October 5, 2021/Proshare

 by FBNQuest Research                                                                                                                                                                                     

Our manufacturing Purchasing Managers’ Index (PMI) returned to positive territory in September after an interval of three months, improving from 49.6 in August to 50.3. It was the first of its kind in Nigeria, and we have now achieved a century of reports. Readings for three of the five sub-indices posted increases in the month, and a fourth was flat. Our partner, NOI Polls, collects the data. An index is produced in advanced economies such as by the Institute for Supply Management (ISM) in the US, larger EMs such as Brazil, China and India, and a healthy number of emerging/frontier markets. It is based upon manufacturers’ responses to set questions on core variables in their businesses. Our highest reading to date has been 68.7 in December 2017 and our lowest 43.3 during lockdown in May 2020. In our unweighted model (that of the ISM), respondents are asked whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have increased over the previous month, are flat or have fallen. A headline reading over 50 (ex 100) indicates expansion for the sector. 

On a 12-month moving average basis, the headline index weakened from 51.3 to 50.9 in September.

The impact of global headwinds on Nigerian manufacturers is felt principally in the supply of imported inputs. The headlines are full of faltering supply chains, which in the case of Nigeria are made worse by challenges surrounding the cost of, and access to fx. Global demand is recovering in the adjustment to COVID-19, but the sector produces consumer goods for the domestic market. Exports are led by cement, and account for a small share of output.

Manufacturing registered 3.5% y/y growth in Q2 ’21. We had hoped for a stronger rebound, given that it contracted by -8.8% in the year-earlier period (the quarter of lockdown in Nigeria). The largest segment (food, beverages and tobacco) achieved 4.9% growth in Q2.   

A question of interest is the effectiveness of the credit interventions by the CBN. At least in the number of projects, light manufacturing is the leading beneficiary of the real sector facility under which NGN1trn has been disbursed to date. Such loans from the CBN could add up to more than 20% of all loans to manufacturing by deposit money banks. The question remains rhetorical since the effectiveness of the loan will vary enormously from firm to firm.

The NOI surveys include trigger questions, which are put to respondents when they have given the same answer on a sub-index for two successive months and changed it for the third.  The common positive themes this time are an improvement in supplies of raw materials (albeit from a low base) and a pick-up in demand. In the case of new orders, there are signs of preparations for the holiday season at the end of the year.

The most popular answer in our surveys is ‘no change’. This accounted for over 60% of responses for all sub-indices. In employment and delivery times its share exceeded 80%.   

China’s manufacturing PMI (the government series) weakened from 50.1 to 49.6 in September. Nigerian analysts may look enviously at some of the latest monthly data emerging from China such as y/y growth of 8.5% and 6.4% in retail sales and industrial production in July, and then wonder at the index reading.

However, they could allow for rising input costs, tougher targets for emissions and the re-emergence of the pandemic in some provinces of China as explanatory factors. They could also reflect on the inherent optimism of Nigerian respondents in surveys.