GDP Growth: Non-Oil Sector to The Rescue

Nume Ekeghe writes on the recent gross domestic product report and the contribution of oil and non-oil sector to nation’s economy  
 
Last week, the National Bureau of Statistics (NBS) released the gross domestic products (GDP) report for the fourth quarter of 2022, showing a 3.52 per cent growth year-on-year (YoY) in Q4-22, as against the third quarter growth rate of 2.25 per cent.

The Q4-22 growth figure brought the 2022 full year growth print to 3.10 per cent lower than the 3.4 per cent that was printed for the 2021 full year. According to the NBS, the performance of the GDP in the fourth quarter of 2022 was driven mainly by the Services sector, which recorded a growth of 5.69 per cent and contributed 56.27 per cent to the aggregate GDP.

Although the Agriculture sector grew by 2.05 per cent in the reference period, its performance was significantly hampered by severe incidences of flood experienced across the country, accounting for lesser growth relative to the fourth quarter of 2021, which was 3.58 per cent. 

Moreover, the industry sector was yet challenged recording -0.94 per cent growth and contributing less to the aggregate GDP relative to the third quarter of 2022 and the fourth quarter of 2021. Overall, the performance of agriculture and industry reduced in 2022 relative to 2021, while the performance of the services sector improved in 2022.

According to analysts at Cordros Research, the growth print was primarily driven by the non-oil sector, reflecting gains associated with the sturdy telecommunication sub-sector’s performance, seasonality effect in agriculture, albeit limited by flooding incidents, manufacturing sector’s return to growth, and improved credit to the private sector.

The analysts noted that the positive contribution of the non-oil sector to the total GDP growth offset the negative contribution from the oil sector. In line with analysts’ expectations, the oil sector’s contraction moderated to 13.38 per cent year on year in Q4-22 reflecting higher crude oil production, an indication of the government’s efforts at tackling crude oil theft and vandalism in the review period.  
 
Oil Production Remains Subdued

A breakdown of the data provided by the Nigerian Upstream Regulatory Commission (NUPRC) showed that the Bonny, Forcados, Brass and Escravos terminals primarily contributed to the increased crude oil production in Q4-22 relative to Q3-22. Overall, crude oil production (including condensates) averaged 1.37 million barrels per day (mb/d) in on account of the synchronous impacts of massive oil theft and pipeline vandalism, retrenchment of large International Oil Companies (IOCs) from onshore oil exploration, and lagging impacts of decrepit infrastructure.

Analysts at Meristem said they anticipate increased oil production in 2023 hinged on intensified efforts by the Federal Government to combat the aforementioned challenges plaguing the sector and reopening of the forcados terminal. 

“In addition, Dangote Refinery which is expected to become operational in Q2: 2023 poses an upside to the growth expectation for the oil sector. Thus, we estimate an average oil production of 1.50mbpd for 2023 (9.49% higher than the average oil production for 2022). Also, while we anticipate OPEC’s supply cut to be muted in 2023, Russia’s planned oil supply cut by 500,000bpd as well as the reopening of the Chinese economy are expected to keep oil prices elevated thereby supporting Nigeria’s oil revenue,” the analysis observed.

Analysts at Cordros believe that,  “for Nigeria to achieve crude oil production up to the country’s OPEC+ production quota (1.83mb/d), the government would need to incentivise investment in new production capacity and invest in the proper training of indigenous firms to handle the divested IOC’s assets.”
 
Non-Oil Sector Driving Growth

Meanwhile, the non-oil sector continued to drive growth expanding by 4.84 per cent year on year in 2022 as against 4.44 per cent and -1.25 per cent in 2021 and 2020, respectively. The major catalysts to this growth were the Information and Communication, which was up 9.76 per cent, trade, which grew by 5.13 per cent, financial services which grew by 16.36 per cent and agriculture which was up by 1.88 per cent. 

Growth in the ICT sector was driven by increased mobile subscriber base due to the recovery of lost subscribers between 2020 and 2021 from the NIN-SIM data linkage exercised mandated by the Nigeria Communications Commission. Consequently, higher voice and data traffic bolstered the average revenue per user of the players in the industry.

Analysts said the expansion of 4G-network coverage as well as 5G-network rollout in some states are expected to result in increased data traffic. Additionally, higher fintech transaction volumes due to increased commercialization of fintech services as well as CBN’s cashless policy are expected to support the ICT sector in 2023.

Furthermore, the agriculture sector recorded a slower growth of 2.05 per cent in Q4 2022 compared to 3.58 per cent in Q4: 2021 owing to the post-harvest losses resulting from the flooding. Cumulatively, the sector grew by 1.88 in 2022 as against 2.13 per cent in 2021, as analysts say they expect the sector’s growth to remain slow in 2023 owing to continued insecurity challenges affecting the food-producing areas and persisting issues in the agricultural value chain.
 
Sectorial outlook

Analysts at Cordros said for the agriculture sector, they expect the increased security challenges associated with the build-up to the general elections to constrain farming activities, limiting agricultural output.

“Similarly, we expect the lower fertiliser usage arising from the lingering high prices to constrain farm activities, limiting crop production. “Therefore, we estimate that the Agriculture sector will grow by 1.88 per cent in Q1-23,” the analysts also said.

For the trade sub-sector, the analysts observed, “Domestic trade activities continue to witness intermittent disruptions in line with the policy maker’s back and forth on the deadlines for old high denomination notes to cease being legal tenders and cash crunch given the significantly low supply of new naira notes. More disturbing is the low-ticket transactions traders’ distrust of digital payments, slowing down their sales, more so that many buyers are experiencing cash shortages to pay for goods and services. 

“Consequently, unless there has been a drastic change in the composition of N1, 000 and N500 notes since December 2022 (which is unlikely in our view), we expect trading activities to be significantly hampered in the near term, more so that the supply of new notes remains low. Thus, we project the Trading sub-sector’s growth to moderate considerably to 1.21% y/y, weighing down the service sector.

“Away from Trade, we expect the ICT sub-sector to maintain its solid growth pace because of the continued strong voice and data traffic growth. However, the ICT’s growth is likely to moderate compared to the prior quarter, given the high base effects from the prior year’s corresponding period.

“Elsewhere, while the relatively improved macroeconomic environment would spur banks to maintain the current quantum of risk assets, the financial institution’s growth will likely moderate given the combined impact of tighter monetary conditions, which are likely to limit the growth of credit creation and unfavourable base effects from the prior year. Therefore, on a balance of factors, we expect the Service sector to grow by 2.68per cent.”

For manufacturing, analysts say aside from the high production costs exacerbated by high energy prices, elevated borrowing costs and FX constraints, they expect the lingering cash crunch to also negatively impact the manufacturing sector.

Cordros analysts said, “We understand that producers are now producing below capacity, given the low consumer spending associated with cash shortages and the cessation of NGN1000 and NGN500 as legal tenders. In addition, heightened uncertainties regarding the election outcome are also expected to limit production in Q1-23. Accordingly, we forecast a 1.57 per cent growth in the manufacturing sector in Q1-23.
 
Split 2023 growth forecast

In all analysts are split in their GDP growth forecast for 2023. Earlier this year, the World Bank had cut Nigeria’s projected growth in its Nigeria development update to 2.9 per cent from 3.1 per cent, citing the downturn in its oil sector as well as the aftermath of rising insecurity and flooding in the country.

Analysts at Cowry Assets Management remained optimistic about the nation’s economy, reviewing forecast for the country upwards to 3.74 per cent for 2023 as against an earlier projection of 2.9 per cent. Similarly, analysts at FBN Quest remained optimistic with a 3.2 per cent projection for 2023 year end.

On the other hand, analysts at Afrinvest West Africa said they expect the country’s economy to grow by 2.99 year on year in 2023, while analysts at Meristem and Cordros Research were more pessimistic with a 2.7 per cent growth expectation.