Another Slowed Improvement In Business Conditions Cause For Concern?

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According to the Central Bank of Nigeria’s (CBN) Purchasing Managers’ Index (PMI) report for the month of February, manufacturing and non-manufacturing activities sustained expansion during the month, at 56.3 and 56.1 respectively – albeit at a slower pace compared to the previous month. The latest data marks the second successive month of slower growth in both PMIs. Nonetheless, we reiterate that the survey result continues to show that business owners and manufacturers are more optimistic about the prospects of the broader economy than a year ago. For instance, compared to February 2017, both manufacturing and non-manufacturing PMIs have improved, from contractions of 44.6 and 44.5, by 1,170 bps and 1,160 bps respectively.Juxtaposed with January’s data, the figures under review strengthen expectation for sustained output growth in the first quarter of 2018; hence (1) positive corporate performance, (2) bullish sentiments towards risky assets, and (3) stronger expectation for lower yields on government securities.

To reiterate, the continued improvement in the survey result is consistent with encouraging conditions in the overall economy, including (1) a 4.86% m/m (+43.06% y/y) increase in foreign reserves to USD42.35 billion as of February 27, (2) the apex bank’s sustained commitment to forex stability, which has helped narrow the spread between the official and parallel segments of the currency market rates, (3) broad-based output growth in Q4-17 (+1.92% y/y), and indeed positive expectation for 2018, (4) improving inflationary conditions, with headline inflation rate moderating to 15.13% in January (from 15.37% in December 2017), and (5) healthy crude oil prices and stable production.

Whilst we had attributed the slower pace of expansion recorded in January to the traditionally seasonality-flattered December, we believe February’s case requires some attention. First, we note the drag constituted by contractions in cement (43.8; previously 65.0), transportation and warehousing (48.8, from 64.0), transportation equipment (48.8, from 46.9); and slower growth in agriculture (57.0, previously 61.3), and textile, apparel, leather & footwear (60.2, from 64.1).
Notably, performance across transportation and warehousing, transportation equipment, and textile, apparel, leather & footwear can be attributed to slowed demand – following the festivity induced frenzy in December and the early part of January.

That said, cement and agriculture caught our attention the most. On cement, the behemoth contraction may not be unconnected to (1) weak private sector demand amid lingering impact of price increase actions taken by cement producers, and (2) still-low public sector demand, reflecting weak implementation of CapEx budget. In that light, we reiterate our position that the fiscal authority cannot downplay the case for speedy passage of the 2018 budget and effective implementation of the same (particularly the capital expenditure component). On agriculture, while seasonality is a factor to consider, we think the rampaging activities of marauding herdsmen on farmlands in major crop producing regions of the country, including Benue State, portends downside risk. No doubt, the need to address the incidence of herdsmen-farmers clashes (which has since intensified) and Boko Haram insurgents across the country cannot be overemphasized.

Manufacturing PMI

The manufacturing PMI remained healthy, expanding to 56.3 in the review period, from a higher
57.3 in January. The slower pace of expansion in the manufacturing segment is attributable to slowed growth in two of the major sub-indices that make up the manufacturing PMI – production level (57.8, previously 59.6) and new orders (55.6, previously 58.3). That constrained the impact of faster growth in supplier delivery time (57.0, previously 56.8), employment level (53.9, previously 53.3), and WIP inventory (58.1, previously 57.7). The sustained stability of the naira exchange rate, coupled with the widely positive outlook for the currency and aggregate demand, remains a major driver of the sustained expansion in the composite manufacturing PMI.

Of the 15 subsectors surveyed, 10 reported growth in the review month in the following order: Plastics & rubber products; textile, apparel, leather & footwear; appliances & components; paper products; primary metal; petroleum & coal products; chemical & pharmaceutical products; food, beverage & tobacco products; electrical equipment and furniture & related products. The remaining 5 subsectors contracted in the following order: printing & related support activities;
cement; nonmetallic mineral products; fabricated metal products; and transportation equipment.

Non-manufacturing PMI

Similar to the manufacturing PMI, non-manufacturing PMI increased at a slower pace of 56.1 in February. The slower growth in the sector reflects decelerating growth in business activity (61.3, from 55.6) and level of new orders (53.7, compared to 58.2 in January), both of which masked faster growth in employment level (55.3, vs. 55.1 in the previous month) and inventory (59.8, ahead of January’s 59.5).

Eleven of the 16 subsectors recorded growth in the following order: information & communication; wholesale/retail trade; educational services; management of companies; utilities; finance & insurance; agriculture; health care & social assistance; construction; electricity, gas, steam & air conditioning supply; and professional, scientific, & technical services. The real estate rental & leasing remained unchanged, while the public administration; water supply, sewage & waste management; accommodation & food services; and transportation & warehousing subsectors recorded contraction in the review period.

Comment:

February 2018 PMI figures, despite reflecting slowed growth in both manufacturing and nonmanufacturing segments, bolster optimism about output growth in the first quarter of the year. We restate our view that the composite PMI will remain strong through 2018, as the impact of the positive drivers supporting the encouraging figures deepens further. Specifically, we highlight the (1) CBN’s sustained commitment to forex stability, (2) a rebound in aggregate demand, with inflationary pressure moderating further as exchange rate and energy prices post no negative surprises, in addition to (3) a pickup in government spending, in line with the 2018 budget. Particularly on forex, suffice to say that confidence has further strengthened vis-à-vis the near-term outlook of the domestic currency amid continued healthy accretion to the nation’s foreign reserves which currently stands at a high of USD42.35 billion, with oil prices staying healthy at USD64.33/barrel, and stable crude production (1.82mb/d, according to available data from OPEC).

 

SOURCE: Cordros Research

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