Fall in PMI below 50 confirms manufacturing sector’s crisis

A slump in headline reading of the Purchasing Managers Index (PMI) to 46.5 in April 2016 from 54.4 percent in March, may be signalling that Africa’s largest economy is in worse shape than previously thought.

Three of the five sub-indices used for the PMI reading were in negative territory, leaving only two in the positive, according to a report by FBNquest released yesterday.

“This is a dire report for April. We have seen only five headline readings below the water since our launch three years ago but two of them have occurred this year,” the report by FBN Quest analysts, Gregory Kronsten, and Chinwe Egwim, said.

“For employment and new orders, the most popular response was “no change”. In contrast, for output it was lower, and this explains the crash in the headline. Output fluctuates more than the other  sub-indices,  being  highly  sensitive  to  shortages  of  power  and  fuel. Analysts  do  not  forecast  the  monthly  change  in  PMIs  for  good reasons. We doubt, however, that ours will see a marked recovery anytime soon.”

Nigeria’s manufacturing sector is relatively large and contributed 9.09 percent to the country’s GDP in the fourth quarter of 2015.

The sector’s output however has been down for the past three quarter’s year on year.

In the Fourth Quarter of 2015, Real GDP growth of the manufacturing sector slowed by 13.09 percent points to 0.38 percent (year-on-year) from 13.47 percent growth recorded in the fourth Quarter of 2014.

Nigeria’s economic growth dropped to 2.8 percent last year, the slowest since 1999 and will decelerate further to 2.3 percent in 2016, the International Monetary Fund (IMF) said in a recent update on the country.

Most manufacturers say Nigeria’s hard currency peg at N199/$ has led to dollar shortages, worsening inflation and slower growth as input costs rise.

PZ Cussons said recently, that currency restrictions imposed by the Federal Government are negatively hitting operations, as the maker of Imperial Leather soap pays 70 percent more than the official rate for dollars.

Nestle SA said its local unit has had to widen the number of banks it uses so that it can access enough foreign exchange. Last year, it was waiting as long as six weeks to be allocated dollars.

For Heineken NV, the major shareholder in Nigeria Breweries: “It is becoming increasingly challenging to obtain hard currency in the market, and the uncertainty regarding a possible devaluation of the naira continues to impact the business adversely,” Jean-François van Boxmeer, chairman of the Executive Board & CEO, commented.

The FBN Quest PMI reading was hinged on five sub-indices which comprise output, employment, new orders, delivery  times from suppliers and stocks of purchases.

For output, the reading crashed by 31 percent from 61 to 42 in the months under review (March and April). The report attributed the slump to operational challenges, power unavailability, as well as fuel and foreign exchange shortages.

The unemployment indices also suffered a decline by 13.2 percent to 42.5 from 49 in the months under review.

Some 80,000 manufacturing jobs are at risk of disappearance according to the Lagos Chamber of Commerce and Industry.

This is being exacerbated by the failure to pass the 2016 budget which was expected to reflate the economy,  five months into the new year.

“The state of infrastructure in Nigeria is poor. We are happy that the budget wants to address infrastructure issues in the country. But the budget is now taking a very long time to be passed or assented to,” said Frank Udemba Jacobs, president, Manufacturers Association of Nigeria (MAN) in an interview.

“The railways are still not there, and manufacturers are complaining of the poor power supply. We just hope they will begin to implement that budget to truly transform the manufacturing sector and economy in general,” Jacobs said.   

The reading for new orders retreated by 14 percent to 45.5 from 53 in the previous month, while the Suppliers Delivery Times Index, which is inverted for respondents (i.e. a fall in delivery times is a positive indicator), eased by 8 percent to 50.5 in April from 55. A trend shared across all company size.

“Respondents … are not asked to distinguish between domestic and export orders. The figure (of non-oil products accounting for exports) would be higher if we were able to quantify the substantial volume of trade in cereals and other products across Nigeria’s porous borders,” the report reads.

In the same vein, the Central Bank of Nigeria (CBN) released its Purchasing Managers Index for April on May 02, which indicated further decline in economic activities across the country during the month. The report showed that both the manufacturing and non manufacturing sectors of the economy suffered decline in level of activities during the month.

According to the report, production levels, new orders, employment and raw materials inventory declined in the manufacturing sector, while business activities, new orders and employment declined in the non manufacturing sector. The report stated, “The Manufacturing PMI dropped to 43.7 per cent in April 2016, compared to 45.9 per cent in the preceding month. This implies that the manufacturing sector declined at a faster rate during the review period.”

PATRICK ATUANYA & LOLADE AKINMURELE