The economic crisis is taking a serious toll on the manufacturing sector
Kunle Aderinokun
Analysts at FBNQuest Ltd, an investment and asset management subsidiary of FBN Holdings Ltd, have predicted that, in the second quarter of this year, the economy would record a negative GDP growth rate of -2.9 per cent year-on-year, showing further contraction of the economy from -0.36 per cent of the first quarter (Q1).
The FBNQuest analysts attributed the envisaged contraction in the economy to further contraction in the oil sector, occasioned by the intensified militant activities against Nigeria’s oil assets in the Niger Delta in recent times, which have drastically affected oil production and exports, coupled with the prevalent volatility in crude oil prices at the international market and its attendant effect on the nation’s oil revenue base.
Besides, they pointed out that the prevalent negative effect of the forex crisis on the non-oil sector would contribute to the negative GDP output in Q2.
According to them, “For Q2, we see negative GDP growth of -2.9 per cent year-on-year. The contraction of the oil sector is set to accelerate (from -1.9 per cent year-on-year in Q1), given the sharp rise in pipeline sabotage. The fx and other prevalent shortages will continue to weigh heavily upon most non-oil sectors.”
The FBNQuest forecast is aligning with the Central Bank of Nigeria estimate and warning that the Nigerian economy might further contract in the second quarter (Q2) of this year into a full blown recession, as some of the conditions which led to the contraction in GDP growth rate in the first quarter remained largely unresolved. The Nigerian economy contracted by about -4 per cent in the first quarter of 2016, signalling the deteriorating economic conditions in the country and its first economic contraction in 25 years.
According to the banking regulatory authority, which alluded to this when its monetary policy committee met and made decisions on the economy, weak outlook for growth, which was signalled in July 2015 when it warned of the risk of a recession, could extend to the second quarter of 2016.
It blamed the delayed passage of the 2016 budget for constraining the much-desired fiscal stimulus, which edged the economy towards contractionary output.
In a similar vein, the Director General, West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, in reacting to the MPC decisions, had also stated “the economy would soon enter a recessionary phase based on the recent negative GDP growth in the first quarter of 2016 released by the National Bureau of Statistics.”
Ekpo feared that once the economy entered the recessionary phase, “monetary policy would become ‘ineffective’ in managing the economy.”
Nevertheless, the FBNQuest analysts highlighted the five worst performing sectors from the national accounts for Q1 2016. “We include what the NBS terms activity sectors, which are often subdivided into segments, and only those accounting for at least 1 per cent of GDP at constant basic prices. For the larger picture, the NBS report shows that the primary sector (agriculture) expanded by 3.1 per cent y/y and the tertiary (services) by 0.8 per cent, while the secondary contracted by -5.5 per cent,” they said.
The analysts pointed out that this last underperformance was largely due to manufacturing and construction.
According to them, “Manufacturing contracted by -7.0 per cent y/y in Q1, and its largest segment (food, beverages and tobacco) even more rapidly, by -11.2 per cent. In this context, we would highlight the fx scarcity as the principal driver.
“Construction contracted by -5.4 per cent y/y, and its main players will be hoping that the FGN can release funds soon for its capital programmes, which are projected to consume as much as N1.6trillion in the 2016 budget. At this point, full delivery appears unlikely.
“Services expanded modestly in Q1 despite the swing from growth of 6.4 per cent y/y in Q4 to contraction of -11.3% in finance and insurance. We link this steep decline to a combination of substantial fx-denominated loan books, general challenges over asset quality and headcount reductions.”
