Last week, the National Bureau of Statistics (NBS) released the Q1-2022 GDP figures showing that the Nigerian economy expanded by 3.1% y/y in real terms in what was broadly a positive surprise as the growth print topped consensus expectations and our in-house forecast.
The expansion in Q1-2022 was despite the unprecedented developments in the global economic environment including rising inflationary pressure, higher importation costs (due disruption in the global supply chain), and geo-political uncertainties.
The real GDP expansion recorded in Q1-2022 makes it the sixth consecutive quarter of expansion in the aftermath of the economic recession during the peak of the coronavirus pandemic, indicating the economy’s resilience in the post-covid era.
As expected, the non-oil sector continued to drive GDP growth in Q1-2022, with the Manufacturing, Information & Communication, Financial & Insurance, Trade, and Agriculture outperforming, thus offsetting drags from lower crude oil production (1.49mbpd compared to 1.72mbpd in Q1-2021).
Notably, of the 19 sectors in the NBS’s classification, 16 expanded while 3 contracted. The green spots include Financial & Insurance, Trade, Manufacturing, Construction, Real Estate, and Agriculture. On the tail end, Mining & Quarrying, Electricity, Gas, Steam and Air Conditioning, and Transportation &Storage supply declined by 25.9%y/y 11.2% y/y and 17.41% y/y, respectively.
Oil GDP Sector: Sector extends contraction into 8th consecutive quarter
The oil & gas sector continued to underperform the broader economy in Q1-2022 as crude oil production struggled to recover. In Q1-2022, the oil sector fell 26.0% broadly due to weaker crude production during the period. The contraction in Q1-2022 extends the sector’s downturn woes into the eighth consecutive quarter. In addition, the persistent weakness in the sector has meant its contribution to overall economic activities has continued to pale with real GDP contribution of 6.6% in Q1-2022 compared to 9.5% before the pandemic outbreak in Nigeria. According to the NBS’ GDP report, Nigeria’s average crude oil production in Q1-2022 was 1.5mb/d (including condensates), lower than Q1-2021’s 1.7mb/d by 13.4% y/y. Interestingly, Nigeria’s crude oil production remained well below OPEC+ quota for Q1-2022 which c.1.7mb/d (excluding condensates). The sustained downturn in the sector remains underpinned by perennial concerns of oil theft and pipeline vandalism. In addition, years of underinvestment in upstream infrastructure is beginning to weigh on output. Lastly, technical and cost issues associated with restarting production at wells previously shut during the pandemic have hindered a return to near-optimal output.
The Non-Oil Sector: A resilient growth story
The non-oil sector continues to remain the key driver of the nation’s growth since the start of the post-covid economic recovery. In Q1-2022, the non-oil sector expanded by 6.1% y/y, outperforming its Q1-2021 growth rate of 0.8% y/y as well as Q4-2021 growth rate of 4.7%.
The improved output of the non-oil sector was primarily driven by the Information & Communication sector (+12.1% y/y) reflecting broad-based improvement in telecoms fundamentals such as recovery in data and voice subscribers after a three-quarter hiatus, increased voice traffic as well as data traffic. In addition, the Trade sector (+6.5% y/y) contributed to the growth reflecting the low base from Q1-2021 (-2.4% y/y) as well as improved import activities underpinned by strong consumer demand. The Financial and Insurance (+23.2% y/y), Manufacturing (+5.9% y/y), and Agriculture (+3.2% y/y) subsectors also showed strong Q1-2022 growth performance, contributing significantly to the Q1-2022 growth performance of the nation’s non-oil sector. Overall, strong loan growth from Deposit Money Banks and Consumer lenders, improved access to inputs & stronger consumer demand, and the peak of the harvest season all contributed to healthy growth in the earlier mentioned sectors respectively.
Agricultural Sector: Harvest season finale supports output expansion
The agriculture sector grew by 3.2% y/y in Q1-2022, up from the 2.3% y/y growth recorded in Q1-2021 but down by 42bps, compared to a growth rate of 3.6% y/y recorded in Q4-2021, reflecting the seasonal impact of peak harvest season and festive food demand in Q4-2021). We consider the growth of the Agriculture sector in Q1-2021 impressive and reflects the positive impact of sustained CBN intervention in the sector, increased commercial private sector presence, and likelihood that the increasing supply gap in the global agriculture market may have created opportunities for stronger output. Lastly, we note that the final stretch of the harvest season was mainly in Q1-2022 which provided decent support for agriculture output. That said, the sector remains highly vulnerable to insecurity issues as the farmer-herder crisis and banditry activities in key food-producing states continue to hamper output and discourage farming activities. Across sub-sectors, the Crop Production, Livestock and Fishery sector grew by 3.0% y/y, 5.6% y/y and 3.1% y/y respectively.
Manufacturing Sector: Robust consumer demand supports fastest growth since 2014
The manufacturing sector expanded significantly by 5.9% y/y in Q1-2022, 3.6ppts higher than 2.3% y/y in Q4-2021 and 2.5ppts higher than Q1-2021’s 3.4% y/y. This reflects the sustained recovery in manufacturing activities thanks to an absence of pandemic-related restrictions and slightly improved supply chain bottlenecks, supported by improved consumer demand. The stronger consumer demand is reflective of rebound in consumer income as part-time workers have begun to recover jobs due to full recovery of manufacturing and hospitality businesses while wages per hour have gradually returned pre-pandemic levels. In addition, widespread adoption of consumer credit is a factor that possibly contributed to stronger consumer demand. Lastly, on the industrial side, sustained interventions from the CBN such as the N428.3bn Real Sector Support Facility (RSSF) disbursement in January and February provided further support for output growth in the manufacturing sector. Considering the aforementioned factors, it is unsurprising that the drivers of growth in the manufacturing sector were Food Beverage & Tobacco (+9.8% y/y), Cement (+9.6% y/y), Motor vehicles & assembly (+5.0% y/y) sectors, as well as strong growth in Chemical and Pharmaceutical Products (+10.3% y/y).
Outlook & Forecast: Output growth upbeat…Growth forecast raised to 2.9%
The GDP growth of 3.1% in Q1-2022 comes as a major positive surprise as it places the Nigerian economy on the path to outperforming our initial forecast of 2.4% for FY-2022. As a result, we re-evaluate the outperformance in the manufacturing and services sector as well as the steeper than expected weakness in the oil sector, resulting in a review of our growth forecast for 2022.
First, the outperformance of the manufacturing sector which helped bolster output growth of the non-oil industrial sector came as a positive surprise based on our initial projections. The outperformance was driven by faster recovery of consumer income as part-time jobs in manufacturing and hospitality recovered to near-pandemic levels while prior pandemic-wage cuts across small income jobs reversed. We consider these factors as fundamental significant shift in consumer demand, which would bolster output from the manufacturing sector. In addition, we expect supply-side bottlenecks will continue to be gradually resolved, creating easier access to input. However, we note that FX pressures will remain a headwind for the sector as CBN attempts to conserve its limited FX resources.
In the services sector, we maintain upbeat expectations on the sector as a key driver of growth for the non-oil sector and the economy overall. We expect the telecommunication sub-sector to be at the forefront of growth in the services sector as voice and data traffic is projected to climb higher. In addition, network providers are now allowed to register new SIMs which should provide additional boost for output growth relative to last year. However, we note that the NIN-SIM linkage hiatus could cause a slowdown in the interim until all active subscribers are restored back to normalcy. Furthermore, we expect loan creation in the financial services sector to continue to grow with Fintech lenders and new-age Consumer credit firms at the forefront of innovative credit features. This would remain a major boost to growth in the financial services sector. Lastly, the trade sector which has been a significant driver of the growth in the services sector is expected to record significant moderation going forward. The above average growth in the past four quarters have been supported by the low base from 2020 and Q1-2021 which is expected to wear off from Q2, subsequently forcing growth to align back with pre-pandemic average. Overall, we expect solid outing from ICT and Financial services to outweigh expected weakness in Trade.
For the Agricultural sector, we remain broadly upbeat for the rest of 2022. However, we note that seasonal impacts of the planting season will moderate output growth in Q2-2022 and Q3-2022 before festivities and start of the harvest season drives faster growth in Q4-2022. The drivers of output growth momentum will remain the country’s robust food demand while an increasing supply gap for key commodities in the global market could become an incentive for farmers to raise output to plug some of the gaps, thereby creating opportunity for above-average growth in the Agricultural sector. In addition, the apparent concern about a food crisis will see intervention funds deployment sustained with likely additions from international financiers. That said, we highlight the recent surge in cost of farm inputs (seeds & fertilizers) and recent scarcity of these items could be potential headwinds for output growth in the sector. Lastly, legacy issues around insecurity, agriculture infrastructure (storage & transport) and farming methods sponsors all drags that will continue to limit growth in the sector.
In the oil sector, we are now negative on our expectations for the sector. Oil theft and unabating pipeline vandalism have hindered Nigeria from reaching its production potential. For context, the CEO of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Mr. Gbenga Komolafe reiterated that only 71.0% of total crude oil production (estimated at 1.9mbpd) gets to the export terminals. This implies Nigeria is currently losing c.551,000bpd to oil theft and vandalism. It remains unclear what the governments roadmap to solving these challenges are. In addition, upstream projects that were expected to come on stream in 2022 appears to have stalled. That said, we expect the rate of contraction in the oil & gas sector will moderate for the rest of the year due to the lower base for crude production between Q2-2021 and Q4-2021.
Overall, we are more optimistic on economic growth for the Nigerian economy. We expect the non-oil sector to remain at the forefront of economic growth led by the Services and Agricultural sector. Due to the positive surprise of Q1-2022 and renewed optimism for the rest of the year, we raise our FY-2022E GDP growth forecast by 0.5ppt to 2.9%. Our growth forecast is lower than IMF’s forecast of 3.4% and World Bank’s forecast of 3.8%.