August 1, 2018/Cordros Capital
The Central Bank of Nigeria’s (CBN) Purchasing Managers’ Index (PMI) continued to show expansion in business conditions, as manufacturers and service providers confirmed sustained improvement in their overall operations. That was highlighted by the PMI report for the month of July, with the headline manufacturing and non-manufacturing indices coming in at 56.8 (previously 57.0) and 57.7 (previously 57.5) respectively.
While noting the modest slowdown in the pace of expansion in manufacturing activities, we equally point out that the relationship between the PMI and GDP data has broken down recently. A case in sight was the weaker-than-widely-expected Q1-18 GDP numbers (including weak non-manufacturing output growth), despite record-high PMI figures during the same period. That said, for what it is worth, the latest PMI reading fuels expectation of continued output growth into the third quarter of the year. For insight, the reported 56.8 and 57.7 manufacturing and non-manufacturing PMIs are both higher y/y by 270 bps and 330 bps respectively. We believe stronger national output growth will be instructive for the economy over the rest of the year in two major ways:
1. Monetary policy consistency: In its last meeting, the Monetary Policy Committee (MPC) reiterated its strong bias for anticipated liquidity surfeit over the rest of 2018, considering the impact of that on inflationary conditions and FX stability. Expectedly, the monetarist members of the Committee voted for a rate hike to proactively rein in inflationary tendencies, although the arguments of the Keynesians superseded. While we consider the MPC’s recent move to boost credit flow to the economy laudable, we equally note the risks to the announced reform (notably CBN’s purchase of commercial papers from credit-challenged corporates and some form of implicit CRR cut) in the event of higher inflation rate – which will strengthen the case for a rate hike, save for stronger output growth.
2. Positive corporate performance over H2-18: Here, we see listed companies across banking, consumer goods, agriculture, industrial goods, and oil & gas sectors benefitting from higher demand – occasioned by improving per capita income. While we reckon the feedthrough impact of that on earnings and ultimately investor sentiment, we are not oblivious of a possible offset by offshore players’ lingering concerns over both capital flow reversal in emerging markets (amid global trade war jitters and monetary policy normalisation in the U.S.) and domestic political risks.
Comment:
Still, there are no sufficient reasons to expect contracting PMIs over the rest of 2018, as the impact of the positive drivers supporting the encouraging figures deepens further. Specifically, we reiterate (1) CBN’s sustained commitment to forex stability, (2) rebounding aggregate demand, (3) a pickup in government spending, in line with the passed 2018 budget, and (4) strengthening consumer expectation. Particularly on forex, suffice to say that confidence remained strengthened vis-à-vis the near-term outlook of the domestic currency considering the still-healthy state of the nation’s foreign reserves, which currently stands at USD47.2 billion, with oil prices staying strong at USD73.3/barrel, in addition to stable crude production.