Q1:2020 GDP: A broad-based Moderation in the Non-Oil Sector Drags Growth Lower at 1.9%

More data point on the performance of the economy so far in 2020 emerged this week, with the release of Q1:2020 GDP and capital importation statistics. Starting with economic growth, Q1:2020 GDP report revealed that the Nigerian economy expanded at a slower pace of 1.9% Y-o-Y (vs 2.6% in Q4:2019), the weakest since Q3:2018. This performance was largely supported by growth in the oil sector amid a much slower expansion in the non-oil sector. The oil sector grew 5.1% Y-o-Y in Q1:2020 (vs 6.4% in Q4:2019) as oil production rose 3.0% Q-o-Q and 4.0% Y-o-Y to 2.1mbpd, the highest since Q4:2015. This was despite the force majeure declared by major oil companies earlier in the quarter and we suspect the ramp-up in production partly cushioned the effect of falling oil prices in the wake of the coronavirus outbreak. Non-oil sector growth slowed to 1.6% Y-o-Y in Q1:2020 (vs 2.3% in Q4:2019, the weakest since Q1:2018. We suspect that the weak growth performance in Q1:2020 slightly reflects the early impact of Covid-19, especially given the high trade relations between Nigeria and China. This is supported by the sharp reduction in the Purchasing Managers’ Index (PMI) for manufacturing and non-manufacturing to 51.1 and 49.2 points in March from 58.3 and 58.6 points respectively in February 2020.

Meanwhile, there was a surprising but largely insignificant outcome at the bi-monthly MPC meeting of the CBN this week as the policy rate was cut 100bps to 12.5% to support growth. The impact of the rate cut would be muted as yields are already at historically low levels and the Monetary Policy Rate (MPR) is only catching-up, with the current level still not reflecting current market realities. The stimulus measures proposed by the CBN are also unlikely to deliver fast-paced economic recovery given the negligible size of the funds, painfully slow rate of disbursements and elevated credit risk. Reprieve is also unlikely to come from foreign investments, as the uncertainty and risk brought by the pandemic have resulted in capital flight. In Q1:2020, foreign capital flows fell 31.2% Y-o-Y to $5.9bn.

Synchronised Moderation across Major Sectors
Growth in the agriculture sector weakened to 2.2% Y-o-Y in Q1:2020 (vs 2.3% Q4:2019), the slowest in three-quarters. This was driven mainly by slower growth in crop production at 2.4% Y-o-Y (vs 2.5% Q4:2019) while the livestock sub-sector expanded at 0.6% (vs -0.2% Q4:2019). In our view, the softer increase in the agriculture sector likely reflects persistent insecurity in Northern Nigeria.

In the manufacturing sector, growth tapered to 0.4% Y-o-Y in Q1:2020 (vs 1.2% Q4:2019) dragged by weakness across its major sub-sectors. However, growth in the cement sub-sector was higher than in the previous quarter at 1.7% Y-o-Y (vs 1.1% in Q4:2019). The food, beverage and tobacco sub-sector softened to 1.1% Y-o-Y (vs 2.7% Q4:2019), the weakest since Q3:2017, while growth in the textile, apparel and footwear sub-sector was relatively flattish at 1.0% Y-o-Y. The weak momentum in the sector is mainly due to sustained weakness in consumer spending.

The services sector also recorded slow-paced growth at 1.6% Y-o-Y in Q1:2020 (vs 2.6% in Q4:2019), the weakest in seven quarters. The telecommunications sector bucked the double-digit growth trend witnessed since Q2:2018, expanding slower by 9.7% Y-o-Y (vs 10.3% Q4:2019). Meanwhile, the financial services sector recorded its second consecutive quarter of double-digit expansion, growing faster at 20.8% Y-o-Y in Q1:2020 compared with 20.2% in Q4:2019. We believe this reflects loan expansion in the sector as the CBN set minimum LDR at 65.0%. On the contrary, the trade and real estate sub-sectors remained in recession as both recorded deeper contractions in Q1:2020. The contraction in the trade sub-sector worsened to -2.8% Y-o-Y (vs -0.6% in Q4:2019), the weakest performance since Q1:2017. Likewise, the real estate sub-sector declined 4.8% Y-o-Y (vs -3.5% in Q4:2019), its sharpest contraction since Q1:2018. In our view, the slow services growth was partly driven by poor consumer spending, the prolonged partial closure of the Nigeria-Benin border by the FGN and global restrictions as countries started to limit the spread of COVID-19.

Outlook: Growth to Underperform in 2020
We revise our growth forecast downwards from 2.5% to -4.4% in 2020 as we believe subsequent quarters would reveal the scale of the economic impact of COVID-19. Our expectation is mainly driven by external shocks brought by the COVID-19 pandemic through weaker oil prices and the lockdown and social distancing measures adopted to contain the spread of the virus in Nigeria. While we expect the weakest performance in Q2:2020, we anticipate a partial recovery in H2:2020 due to the reopening of the cities on lockdown domestically and in countries with extensive economic relationships with Nigeria.

In the oil sector, we expect a contraction going forward as Nigeria committed to producing 1.7mbd (including condensates) as part of the output cuts agreed by OPEC and allies to rebalance the oil market. Growth in the agriculture sector would also remain weak given disruptions to the supply chain, especially in the sourcing inputs for planting activities and the distribution of harvests as well as elevated insecurity. We expect a contraction in the manufacturing and services sectors in Q2 due to weak consumer spending, the closure of activities in many critical sectors, trade restrictions, lack of access to FX and currency devaluation. However, we anticipate a gradual recovery in Q3 and Q4 2020.