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Firms Lift Capital Spending to N887.90bn Amid Dim Macro Outlook

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Several big Nigerian companies ramped up capital spending even as there are concerns that rising interest rates and uncertainties surrounding next year’s elections could force them to scale back on expansion plans.

Based on the third quarter results of the firms in the NGXASI index, capital expenditure has risen 32.82 percent to N668.51 billion from N668.51 billion as at September 2021, according to data gathered by MoneyCentral.

It is noteworthy that 63.52 percent of entities magnified spending on the acquisition of assets.

According to a MoneyCentral analysis, companies in the consumer goods, oil and gas, Agric, and telecommunications sectors have been the most significant contributors to capital-expenditure growth.

However, some firms are tightening their belts amid a potential economic downturn. Dangote Cement, the largest producer of the building material, saw capital expenditure spending dip by 45.38 percent as it recorded its biggest profit drop in five years.

Interestingly, increase in commodity prices account for much of the increase in capital spending crude oil price rallied following Russia’s invasion of Ukraine.

Seplet Energy, the largest indigenous oil and gas firm, has completed eight wells and another seven wells to be drilled in the fourth quarter of 2022. It maintained capital expenditure at $160 million despite additional wells.

The company has earmarked a $128.3 million deposit for the proposed acquisition of Mobil Producing Nigeria Unlimited (refundable) and the $12.0 million farm-in fee for the Abiala marginal field carved out of OML 40.

Investors and analysts are not optimistic over the country’s economic outlook as they added that aggressive monetary tightening by the central bank will force firms to trim their plans for investment in new plans and equipment.

“Certainly business organisations will typically respond to rising interest rates by cutting down on capital expenditure because of the increase in cost of capital,” said Gbolahan Ologunro, former research analyst at Cordros Capital Securities Limited.

“Moreover, subdued macro conditions will further reduce the attractiveness of projects with positive net present value leading to a push back in implementation dates of such projects,” said Ologunro.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has raised the benchmark rate for lending to 16.5 percent.

In October, Nigeria’s inflation rate reached a 17-year high of 21.09 percent. Nigeria’s Gross Domestic Product (GDP) grew by 2.25% (year-on-year) in real terms in the third quarter of 2022, the National Bureau of Statistics (NBS), said in its GDP report.

The Q3 2022 growth rate decreased by 1.78 per cent points from the 4.03 per cent growth rate recorded in Q3 2021 and decreased by 1.29 per cent points relative to 3.54 per cent in Q2 2022.

The Bureau blamed the decline on the base effects of the recession and the challenging economic conditions that have impeded productive activities.

Manufacturers are struggling with a severe foreign exchange scarcity that makes it difficult for them to import raw material and equipment to meet production while inflation is increasingly eroding the purchasing power of consumers.

The Nigeria 10 year government bond has a 14.594% yield, according to World Government Bonds data.

Rising borrowing cost brought on by rising interest rate bloats interest expense in the books of firms, which squeezes profit and undermines asset prices

“I believe the rising capex of a few companies in a selected sector so far may not be generalised, as most of them have slowed down expansion drive and are making only minimum capital investment required for maintaining operations,” said Rasaq Abiola, former head of investor relations at United Bank for Africa Plc.

“Nonetheless, a few entities may seek to take advantage of identified opportunities in the import substitution and backward integration policy orientation of the government to deepen their market share, especially those who are able to provide substitutes to imported products,” said Abiola.

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