November 1, 2017/Cordros Research
The Central Bank of Nigeria (CBN) released its Purchasing Managers’ Index (PMI) report for the month of October, showing that manufacturing and nonmanufacturing activities during the month expanded for the seventh and sixth consecutive months, respectively, to 55.0 and 55.3.
The PMIs continue to suggest that business owners and manufacturers are responding positively to improvement in the macroeconomic landscape, indicating that output growth will likely be firmer in the last quarter of the year.
The sustained strength in the survey result further corroborates notable positive developments in the macroeconomic landscape, including (1) improving foreign exchange conditions amid the apex bank’s continued intervention in the currency market, (2) positive expectation for output growth in the third quarter of the year, (3) declining pressure (albeit at a marginal pace) on general price level, with headline inflation rate moderating to 15.98% in September (from 18.72% at the beginning of the year), and more revealing (4) the World Bank’s Ease of Doing Business Report for 2018 placing Nigeria in the 145th position (169th position in 2017), and ranking the country among the top 10 countries that improved on reforms.
Manufacturing PMI Sustains Expansion
The manufacturing PMI commenced the fourth quarter of the year on a positive note, sustaining the growth it started in April, with the composite index expanding to 55.0 in October, a soft touch below the 55.3 recorded in September. The continued expansion was driven by faster growth in supplier delivery time (55.5, previously 55.4), employment level (53.1, previously 52.8), and raw materials/WIP Inventory (56.5, previously 56.4). Conversely, production level (58.4 vs. 58.8) and new orders (52.8 vs. 53.5) expanded at a slower rate. In particular, the slower pace of growth in new orders is attributed to notable reverse to contraction in cement (33.3, previously 51.7) and computer & electronic products (0.0, from 58.3). Broadly, the continued relative stability of the NGN exchange rate at various segments of the currency market remains supportive of manufacturing activities.
Non-Manufacturing PMI Grows Stronger
Non-manufacturing activities remained strong, with the composite PMI for the sector expanding at a faster rate to a 35-month high of 55.3, compared to 54.9 in September. Similar to the observed trend in the preceding month, the improvement in non-manufacturing activities was supported by faster rate of expansions in all major sub-indices that constitute the composite index, save for employment level – which grew at a slower pace of 54.4 (September: 54.7). Drilling down on employment level during the month, we note continued decline in construction (35.7, previously 48.4), and a switch to contraction in utilities (43.8, previously 57.9) and professional, scientific & technical services (43.9, compared to 57.9 in September).
Comment:
October 2017 PMI figures further cement the view that business activities are continuously picking up in the domestic economy. We reiterate our thought that the level of improvement achieved thus far will be consolidated, going forward, as the impact of the positive drivers supporting the encouraging result deepens further. Again, we highlight the (1) CBN’s sustained commitment to forex stability, (2) modest rebound in aggregate demand, with inflationary pressure expected to moderate further as the harvest season commences, (3) a pickup in government spending, in line with the 2017 budget, and (4) strengthening consumer and business confidence, further boosted by the recent positive ranking by the World Bank on the ease of doing business in Nigeria. To be certain on forex, near term outlook for the domestic currency remains stability, as we look for the apex bank remaining committed to its intervention in the currency space amid continued healthy accretion to the nation’s foreign reserves which currently stands at a 2-year high of USD33.69 billion, supported by increased dollar inflow on the back of (1) relatively higher oil prices at a 2-year high of USD61.54/barrel at the time of writing, (2) crude production increasing to 1.8mb/d (according to available data from OPEC), and (3) rising foreign portfolio investment.