Nigeria’s economy driven by the highest quarterly exports in three years, the current account surplus rose to ₦1.2 trillion in Q3’17 (Q1’17: ₦719 billion, Q2’17: ₦506 billion), the highest since the 2014 oil price slump. The quarter’s performance was helped by a simultaneous increase in exports – ₦3.1 trillion to ₦3.6 trillion – and moderation in imports – ₦2.6 trillion to ₦2.4 trillion compared to Q2’17.
Oil recovery buoys current account
Accounting for 83% of total exports (previous: 78%), the surge in crude exports was the main driver of Nigeria’s strong export performance. With oil prices little changed q/q ($52.19/bbl in Q3’17 vs. $50.79/bbl in Q2’17), stronger oil earnings came on the back of continued improvements in domestic oil production. According to the Ministry of Petroleum Resources, average oil production for the quarter rose from 1.87 mb/d in Q2’17 to 2.03 mb/d in Q3’17, touching a 2017-high of 2.08 mb/d in August.
In terms of export destinations, India (19%) remains Nigeria’s most important crude oil buyer, though the United States (15%) increased their crude imports from Nigeria by 66% q/q. Relatively stronger oil prices in the final quarter of the year (average of $60.26/bbl in October and November) and stable oil production (average: 2.03 mb/d in October and November) point towards another strong export performance for Q4’17. Going into 2018, stronger full-year oil output numbers (forecast: 2.10 mb/d) and relatively healthy global oil prices (IMF forecast: $51.00/bbl) would buoy Nigeria’s exports.
At just ₦126 billion and 3.5% of total exports, Nigeria’s Q3’17 non-oil exports came in at their weakest in 2017. This highlights the limited impact of endeavours aimed at diversifying Nigeria’s export revenues, such as the Zero-oil initiative. It also reflects the natural lag of reaping the fruit of non-oil export initiatives and the long road to diversification.
Moreover, we note that there are positive signposts on the route. The review and revival of the Export Expansion Grant (EEG) at the start of 2017 and stable budgetary allocations (₦20 billion) should provide tax incentives for prospective exporters.
Furthermore, the proposed $1 billion Badeggi Export Processing Zone (EPZ) in Niger State could significantly boost access to market for Nigeria’s key agriculture produce such as rice, yam, and maize. Whilst the EPZ is slated to open in 2018, challenges with securing counterpart funding ($250 million provided by Turkish partners) may delay the process. Nevertheless, we stress the potential of well-executed EPZs in providing a stable platform for the diversification of export revenues.
Imports dip on lower fuel cargos
Nigeria’s imports have hovered around the average of ₦2.4 trillion in the quarters since devaluation (Q2’16). It is noteworthy that the improvement in foreign exchange liquidity in the two most recent quarters has had a very little effect on Nigeria’s goods imports, in comparison to capital inflows and services which have both increased.
Premium motor spirit (PMS) accounted for 20% in the quarter, unchanged from Q2’17. But imports of PMS in Q3’17 were 6% and 14% lower than the corresponding values in Q1’17 and Q2’17 respectively. This decline is consistent with lower product truckout as reported by Nigerian National Petroleum Corporation (NNPC) in Q3’17 – 31 million litres per day vs. 39 million litres per day in Q2’17.
We note that NNPC has been close to the sole importer of PMS in 2017 as a result of relatively high global crude oil prices (compared to the NNPC pricing template benchmark) which have made product importation uneconomic for independent marketers.
Strong FY’17 current account surplus in sight
Crude oil sales will continue to drive Nigeria’s current account and given our positive outlook on this front, we foresee current account coming in strong going forward. If Q4’17 is as good as even the weakest quarter seen so far in 2017 (Q2), FY’17 current account surplus would be the highest since oil prices slumped in 2014 – reflecting the conclusion of Nigeria’s current account cycle since that point.
Despite this, we note that 2014 current account surplus was still significantly stronger (₦8.9 trillion vs. 2017 ytd: ₦2.4 trillion) and looks unattainable in the short-term given prevailing oil prices. On the import front, we expect relatively high global energy prices to slightly increase the value of imports given the price inelasticity of petroleum product demand. Overall, we expect Nigeria’s recovering current account to support dollar inflows.