- We at Fitch Solutions expect a temporary uptick in Nigeria’s oil production to bring real GDP growth to 2.3% in 2019, from 1.9% in 2018, though stagnating output thereafter will see growth slow to 2.1% in 2020.
- Fiscal constraints will continue to weigh on the government’s capacity to stimulate growth via capital expenditure, while private investors remain wary amid a lack of reform momentum.
- We expect stimulus from the Central Bank of Nigeria (CBN) and a minimum wage boost to provide tailwinds to private consumption, while noting that high unemployment and inflation will cap gains over the short term.
Growth Remaining Below Pre-Recession Levels
Nigeria – Real GDP
Fitch Solutions estimate/forecast. Source: National Bureau of Statistics, Fitch Solutions
A temporary uptick in Nigeria’s oil production will bring real GDP growth to 2.3% in 2019, from 1.9% in 2018, though stagnating output thereafter will see growth slow to 2.1% in 2020. Reduced attacks on oil pipelines have allowed Nigeria’s production to see a gradual recovery over the past two years, following a string of attacks in 2016 which, together with low oil prices, brought the economy into recession. With Total’s 200,000 barrels per day (b/d) Egina field having begun production in late 2018, our Oil & Gas team now forecasts crude oil production to rise by 3.3% over 2019. As oil accounts for over 90% of annual exports, rising production will bolster exports and broader real GDP growth over the coming quarters.
Moderating Oil Production Beyond 2019 Hampering Economic Expansion
Nigeria – Oil Production
f = Fitch Solutions forecast. Source: Nigerian National Petroleum Corporation, Fitch Solutions
However, this acceleration of oil export growth is unlikely to last into 2020. Following years of underinvestment due to lower oil prices and a lack of reform progress, our forecasts for average daily production of 2.12mn b/d in 2019 and 2.11mn b/d in 2020 are well below the 2010-15 average of 2.41mn b/d. With there being potential for domestic output to underperform as oil fields approach maturity, risks to exports and overall real GDP growth are tilted towards the downside (see ‘Nigerian Current Account Surplus Moderating Amid Stagnating Oil Exports’, July 31).
Fiscal constraints will also continue to weigh on the government’s capacity to stimulate growth via capital expenditure. With oil proceeds typically accounting for three-quarters of federal revenues, we expect higher output and prices to bolster public finances. However, the majority of public expenditure over the short term will be dedicated to current spending on security and public sector wages (see ‘Revenue Constraints Driving Nigerian Fiscal Deficit To Widen’, May 7). As such, while our Infrastructure team forecasts the construction sector’s growth to accelerate from 2.3% in 2018 to 3.4% in 2019 and 3.9% in 2020, this will remain below the 2011-15 average of 11.3%.
Sluggish Growth And Lack Of Reforms Weighing On Investor Sentiment
Nigeria Stock Exchange Index And MSCI Frontier EM Index, July 30 2018 = 100 (Left) And Operational Risk Index Scores, Out Of 100 (Right)
Note: Higher score in the right chart = lower risk. Source: Bloomberg, Fitch Solutions
Meanwhile, private sector investment will remain suppressed by a lack of reform momentum and an unattractive operating environment. Following President Muhammadu Buhari’s election for a second term in February 2019, the Central Bank of Nigeria (CBN) reiterated its intent to maintain the managed multiple exchange rate regime for the naira, which restricts currency liquidity for many firms and complicates business activity. Additionally, Buhari’s delay in not forming a cabinet until July has seen policy formation stall, echoing the situation after his 2015 election. These factors have contributed to driving down Nigerian stocks compared to other frontier markets, highlighting a lack of investor confidence. We also note that Nigeria scores worse than the EM average in most components of our Operational Risk Index, reflecting structural barriers to greater private investment.
CBN stimulus and a minimum wage boost will support private consumption, albeit to a limited extent. Amid sluggish credit growth, the CBN cut its benchmark interest rate by 50 basis points to 13.50% in March and implemented new measures aimed at boosting lending to the private sector in July (see ‘Central Bank Of Nigeria Holding Its Policy Rate Over The Short Term’, July 30). We expect these measures to help bring loan growth back into positive territory over the coming quarters, supporting an increase in private demand. Additionally, in April Buhari signed into law an increase in the monthly minimum wage from NGN18,000 to NGN30,000. We expect the eventual full implementation of the wage rise to help buoy consumption over the coming quarters.
High Unemployment Will Limit Gains To Private Consumption
Nigeria – Labour Force Population By Age Group And Unemployment Rate
Source: National Bureau of Statistics, Fitch Solutions
That said, with several headwinds persisting, private consumption will only improve to a limited extent, keeping real GDP growth below levels recorded before the 2016 recession. The unemployment rate stood at 23.1% in Q318 (latest data available), up from 7.8% in Q114, driven up by an oil-led economic downturn. Additionally, we forecast inflation to remain high in the near term, hitting an average 11.7% in 2019 and 12.4% in 2020, from 11.4% in 2018, with risks tilted to the upside. We believe these factors will continue to stymie purchasing power, keeping private consumption growth below potential.