December 8, 2017/Cowry Asset
Nigeria‟s economic outlook was bolstered by positive numbers of the November 2017 PMI survey report as well as the relatively early passage of the 2018-2020 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) by the National Assembly.
The November 2017 survey report on purchasing and supply executives from manufacturing and non-manufacturing businesses as released by Central Bank of Nigeria showed sustained expansions in both the manufacturing and nonmanufacturing businesses.
The boost in real sector activity could be partly attributed to growing demand for goods and services on the back of improving purchasing power domestically. This, coupled with favourable ongoing economic reforms to improve the business environment, led to a strengthening of business sentiment.
The reforms also include recent efforts by monetary authority at improving foreign exchange supply to end users. According to the survey, the manufacturing composite PMI stood at 55.9 index points in November 2017 (albeit lower than 55.0 index points in October 2017).
The faster increase in manufacturing composite PMI was driven by accelerated expansion in production level, to 59.3 in November (58.4 in October); faster expansion in new orders to 54.3 (from 52.8); and slower contraction in new export orders at 37.6 (from 35.5). In addition, there was faster growth in employment to 53.7 (53.1); faster expansion in purchase of raw materials/inventories, to 57.1 (from 56.5); while supplier delivery times shortened, to 56.0 (more than 55.5), possibly due to improved capacity at input suppliers‟.
Expansion in input prices increased to 64.3 (from 62.7); however, output prices followed expanded slower to 54.0 (from 55.4) as manufacturers could not transfer rising input cost on to the final consumer. Of the sixteen manufacturing sub-sectors under survey, twelve sectors recorded expansions (same as in the preceding month) – manufacturers of „Textile, apparel, leather & footwear‟, „Food, beverage & tobacco products‟, „Petroleum & coal products‟ and „Cement‟ recorded expansions: at 60.6 (from 57.6), 57.4 (from 55.3), 65.0 (from 43.3) and 52.5 (from 46.7) respectively.
On the other hand, the non-manufacturing sector extended its advance as the non-manufacturing composite PMI increased to 57.6 in November 2017 (from 55.3 in October 2017). This was partly driven by expansion in business activity and incoming business to 59.4 in September (faster than 57.5 in October) and 58.4 (faster than 55.7) respectively; while work in progress expanded faster to 58.0 (from of 53.4).
In a related development, both chambers of the National Assembly, on Tuesday, passed the 2018-2020 MTEF/FSP. On the revenue assumptions, benchmark crude oil price for the 2018 budget was reviewed to USD47 per barrel (higher than the proposed USD45 a barrel) while other assumptions of 2.3 million barrels per day crude oil production, foreign exchange rate of N305/USD, real GDP growth of 3.5% and the inflation rate of 12.4% were retained as proposed by the executive. Similarly, projections for Federal Government‟s retained revenue, expenditure and fiscal deficit were retained at N5.646 trillion, N8.612 trillion and N2.005 trillion (1.77%) of GDP respectively; while new borrowings projection remained N1.699 trillion.
With the approval of the MTEF, the country appears to be on course to have its budget passed early 2018, beating the mid-June 2017 passage of the 2017 appropriation bill. Crude oil price assumption appears realistic as prices have been trending above USD60/barrel; however, projection of 2.3 mbpd would imply condensates constituting 500,000 bpd since Nigeria agreed to cap crude oil output at 1.8 mbpd; hence projection appears realistic, being only 3.69% higher than current production (given 1.74 mbpd as at October 2017).
Hence, we opine that aggressive fiscal consolidation to include a significant boost in non-oil revenue will be a key success factor for the 2018 fiscal year.