GDP growth has recovered its momentum to a provisional 7.7% y/y in Q4 from 6.8% the previous quarter and 7.0% in the year-earlier period. For the non-oil economy growth of 8.7% y/y compares with 8.0% and 8.2% respectively. These figures were quoted in last week’s communiqué from the monetary policy committee, which cited the National Bureau of Statistics (NBS). (The bureau has yet to publish its report for Q4.)
These are stellar figures, which match China’s growth in the same quarter. They invite scepticism because they tell a story of robust private consumption. Given the dearth of consumption indicators, the figures are challenged per se. Additionally, the results of most listed companies in the consumer goods sector point to still soft demand. A common theme in their commentary after their latest results has been the negative impact on consumption of the fuel subsidy reduction in January 2012 and the insecurity in the north. These companies, however, do not mirror the sub-segment, which includes a large number of unlisted firms of all sizes.
Five sectors achieved double-digit y/y growth in Q3 according to the NBS. We will read across from the sectors to listed companies and demand. Telecommunications and post achieved 24.2%. The sector is effectively unrepresented on the Nigerian Stock Exchange (NSE). Its rapid growth is built on demand not initially thought by most observers (and the operating companies themselves) to exist. Research by the NBS in the 2012/13 agricultural season shows that spending on recharge cards ranged from 54.3% of households in the north east to 85.7% in the south west. The growth in mobile subscriptions may have slowed but the four main operators have merely turned their attention to the provision of data services.
Building and construction expanded by 14.3% y/y in Q3. We can reconcile this outturn with the strong performance of listed cement companies. The overseas plans of Dangote Cement are still marginal to the big picture, and we can say that the industry’s growing production has a distance to go before it meets domestic demand. Government at all tiers accounts for some of this demand as well as the private sector in the formal and informal economies. The third fastest growing sector in Q3 was hotels and restaurants (13.7%). It is not well covered on the NSE but strikes us as a good barometer of consumption demand.
The third fastest growing sector was solid minerals (12.7% y/y). It has a very small share of GDP and should not be confused with hydrocarbons. Activity in the sector is predominantly artisanal. The FGN, unlike many governments in the sub-region (Burkina Faso, Cameroon, Côte d’Ivoire and Mali), has made little progress in marketing its mineral resources to the international community. The fifth sector to post double-digit growth in Q3 was real estate (10.4% y/y). The pointers for demand are similar to those for building and construction.
We noted the dearth of consumption indicators but should refer to our own manufacturing Purchasing Managers’ Index (PMI), which was launched in April 2013. As an indirect measure, its readings are encouraging. The index has been in positive territory (ie above 50) each month with the exception of July, and above 60 in the past two months. Significantly, the readings for both output and new orders have been above 70 in November and December. We have to make allowances for seasonality but these readings, if maintained into the New Year, tell a good story about consumption demand.
We also take encouragement from deal flow on the reasonable assumption that potential investors do their homework. One of the most bullish investors is Actis, the UK-based private equity player, which is regularly cited in the local media for its views on rising incomes and retail opportunities. A cynic might say that such an investor tends to talk up prospects for the sake of smoothing their exit opportunities. The company has however invested in shopping malls. We could also cite substantial projects in consumer goods, cement, fertilizers, rice, petrochemicals, telecoms and hotels.
The portfolio investor has also bought into the story of rising incomes and favourable demographics. At first glance, this may appear a surprise, given the dull performance of most listed companies (other than banks) in Q3. We spent last week visiting portfolio investors in the UK, and emerged with the sense that the majority, far from looking to dump their stocks as a consequence of tapering in the US, are comfortable with their exposure. In some cases they will increase their holdings because of changes in mid-2014 to the benefit of Nigeria in the industry benchmark for frontier market equity investors.
We are aware of the sizeable gaps in reliable indicators of consumption in Nigeria and of the below par results in Q3 of listed companies in consumer goods (but not cement). That said, we conclude that consumption demand is picking up and is the driver of non-oil GDP growth now back up above 8% y/y. Our case rests upon the consistent double-digit y/y growth of sectors such as telecoms, construction, and hotels and restaurants. In support, we note the deal flow for both direct and portfolio investors.
By: Gregory Kronsten
