Economic Analysis - Underway Recovery Remains Susceptible To Downside Risk - FEB 2018

BMI View : A gradual recovery in Nigeria ' s oil sector will see economic activity continue to accelerate over the coming quarters. That being said, this recovery depends largely on further progress on exchange rate reform and continued stability in the traditionally volatile Niger Delta region.

A recovery in the Nigerian economy will entail real GDP growth accelerating in the years ahead, following a five-quarter recession. This will largely come on the back of an improving outlook for the country's dominant hydrocarbons industry, which we believe will benefit from both rising crude oil prices and increasing output. The central bank's decision to allow for more flexibility in its multiple exchange rate regime with the introduction of a free-floating exchange rate window (NAFEX) for portfolio investors and exporters in Q217 has also helped improve sentiment towards the region's largest economy. We now see growth reaching 3.0% and 3.5% in 2018 and 2019 respectively, up from a projected 1.5% in 2017. That being said, our outlook is predicated on progress towards a number of important reforms that are by no means guaranteed. As such, while we expect the economy will benefit from a cyclical upswing, we highlight that several potential downside risks could see us make negative revisions to our forecasts.

Growth Will Accelerate Going Forward
Nigeria - GDP
e/f = BMI estimate/forecast. Source: CBN, BMI

Oil Rally Has More To Offer

After driving Nigeria's economy out of recession in 2017, we believe the country's oil sector will offer further tailwinds to growth going forward. Crude oil has historically accounted for over 70% of government revenue and over 90% of total merchandise export value, meaning Nigeria suffered heavily during the collapse in prices between 2014 and 2016. However, with our Oil & Gas team anticipating that prices will now continue to rise to USD57.0/bbl and USD63.0/bbl in 2018 and 2019 respectively (from a nadir of USD45.1/bbl in 2016), we believe the country is firmly past the worst. The further growth in crude prices will not only support the government's ambitious plans for infrastructure investment ( see ' Budget Balance Beyond The Worst ' October 27), but will also help to improve access to foreign exchange. Low oil prices saw the supply of hard currency dry up in 2016, weighing on headline GDP growth as businesses struggled to access the dollars needed to buy the imports used in their supply chains.

Increasing Oil Production Will Support Headline Growth
Nigeria - Oil Prices & Production
Source: Bloomberg, BMI

Rising production in the oil sector will also help real GDP growth in 2018 as output continues to recover from the impact of a number of attacks carried out on major pipelines by the Niger Delta Avengers over 2016. Following an ongoing, albeit tentative, ceasefire between the government and insurgent group, our Oil & Gas team see overall crude output increasing by 4.8% over 2018.

Sentiment On The Up

With a recovery in Nigeria's oil sector well underway and the central bank's introduction of the NAFEX window having improved foreign exchange liquidity, we believe the wider economy will also benefit from a broader uptick in investor sentiment over the coming months. The low growth environment and concerns that a lack of hard currency in the economy would make it difficult to repatriate profits saw foreign investment decelerate in recent years. However, we expect that the scale of projects on offer for foreign investors, particularly in the infrastructure sector, will see the flow of capital into the economy begin to accelerate over the coming quarters now that liquidity pressures are starting to ease ( see ' Infrastructure: Outsized Rewards Offset Significant Risks ' , October 5).

Cannot Ignore Political Risks

While we are now largely more positive on Nigeria's economic outlook over the next two years than we have been since before the collapse in oil prices, there remain substantial downside risks that could see a slower recovery than the one we currently anticipate. For instance, our core view is for the central bank to consolidate its multiple exchange rate regime around a single, more flexible (albeit partly managed) rate. However, such a move would undoubtedly be subject to political considerations, with President Muhammadu Buhari having stated publicly his support for the official peg on several occasions. Similarly, the government's ceasefire with the Niger Delta Avengers is far from stable, and recent efforts at reaching a more substantive peace agreement have seen little progress ( see ' Delta Discord Raises Risk To Stability ' , October 04). Any return to violence would entail significant downsides for oil production, leading us to revise down our forecasts for the coming months.