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Manufacturing Required for Industrial Take-off – Coronation Merchant Bank

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Over the past five years, Nigeria has experienced oscillatory movement in manufacturing output growth. According to the latest national accounts, manufacturing sector growth contracted to -1.9% y/y in Q3 ’22 compared with a growth rate of 3.0 % y/y recorded in Q2 ’22.

The contraction in manufacturing activity can be partly attributed to macroeconomic headwinds such as the high energy prices, elevated operating costs, soaring inflation, and fx liquidity constraints among others.

The food, beverages, and tobacco segment contracted by -4.1% y/y while the apparel, and footwear segment contracted by -3.9% y/y respectively in Q3 ’22. Combined, these segments accounted for 67.4% of total manufacturing GDP in Q3’22. The chemical and pharmaceutical products segment grew the fastest at 11.1% y/y in Q3 ’22.

The CBN’s Manufacturing Purchasing Managers’ Index (PMI), moderated slightly to 52.3 index points in August ‘22 from 53.2 index points in July ‘22. A reading above 50 points towards an expansion while a reading below 50 translates into a contraction.

The FGN has had plans and high hopes for Nigeria’s manufacturing sector. In March 2021, the federal ministry for industry, trade and investment disclosed that a growth target of a 20% share in GDP by 2023 had been set for the sector. This would mark an impressive step up from the 14.8% attained at current prices in 2021. Similar to the power industry, the manufacturing sector is critical for Nigeria to achieve its well needed industrial take-off.

This performance of the sector is largely dependent on crude oil price movement and forex availability. Following Russia’s invasion of Ukraine, oil prices have surged to their highest level since 2008. Unlike premium motor spirit (PMS), diesel has been deregulated. As such, the surge in global oil prices has led to an increase in diesel price. According to the Manufacturers Association of Nigeria, the situation has resulted in soaring operational costs as most businesses rely on diesel-powered generators in the absence of reliable grid electricity.

The proposed take-off of the Dangote Refinery in Q4 ‘22 is expected to help improve the supply of petroleum products in Nigeria.

Typically, to meet high fx needs, some manufacturers source funds from the parallel market which trades at a significant premium to the I&E window (62.2% as at 19 January ’23). This also contributes to upticks in operational costs for the manufacturing sector.

Manufacturers face a dilemma with regard to incurring additional costs due to rising operational costs or passing on these costs to consumers. For the latter, the current squeeze on household wallets may result in a potential loss of market share to foreign competitors due to their relative affordability.

We expect the uptick in operational costs to have an impact on the headline inflation rate (currently at 21.34% y/y). We note that the absence of constant power supply has also contributed to the underperformance of the manufacturing sector, as self-generation places further pressure on operating expenses.

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Economy

Federal Government Halts Cooking Gas Export to Lower Local Prices

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In a bid to stabilize domestic prices and meet rising demand for cooking gas within Nigeria, the Federal Government has announced a temporary halt on the exportation of Liquefied Petroleum Gas (LPG), commonly known as cooking gas.

This decision follows a significant surge in the cost of cooking gas, which has placed a strain on consumers across the country.

According to reports, the halt in LPG export aims to increase the availability of the commodity within Nigeria’s borders, thereby reducing its local price.

The move is part of broader efforts to address the challenges faced by consumers grappling with the high cost of living.

In recent years, the demand for cooking gas has steadily increased in Nigeria, driven by urbanization, population growth, and a shift towards cleaner energy sources.

However, despite being a major producer of LPG, Nigeria has struggled to meet its domestic demand due to insufficient local production and distribution infrastructure.

Data from the Nigerian Midstream Downstream Petroleum Regulatory Authority reveals that while the total consumption of cooking gas in Nigeria has been on the rise, the country has relied heavily on imports to bridge the supply gap.

The recent decision by the government underscores its commitment to prioritizing the domestic market and ensuring that Nigerians have access to affordable cooking gas.

Consumers have been grappling with escalating prices, with reports indicating a significant increase in the cost of refilling a 12.5kg cylinder of cooking gas in major cities like Abuja, Lagos, and Kano.

The decision to halt LPG exports signals a proactive measure by the government to mitigate the adverse effects of rising prices and alleviate the financial burden on households across the nation.

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Manufacturing Sector Records 7.70% Quarter-on-Quarter Growth in Q4 2023

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In the fourth quarter of 2023, Nigeria’s manufacturing sector grew by 7.70% year-on-year, according to the National Bureau of Statistics (NBS).

The surge in growth reflects a significant uptick from the preceding quarter and underscores the resilience of the manufacturing industry amid economic challenges.

This growth trajectory indicates positive momentum and signals potential opportunities for economic recovery and development.

The manufacturing sector, comprising thirteen key activities ranging from oil refining to motor vehicles and assembly, demonstrated notable dynamism across various subsectors.

This growth surge is attributed to increased production, enhanced operational efficiencies, and strategic investments across the manufacturing value chain.

Despite facing headwinds such as supply chain disruptions and regulatory uncertainties, the sector’s robust performance underscores its pivotal role in driving economic diversification, job creation, and industrialization efforts in Nigeria.

Moving forward, sustaining this growth momentum will require continued policy support, investment in infrastructure, and efforts to address key bottlenecks hindering the sector’s expansion.

By fostering an enabling business environment and promoting innovation and technology adoption, Nigeria’s manufacturing sector can further catalyze inclusive economic growth and contribute significantly to the nation’s development agenda.

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Economy

Nigeria’s GDP Grows by 3.46% in Q4 2023, Driven by Services

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Nigeria’s Gross Domestic Product (GDP) grew by 3.46% in the fourth quarter (Q4) of 2023 on the back of robust performance of the services sector, according to data released by the National Bureau of Statistics (NBS).

The GDP expansion though slightly lower than the 3.52% recorded in the same period of 2022, reflects a positive trajectory for the Nigerian economy amid ongoing challenges.

The growth rate surpassed the 2.54% recorded in the preceding quarter, indicating a rebound in economic activity.

The services sector emerged as the key driver of growth expanding by 3.98% and contributing 56.55% to the overall GDP.

This sector’s resilience underscores its pivotal role in Nigeria’s economic landscape, encompassing diverse industries such as telecommunications, finance, and real estate.

Also, the agriculture sector experienced growth, expanding by 2.10% compared to the same period in 2022.

Meanwhile, the industry sector recorded a notable improvement, growing by 3.86%, a stark contrast to the -0.94% contraction observed in the fourth quarter of 2022.

On an annual basis, Nigeria’s GDP expanded by 2.74% in 2023 compared to 3.10% in the previous year, reflecting sustained but moderated growth.

The positive trajectory in GDP growth reflects resilience in the face of various economic challenges.

However, sustaining and accelerating growth will require continued efforts to address structural bottlenecks, foster investment, and promote inclusive economic policies across sectors.

Nigeria’s Oil Sector Growth

During the fourth quarter of 2023, Nigeria’s oil sector posted a real growth rate of 12.11% year-on-year, signifying a significant improvement from previous periods.

This was driven by the surge in average daily oil production to 1.55 million barrels per day (mbpd), a positive shift in the sector’s performance.

Despite challenges such as global market fluctuations and production constraints, the oil sector contributed 4.70% to the nation’s total real GDP in Q4 2023.

Nigeria’s Non-Oil Sector

Nigeria’s non-oil sector sustained growth momentum, posting a 3.07% real growth rate in Q4 2023.

This growth was primarily attributed to key industries including finance, telecommunications, agriculture, manufacturing, and construction.

Accounting for 95.30% of the nation’s GDP in the same quarter, the non-oil sector continues to drive economic diversification efforts and reduce dependence on oil revenues.

Despite facing challenges, such as infrastructure deficits and regulatory bottlenecks, the sector’s resilience underscores its pivotal role in fostering sustainable economic development and inclusive growth agendas.

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