2016 Budget Signing Exciting, Outlook Conservative

This week’s data releases by the CBN and NBS - April 2016 Purchasing Manager’s Index (PMI) and Q1:2016 Quarterly Capital Importation data - revealed very disappointing numbers. Besides the fact that the weak numbers reflected poorly on business activities and investment confidence, they further reinforced market perception that weakening domestic fundamentals is yet abating.

The PMI data, a monthly survey carried out by the CBN to examine the level of business activities, showed that Manufacturing and Non-Manufacturing activities contracted in April, and more alarmingly, at a faster pace relative to March.

The Manufacturing PMI touched 43.7% in April, 2.2ppt below March level and 6.3ppt below the no-change threshold of 50.0% which separates growth from contraction. Production level, new orders, employment and inventory level all declined faster in the Month but supplier delivery time expanded faster for the 3rd consecutive month. This decline in April means manufacturing PMI has contracted all through 2016 and retraced from the strong rebound observed in Q4:2015. Our trend analysis of the manufacturing PMI and Manufacturing sector GDP growth shows a strong relationship with Growth turning positive in Q4:2015 when Manufacturing PMI Improved and negative between Q1:2015 and Q3:2015 when the PMI contracted. Similar to the manufacturing sector, composite Non-Manufacturing sector PMI has contracted all through 2016 and at a faster pace in April with the index gauge at 44.3%from 45.3%in March. Business activities, new orders and employment all contracted at a faster pace whilst raw materials also contracted slower.

Also, capital importation data for Q1:2016 released earlier in the week by the NBS fell to the lowest level since the start of the data series in 2010. Capital importation in the Quarter stood at US$711.0m, down 73.4% Y-o-Y and 54.3% Q-o-Q. Capital importation fell across all categories on Y-o-Y basis; with Portfolio and Direct Investment inflows down 55.8% and 85.4% Y-o-Y to US$174.5m and US$271.0m respectively. Other forms of Capital importation also weakened 36.2% Y-o-Y to US$265.5m. Despite the relatively small contribution of investment spending to nominal GDP (15.1% in 2014), the impacts of the slowdown in capital importation (especially FDI) may constitute a huge drag on real GDP growth as consumer spending (highest contributor to nominal GDP at 70.6% in 2014) has also been pressured by eroding purchasing power and low fiscal spending. Household domestic savings in Nigeria is barely 17.0% of GDP which makes capital importation an important source of FX for businesses and more importantly, a notional driver of gross fixed capital and portfolio investment.

We believe factors driving the prolonged slackness in capital importation and business activities are similar and structural in nature. They include; exchange rate uncertainty and shortages as well as weak investor confidence in policy responses to the oil price shock.

Thankfully, the 2016 budget which is one of the factors dragging investor confidence and business activities was signed into law by the President earlier today (5th May, 2016) and we believe rapid implementation of the capital component of the budget could generate enough impulse to effectively lift aggregate demand in the medium term. Yet, the current economic constraints can also be contextually situated as a supply-side challenge which could mute the real impact of the budget on the economy if structural reforms to boost FX supply, petroleum resources and availability of foreign/domestic investment capital are not implemented. No time-bounded guidance has been issued yet on expected reforms and we remain conservative on our 2016 GDP growth forecast at 2.0%.