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Economy: Another quarter of subdued growth

Economy: Another quarter of subdued growth

Growth slowed in 1Q19

Nigeria’s headline real GDP growth slowed to 1.9% in 1Q19 from 2.4% in 4Q18, largely due to a sharper contraction in oil production. Non-oil GDP growth also slowed marginally to 2.5% from 2.7% in 4Q18, reflecting the clearly subdued growth environment. Non-oil growth was again primarily driven by the continued boost from the telecom sector, after the one-off growth adjustment in 2Q18; the sector accounted for more than half non-oil growth in the quarter.

The picture is mixed on a sectoral level: while sectors like construction, agriculture, and transportation showed accelerated growth, this was masked by a disappointing performance in the finance sector, which contracted a sharp 8% Y-o-Y in 1Q19, as well as slowing growth in the key manufacturing and trade sectors.

Overhangs on growth to persist

The numbers reflected the subdued growth environment and came as no surprise given the sustained overhangs on economic growth. The toxic policy mix of a tight monetary policy, constrained fiscal space, and absence of structural reforms is clearly starving the economy of any fuel to kick-start a recovery. We remind readers that we were skeptical on the policy rate cut in March representing any serious easing in the monetary policy, a view that is supported by the still-elevated interest rates on Treasury bills. The re-election of President Buhari earlier this year and the recent reappointment of the CBN Governor points to policy continuation, hence we expect the subdued growth environment to sustain and we stick to our growth forecast of 2.5% in 2019. We note that non-oil growth in the coming quarter is likely to dip as the one-off adjustment to the telecom sector normalises and given the absence of structural reforms to boost the economy’s productivity.

MPC keeps rates on hold; CBN entertains more “unconventional policies” to revive growth .

The Monetary Policy Committee decided to keep policy rates unchanged in its meeting on Tuesday, noting the recent uptick in inflation and a less supportive global environment. Nevertheless, we see room for further policy rate cuts this year thanks to the more accommodative global monetary policy, which has provided a more benign environment for emerging and frontier economies.

This, together with rising oil prices, have provided the CBN with the ability to start accumulating foreign reserves again, in turn providing some room for marginal monetary easing. However, we don’t expect this potential easing to give much relief to the economy given the aforementioned policy overhangs. Against this background of subdued growth, the MPC’s communique hints that the CBN intends to continue playing an expanding role through unconventional policies to revive GDP growth. MPC members called on the CBN to come up with policies that would “promote consumer and mortgage lending”, in a reminder of the programme the CBN pushed last year aiming to avail lending for the manufacturing and agriculture sectors at below market rates.

More interestingly, the communique called on the CBN “to provide a mechanism to limit DMBs access to government securities” in order to stop crowding out the private sector. It is not clear how such a restriction would be implemented, but in all cases we don’t believe that it would necessarily lead to a pick-up in credit growth given: i) tight liquidity in the system thanks to the CBN’s tight monetary policy; and ii) banks’ risk aversion due to the poor macroeconomic backdrop.

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