Macroeconomic Stability Drives GDP Growth Expansion and Capital Importation in Q4:2017

Nigeria continues to reap the benefit of improved macroeconomic stability as shown by economic data releases by the National Bureau of Statistics (NBS) and Central Bank of Nigeria (CBN) last week.

Last Tuesday, the NBS released Q4:2017 GDP data wherein it reported activity rose 1.92% Y-o-Y in the Quarter, marking the 2nd consecutive expansion in growth since the economy exited recession in Q2:2017. The successive positive GDP growth recorded from Q2 - Q4:2017 offset the 0.9% Y-o-Y contraction in Q1:2017, resulting in FY:2017 actual growth of 0.83% Y-o-Y, 13bpd ahead of our initial projection of 0.7%. Though Q4:2017 actual growth (+1.9% Y-o-Y) was ahead of our estimate (+1.5% Y-o-Y), it lagged consensus estimate polled by Bloomberg at 2.1%. However, as we highlighted in our Note published earlier this week on the GDP report, there is a major positive to draw from the data despite the slight negative data surprise: unlike the oil sector driven rebound in aggregate output between Q2 - Q3:2017, growth was more broad-based in Q4 as the three major economic sectors – Industry, Services and Agriculture – expanded concurrently for the first time since Q4:2014.

Our outlook for the economy remains positive as we expect Oil sector low-base-push to last till Q4:2018 – particularly considering oil production disappointed in Q4:2017 and new barrels are expected from Total’s Egina field by Q4:2018. Thus, we have raised Oil sector GDP growth projection from 8.8% to 11.8% Y-o-Y. Whilst structural constraints to non-oil sector growth – recurring energy scarcity, weak infrastructure and port congestion - remain headwinds, we note that the cyclical challenges will start to abate from 2018 against the backdrop of 1) anticipated expansion in fiscal spending as fiscal balance stabilizes and political parties spend ahead of the election, 2) further deceleration of inflation rate which will directly affect GDP price deflator and support real growth, 3) Increase in private investments due to favourable aggregate demand outlook and stable FX rate, 4) low-base effect of ICT sector which contracted in FY:2017 due to a 6.1% Y-o-Y decline in Active Voice subscribers and 5) declining market interest rates with anticipated knock-on impact on real sector lending which contracted in real terms in 2017. Thus, we have revised our FY:2018 GDP growth projection upward to 2.6% from 2.1%.

Further affirming consensus optimism on near term growth, the CBN released its PMI report for the month of February yesterday, showing an expansion in both Manufacturing and Non-Manufacturing sectors, albeit at a slower pace. The Manufacturing and Non- Manufacturing PMI settled at 56.3 and 56.1 points respectively in February, lower than 57.3 and 58.5 points in January 2018 – indicating that both sectors expanded in the reported month but at a slower pace. The upbeat performance of both the Manufacturing and Non-Manufacturing sectors is unsurprising, given the steady improvement the economy has recorded since Q2:2017 - buoyed by FX policy reforms, stable oil prices and production volumes which have had positive knock-on impacts on FX liquidity, fiscal spending and consumption & investment spending.

We observed that the expansion in the Manufacturing sector was buoyed by growths across all sub-indices, with Employment Level, Raw Material Inventory and Supplier Delivery Time sub-indices rising at a faster pace M-o-M while New Orders and Production Level grew at a slower pace. Similar to the Manufacturing sector, all components of Non-Manufacturing PMI expanded, although momentum slowed in Business Activity and New Orders. Whilst rising Employment Level was a positive, slowing momentum in Production Level/Business Activity and New Orders across the two sectors remain a concern. Yet, we expect PMI data to continue to reflect expansions as near term growth outlook remains well anchored above 2.5%.

Foreign Investor Sentiment Upbeat as Capital Importation Rises 29.9% Q-o-Q to US$5.4bn in Q4:2017
The National Bureau of Statistics (NBS) released Q4:2017 data on capital importation yesterday and in line with expectation, capital importation improved, surging 247.5% Y-o-Y and 29.9% Q-o-Q to US$5.4bn in Q4:2017 – a level last seen in Q3:2014 - from US$1.5bn in Q4:2016 and  US$4.1bn in Q4:2016. Though all categories of Capital Importation rose both Y-o-Y and Q-o-Q, as with previous Quarters, capital flows are still largely driven by Foreign Portfolio Investment (FPI) which rose 1123.5% Y-o-Y and 25.7% Q-o-Q to a 14-Quarter high of US$3.5bn in Q4.2017, while Other Investments (comprising of Loans, Trade Credits, Currency Deposit and “Other Claims”) jumped 66.0% Y-o-Y and 21.2% Q-o-Q to US$1.5bn and Foreign Direct Investment (FDI) increased 9.8% Y-o-Y and 221.8% Q-o-Q to US$378.4m. FPI in the Quarter was supported by Fixed Income investment related flows (Money Market Instruments and Bonds) which cumulatively rose 197.9% Q-o-Q to US$2.5bn to offset 48.8% Q-o-Q drop in portfolio flows to the equity market which fell to US$989.2m.

The surge in Q4 capital importation took cumulative Capital Importation in FY:2017 to a 3-year high of US$12.2bn, 138.5% higher than US$5.1bn recorded in FY:2016 and the highest since US$20.8bn in FY:2014. Foreign Portfolio Investment (FPI) remains the biggest vehicle through which capital flows into the country, rising fourfold to US$7.3bn in FY:2017 and accounting for 59.9% of total capital  flows. Other Investments also jumped 72.8% to US$3.9bn while FDI remains a source of weakness as it declined 6.0% Y-o-Y to a record low of US$981.8m.

Increased policy flexibility in the foreign exchange market and stability in current account – following rally in oil prices and rebound in domestic production volumes – were the major factor drivers of the surge in capital importation in 2017 which in turn bolstered FX market liquidity. We anticipate capital inflows into the economy to remain upbeat in the first half of the year on the back of increased foreign investor participation in the financial market and external deficit financing strategy of the Federal Government. Major downside risk to near term capital flows include polity stability ahead of 2019 elections, fragility in global oil market conditions and pace of policy normalization by systemic central banks in advanced markets.