November 28, 2019

Patience for the economy to grind through the gears

The economy has been bumping along the bottom since the start of 2015. Real growth has been positive year on year (y/y) for nine successive quarters through to Q2 2019’s underwhelming 1.9 percent but is contracting when adjusted for the demographics. Elsewhere in the sub-region (Côte d’Ivoire, Ghana and Senegal for example), there has been a solid track record of increasing per head incomes. We have all seen the headlines about Nigeria replacing India as the poverty capital of the world.

In this column we are going to extract data from the latest national accounts for Q2, and attempt to draw some conclusions. We are working with the output series since it is more current than the expenditure-based data. Our first point is the evidence of subdued household demand, which represents 77 percent of GDP. We can see from the trade segment, which has contracted in three of the past six quarters and not managed more than 1.0 percent y/y in the other three, that household budgets are under pressure.

For further evidence, we need look no further than manufacturing, which in Nigeria is synonymous with consumer goods industries. The sector contracted by -0.1 percent y/y in Q2, and its largest component (food, beverages and tobacco) grew by just 1.2 percent. Without opening the can of worms that is methodology, we wonder at headline PMI readings in the mid-fifties.

For a brief digression from the path, we often hear that prominent multinationals in the space, particularly those producing food goods, enjoy some protection from competition by virtue of their iconic brands. It was put to us at a discussion group last week that the average age in Nigeria is now +/- 20 years and that therefore nostalgic memories of Lever Brothers in the 1960s and 1970s carry little marketing weight in the face of changing tastes, not forgetting social media.

Probably, the greatest disappointment in the national accounts is the underperformance of the largest sector, agriculture, which has averaged growth of only 2.3 percent y/y over the last six quarters. We should remember that, almost alone among sectors, government policy has changed little over the past two administrations. This continuity would appear to have made limited impact. Also, agriculture has been the main beneficiary of CBN funding over the past three governors. Most likely, insecurity in food growing areas has been costly, and headline investments in export crops such as cashew nuts and sesame seeds form a small part of the overall picture.

We can pontificate about the scale of the returns on the CBN’s development finance initiatives. Yet, if the banks are reluctant to lend to the sector and the private sector has reservations about investing, then we should expect a continuation and even acceleration of those initiatives.

In contrast with agriculture, information and telecommunications (I&T) has grown at an average of 9.5 percent y/y over the same six quarters. Telecoms has taken the lead, proving the point that, rather than being a luxury item, the mobile phone is a core element of the household budget. Fintech has also provided a boost. The two largest mobile operators, MTN Nigeria and Airtel, are applying for licenses as payment service banks, which shows that they are excited by the market opportunities despite the operational and political challenges in the field.

Motion pictures, sound recording and music production are another element of I&T, representing 0.9 percent of current price GDP. We hear that Nollywood is larger than Bollywood in terms of films produced but do not see the evidence in the official data.

When we are looking for the government input in the national accounts, we highlight the transportation and storage sector. Road transport, its pre-eminent segment, has expanded by an average of 15.0 percent y/y over the period. The capital expenditure of the Federal Government of Nigeria (FGN) has been the driver of this rapid growth off a low base, and will remain so.

This brings us back to our familiar argument that the FGN has to invest heavily in roads, power and other infrastructure if it is to diversify the economy (and make it less dependent upon movements in oil revenue). The local banks, the Development Finance Institutions, the donor community and private equity can all contribute but ultimately, the FGN has to take the lead because of the scale of the challenge. Since its revenue collection is far short of its requirements for this investment, it has to borrow. If that means tapping the Eurobond market again in the current favourable conditions, then so be it.

Our story in conclusion is that the economy will continue to bump along the bottom for the next two to three years as household budgets are slowly rebuilt. At some stage, the new national minimum wage will help, as will the FGN’s capital releases. While our growth forecast for this year (2.5 percent) is marginally ahead of the CBN’s 2.3 percent and the IMF’s 2.1 percent, we urge patience. The economy is too large, the neglect has been too great and the limitations imposed by the current federal system are too many for the transformation, if it comes, to be any faster.

 

Gregory Kronsten

Head, Macroeconomic & Fixed Income Research

FBNQuest