Weak oil production to drag GDP growth in Q3, full-year

Against the backdrop of the weak performance in Nigeria’s latest figures of the Gross Domestic Product, GDP, analysts have painted a hazy picture of the immediate future for the economy.

Giving its perspective to the economy’s short-term outlook, analysts at CardinalStone Finance, a Lagos-based investment house stated: ”The uninspiring performance in the oil and gas due to terminal shut-ins, pipeline maintenance, and ageing infrastructure led us to taper our oil production projections for the third quarter, Q3’23, to 1.3 million barrels per day (mb/d) from 1.5mb/d.

”This translates to an oil GDP projection of 8.3% Year-on-Year (YoY) in Q3’23 as against 25.0% YoY previous projection).

”However, we are optimistic about the last quarter of the year, as Seplat Petroleum Company has already completed drilling five oil wells, three of which are expected to begin production.

”Elsewhere, due to the robust performance of the non-oil sector, we maintained our initial forecast of 2.9% YoY for Q3’23.

”This view is premised on ICT-led growth in the services sector due to the accretive benefit of increased 4G and 5G network coverages and elevated CAPEX (Capital Expenditure) spending.

”In addition, we expect credit growth to remain elevated, supporting the outturn in the financial services sector.

”Finally, our outlook for the agriculture sector remains modest due to the prevailing security concerns in the country.

Giving an outlook perspective, Marvellous Adiele, Senior Associate at Parthian Partners, another Lagos-based investment house, stated: “Generally, while a 2.51% growth is positive, there are concerns around the sustainability of this growth trajectory, especially given the economic challenges we’re faced with as a nation.”

Also giving his short-term perspective of the GDP, David Adonri, Analyst and Executive Vice Chairman at Highcap Securities Limited, stated: ”Q3 2023 will indicate whether the economy is fast or slowly adjusting to the new policy direction of government.”

Meanwhile, the analysts at CardinalStone have put a caveat to the outlook expectations as follows: ”Elevated consumer prices will further weaken purchasing power, with negative pass-through to trade and FMCG (Fast Moving Consumer Goods) sectors.

”The elevated interest rate environment and dollar supply shortages will likely pressure manufacturing players.

”The elevated energy prices will likely lead to a recession in transport GDP due to the reduced number of cars on the road”.

Adiele, in a general comment on the GDP performance for Q2’23, stated: “The increase in Nigeria’s real GDP by 2.51% in Q2’2023 indicates a slight improvement in economic performance, compared to the Q1’s growth of 2.31 %, and can be seen as a positive sign, especially considering the challenging economic conditions the country has been facing.

“No doubt, the prevailing economic challenges – high inflation, increase in tariffs, FX instability, removal of fuel subsidy amongst others, contributed to the lower growth rate Y-o-Y”.

Commenting on the GDP, Adonri said: “The slightly positive GDP growth in Q2 2023 matches forecast by analysts. Planting season started early and some harvest occurred in areas with less banditry.

”However, the growth was propelled mainly by services. The productive sector remained troubled indicating that import dependence had not reduced”.

Also giving a general comment on the Q2’23 GDP figures, the analysts at CardinalStone stated: ”Economic traction was capped in the second quarter of the year, as sustained headwinds in the oil and gas sector led to a GDP growth of 2.5% YoY, defying analyst expectations of 2.8% YoY. The print was the lowest Q2 GDP growth since the exit from the pandemic.

”The oil sector (-13.4% YoY) shaved off about 80bps from growth, as average crude oil production (1.22mb/d) in the review quarter touched the second lowest point since 2013.
”We attribute the uninspiring oil outturn to the leakages in the Forcados terminals, ageing infrastructure and strike action by oil workers.

”On the non-oil front, the services sector remained robust, profiting from the 34.6% YoY increase in credit creation in the financial services sector (+26.8% YoY) and positive pass-through from increased cross-border activities and enhanced e-commerce channels in the trade sector (+2.4% YoY).

”Nevertheless, we highlighted some weaknesses in the ICT sector, which moderated to a 4- quarter low of 8.6% YoY, owing to a 2.8% YoY decline in telephone subscribers and a 3.2ppt reduction in teledensity.

”This moderation likely reflects the decrease in Work-From-Home (WFH) structures and less intensity on electronic channels since the availability of cash.

Elsewhere, agriculture output recorded a 1.5% YoY growth in Q2’23, rebounding from the Naira illiquidity-induced contraction in the first quarter of 2023.

”In addition, the manufacturing sector (+2.2% YoY) sustained a growth trajectory, owing to the expansion of product lines by some FMCG players.”

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