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Manufacturing sector report: PMI, BCI data portend mixed fortunes for real sector

By Nkiruka Nnorom
The expansion recorded in the manufacturing sector in October as indicated by the Central Bank of Nigeria (CBN) Purchasing Managers Index (PMI) would likely sustain its uptrend till year end. But whilst this is a position given by economy watchers at Cordros Capital Limited, a Lagos-based finance and investment house, another group of analysts have punctured this position with the current Business Confidence Report which shows a dim picture of the short term economic outlook.

The optimists have said the expansion was largely driven by stability in the foreign exchange market, which commenced since the introduction of Investors & Exporters FX window by the CBN in April 2017.

Godwin Emefiele, CBN Gov. ,Okechukwu Enelamah, Minister of Industry, Trade & Investment and Engr. Mansur Ahmed, President, Manufacturers Association of Nigeria

They observed that the expansion would be sustained for the rest of the year following the Yuletide sentiment which they believe plays a key role in driving the positive business sentiment.

However, the Organised Private Sector, OPS, under the aegis of Lagos Chamber of Commerce and Industry, LCCI, said that despite the growth recorded during the period, some of challenges facing the manufacturing sector still persists.

The chamber listed some of the challenges to include weak consumer demand, high operating cost and high cost of credit among others.

Nigeria’s business landscape, in the last quarter of 2018, set off to a positive start, as CBN’s monthly PMI sustained its expansionary trajectory for the nineteenth consecutive month in October. Precisely, both the manufacturing and non-manufacturing PMIs expanded at a faster pace compared with the slower increases recorded in the prior month.

The report reveals that Manufacturing and Non-manufacturing indices grew by 56.8 and 57.0 compared to 56.2 and 56.5 points in September respectively.

Reacting, Cordros Capital, an investment banking house, stated that, “While we reiterate that continued FX stability and availability remain the key driver of business health across the manufacturing and non-manufacturing space, we believe the commencement of the festive quarter must have boosted business sentiments as Q4 average PMI is historically the strongest.

“In the face of the renewed uptick in inflation, sustained improvement in PMI have thus far coincided with improved FX stability and availability, which continue to drive positive business sentiment. Hence, we expect the PMIs to remain strong through the rest of the year, with the imminent festive period also supporting sentiments.

“High crude oil prices, together with the possibility of inflows from Eurobond, will support CBN’s goal of keeping FX rates largely stable and liquid across all segments.”

The investment banking firm observed that with manufacturing, service, and agriculture contributing 9.3 percent, 37.5 percent and 22.9 percent respectively to quarter two, Q2 GDP, the overall growth in Q3’18 and Q4’18 will be supported by the resilience of the above sectors.

PMI report not in consonance with Business Expectation Survey – United Capital

Researchers at United Capital Plc, another investment banking firm, said that while the stability/liquidity recorded in the FX market since the introduction of the Investors & Exporters window in mid April, 2017 has been the major driver of sentiment around the composite indices, the latest Real Sector Support Facility (RSSF) initiated by the Central bank of Nigeria (CBN) to boost real sector growth might be the major driver of the renewed optimism, especially in the manufacturing sector.

The RSSF guideline by the CBN means that operators in agricultural, manufacturing and the sectors considered as growth and employment stimulating can now borrow long term and as much as N10 billion at consolidated nine per cent interest rate under new guidelines.

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They, however, observed the contradiction between the PMI report and monthly Business Expectations Survey Report for October, 2018 which showed less optimism on the macro-economy by respondent firms during the period (23.2 index points) when compared with the level recorded in the preceding month (24.8 index points), saying that the PMI might not be a reflection of reality.

“We think the fact that this survey (Business Expectation Survey Report) did not co-move with October PMI (which grew at a faster rate relative to September) suggests that sentiment surveys as this should be treated with considerable caution as it can easily be “gamed” to pass a certain message across rather than to reflect reality. Nonetheless, if one must pay attention to the numbers, then the identified business constraints at least have a passing correlation with reality.

PMI report good, but challenges still remain – LCCI

Though the Lagos Chamber of Commerce and Industry, LCCI, commended the improvement in manufacturing PMI, which indicated improvement in the manufacturing sector, the chamber said that the expansion should be celebrated with caution as the challenges besetting the sector still remained.

Like the investment experts, Mr. Muda Yusuf, Director General, LCCI, said that the driving factor behind the expansion in the manufacturing sector as recorded in the PMI is the increased buying for the festive period.

He said: “The manufacturing PMI which grew from 56.2 in September to 58 in October is a positive development. However, it should be celebrated with caution. Some of the key possible drivers of the improvement in the PMI include the need to meet the demands of the festive season, which is typically high in the last quarter of the year.

“Secondly, the uncertainty created by the Apapa gridlock has compelled many manufacturing firms to increase their raw materials inventory, and this is coming at a great cost to them.”

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Continuing, he said: “The Nigerian manufacturing sector is still faced with the challenges of weak consumer demand, high operating cost, high energy cost (especially the cost of diesel), high transportation cost and high cost of credit.

These problems still constitute major impediments to the growth of the Nigerian manufacturing sector. Therefore, for sustainable industrial development to take place, these challenges need to be addressed.”


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