Industry Trend Analysis - Tepid Recovery Driven By Government - MAR 2018

BMI View: Nigeria's construction sector will see stronger growth over 2018 following a weak recovery in 2017, which will be driven by government expenditure on the back of higher oil revenues While we forecast the private sector's investments in construction projects to improve marginally, further naira devaluation will to keep economic pressure on businesses high, and a continued lack of reform in the infrastructure sector means risks remain too high.

Latest Updates

  • We are maintaining our forecasts for Nigeria's construction sector real growth over 2018 and our full 10-year forecast. The industry will enjoy an acceleration in real growth at 5.5% y-o-y in 2018.
  • We believe that an eagerness on behalf of the government to be seen as making progress on infrastructure goals will see some projects move forwards, although we do note the downside risk from the upcoming 2019 elections may divert government attention away from the sector just as economic conditions in the country begin to improve.
  • Nigeria will continue to benefit from external support from the likes of the African Development Bank, which has announced it expects to loan Nigeria an additional USD2bn for largely infrastructure investments. Chinese backed projects are also likely to continue apace.

Structural Trends

The Nigerian construction sector will gather pace in 2018, but remain weak up to 2020 in comparison to historical growth levels. Driving the recovery in 2018 will be the rise in both global oil prices and Nigeria's oil production, both of which will serve to bolster government revenues and allow it to pursue a greater share planned infrastructure investments. Furthermore, reform to the country's multiple exchange rate regime in H118 will not only boost access to hard currency but also offer tailwinds to investor sentiment during this period, which will begin the revival in private sector interest in capital investment. However, on both public and private investment fronts, we do not expect a sudden rush of project activity; for the government, it is unlikely that we will see a vast improvement in the disbursement of funding for projects which has dogged the sector over recent years; for the private sector, business conditions will remain challenging as currency weakness and inflation persist and there remain few attractive avenues for private investment into infrastructure projects.

For public sector investment, government expenditure on infrastructure and housing will be a major beneficiary of an increase in oil revenues. BMI's Oil and Gas team forecasts an annual average Brent price of USD65/bbl over 2018, rising to USD69 and USD72/bbl in 2019 and 2020 respectively. Crude oil has traditionally accounted for around 65.0% of fiscal revenues, so we expect that the 60.4% increase in the price of Brent since June 2017 will offer substantial tailwinds to economic activity in the form of public investment and government consumption. We see government spending growing by 11.9% in 2018, compared to an estimated 6.0% increase in 2017, with a 20.0% rise in capital spending expected to support economic growth. Aside from the benefits of higher oil prices, rising oil production will also offer tailwinds to Nigeria's economic outlook with a 3.1% increase in crude production over 2018 as output continues to recover from a series of pipeline attacks in 2016.

Continued Recovery In 2018
Nigeria - Construction Industry Value, NGNbn & Real Growth, % Chg y-o-y
e/f = BMI estimate/forecast. Source: National Bureau of Statistics, BMI

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