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Plunge in Private Sector Capex Set to Test Nigeria Recovery

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Nigerian companies are pushing back big-ticket investment plans in another sharp blow to an economy that just exited a recession caused by the coronavirus pandemic that disrupted the demand and supply chain.

This suggests that entities are focusing on cash preservation and surviving the pandemic rather than risking valuable resources to chase an uncertain demand recovery.

A lower capital investment means firms are increasingly becoming bearish about Africa’s largest economy, as the International Monetary Fund expects real GDP growth in 2021 to turn positive at 1.50 percent.

Nigeria’s economy expanded by 0.51 percent in the first quarter of 2021.

Capital expenditure, or capex, reduced sharply by 65.54 percent to N91.84 billion as at March 2021, the steepest drop in 5 years, according to data gathered by MoneyCentral. That’s even compared to N265.69 billion expended last year.

The downward revisions reflect spending plans of twenty-one largest listed companies, excluding financial groups.

Companies are motivated to acquire property, plant and equipment when there are expectations of demand for their products.

Analysts have warned that the diminishing investment in capital expenditure means firms will not be employing more people on their factories and offices, and they added that the situation is a harbinger of existential crisis for a country with one of the highest misery indexes in the world.

“You will observe that a lot of companies are not operating their factories because demand is low. Even in the service industry, capacity utilization has been low,” said Johnson Chukwu, managing director and CEO of Cowry Asset Management Limited.

The Nigerian economy has been in a precarious situation before the advent of a virus that has killed millions of people across the globe, and it is still killing with a recent surge in India.

GDP per person has fallen every year since 2015 when oil prices slumped and the World Bank reckons that by the end of the year real income per person in Nigeria, home to one in six of sub-Saharan Africa’s people, will be at the same level as it was in the 1980s.

While Nigeria’s inflation reduced to 18.12 percent for the month of April, from 18.17 percent in March, it is way below the 6 percent and 9 percent Central Bank of Nigeria (CBN) target range. This reflects erosion in the purchasing power of consumers while borrowing becomes more expensive.

Unemployment rate, which surged to the second highest on a global list of countries monitored by Bloomberg, rose to 33.3 percent in the three months through December, according to a report published by National Bureau of Statistics (NBS).

Interestingly, consumer goods firms appear to be vulnerable to twin pressures of the headwinds as they are beset by decrepit infrastructure, deteriorating consumer purchasing power, multiple taxes, and foreign exchange scarcity.

The largest consumer goods firms saw combined capital expenditure dip by 44.09 percent to N32.51 billion in March 2021 from N58.15 billion the previous year.

While the industrial goods firms have seen earnings grow on the back of gradual pick up construction activities as the government relaxes social distancing measures, they are not still embarking on enough capital outlays.

Dangote Cement, Lafarge Africa, and BUA Cement Plc, saw combined investment in property plant and equipment fall by 82.27 percent to N29.07 billion as at March 2021.

Drilling down the numbers shows BUA Cement’s capex spend slumped by 90.45 percent to N12.13 billion as at March 2021 from N127.11 billion the previous year.

The 21 largest non-financial companies are not willing to spend from a gross cash pile of N831 billion, and where private investment is absent, governments always make up for it by spending on infrastructure such as roads, schools and hospitals.

One the greatest economist of his time, John Meyer Keynes, saw government spending as crucial not only to sustain consumer and business consumption, but to nudge individuals so that their confidence in the economy stayed high, to avoid a collapse in their expectations.

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.

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