2 growth rate is lower than the 2.2 percent consensus estimate of 15 economists polled by Business Day.

“With the disappointing Q2 numbers and the bleak expectation for the rest of the year, Nigeria looks nailed on for a full-year growth downgrade,” said Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham.

A growth downgrade deals a blow to investment confidence in Nigeria, which could do with new investments to boost growth and create jobs for its teeming population.

Many analysts expected higher oil production to combine with consolidation in the non-oil sector in providing GDP print north of 2 percent, but that fell through.

Lower oil prices, exacerbated by the trade war between the US and China, and the outlook for trade following the abrupt boarder closure and FX ban on food imports will also weigh on growth this year, making it nearly impossible for Nigeria to escape a growth downgrade.

“We think beyond numerical downgrades to 2019 growth estimates closer to 2 percent, market expectations for the economy are likely to gravitate from prior calls for V-shaped recovery to a W-shaped one,” Okunrinboye of Sigma Pensions said.

A dilemma of old returns

The central bank cut interest rates to 13.5 percent in March 2019, to stimulate economic growth. The rate cut appears to have had little impact going by the Q2 numbers.

The global and domestic environment has changed since that cut, with oil prices trending lower and global growth projections lowered on the back of the trade spat between the US and China.
Foreign portfolio investors are demanding more from Nigeria to invest in debt securities from Bonds to Treasury Bills. That has seen interest rates push up since then and the naira has marginally weakened at the market-reflective Investors and Exporters window.

At subsequent monetary policy committee meetings, the CBN will be faced with the pressure to cut rates and stimulate economic growth or raise them to attract foreign portfolio inflows.
A similar scenario played out in 2016, where the CBN sided with its core mandate of price stability over economic growth.

In terms of policy responses, the CBN would continue to bear the burden of adjustment as the fiscal side, amid its heavy debt service burden, continues to constrain policy wriggle room by refraining from taking bold measures on reform: privatisation, subsidy rationalisation, etc.

In all likelihood, the weak growth number is likely to raise the incentive for the CBN to deploy initiatives, which seek to boost credit growth either directly from its balance sheet or indirectly via policies such as the minimum loan-deposit ratio to get banks to raise loan origination.

Though it may fuel calls for monetary policy accommodation, a less favourable oil price picture and likely FX pressures ahead continue to cap the scale of any dovish intentions.

High-flying Telecoms shows gains of liberalisation

The telecoms sector was one of the shining lights of the quarter and its influence on the Services sector was telling.

Telecoms grew 11.34 percent in the second quarter compared to the previous year. Analysts say the sector is a shiny example of the gains of liberalisation.

The performance of the sector should encourage the federal government to liberalise other sectors for the benefit of better economic growth.

Spurred by improved activities in telecoms, the Services sector expanded 2.9 percent compared to the same period last year.

Subscriber growth observed from both the data users (29.5 percent compared to last year) and voice calls (7.3 percent year-on-year) fuelled the momentum with total subscribers at the end of Q2 19 printing at 173.8 million.

Slow non-oil growth exposes sluggish diversification
The Non-oil sector expanded by 1.6 percent compared to last year, while oil sector expanded by 5.2 percent.

The non-oil sector recorded a higher contribution to the GDP (91.18%), advancing by a marginal 1.64 percent compared to last year.

Its performance was driven by the 2.10 percent growth in the industrial sector, which contributed 23.21 percent to GDP during the period.

The agricultural sector which contributes about 22.82 percent to GDP, also expanded by 1.79 percent, as against the 1.19 percent in the second quarter of 2018, while the financial services sector (3.18%) and the manufacturing sector (9.10%) contracted by 2 .24 percent and 0.13 percent, respectively.

After a brief quarter of growth, the real estate sector also contracted by 3.84 percent. There was also a relapse in trade in the second quarter, as it slipped back into contraction, while a deepening recession in financial services was disheartening.

In the light of recent border closures and moves to restrict FX supply to certain import items, it could only get worse for trade.

Given that growth in Nigeria is historically stronger in the second half of the year due to seasonality, the resumption in pressures in trade and real estate is more worrisome. Analysts say the policy inertia following the 2019 general elections left an uncertain environment for economic agents over Q2 2019.

Things were much better on the oil front. The oil sector posted a growth of 5.15 percent year-on-year, as crude oil output (including condensates) rose to 1.98 million barrels daily from the 1.84 million recorded in same period of last year.

However, quarterly growth was negative at -1.55 percent, as production numbers came in softer.

This was on the back of the turbulence in the months of April and May, as several Force Majeures declared by major producers disrupted production in key fields and pipelines during the period, despite relatively higher oil prices.

The oil sector, therefore, contributed higher to real GDP at 8.82 percent as against 8.55 percent in the second quarter of 2018.

The road to diversification and reducing the economy’s reliance on crude oil is a long one but government critics say not much has changed to propel the economy on the path of diversification.

Key fiscal reforms that should open the economy to private capital are dragging, whether it’s the passage of the Petroleum Industry Bill or the elimination of fuel subsidies that deter investments.



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