2/9/2016/Cordros Research
On Wednesday, the Central Bank of Nigeria (CBN) released its Purchasing Managers’ Index (PMI) Report for the month of August. In what followed the disappointing pattern of decline recorded throughout the first half of the year, both the manufacturing and non-manufacturing PMIs remained below the 50 point expansion threshold for the eighth consecutive month (this year), in August. This clearly buttresses the sense that economic and business activities are yet to materially pick up, and further calls for more definitive (and complementary) policy actions by both the monetary and fiscal authorities.
In more specific terms, the composite manufacturing PMI fell to 42.1 (save for the record low of 41.9 recorded in June 2016, August’s reading actually came in at a historic low). Compared to the previous month (44.1), this figure suggests a quicker deceleration in manufacturing activities across the country. On the other hand, non-manufacturing PMI, at 43.7, recorded a marginal improvement, to show a slower pace of decline relative to July’s 43.2.
Clearly, business conditions will remain threatened on the back of (1) subsisting threats (e.g. declining crude production and consequently depressed government revenue) to the full implementation of the 2016 appropriation bill; (2) the Monetary Policy Committee’s switch to monetary tightening — which has notably increased the cost of borrowing; and (3) soft consumer spending. In particular, we note the recent comments from the Manufacturers Association of Nigeria (MAN) revealing that manufacturers are grappling with an unfavourable financing environment where commercial banks are lending at double digit interest rate, to the tune over 20% in most cases.
Manufacturing PMI
The manufacturing sector remained strained, with manufacturing PMI posting its second highest decline (of 42.1) in the 20-month period that the CBN data is available. This insipid performance provides little or no comfort for manufacturing activities in Q3-2016, considering especially that most of the structural headwinds facing manufacturers broadly remain unabated. Here, we refer to the (1) difficulties in accessing forex for basic operations; (2) significant drop in electricity power generation and supply; and (3) security concerns.
Non-Manufacturing PMI
The composite non-manufacturing PMI — having declined at a slower rate the previous month — improved further, albeit modestly, in August. Specifically, the index advanced to 43.7 (vs. 43.2 in July). During the period under review, two (level of new orders and level of employment) of the major sub-indices declined at a faster rate, while business activity and raw materials/WIP inventories declined faster. Activities in this sector similarly remained pressured amid the lingering forex crisis, and in addition, the recent +40% devaluation of the NGN against the USD. We note specifically (1) South Africa’s Sun International decision to exit Nigeria, citing weak economic growth as a major driver; (2) Aero Contractors Airlines, Nigeria’s second largest commercial carrier, suspending its scheduled flight services and ordering its workers to proceed on an indefinite leave (with other domestic carriers following suit).
