Nigeria: Recession deepens in Q3
November 21, 2016
Nigeria’s economy continued to weaken in the third quarter. GDP contracted 2.2% annually, marking a sharper drop than the 2.1% decline observed in the previous quarter. Q3’s reading, which marks the third consecutive contraction, surprised market expectations of a softer 2.0% drop. The print suggests that the economic headwinds the country is facing show no sign of abating and prospects of an economic recovery remain dim.
The third quarter reading was underpinned by a contraction in the oil sector, largely due to militant attacks on oil infrastructure. Oil output in Q3 slid from 1.69 million barrels per day (mbpd) in Q2 to 1.63 mbpd, which marks the fourth quarterly decline. Compared to the same quarter of the previous year, oil output declined 24.9% (Q3 2015: 2.17 mbpd) and the oil industry has contracted 22.01%.
The non-oil sector posted flat growth in Q3, reverting a trend of two consecutive declines. A contraction in manufacturing, construction, mining and quarrying and trade offset growth in information and communication and agriculture. The non-oil sector has been hampered by a crunch in foreign currency, the depreciation of the naira and ongoing foreign-exchange volatility.
Although the non-oil sector constitutes over 90% of the economy, there is little evidence to suggest that it could support an economic recovery. Razia Khan, senior economist at Standard Chartered, comments that the country is under pressure from various sources and that a recovery still remains elusive:
“While the flat non-oil GDP data marks some improvement versus previous quarters, there is little to suggest meaningfully improved economic momentum. With no evidence of improved FX liquidity, and the FX shortage still one of the key constraints on activity in Nigeria, we now expect negative growth to persist in Q4-2016 […] Important reforms, not least those centered on Nigeria’s FX market, are required to unlock faster and more sustained economic growth, in our views.”
A potential agreement between OPEC and non-OPEC members in November should support oil prices. However, dwindling oil output and the ongoing threat of militant attacks could offset some of these gains. Although the government and the Niger Delta Avengers militant group are currently negotiating a permanent ceasefire, it remains to be seen whether this will bear fruit. In turn, analysts agree that a recovery is conditional on the implementation of reforms and improving liquidity conditions in the economy, suggesting that another devaluation of the naira is needed.