FG spending stimulus to boost consumer stocks

Plans by the Nigerian government to stimulate its struggling economy hit by collapsing oil prices, through record spending may trickle down to the top lines of consumer goods firms that have had their stocks beaten down in the past year.

President Muhammadu Buhari last month asked lawmakers in a speech in Abuja to approve the country’s biggest ever budget.

Buhari outlined plans for the government to spend N6.08 trillion ($30.8bn) in 2016, an increase of about 35 percent over 2015.

“Gleaning from the spending plans inferred from the 2016 budget, we anticipate a drop in unemployment levels, accompanied with increased consumer spending,” Saheed Bashir, head, finance and operations at Meristem Securities Limited, said in an email note to BusinessDay.

“This, unarguably, should bode well for the economy at large, and particularly for top line figures of companies in the Fast Moving Consumer Goods space,” Bashir said.

Economists across a wide spectrum agree that government expansionary budget in a time of near recession can be used to increase aggregate demand, thus increasing economic activity.

Analysts are of the view that if the money is judiciously spent, people who receive it will spend it on consumption and this will have a positive impact on the revenues of companies.

Such extra spending allows businesses to hire more people and pay them, which in turn allows a further increase in consumption.

Nigerian growth in 2015 probably slowed to 3.2 percent – its slowest pace since 1999, according to data from the IMF.

The unemployment rate is a high 9.9 percent, while the inflation rate printed at 9.3 percent in November 2015.

Consumer goods firms are struggling due to the twin impact of a slowdown in consumer spending and exchange rate shock from the Central Bank of Nigeria (CBN) restrictions on dollars.

“The restrictions have made it difficult for manufacturers to import raw materials and obtain dollars needed to operate,” Frank Udemba Jacobs, president, Manufacturers Association of Nigeria, which represents more than 2,500 companies, said.

The weaker than expected earnings report of consumer firms reflected on their stock prices on the floor of the Nigerian Stock Exchange as negative returns were recorded, signalling the effects of tough operating environments.

Flour Mills of Nigeria one-year return was -36.27 percent; Guinness -58 percent; Nigeria Breweries -16.48 percent; Cadbury -60.59 percent; Honeywell Flour Mills -44.03 percent; International Breweries -22.85 percent; Nestle -5.84 percent, and Northern Nigeria Flour Mills -51.40 percent.

The NSE All Share Index by comparison fell by 17 percent in 2015.

Industry experts say despite potential boost from government spending, which is expected to bolster the performance of companies in the consumer goods space, the difficulty in accessing foreign currency remains a drag on earnings.

“Although the government plans an expansionary fiscal policy in 2016, we think investors should only be cautiously optimistic. In our view, an initial execution of such policy, which should reflect in the quarterly results of FMCG companies, is required for investors to aggressively mop up consumer stocks in the market,” Tajudeen Ibrahim, analyst at Chapel Hill Denham, said in an email note to BusinessDay.

The Central Bank on Monday reviewed some of the foreign exchange market rules through lifting of restrictions on FX cash deposits in banks and discontinuation of forex supplies to Bureau De Change (BDC) operators.

The CBN had before now continued with its determination to stabilise the naira by imposing trading restrictions and banning importers from using the foreign exchange market for about 40 items.

“We opine that participation at the currently depressed price levels is guided by companies’ fundamentals and the marginal possibility of relaxed FX trading rules by the CBN,” Bashir further said.

BALA AUGIE