Optimism that the Nigerian economy has hit rock bottom and is experiencing a turnaround has been shown in a surprise jump in the Purchasing Managers Index (PMI) reading for December, as captured separately by investment banking firm, FBNQuest and the Central Bank of Nigeria (CBN).
In calculating a PMI, a selection of companies is asked their view each month, on core variables in their business. The respondent, who is characteristically the purchasing manager in a larger firm, has three possible replies: better, unchanged, or worse than the previous month. According to the standard methodology, 50 marks is a neutral reading and anything higher suggests that the manufacturing economy is expanding. Readings are released at the start of the new month.
FBNQuest NOI Polls December PMI reading, came in at 60 from 48.8 in November, an indication that the PMI is in a strong positive territory. All the five variables measured by the PMI; output, employment, new orders, delivery times from suppliers and stocks of purchases were also in positive territory.
Similarly, the CBN PMI for manufacturers also showed a strong rebound in December. The CBN manufacturing purchasing managers index (PMI) rose to 52.0 index points in December 2016, from 46.0 in November.
The index had recorded decline in the preceding 11 months. Eight of the 16 sub-sectors surveyed recorded expansion in the review month in the following order: cement; food, beverage and tobacco products; textiles, apparels, leather and footwear; plastics and rubber products; paper products; appliances and components; chemical and pharmaceutical products, and furniture and related products.
“We can only explain the surge in the headline reading from 48.8 to 60.0 in December, in terms of the seasonal boost to household demand. Our index is not seasonally adjusted, and since the launch of the index, December has always provided a strong reading. (Those in 2013 and 2014 were even higher.) Since Nigeria is mired in recession, the extent of the seasonal demand boost this year has come as a surprise” FBN Quest stated in a note to investors.
However, analysts at FBN Quest also note that once seasonal effects are stripped out of the index, “the landscape for manufacturing is little changed. Substitution is beginning to have an impact, while the CBN and state-owned investment vehicles are providing additional credit for the sector.
“The FGN’s expansionary fiscal stance is also supportive in the form of accelerated capital releases. We suspect, however, that manufacturing will be one of the last sectors to benefit because of the scarcity of foreign exchange, which we expect to continue well into the year. In conclusion, it may well be that the reading in January erodes the gains of this report.”
The output variable witnessed the strongest growth in the period, rising from 49 to 59. The principal shift was among medium-sized firms, which have a payroll of between 50 and 200 employees.
But the report notes that “The experiences of manufacturing segments differ greatly. Food, beverages and tobacco, the largest segment, contracted by -5.8% when compared to the previous year in the nine months ended September 2016.
“We can explain this away as the consequence of the segment’s high import dependency but we are then confronted with the -6.3% year on year contraction of cement in the quarter. The softness of new orders, particularly from the tiers of government, could explain the poor performance of the cement industry, which has a very low import requirement for its production. A third segment tells a different story.
Textiles, apparels and footwear contracted by just -0.9% and has outperformed the sector as a whole, for three successive quarters. The likely explanation lies in a number of government support schemes for the segment, notably at state level, and increasing use of local inputs” FBNQuest stated.
FBNQuest also notes that they do not see a near-term solution to the foreign exchange scarcity facing the manufacturing sector.
“There will not be the proposed flexible, market-driven foreign exchange regime until the CBN’s modest sales are complemented by sizeable inflows from autonomous sources. Oil price has recovered by about US$10/b since our last report, as a result of the OPEC accord in Vienna and the pledges of output restraint by several non-member producers.
“This is seemingly evident in the official reserves but does not transform foreign exchange inflows. The FGN will not take money from the IMF and is reluctant to sell state-owned assets in what is a buyers’ market. Offshore portfolio investors will have the confidence to return in large numbers when they see a succession of positive steps which amount to large foreign exchange inflows: examples are the sovereign Eurobond issue expected this quarter, the budget deficit financing under negotiation with multilaterals and possible advance payments by importers of Nigerian crude.”
Analysts at FBNQUEST expect “output readings should be more consistent whenever the turnaround of the power sector gains greater momentum. According to one of several industry estimates in circulation, an annual investment of US$15bn for three years is required to lift generation to 8,000 megawatts (MW). The largest allocation for capital spending in the FGN’s budget proposals for 2017 is N529bn for power, works and housing but it nonetheless accounts for little more than 10% of the identified annual investment requirement.”
But the Central Bank of Nigeria (CBN) Manufacturing PMI report released on Monday, revealed that production level index for manufacturing sector at 57.6 index points, indicated the sector expanded in the review period, compared with the decline recorded in the preceding 11 months.
Five manufacturing sub-sectors recorded growth in production level during the review month in the following order: cement; food, beverage and tobacco products; electrical equipment; plastics and rubber products; and textile, apparel, leather and footwear.
The appliances and components sub-sector remained unchanged, while the remaining ten sub-sectors declined in the review period in the order: primary metal; petroleum and coal products; computer and electronic products; transportation equipment; furniture and related products; fabricated metal products; non-metallic mineral products; paper products; chemical and pharmaceutical products; and printing and related support activities.
The report showed that at 51.8 points, the new orders index showed expansion in new orders after eleven months of contraction. It stood at 45.1 in November 2016.
The five sub-sectors that recorded expansion in new orders were: cement; food, beverage and tobacco products; textile, apparel, leather and footwear; paper products; and fabricated metal products.
The plastics and rubber products sub-sector remained unchanged, while the remaining ten sub-sectors declined in the order: primary metal; electrical equipment; transportation equipment; appliances and components; petroleum and coal products; printing and related support activities; computer and electronic products; non-metallic mineral products; furniture and related products, and chemical and pharmaceutical products.
Hope Moses-Ashike
