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Tuesday, March 21, 2023

Nigerian Companies Cut Spending on Growth Fears

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Nigerian companies are watering down their spending plans as they have not yet recovered from the devastating effects of the coronavirus pandemic as the challenging operating environment damps business confidence.

The capital expenditure of the 30 largest NGX listed entities dipped by 63.22 percent to N76.28 billion in March 2021 from N207.41 billion as at March 2020, according to data gathered by MoneyCentral.

Capex is one of the biggest concerns about the state of the economy because it is used to gauge future profits.

As companies invest in their businesses in order to expand their products and services, they hire more employees and increase salaries or wages.

But deteriorating consumer spending elicited by rising inflation and spiraling utility bills, foreign exchange challenges, and infrastructure bottlenecks has hindered corporates from embarking on expansion plans needed to magnify earnings.

Analysts say a lot of companies are not sweating their assets enough since capacity utilization is low and that there is room for improvement if the government can create an enabling environment for businesses to thrive.

Ayodeji Ebo, Senior Economist/Head Research and Strategy, Greenwich Merchant Bank, said firms are raising commercial papers that have short term tenors to bonds that are issued to fund future long term expansion plans.

“For most firm’s capacity is low so they see no reason to expand,” said Ebo.

There are fears that chief executive officers of corporations could shrink the work force to stay afloat, a double whammy for a country that has been crowned the poverty capital of the world.

The jobless rate in Nigeria rose to 33.3 percent in the three months through December, according to a report published by the National Bureau of Statistics.  That’s up from 27.1 percent in the second quarter of 2020, the last period for which the agency released labor-force statistics.

While Nigeria’s inflation rate dropped further for the second consecutive month to stand at 17.93 percent in May 2021 from 18.12 percent recorded in April 2021, the figure is way behind the central bank’s inflation target range.

Consumer goods firms, who are more susceptible to inflationary pressures and weak consumer spending saw combined capital spending dip by 7.60 percent to N43.27 billion in March 2021 from N46.83 billion the previous year.

Investment in property plant and equipment has been nosediving since 2016, they spent a total of N89.15 billion that year.

The largest producers of the building material cement -Dangote Cement, BUA Cement, and Lafarge Africa- saw combined investment in property plant and equipment reduce by 83.15 percent to N29.07 billion as at March 2021.

BUA Cement’s capex spending slumped 90.45 percent to N12.13 billion as at March 2021, while Dangote Cement’s capital spend reduced by 65.02 percent to N38.46 billion in the period under review.

The outlook for the industrial goods sector is benign since the government has earmarked funds for capital projects across the country while a gradual recovery in real estate is expected to accelerate demand for cement.

The 2021 budget submitted to the National assembly showed that the government plans to spend N3.60 trillion on capital projects, an increase of 45 percent from the revised capital expenditure for 2020 N2.49 trillion.

There is light at the end of the tunnel as the roll-out of vaccines and the relaxation of lockdown measures is driving a gradual economic recovery.

Nigeria’s economy grew by 0.51 percent year on year (y/y) in the first quarter (Q1-21) from 0.11 percent in the fourth quarter of (Q4) of 2020, but lower than expansion of 1.87 percent in the first quarter of 2020.  (Q4-20: 0.11% y/y and Q1-20: 1.87% y/y); the non-oil sector continued to drive the overall economic performance amid a slower decline in the oil sector.

The thirty most capitalized and liquid firms otherwise known as “Nigerian Stock Exchange (NSE) 30” however saw a combined net income spike by 35.13 percent to N695 billion in March 2021 from N514.86 billion as at March 2020, according to data gathered by MoneyCentral.

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