Analysts at FBNQuest capital have attributed the pickup in its purchasing manager’s index reading to resumption in economic activities after the election. In Its latest Purchasing Managers Index (PMI), released yesterday for the month of March 2019 showed that increased activities in new order flows and employment, which characterized the first quarter ended March 31, 2019.
The latest report, compared with economic performance in the fourth quarter of 2018, shows that the gross domestic product (GDP) grew at 2.4 per cent year on year, compared with 1.8 per cent in Q3 of 2018. However, the oil economy contracted by 1.6 per cent year on year (Y/Y).
The report stated that the reading rose marginally from 54.0 to 54.5 in March. This pickup was limited to small companies.
It observed that the contraction was at a slower pace than the previous quarter. For the non-oil economy, the data showed year on year growth of 2.7 per cent. Manufacturing grew by 2.4 per cent, compared with 1.9 per cent year on year in Q3. Its largest segment (food. beverages and tobacco) expanded by 2.2 per cent. The headline reading increased considerably from 50.4 to 56.9 in March.
FBNQuest report noted that the buoyant trend was mirrored across four of the five sub-indices.
“We attribute this visible pickup in the headline reading to resumption in economic activity, post-election. Production slowed in January on the end of the holiday season, and slowed further in February due to uncertainty surrounding the outcome and conduct of the presidential election. Whatever outcome manufacturers favoured, they would have welcomed the manageable level of disruption”.
“Fx is freely available to manufacturers for their inputs. Furthermore, some large manufacturing firms have been able to boost their local substitution. However, we understand that the cost of securing locally sourced inputs (mainly agro-related) can sometimes be more expensive when compared with imported inputs, largely due to tensions in food producing regions as well as smuggling”, the analysts noted.
The firm in its report reckoned that the reading surged from 45.5 to 60.5 in March. According to the report, the increase was visible across all company sizes. Meanwhile, the proportion of no change responses accounted for 59% of the total, compared with 51% recorded in February. Responses to our trigger questions confirm that there was a surge in demand post-election.
“We also note that the delivery of delayed raw materials contributed to higher output. Furthermore, some manufacturers were able to gain additional access to credit facilities during the period. Although some manufacturers were able to gain access to credit, affordable credit is still difficult to access as banks maintain a cautious approach towards lending to the private sector”, the report stated.
Meanwhile, according to the National Bureau of Statistics (NBS), non-performing loans as at fourth quarter of 2018 stood at N1.79 trillion, which accounted for about 12% of total loans. Data from the same source show that in the fourth quarter 2018 loans extended by banks to the private sector declined by 3% quarter on quarter to N15.1 trillion.
The second largest recipient of loans was the manufacturing sector, which accounted for 14.6% of the total. The CBN’s FX reforms have exceeded expectations (including its own) by making fx freely available. There is negligible domestic pressure for the CBN to unify its own with other rates, and we suspect that there will be no change throughout this year.
The current arrangements are popular with foreign portfolio investors (FPIs), who are confident that they can exit the market at will. Since 23 February, that is post-election, the I&E window (NAFEX) has recorded inflows of US$5.35 billion, with FPIs accounting for 72% of the total.
The cost of self-generation weighs heavily on operational costs for businesses and continues to affect profit margins. According to the Rural Electrification Agency (REA), N5trn is expended yearly on importing, fuelling and maintaining generators by businesses across Nigeria. The FGN currently estimates national energy demand at about 22,000 megawatts (MW).
Meanwhile, power generation capacity from the grid stands at about 7,000MW while distribution capacity is still about 5,000MW. 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. A better energy mix of non-renewable and green energy will accelerate the process of attaining power for all.
“We note that the increased demand resulted in the recruitment of support staff in some cases but assume that these roles are short-term contracts. We doubt that manufacturers will take on additional permanent labour until the business climate is dramatically improved. Given that Nigeria’s macroeconomic environment is relatively stable and disruptions to the current policy direction are somewhat unlikely, the business terrain could become more conducive in the near term”.
The latest unemployment/underemployment watch from the NBS shows a sustained rise in the national unemployment rate to 23.1% in the third quarter 2018 from 22.7% recorded in the previous quarter and 18.8% in Q3 2017. It was the fifteenth successive quarter of acceleration in the unemployment rate. The latest rate increases to 43.1% when we add underemployment.
The employment sub-index would perform better if the authorities invested in human capital, given that job vacancies across the sector are sometimes linked to the absence of skilled labour. Also, the PMI`s reading for new orders, the most forward-looking of the five sub-indices, climbed strongly from 49.0 to 59.5 in March. The proportion of no change responses accounted for 69% of the total, compared with 60% in February.
According to the CBN, non-oil products accounted for 6.2% of total merchandise exports in the fourth quarter of 2018, compared with 5.6% recorded in the third quarter. Manufacturers continue to struggle with producing profitable standard products able to compete in the global village due to infrastructural issues.
“However, we note that the Presidential Enabling Business Environment Council is currently implementing initiatives geared towards boosting soft infrastructure, which should have a visible impact on the business environment. The growing narrative of protectionism and trade barriers on a global level makes a good case for the African Continental Free Trade Area (AfCFTA)”, the firm stated in the report.
It also observed that Nigeria is yet to sign the agreement. There are currently 49 out of 55 possible signatures. The implementation of the re-introduced export expansion grant (EEG) has been slow; in the 2019 budget proposals a total of N5.1bn has been allocated for the grant, compared with N20 billion in 2018.
“We understand that there is a backlog as high as N1.2 trillion to be settled through promissory notes”, FBNQuest capital revealed in the report.
The post Nigeria’s industrial activities rise in Q1 on new order flows, employment appeared first on Market Forces Africa.
source https://dmarketforces.com/nigerias-industrial-activities-rise-in-q1-on-new-order-flows-employment/