An increase in the headline reading of the Purchasing Managers Index (PMI) by 4.14 percent to 50.2 in June from 48.2 in May, signals that the manufacturing sector of Africa’s largest economy may have crawled out of the troubled waters it got into since April.
PMI is an indicator of the economic health of the manufacturing sector, usually anchored on indicators such as new orders, inventory levels, production, supplier deliveries and the employment environment.
Despite the fact that three of the five sub-indices remained in negative territory, new orders and employment sub-indices climbed to 52.5 and 48 respectively, lending their weight to the improved headline reading.
“We suspect that this was driven by those respondents who have increased their domestic input utilisation,” Gregory Kronsten and Chinwe Egbim, analysts at FBN Quest, wrote in the research firm’s PMI reading report.
“Faced with the challenges of sourcing foreign exchange for imports of raw materials and intermediates, some companies have been able to boost their processing of local raw materials,” Kronsten and Egbim noted.
The reading for new orders had jumped 8.79 percent in May to 49.5 from 45.5 the previous month, while employment reading slumped 4.7 percent to 40.5 in May, from 42.5 in the preceding month.
The PMI reading had fallen to 46.5 in April 2016 from 54.4 percent in March.
Nigeria’s economy is on the brink of an economic recession after Gross Domestic Product (GDP) shrank 0.36 percent in the first quarter of 2016, as oil output slumped and the manufacturing, financial and real estate industries declined.
Manufacturing GDP printed at -7.0% in the period under review, from 0.38 percent and -0.70 percent in Q4 and Q1 2015 respectively.
The fractionally positive headline reading of 50.2 is still consistent with Q1 manufacturing sector GDP, as well as the prospect of another poor set of GDP figures in Q2, analysts say.
“I attribute the pick up or improvement in the PMI (especially for new orders) to the improvement in fuel supply situation, following the deregulation in May and the floating of the FX that occurred around mid June,” said Tosin Ojo, head of research at Cardinal Stone Partners, in response to questions.
“Though the FX liberalisation may only be partly reflected. The deregulation eliminated severe shortages of fuel products which were quite acute in April and some weeks in May.
I would expect logistics and delivery to improve on the back of that, which then probably reflected in the new orders sub-index,” Ojo said.
However, Ojo begged to differ from Kronsten and Egbim’s assertion that manufacturers increased domestic input utilisation in the period under review.
“I don’t fully agree with their view that it’s because some businesses may have begun sourcing inputs locally,” Ojo said. Adding that, “While this may be true for food products, Cement has always been locally produced even in the previous month when the PMI was lower.”
The reading for output sub-index eased marginally to 43.5 percent from 44 percent, with 33 percent of respondents reporting higher production, FBN Quest’s report read, and attributed to “the predominant expansion in medium-sized companies.”
Suppliers’ delivery indexes, which is inverted for respondents (i.e. a fall in delivery times is a positive indicator), dropped marginally to 57.5 from 58.5; while stock of purchases also increased to 49.5 from 48.5 recorded the previous month.
Inflation quickened to a six year high of 15.6 percent in May and unemployment rate sits comfortably at 12.1 percent in the first quarter (Q1) of 2016.
Four of the five sub-indices used for May’s PMI reading were in negative territory, as only the reading for suppliers’ delivery time sub index rose to 58.5 from 50.5 in April.
Most manufacturers say Nigeria’s hard currency peg at N199/$ has led to dollar shortages, worsening inflation and slower growth as input costs rise.
However, investors got the foreign-exchange policy change they asked for when Emefiele announced the new currency system on June 15, abandoning a 16 month-old peg.
Maneesh Garg, group managing director of Nagode said the FX shock had crimpled the manufacturing sector and sees the new FX guidelines revert the sector to the path of growth.
“Abandoning the hard currency peg has improved the level of liquidity in the foreign exchange market,” Garg said.
Even as he acknowledged 2016 to be a tough year for businesses, he says “the steep challenges of today will fade in soon.”
Fast Moving Consumer Goods (FMCG) firms are breathing huge sighs of relief, as policy makers in Africa’s largest economy finally threw in the towel on a 16 month currency peg.
This sparked a glimmer of hope for consumer goods manufacturers in Africa’s strongest consumer market, whose profit margins and inventory levels had nose-dived owing to dollar shortages.
With the adoption of a market driven FX policy, analysts are in the affirmative that it may revert FMCG firms on the path of expansion.
“Each company will approach expansion plans on a case by case basis. If the revised business case still works, then yes they can expand, but many will rethink,” said Pabina Yinkere, Head of Research at Vetiva Capital Management, in an emailed note to BusinessDay.
“However, many top FMCGs had expanded recently, so they are armed with capacity to last a few years before next expansion cycle.”
It may have also put the firms in better positions to plan meticulously.
“Flexibility in Nigeria’s foreign-exchange market will bring clarity in terms of pricing and allow us to plan for the future,” said Larry Ettah, CEO of UAC, in response to questions.
Consumer goods brands, UAC and PZ Cussons had signalled lacklustre performances in their subsequent financials, as the foreign exchange shortage continued to pose a significant threat to their profit margins.
