2020: Economy Set to Ride on Non-oil Sector for Growth

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The prospects for economic growth in 2020 seem bright, but the growth is expected to be fragile. As it was the case in 2019, non-oil sector driven by agriculture, ICT and manufacturing among others, will deliver the expected result, writes Bamidele Famoofo

The economy is expected to expand beyond the record achieved in 2019. Economic experts have predicted a modest 2.25 percent GDP growth for the economy in 2020, noting that key driver of growth in the fiscal year would be the non-oil sector. The non-oil sector continued to keep overall GDP afloat for much of 2019, having supported overall growth since Q2-18, amidst the weakness in the oil sector.

The non-oil sector grew on average by 1.99 per cent year on year over the first nine months of 2019, with strong performances recorded across all sub-components, save for trade with a negative of – 2.8% y/y, services and agriculture recorded a growth of 3.16 per cent and 2.42 per cent respectively as at third quarter of 2019. Construction’s contribution to growth as of Q3 2019 was 2.07 per cent while manufacturing added 0.59 per cent year on year to GDP.

“In 2019, the economy strengthened by an average of 2.17 percent y/y, riding the wave of strong performances from the non-oil sector (+1.99%) and a rebound in the oil sector (+4.07%). To start with, economic activities started on a strong footing, as GDP growth expanded by 2.10 per cent y/y in the first quarter, on the heels of a robust performance from the non-oil sector (+2.47%), while the oil sector (-1.64%) remained in a recession for the fifth consecutive quarter. As we had expected, a rebound in the oil sector and sustained aura in the non-oil sector underpinned the stronger economic expansion of +2.12 per cent y/y and +2.28 percent y/y in Q2-19 and Q3-19, respectively,’’ experts noted.

Non-Oil to the Rescue

Given an indication of a limited upside in the oil sector, a stronger non-oil sector growth is expected to drive the economy in 2020. Economic analysts at Cordros Research have predicted that the combination of extension of OPEC’s crude oil production cut agreement and unfavourable high base from 2019 look set to put a cap on oil sector growth next year. “Thus, our prognosis is that the non-oil sector will dictate the pace of growth over 2020. To be clear, we believe the FGN’s continued efforts to curb herders-farmers conflict would drive the agricultural sector back to its historical level. Meanwhile, the CBN’s push for higher credit to the private sector is expected to improve activities within the manufacturing space. Similarly, we expect the recently introduced payment service bank by the telecommunication sector to drive better performance in the service sector.’’

Agriculture

It is expected that sustained government intervention to make peace reign in some parts of the country especially in the North-East region, where agriculture is their main business will help boost domestic agriculture production and bridge the demand-supply gap in Nigeria in 2020. The various interventions on the part of the Central Bank of Nigeria (CBN) to enhance output in the agric sector is a major reason why experts believe that the sector will further boost GDP growth in the coming year. It would be recalled that the CBN has developed a “Commodity Development Initiative” to finance 10 commodities across the agricultural value chain.

Specifically, the CBN stated that it disbursed N171.60 billion towards the production of 10 commodities including but not limited to rice, oil palm, cotton, and cassava, which received N53.40 billion, N34.80 billion, N40.50 billion and N11.40 billion, respectively. ‘’Thus, we expect increased agricultural output in 2020. Hence, in modelling our growth expectation for the sector in 2020, we discounted our expected output growth by the identified downside risk factor when and where applicable. The identifiable risk factors include; (1) herders/farmers conflict, (2) banditry and (3) flooding in the food-producing state. On net, we expect agriculture sector growth to print at 2.75 percent in 2020,’’ the Cordros Research team said.

ICT

After an impressive performance in the services sector in 2019, a sustained trend is expected in 2020. Economic experts at Cordros Research said they expect the Information and Communication subsector to continue to drive the performance in the sector, as telecommunication subscribers are expected to increase by 10 per cent year on year in 2020.

Sustained level of innovation by telecommunication companies is believed to be the key driver of growth in the ICT sector in 2020. For instance, in a bid to solidify its position as the market leader, MTN has kick-started 5G trials, while Airtel and Glo are strategically positioned in the data space.

‘’Similarly, we expect the recently introduced payment service banks (PSB) to further support improved output in 2020. Elsewhere, we see room for decent growth in transportation and storage, while we maintain our view of a decline in the financial and insurance services, as well as real estate services. Hence, tying all together, we expect the service sector to growth by 3.86 percent in 2020.’’

Manufacturing to Win Big

Though the manufacturing sector grew marginally in 2019, following subdued growth across sub-component, CBN’s intensified effort to drive higher credit to the private sector, expectation for improved electricity supply following proposed cost-reflective electricity hike and waned competition from foreign and smuggled goods if the border closure is sustained are three major reasons why the sector will win big in 2020.

The CBN has demonstrated its commitment to increase funding to the manufacturing sector with its directive to commercial banks to maintain a loan to deposit ratio (LDR) of 60 per cent (the ratio shall be subject to quarterly review).

Based on the latest available statistics, credit to the private sector grew by 4.8 per cent year on year in second quarter of 2019, the highest since third quarter of 2016. Similarly, banking credit to the manufacturing sector in Q2-19 widened to 14.82 per cent y/y, the highest since Q1-17. According to the CBN, lending to manufacturing companies from May to the end of October totalled N459.7 billion ($1.3 billion), the most in two decades. It is therefore expected that the impact of lending to the sector will drive growth higher by 1.52 percent y/y. Overall; the expectation is that the manufacturing sector will grow by 1.16 percent y/y in 2020.

Higher Inflation

Inflationary pressure is not expected to abate in the coming year as a result of impact from border closure, electricity price hike and implementation of 7.5 per cent value added tax (VAT). Prices are also expected to firm across both food and core inflation.

If the projection of Cordros comes through, headline inflation will rise up to 12.77 per cent in 2020 from a forecast 11.40 per cent in 2019.

Despite pockets of deviation in some months, Nigeria’s headline inflation tempered for much of 2019, driven by muted core and food inflationary pressure. Notably, on account of the green harvest season, inflation dropped to a 43-month low in August 2019. However, inflationary pressure resurfaced in September as the impact of the land border closure by the FGN took a toll on food prices, given the thinner supply of food items. To underscore the scale of things, October m/m headline inflation printed 1.07 per cent, cascading to a y/y outturn of 11.61 percent, highest level in 18 months, and effectively wiping off gains recorded over 2019.

Capital inflows

The decline of flows to equities, given investors’ reticence towards investing in Nigeria’s equities amidst an absence of catalysts; might continue in 2020.

Analysts said two events are central in framing the outlook for capital flows in 2020. Firstly, if the trade dispute between the U.S and China remains unresolved through 2020, it should herald a new layer of uncertainties in both the developed and emerging markets. Given the damage done thus far, it is believed that global central bankers will remain largely hard-pressed to adopt further policy accommodation – to guard against the impact of slowing global growth. While the preceding should ordinarily help redirect flows to higher-yielding and fundamentally sound emerging and frontier market countries, ‘’we believe Nigeria might not be well-positioned to be a major recipient. This will leave the CBN in the precarious position of defending the currency in the face of accretion to the reserves from just oil receipts.’’

The second key event is the timing of the implementation of policies that could reignite interest in naira assets. Investors’ clamour for the implementation of more market-friendly reforms is yet to resonate with the government. In their defence, we believe the FGN will lose sleep over the perceived negative impact on the ordinary Nigerian.

While either of the deregulation of the downstream oil & gas sector or naira devaluation, should reignite investors’ interest in naira assets, the immediate impact on an already pressured consumer wallet will be far more reaching. “Our prognosis is that neither of the above will come to light in 2020. Against that backdrop, bias is for capital inflows to remain tame’’, researchers at Cordros hinted.