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Q3 2018 GDP: Non-oil sector masks successive contraction in the Oil sector

• This morning, the NBS released Nigeria’s Q3 2018 GDP numbers. From the details provided, the Nigerian economy grew by 1.8% in Q3 18 YoY, higher than our estimate of 1.6% and Q2 growth of 1.5% YoY. The growth recorded was driven by improvement in the non-oil sector (+2.3%) as the oil sector posted its second consecutive contraction in 2018. The surprise for us was an expansion in trade sector, which contracted in Q1 and Q2 18, notwithstanding moderated FX issues experienced in the prior year.
• Non-Oil Sector sustains its lead:  In line with our expectation, non-oil sector supported overall economic expansion, growing 2.3% YoY in the third quarter of 2018 (Q2 18: 2% YoY). The numbers revealed improvement across all the sub-sectors, with the agriculture and the services topping the growth. In the Agric space, growth was recorded in crop production while livestock production which declined in the prior quarter YoY reverted to growth, causing the overall Agric sector to expand by 1.8% YoY (Q2 18: 1.2% YoY). In our minds, we think FG efforts to moderate the communal conflict in the food areas led to the expansion in crop production and livestock. Elsewhere, Services sector expanded by 3.4% YoY mirroring improvement in information and communications technology (ICT). For context, the Nigerian communications communication (NCC) revealed active subscribers, our proxy for callable minutes, improved by 15.8% while internet subscribers was up by 14% YoY in the review quarter.
• Elsewhere in the non-oil space, manufacturing sector grew by 1.9% YoY due to expansion in cement and food production. For us, the improved wage bill (employee compensation was up by 11% in FY 2017) as well as FX availability supported production in the sectors. Supporting this view, food and cement companies across our coverage universe reported mid to high single digit growth in volumes in Q3 2018. As earlier mentioned, the surprise for us was the expansion in trade segment ( +0.98 YoY) which remained in contraction in the first two quarters of 2018, notwithstanding the stability in the currency.
• Oil production improves, at the re-opening of Forcados. Oil output recovered in the third quarter, printing at 1.94mbpd (Q2 2018: 1.84mbpd) reflecting completion of repairs at the Trans-forcados and Trans-ramos lines which were closed for a while in Q2 due to leakages discovered. However, reflecting lower production relative to Q3 17 of 1.98mbpd, the sector contracted by 1.3% YoY.
• Q4 2018 – Low base to drive strong growth numbers. Over Q4 18, we expect a further expansion, supported by improved performance in both the oil and non-oil sectors. Accordingly, we expect the oil sector to grow by 9.3% (Q4 18E production: 2.1mbpd) buoyed by low base of oil production in the corresponding quarter of 2017. Also, we expect the non-oil sector to expand by 2.5% mainly supported by improved activities in Services and Agricultural sectors. Overall, the economy is expected to expand by 3.0% in Q4 18 which brings our FY 2018 economic growth to 2.1%.
• With output for the year closing on a strong note, the consideration for investors (especially offshore funds) and policy makers alike remains the impact of the current FX sales by the apex bank on the gross reserves and the possible reversal of such intervention post the 2019 elections. Specifically on Monetary policy, with its hawkish policy having little impact on growth during the year, we believe the focus of monetary policy going into 2019 will still remain FX and price stability, while the effort on driving growth would still be largely determined on level of stimulation from fiscal policy.