Main conclusions:

1)Decline in May to 49.2 for headline
2)Three sub-indices in negative territory, one neutral
3)Highest for delivery times
4)Lowest for output 

We release today the latest reading (no 62) of our manufacturing Purchasing Managers’ Index (PMI) for Nigeria, which takes the temperature of the sector. Our PMI was the first in Nigeria. It has developed into a core forward indicator.
A PMI is a simple exercise. A selection of companies are asked their view each month on core variables in their business. The respondent, who is characteristically the purchasing manager in a larger firm, has three possible replies: better, unchanged or worse than the previous month. According to the standard methodology, 50 marks a neutral reading and anything higher suggests that the manufacturing economy is expanding. Readings should be released at the very beginning of the new month, subject to public holidays.
In our case, the five variables are output, employment, new orders, delivery times from suppliers and stocks of purchases. They have equal weightings in our index. Our reports cover a representative sample of the sector with large, medium-sized and small firms. Any broad economic conclusions on the basis of our reports need to be tentative because we are operating in a near statistical void. 

The national accounts, unlike a PMI, are a historical indicator. The latest series (for Q1 2018) shows GDP growth at 2.0%, compared with an upwardly revised 2.1% in Q4 2017. The oil economy grew by 14.8% y/y, reflecting the recovery in production in the Niger Delta. For the non-oil economy, the data show y/y growth of 0.8%. Manufacturing grew by 3.4%. Food, beverages and tobacco, its largest segment, expanded by 5.5% y/y. For textiles, apparel and footwear, the second largest, the rate of growth in Q1 was 1.9% y/y.
The headline PMI reading declined from 51.0 to 49.2 in May, its lowest since January last year. The general theme from respondents was uncertainty over demand, due in part to Ramadan, which started in mid-May. Most respondents reported no change across the sub-indices: the proportion was beyond 70% for four of the sub-indices. 

In May, as the previous month, respondents were uncertain about consumption patterns. While inflationary pressures have eased, anecdotal evidence indicates that household demand remains subdued as consumers have adopted a cautious spending stance. However, on a supply-side basis, imported inputs and finished goods remain accessible as the CBN’s fx reforms have resulted in improved fx availability.

Output sub-index 

This reading retreated from 50.0 to 47.5 in May. Although declining from 80% to 69%, the proportion of no change responses remained relatively high. In addition to Ramadan, seasonal effects (the rainy season) have affected transport logistics and contributed to reduced patronage. 

We expect the economy to be relatively stable this year and for Q2 2018 our GDP growth projection is 2.4% y/y. This is based upon a modest boost from the oil economy on base effects and a slightly better performance from the non-oil economy. For the following quarters, it would be naïve not to expect any fiscal stimulus in this pre-election year: such features in the official Economic Recovery and Growth Plan 2017-2020. That said, the impact has been overstated in many forecasts and scenarios. 

The CBN’s fx reforms have exceeded all expectations (including its own) by making fx freely available. Its windows include: spot and forward sales to banks for the use of importers; further sales to banks at N357 per US dollar for the use of the retail segment for travel, medical and educational bills; sales to the bureaux de change; sales to SMEs; and NAFEX (the investors’ and exporters’ window). There is negligible domestic pressure for the CBN to unify the rates, and a change would be unlikely before the elections. Meanwhile, the proposed currency swap with China remains topical among manufacturers, specifically those within the textile industry who are optimistic that payment for importing raw materials from China with the CNY as opposed to the USD could cut their costs by more than 50%. 

The cost of self-generation continues to weigh heavily on businesses. We understand that self-generation accounts for at least 40% of manufacturers’ operating costs. A survey carried out by the Manufacturers Association of Nigeria (MAN) revealed that N130bn was spent on self-generated energy in 2016. The daily report from the Transmission Company of Nigeria for 30 May shows peak national energy demand at 22,780 megawatts (MW), the generation capability of the national grid at 7,354MW, and peak and lowest generation on the day at 4,514MW and 3,467MW. According to industry sources, the FGN has secured US$486m from the World Bank as funding for the expansion of the transmission grid. Earlier the TCN had secured US$1.55bn in funding from a group of multilateral donor agencies for the same purpose. The FGN targets a wheeling capacity of 20,000MW from the transmission grid over the next four years. 

Employment sub-index 

This reading was unchanged in May at 48.5. Both large and medium-sized companies reported a small deterioration in employment. However, respondents reporting no change remained 87% of the total. In our view, most manufacturers have adopted a wait-and-see approach regarding additional recruitment. 

The authorities have made good strides in improving the country’s business environment, which is evident from the World Bank Group’s latest Doing Business report. However, structural issues continue to stifle business expansion and some manufacturers struggle to break even. The labour force report from the NBS for Q3 2017 shows a rise in the national unemployment rate from 13.9% in Q3 2016 to 18.8% one year later. This latest rate increases to 40.0% when we add the underemployed. 

New orders sub-index 

The reading for new orders, the most forward-looking of the five sub-indices, retreated from 53.5 to 50 in May. The decline was felt predominantly by medium-sized companies. However, the main trend again was a high response rate for no change (76%). Respondents under the model of our choice (the ISM’s in the US) are not asked to distinguish between domestic and export orders. 

According to the CBN, non-oil products accounted for 6.6% of total merchandise exports in Q4 2017, compared with 6.8% for the year-earlier period. 

The MAN has been lukewarm at best about the African Continental Free Trade Area (AfCFTA), which the FGN and many other governments declined to sign in Kigali in late March. Its reservations, which were also evident in its successful opposition to an Economic Partnership Agreement with the EU, centre around its concerns that the area would undermine its and the FGN’s efforts to build a solid industrial base. The FGN decided at the last minute not to sign the pact in Kigali although the door is open until September for its signature. 

Challenges to sustained local production by non-oil exporters include power shortages, poor roads, cumbersome documentation processes, the levying of taxes by all three tiers of government and the multiplicity of regulatory agencies at seaports. The implementation of the re-introduced export expansion grant (EEG) has been slow; N20bn was set aside for the EEG in 2017 budget. For this year, we understand that the FGN has reduced the allocation to N9.7bn. 

Suppliers’ delivery times sub-index 

This question is inverted for respondents (i.e. a fall in delivery times is a positive indicator). In May the reading decreased from 51.5 to 50.5. The decline was felt mainly by the medium-sized firms, and the percentage of no change responses declined from 87% to 83% in the month. 

Stocks of purchases sub-index 

This reading declined in May from 51.5 to 49.5. The trend was visible across small and medium-sized firms. No change was again the most popular response, which points to the prevalent wait-and-see stance in the May report.