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Cordros Capital Sees No Silver Lining in Manufacturing Activities

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In a pessimistic note, analysts at Cordros Capital Research have unanimously agreed that there is no silver lining for improvement in manufacturing activities as they maintained a negative outlook for the fourth quarter.

The investment house cited foreign exchange scarcity, weak currency, subdued demand, border closure, and restriction in the movement of goods and services in the wake of the coronavirus pandemic for the negative prognosis.

The manufacturing sector contributed 8.90 percent to the Gross Domestic Product (GDP) in the third quarter, according to the latest data from the National Bureau of Statistics (NBS).

That compares to 9.76 percent in the first quarter of 2020, and 9.9 percent in the first quarter of 2018, according to the Abuja based Bureau.

Nigeria’s gross domestic product shrank 3.6 percent in the three months through September from a year earlier, the statistics body said.

Analysts at Cordros Capital project sector GDP growth of -5.61 percent and -3.49 percent in Q4-20 and 2020FY, respectively.

Foreign exchange constraints have always been the biggest obstacle to the growth of a sector that is supposed to create employment and spur economic growth.

The coronavirus induced headwinds have compounded the woes of manufacturers as the depletion in external reserve has forced the central bank to embark on foreign exchange demand strategy that isn’t meeting the needs of entities.

The largest listed companies in the sector are running on fragile margins as receding sales and rising production have hindered them from delivering higher returns to shareholders in form of share appreciation and bumper dividend.

The combined average operating margin of listed manufacturers fell to 8.04 percent in September 2020 from 9.84 percent the previous year, according to data gathered by MoneyCentral.

Also, their combined net profit margin declined to 4.44 percent in the period under review as against 5.83 percent the previous year, MoneyCentral data shows.

The Manufacturers Association of Nigeria (MAN) has warned that many of its members could close shop by January 2021, unless the Federal Government takes urgent steps to address challenges in the sector.

The association noted that many of its members that have been able to access the CBN’s N1 trillion intervention fund still could not buy machines for their production due to the foreign exchange scarcity.

“If there’s a scarcity of dollars, you cannot pay your suppliers. You cannot service your offshore debt, and that creates credibility problem,” said Muda Yusuf, head of Lagos State Chambers. “It’s a major crisis,”

The leverage ratio-which measures the amount of debt in the capital structure- are high, and analysts fret that entities may not have enough cash flows to meet future long term obligations if the economy fails to recover.

The largest listed manufacturers have a combined debt of N858.05 billion as at September 2020, according to data gathered by MoneyCentral.

Domestic production remains hindered by high cost of power, which is why productivity remains low.

Consumption will continue to be pressured as about 90 million Nigerians live on less than $1.98 a day, and The World Bank painted a gloomier picture when it said a couple of weeks ago that the country could have 100 million people in poverty by 2022.

“Nigeria will lose 14 years of per capita income in the next two to three years because of Covid-19, going back to 2010 levels, which is the equivalent in real terms of 1980, the lender said. The average loss in incomes of other middle-income countries is seven years,” said the Bank.

The bank estimates that government revenues will fall by the equivalent of at least 2 per cent of gross domestic product in 2020 alone as a result of the oil price slump.

Remittances, which made up about 5 percent of GDP last year, are set to fall as much as 20 percent this year.

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