03 August 2016, Sweetcrude, Abuja – With the alarming loss of revenue from oil over the past several months, Nigeria’s economy might soon see a bright spot as the manufacturing sector is seen to have made a good start to the third quarter of 2016, according to the Purchasing Managers’ Index, PMI, undertaken by investment bank, FBN Quest, which indicated the sector expanded by 51.0 percent in the month of July.
A Purchasing Managers’ Index measures the activity level of purchasing managers in the manufacturing sector, and a reading above 50 indicates expansion in the sector, while a reading below 50 indicates contraction.
According to the PMI report by Gregory Kronsten and Chinwe Egbim, analysts at FBN Quest, published yesterday, “The modest uptick in the headline reading observed in both June and July suggests that manufacturing has risen off the floor and possibly that GDP numbers for Q3 will be less depressing than those for the second quarter.”
The report noted that July’s reading represents an increase of 1.59 percent compared to 50.2 percent in June, after a set of poor figures, occasioned by acute dollar shortages, and made worse by the manufacturing sector in the run up to the month.
“The foreign exchange (FX) liberalisation which addressed the challenge of accessing dollars to import raw materials possibly aided manufacturers in June,” said Tosin Ojo, head of research at Lagos-based Cardinal Stone Partners Ltd.
The Central Bank of Nigeria (CBN), on June 15, abandoned a 16 month currency peg of N199/$ which had eroded FX liquidity and brought manufacturing to its knees.
“Abandoning the hard currency peg has improved the level of liquidity in the foreign exchange market,” said Maneesh Garg, group managing director of Nagode, in an interview with a local newspaper.
Garg said the FX liberalisation would revert the sector to growth, adding that “the steep challenges of today will fade soon.”
The desired impact of the CBN’s new flexible, market-driven FX policy, which was launched in June, is likely to be felt over time, given that the CBN is still the predominant supplier of FX, analysts at FBN Quest say.
“Autonomous suppliers (other than the oil majors) are expected to enter the market tentatively and, until they return in good numbers, we are not sure to what extent the CBN can sustain foreign exchange liquidity,” Kronsten and Egbim noted.
The PMI reading is hinged on five variables with equal weightings. These include output, employment, new orders, delivery times from suppliers and stocks of purchases.
This month’s reading saw output climb marginally to 46 from 43.5 in June, employment scale up to 49 from 48, while suppliers delivery, which is inverted for respondents (i.e. a fall in delivery times is a positive indicator), dropped marginally to 57 from 57.5.
New orders also fell to 50.5 from 52.5 while stock of purchases jumped to 52.5 from 49.5 the previous month.
In the first quarter of 2016, Nigeria’s oil and non-oil sectors contracted by 1.9 percent year-on-year(y/y) and 0.2 percent y/y respectively in the first quarter, as GDP growth slumped to figures (0.36) last seen in 2004.
It noted, however, that declines in manufacturing, financial institutions and real estate over the period dragged the non-oil sector down.
The manufacturing sector contracted by 7.0 percent y/y in the period under review, compared with growth of 0.4 percent the previous quarter.
According to FBN Quest, PMI was at its worst in the month of January 2016, slumping 17.7 percent to 44.6 from 54.2 in Dec. 2015.
The challenge of accessing FX drove the index sharply downwards, according to FBN Quest analysts.
On the other hand, CBN’s Manufacturing PMI rose marginally to 44.1 index points in July 2016, compared to 41.9 in the preceding month, in what analysts say indicate a slower rate of decline in the review period.
Of the 16 manufacturing sub-sectors, 13 recorded a decline in the review month in the following order: electrical equipment; primary metal; non-metallic mineral products; furniture & related products; fabricated metal products; printing & related support activities; food, beverage & tobacco products; textile, apparel, leather & footwear; paper products; petroleum & coal products; plastics & rubber products; transportation equipment; and chemical & pharmaceutical products.
The appliances & components sub-sector recorded no change, while the computer and electronic products, as well as cement, expanded.
At 43.0 index points, the production level index for manufacturing sector declined for the seventh consecutive month, but at a slower rate than that recorded in June 2016.
Of the 16 manufacturing sub-sectors, 12 recorded declines in production level during the review month in the following order: primary metal; plastics & rubber products; printing & related support activities; furniture & related products; appliances & components; non-metallic mineral products; fabricated metal products; electrical equipment; paper products; food, beverage & tobacco products; transportation equipment; and textile, apparel, leather & footwear.
The cement subsector remained unchanged. The remaining three recorded growth in production level during the review month in the following order: computer & electronic products; chemical & pharmaceutical products; and petroleum & coal products.