The chilling spending on new factory equipment by big Nigerian companies appears to have persisted through the first quarter, with warning from analysts that budget may slow further this year.
Capital expenditure fell 12.74 percent for the first three months to March 2020 to N347.75 billion, from N398.53 billion the previous year, judging from the financial statements of companies that have released earnings for the first quarter.
Analysts are of the view that the biggest Nigerian firms will slash their cash spending on the acquisition of property plants and equipment amid uncertainty caused by the coronavirus pandemic.
There could be deeper cut to capital budget than was seen during the 2016 economic downturn when the sharp drop of mid-2014 tipped the country into its worst recession in 25 years, according to the analysts.
Usually, confidence over the strength of demand tends to drive spending decisions which can improve a company’s productivity. That means during an economic boon, there is acceleration in factory activities. Even oil majors acquire more rig wells when oil prices are benign.
“You would expect a change of business and investment plan on the back of expectation of weaker demand for goods and services,” said Gbolahan Ologunro, equity research analyst at CSL Stockbrokers Limited.
“The outlook on how business operation will be is uncertain as Covid-19 disrupted the demand and supply side. Companies that had plans to expand before the pandemic will have to suspend such plans,” Ologunro said.
The World Bank has projected that Nigeria, Africa’s largest economy, will shrink by 3.2 percent yoy in 2020. According to the bank, this year’s contraction may be the worst in four decades due to the outbreak of COVID-19 and the associated lockdowns as well as the oil price collapse.
Brent crude oil fell from $70 per barrel at the dawn of 2020 to $20 per barrel as of April 22, 2020.
Nigeria’s GDP growth slowed in the first quarter of the year. According to the Q1-2020 GDP report published by the National Bureau of Statistics (NBS) in May, economic growth slowed to a nine-quarter low of 1.87 percent yoy from 2.55 percent yoy in Q4-2019 and 2.12 percent yoy in Q2-2019.
Based on NBS data on capital importation for the first quarter (Q1) of 2020, the total amount of foreign investment inflows into the Nigerian economy declined by 31 percent year on year (y/y) to $5.85 billion in Q1, from $8.51 billion in Q1 2019.
“Companies will not spend as there is growing need to conserve cash so as to avoid liquidity crisis,” said Ayodeji Ebo, managing director/CEO of Afrinvest Securities Limited.
The industrial building industry will be the added hit from the Covid-19 shock that ravaged economies across the globe as construction activities were slow. That means cement volumes will be weak.
BUA Cement, the third largest company in Nigeria, saw acquisition of property plant and equipment dip by 81.27 percent to N2.31 billion as at March 2020, from N12.68 billion the previous year.
Khaled El Dokani, CEO of Lafarge Africa, said the cement maker will freeze capital expenditure this year as it forecast a drop in second-quarter sales following drop in demand due to the coronavirus pandemic.
The outlook for the industry remains gloomy as Federal Government has reduced the amount budgeted for capital expenditure by 20 percent in the 2020 budget.
“We believe most construction projects across the nation may have been suspended in the interim owing to Covid-19 restrictions. Our expectation is that full resumption of construction activities is unlikely to commence until H2-2020,” said analysts at CSL Stockbrokers Limited.
International Breweries’ capital expenditure reduced by 70.70 percent to N2.51 billion as at March 2020, as the company continues to struggle with recurring losses caused by weak sales and huge debt.
