Nigerian Business Confidence Index: Modest Improvement amid Uncertainty

Aggregate BCI
The second quarter (Q2) 2013 aggregate Business Confidence Index (BCI) recorded a modest improvement of 16.50% from the 10.50% it achieved in the first quarter (Q1) 2013. This represents a six point movement of the index along a positive trajectory. This improvement notwithstanding, the BCI scores for the Q1 and Q2, 2013 continue to trail far below the 50% global confidence threshold. Investors and business leaders are still wary about the state of the economy and the unfriendly doing business environment.

The factors that mostly frustrated the index score include: poor access to credit, inhibitive tendencies of monitoring and regulatory agencies, sustained insecurity situation across the country, dwindling public power supply and budget approval/implementation crisis. Macroeconomic factors such as non performing credit, exchange rate and inflation rate exerted neutral influence on the Q2, 2013 BCI score.

The neutral impact of macroeconomic prices on businesses at this time is informed by the relative stability achieved by the monetary authority over the last few months. However, the downside remains that the current stabilisation of prices through monetary tightening has been achieved at the expense of investment, employment, output and growth.

Sectoral BCI
The real sectors –agriculture, manufacturing and solid mineral reversed the negative confidence they posted in Q1 by joining other sectors on the positive confidence trajectory. Notwithstanding, the real sectors remains at the bottom leader with the very low confidence levels of 7%, 5% and 2% scores respectively. Interestingly, hotel/restaurant, IT/telecoms, finance and professional services sectors continue to top the league of sectors with the highest confidence levels at 35%, 27%, 21% and 17% respectively.

Regional BCI
Businesses located in the South-West Nigeria are the most confident with BCI score of 38%. This is followed by companies operating in the South-East and South-South with BCI score of 29% and 19% respectively. Expectedly, businesses located in North-East, North-West and North-Central sustained negative confidence at BCI score of -2%, -1.5% and -0.1% respectively. The worsening security situation has dealt a devastating blow to investment/businesses in the North and perception of the country over the last two years.

BCI by Size of Businesses
We also discovered that BCI score fluctuates significantly in line with the size of firms in Nigeria. For instance, larger companies with 51 employees and above tend to exhibit a higher level optimism relative to smaller firms. In the same vein, firms that reported sizable annual turnover (₦100 million to over ₦1 billion) posted higher confidence level relative to firms with smaller turnover. This suggests that it might be easier for the larger firms with relatively deeper pocket to work their way through the challenges confronting businesses in Nigeria. This finding is also consistent with the Q1, 2013 BCI survey.

BCI by Age of Companies
Newer firms (1-5 years old) posted a surprising 17% confidence level with older companies (6-50 years old), showing a slightly weaker confidence level at 14%. New comers’ syndrome, youthful exuberance, inexperience and illusive political and funding connections may potentially explain the unique optimism we found in newer entities. However, as firms grow older, it appears that confidence lost during its consolidation years (6-20 years old) tends to resurface though in a modest fashion.

Confidence Level of Board Vs Management
The survey found that confidence level vary widely between owners/board and the executive management of companies. For instance, owners/non-executive board members are more confident with index score of 24% while executive and senior management members of the private sector scored 10%. The cautious tendency of executive management not to over promise on profit/turnover and the desire of owners/board to make good their investment at any point in time may partly explain this finding.

Business/Investment Destinations
When asked to mention three cities other than Lagos where they will like to site their new investments in 2013, 98.5% of business executives across the country opted for cities mainly in the Nation’s Capital and Southern part of the country. Abuja and Port Harcourt alone accounted for 50% of potential new business destinations in 2013. Sadly, no Northern city made it to the top 15 alternative investment destinations in 2013 irrespective of the industry and original business location.

New Employment
For the second consecutive quarter, results from BCI survey shows that the private sector will largely keep their current work force size or even slash it down in 2013. With official unemployment number already put at 23.9% by the National Bureau of Statistics (NBS) as at 2011, the job market in 2013 look ominous.

Outcome of Key BCI Indicators
The difficulty of getting credit remains on the top of variables that significantly pool down the BCI scores. The survey shows that access to getting credit by businesses especially the small and medium-sized enterprises (SMEs) over the last three months is getting worse. Expectations for credit access in Q2, 2013 even looks somewhat gloomier. Regulatory and monitoring agencies in the states and the federal government levels are another source of major concern for doing business in Nigeria. Incidences of informal/reckless charges/fees, frequent and unscheduled visits, intimidation and seizure of all kinds, collection of excess sample with attendant cost on the intellectual property of the agencies. The impact of regulatory and monitoring agencies weighed down the aggregate index by scoring -15.1% and -11.1% in Q2 and Q1 2013 respectively. New employment also followed the same path as reported above.

The negative impact of price (inflation and exchange rate) volatilities on doing business seems to have moderated significantly. From index score of -32.3% and -29.4% respectively in Q1, 2013, inflation and exchange rate posted a neutral impact on business with 0% and -0.5% index scores  in Q2, 2013. The downside is that this is being achieved through monetary tightening at the expense of investment, employment, and growth. The index score for public power supply which was impressive at 3.01% in Q1 2013 has falling back to the negative corridor. Companies are increasingly casting “a vote of no confidence” on public power supply.

BCI indicators such as capacity of firms to produce, export prospects, turnover/sales expectation, deals closed, strength/patronage of domestic market, turnover/sales expectation, new investment/expansion and the impact/size of non-performing credit have consistently boosted the aggregate index over the last two surveys. Interestingly, these indicators did not only post a positive confidence, but the levels of confidence achieved this time are more significant and itching closer to the global business confidence threshold.

Sample Size and Sample Distribution
The Q2 quarter 2013 BCI survey covered 14 sectors, 37 subsectors and 600 (top business executives) respondents over the period, 15th February to March 16th 2013. While ideally the sample would reflect the sectoral composition of the economy, gathering the responses per sector, this may not be absolutely feasible. We used GDP contribution weighting for each sector to balance the sample outcomes. The survey covered most sectors sufficiently, though solid mineral sector in particular is a concern. The participation of top private players across all the sectors was secured in a responsible fashion.

The business environment remains largely unsupportive with rising socioeconomic uncertainties. This has kept the BCI scores trailing far below the global optimum levels. However, with the progress made so far on the privatisation of the nation’s power sector and the commencement of the implementation of the 2013 budgets across the states and the federal government levels, we look to see how far this will reflect in the outcome of our Q3-2013 BCI survey and computation.
About BCI
BCI is a leading economic indicator designed to measure the degree of optimism on the state of the economy that business leaders are expressing through their activities of investing and spending. Decreasing business confidence is often a pointer to slowing economic activities because business owners are likely to decrease their investment. The idea is that the more confident business owners and managers feel about the economy, the more likely they are to make new investments and create opportunities.

Report by Vincent Nwani –LCCI’s Director of Research & Advocacy