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Oil sector headwinds slowed economic growth in 2018 -Report

*Oil to trade between $55 and $60pb in 2019 …Agriculture to sustain non-oil sector growth in 2019

Meristem Research, in its 2019 Outlook, has indicated that improved activities across major sectors kept the Nigerian economy on the path of growth in 2018, though at a slower pace than in 2017.

According to the National Bureau of Statistics (NBS), the economy grew by 1.95 per cent, 1.50 per cent and 1.81 per cent in the first, second and third quarters respectively.

Meristem noted that the gradual improvement in the non-oil sector supported the overall growth, in contrast to the decline in the oil sector, especially in the second quarter of 2018.

Oil sector growth contracted 3.5% in 2018

Meristem Research, noted that the oil sector’s growth for Q1:2018 came in stronger at 14.77 per cent than the 11.20 per cent growth in Q4:2017, following better production volumes as export activities continued smoothly on the Forcados terminal which resumed production late in 2017. The sector’s growth was also supported by the increased oil prices during the quarter. However, the shut-down of the Nembe Creek Trunk Line (NCTL) and Trans Escravos Pipeline due to leakages contributed to the moderated oil production levels in the second quarter of 2018. On the other hand, oil prices continued its upward trajectory, reaching a high of USD79.80pb in May.

Despite the higher crude oil prices, the moderated production levels impacted the oil sector’s growth during the period, as it contracted by 3.95 per cent YoY. The sector however gradually regained momentum in the third quarter, as the resumption in activities across key pipelines supported production levels, raising it to 1.94MMbpd.

We expect oil production to continue to trend upwards in 2019, supported by the planned resumption of export from the Egina oil field, which should bring on board about 100,000 barrels of oil a day. The possibility of disruption from pipeline vandalism and militant attacks, however, is a downside risk to our outlook.

Oil to trade between $55 and $60pb in 2019

The rising US shale oil production, expected moderation in global oil demand growth and the gradual movement to alternative source of energy may keep oil prices below USD70.00pb in 2019. Asides the 1.2MMbpd OPEC+ cut as concluded in December 2018, we expect OPEC to closely monitor the energy market and have a rebalancing strategy in order to forestall any fall below USD50.00pb. The rising geopolitical tensions and the possibility of any occurrence of natural disasters may temper oil supply, and subsequently support oil price movement. We therefore expect average oil price to range between USD55pb -USD60pb in 2019.

On the production side, the upcoming 2019 election puts the resumption of militant activities as a risk on current production levels. However, barring any disruption episodes in the year, production is expected to continue to trend upwards. 2019 production outlook is also supported by the resumption of oil production from Total’s Egina oil field, which is expected to bring about 200,000bpd of oil to the market, and sustain Nigeria’s production above 2.00MMbpd in 2019. The downside, however, remains the decision by OPEC + to cap Nigeria’s oil production at 1.685MMbpd excluding condensates, which roughly equals to 1.8MMbpd including condensates. The eventual compliment may moderate the planned production levels.

Non-oil sector growth to be sustained by agriculture

It was noted that the non-oil sector expanded marginally by 0.76 per cent in the first quarter of 2018 . The sector’s performance, however, improved in the second and third quarters of 2018, recording respective growths of 2.05 per cent and 2.32 per cent following faster growth in the agriculture, manufacturing and services sectors. The sustained CBN intervention and FX liquidity eased business activities for real sector players, hence, contributing to the improvement across businesses in the manufacturing space. The increased level of business activities was reflected in the manufacturing PMI, which stayed above 50.0pts throughout 2018 to peg at 57.9pts in November 2018 (vs. 55.9pts in November 2017).

It said the slow growth of the agriculture sector, which expanded by 3.00 per cent (vs 4.23 per cent in Q4:2017) and 1.19 per cent YoY in the first and second quarters of 2018, was a major drag to the non-oil sector’s performance. The pre-planting season, characterized by low inventory of agricultural produce, and the ongoing conflicts between farmers and herdsmen contributed majorly to the low output of both the crop production and livestock sub-sectors.

“Going forward, however, the decline in herdsmen conflicts, coupled with the harvest season contributed greatly to the improvement in the sector. Also, the focus given to agriculture in the ERGP has contributed to increased investments within the sector, while the implementation of the Anchor Borrowers’ Programme fostered increased agricultural output; the CBN stated that 862,069 farmers across 16 different commodities have so far benefitted from this programme.”

It further noted that the CBN’s restriction on 41 imported items promoted local production of some major agriculture products like rice, tomatoes, among others, thus, supporting the growth of the sector in the year.

It said that major investments expected in 2019 such as the Agritech innovation investment by the African Development Bank (AfDB), should further support capacity within the sector and ultimately drive increased agricultural output.

Also, the Outlook noted that the on-going support from policies like the Anchor Borrowers’ Programme and the Agriculture Promotion Policy should also support participation within the sector. The continued herdsmen and farmers’ conflict, which may intensify due to the upcoming elections, and the flooding cases are major downside risks to growth from the sector.

Government, private spending and investment to support growth

Improved economic activities supported the growth in both government and private consumption in 2017. According to the NBS, the real household and government consumption declined by 0.99 per cennt YoY in 2017. However, this was still higher than the 5.71 per cent contraction in 2016.
2018 was definitely a better year; the upward trend in oil prices for the major part of the year, relatively better production levels and the increased government borrowings should have supported the planned CAPEX for the year, hence, increasing government expenditure.

Economy to growth at 2.4%

Given our outlook on oil prices, we expect the CBN to continue its intervention in the FX market, thereby sustaining liquidity and attracting more investment in the real sector. We also envisage increased growth in the ICT sector, particularly after the elections, as more investors continue to invest in startups and mid-market businesses. The services sector should also be supported by the CBN’s growth agenda in 2019, which may necessitate increased collaboration with Fintechs. This, alongside our outlook on agriculture sector, should further sustain the non-oil sector’s growth in 2019, albeit moderately it said.

For the oil sector, the upcoming 2019 election puts the resumption of militant activities as a risk on current production levels. However, barring any disruption episode in the year, production is projected to continue to trend upwards. Total’s Egina oil field which is projected to add c.100, 000bpd oil into the market should also support 2019 production levels. The decision by OPEC + to cap Nigeria’s oil production at 1.685MMbpd excluding condensates, which roughly equals to 1.8MMbpd including condensates may moderate the planned production levels, if adhered to. We however project an average production of 1.98MMbpd in 2019. As previously discussed, we expect average oil prices to range between USD55.00- USD60.00pb in 2019.

On the back of this, our 2018 and 2019 growth projections therefore stand at 1.75 per cent and 2.14 per cent respectively. The major downside risk, however, remains the uncertainties regarding the upcoming elections, which may continue to limit inflows and investments.

Federally collected revenue fell short of projected amount

The federally collected revenue fell short of the projected amount, with only 53 per cent of the target achieved as at the end of the third quarter of 2018. While crude oil price was favourable at an average of USD72.76pb as at the end of the third quarter (47 per cent higher than the budget benchmark of USD51pb), a shortfall in production from the target, due to closure of some key pipelines in the second quarter of the year led to the drop in crude production from 2.00bpd in Q1:2018 to 1.84bpd in Q2:2018, before a slight pick-up in Q3:2018 to 1.94MMbpd. Hence, federally collected revenue stood at N2.84trillion as at Q3:2018, 53.00 per cent of the sum projected in the budget. The share of oil revenue stood at N1.5trillion, 53.17 per cent of the total revenue, while Company Income Tax, Value added Tax, and Customs Collection make up 17.62 per cent, 3.53 per cent, and 8.09 per cent respectively.