Manufacturing Required for Industrial Take-off – Coronation Merchant Bank

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.