FBNQest Capital an arm of First Bank Holding has said that Nigerian economy is breathing very slowly. This is reflected in the Manager Purchasing Index PMI, conducted by it in the Month of June. The survey showed that the headline PMI reading rose very marginally from 49.2 to 49.8 in June. Most respondents, although a decreasing proportion, reported no change across the sub-indices.
it said “our trigger questions show that seasonal effects (the rainy season) appear to have kicked in. Generally, logistics issues arise during the rainy season as manufacturers experience challenges with transporting their inputs for production as well as finished goods to consumers. Furthermore, similar to previous months, consumer demand remains soft and manufacturers uncertain about consumption patterns. Despite the obvious easing of inflationary pressures, household demand is subdued. However, we did notice that some manufacturers may be struggling due to the influx of competitively-priced products from China. On the supply side, imported inputs and finished goods remain accessible as the CBN’s foreign exchange reforms have resulted in improved forex availability.
“This reading retreated from 47.5 to 45 in June. There was a significant shift from respondents reporting no change to lower output. The proportion of no change responses accounted for 40 per cent, compared with 69 per cent recorded in May. Our trigger questions tell us that for specific imported inputs, government policies geared towards import controls slowed production activity. Additionally, seasonal effects (the rainy season) have affected transport logistics and contributed to reduced patronage.
According to FBNQuest “we expect the economy to be relatively stable this year and for second quarter of 2018 our GDP growth projection, subject to revision in the very short term, is 2.4 per cent y/y. This is based upon a modest boost from the oil economy on base effects and a slightly better performance from the non-oil economy. For the following quarters, it would be naïve not to expect any fiscal stimulus in this pre-election year: such features in the official Economic Recovery and Growth Plan 2017-2020. That said, the impact has been overstated in many forecasts and scenarios.
“The CBN’s foreign exchange reforms have exceeded all expectations (including its own) by making forex freely available. Its windows include: spot and forward sales to banks for the use of importers; further sales to banks at N357 per US dollar for the use of the retail segment for travel, medical and educational bills; sales to the bureaux de change; sales to SMEs; and NAFEX (the investors’ and exporters’ window). There is negligible domestic pressure for the CBN to unify the rates, and a change would be highly unlikely before the election in February 2019. Meanwhile, the proposed currency swap with China remains topical among manufacturers, specifically those within the textile industry who are optimistic that payment for importing raw materials from China with the CNY as opposed to the USD could cut their costs by more than 50%.
It further said “the cost of self-generation continues to weigh heavily on businesses. We understand that self-generation accounts for at least 40% of manufacturers’ operating costs. A survey carried out by the Manufacturers Association of Nigeria (MAN) revealed that N130bn was spent on self-generated energy in 2016. The FGN currently estimates national energy demand at 22,560 megawatts (MW). Meanwhile, power generation capacity from the grid is c.7,000MW while distribution capacity is still c.5,000MW. The daily report from the Transmission Company of Nigeria for 29 June shows peak and lowest generation on the day at 4,690MW and 3,295MW. Until power shortages are curbed to a bare minimum, the manufacturing sector will continue to struggle with operating costs, profit maximization and the ability to scale up. Perhaps, the FGN’s plans to diversify the country’s energy source through investments in renewable energy will bring some relief to the sector.
“This reading was somewhat flat, inching up marginally to 49 from 48.5 recorded in May. Both large and small companies reported a deterioration in employment. As for medium-sized companies, we noticed a considerable increase. However, respondents reporting no change remained high at 70% of the total, compared with 87% in May. It appears to us that most manufacturers have adopted a wait-and-see approach regarding additional recruitment. The authorities have made good strides in improving the country’s business environment, which is evident from the World Bank Group’s latest Doing Business report. However, structural issues continue to stifle business expansion and some manufacturers struggle to break even. The labour force report from the NBS for Q3 2017 shows a rise in the national unemployment rate from 13.9% in Q3 2016 to 18.8% one year later. This latest rate increases to 40.0% when we add the underemployed. The reading for new orders, the most forward-looking of the five sub-indices, rose marginally from 50 to 50.5 in June. The medium- size companies reported the best results in June. Respondents under the model of our choice (the ISM’s in the US) are not asked to distinguish between domestic and export orders.
According to the CBN, non-oil products accounted for 6.6% of total merchandise exports in Q4 2017, compared with 6.8% for the year-earlier period. The MAN has been vocal in its support of the FGN’s decision to decline signing off on the African Continental Free Trade Area (AfCFTA). While the agreement may appear attractive for a country like Nigeria which is still developing its manufacturing sector and is far from being a fully export-oriented country, it could hurt domestic producers and frustrate the FGN’s efforts to build a solid industrial base. The FGN decided at the last minute not to sign the pact in Kigali although the door is open until September or later for its signature.
“The implementation of the re-introduced export expansion grant (EEG) has been slow; N20 billion was set aside for the EEG in 2017 budget. For 2018, the FGN has set an allocation of N13.3 billion. This question is inverted for respondents (i.e. a fall in delivery times is a positive indicator). In June the reading surged from 50.5 to 57. The increase was again felt mainly by the medium-sized firms, and the percentage of no change responses declined from 83% to 66% in the month. This reading declined in June from 49.5 to 47.5. The trend was visible across all company sizes. No change was again the most popular response, which points to the cautious approach manufacturers have adopted to manage the apparent soft demand”.
