The squeeze on consumers’ pockets
The lingering macro challenges in Nigeria have taken their toll on consumer discretionary spending. Nigeria is an import dependent country and as such has been bruised by the fx sourcing challenges. Given that revenue from oil is predominantly in dollars, the slide in the oil price as well as disruptions to oil production have contributed to fx scarcity.
Import costs have soared as seen in the acceleration of the country’s headline inflation rate. The CBN has a “reference range” of 6%-9% for headline inflation. However, the headline rate broke out of this range in June 2015, and had moved to 17.1% y/y as of July 2016. There has been no revision to the reference range. For July, commentary from the National Bureau of Statistics (NBS) identified energy products and import items as the principal drivers behind the acceleration in inflation; meanwhile, imported food inflation surged to 20.5%.
The drought in liquidity across the country is discernible. Noticeably, luxury spending among consumers has been curtailed. For instance, fewer visits to the cinema, ice cream parlours and quick-service-meal points have been observed.
There has been a general moderation in traffic in the airline industry – a reflection of the squeeze in consumers’ purchasing power. Additionally, fx challenges are weighing on the sector as the importation of aviation fuel has slowed down, resulting in delays and in some cases, cancellation of domestic flights. Scarcity of aviation fuel is not the only challenge created by fx sourcing issues. The inability of airlines to repatriate their funds has also plagued the sector. Households will continue to revise their spending patterns to reflect the new realities. Expenses will be geared towards ‘priority’ items, therefore demand for international travel is likely to wane.
The customs agency has recorded a decline in imported goods; this is adversely impacting the agency’s revenue collection. Based on data released on the automotive industry, the importation of brand new cars plummeted by 67% last year. However, local assembling appears to be gaining some traction as the FGN has granted licenses to over 30 new assembly plants since the inception of the Nigerian Automotive Industry Development Plan (NAIDP). In as much as the roll-out of locally assembled cars has increased, car prices are still prohibitive for the average Nigerian. This has resulted in some buyers of brand new cars shifting to ‘tokunbo’ cars (second hand imports). Meanwhile, anecdotal evidence also suggest that purchases of fairly-used cars have declined.
The property market has also been impacted. The infamous fx sourcing challenges have put a strain on the sector as difficulties in securing imported building materials have led to higher costs in developing housing units. Industry sources suggest that Nigerian tenants spend about 60% of their disposable income on rent, compared with 30% recommended by the United Nations. Given the economic downturn, tenants will continue to face budget constraints; thus, the number of rental defaults in the market (particularly residential) are likely to surge.
The development of the mortgage market is necessary to assist with delivering affordable homes across the country. Financing remains a major bottleneck as mortgages continue to account for a low single-digit percentage of banks’ loan books. Granted, the Nigerian Mortgage Refinancing Company (NMRC) has injected about N6bn and is currently evaluating 5,000 mortgages. While this is laudable, it is not sufficient.
As for the ‘restaurant and hotel’ industry, a recent survey carried out by an indigenous credit rating and risk management company disclosed that close to 80% of hotel reservations are made by corporates. The fact that corporates are less sensitive to price movements than retail should provide some comfort for hotels. However, imported goods contribute significantly to the cost of doing business for the restaurant / food service segment. The prices of food products such as rice, poultry and fish have skyrocketed. This has put some strain on restaurants and fast food operators, particularly the small- to medium-sized indigenous brands. Many have been forced to revise their menu prices upwards and industry players are tasked with identifying innovative methods to retain and if possible increase their clientele.
For manufacturers heavy on imported inputs, most have been forced to source fx from the parallel market which is trading at a premium to the interbank rate. This has resulted in higher input costs, and contraction in profit margins, as manufacturers find it difficult to fully pass on these costs to consumers. In many cases, delays in sourcing fx for the purchase of critical raw material have led to a drop in output. To mitigate the effects of stock-out situations and also to provide enough time for sourcing fx, many companies now carry several months of inventory at huge costs.
Just like other businesses in various sectors of the economy, manufacturers are downsizing in a bid to cut costs. As such, a number of firms have been reclassified by size; from large to medium-size and in some cases, medium-size to small company. Furthermore, a few manufacturers have been able to boost their processing of local raw materials, particularly food, beverages and textile focused companies.
The chief beneficiaries of the current economic situation are agriculturists as well as local manufacturers. For instance, the challenges faced with importing food inputs should drive restaurateurs to source inputs locally which could boost growth. Needless to say, poor power supply still poses a major roadblock and inhibits the scaling up of businesses in agriculture and local manufacturing. The alternative source of energy, generators, are now much more expensive as fuel price has risen.
As for the banking sector, there are no surprises that the volume of consumer loans have deteriorated and non-performing loans (bad loans) have increased. Although bank loan books have shown decent growth from December 2015 to June 2016, this was mainly due to translation effects (Given that at least 40% of their loan books is dollar denominated, the naira depreciation has led to an increase in their reported naira value of the overall loan books). However, the underlying loan growth is actually weak.
Regarding non-performing loans, the data reported by banks so far have not been alarming. In addition, most of the deterioration has come from corporate loans going bad, particularly foreign currency loans, not retail. Banks’ loan books are generally more skewed towards the corporate category. With the strain this segment is under, it is expected that liquidity in general will worsen going forward, making it even more difficult for consumers to obtain loans. Furthermore, with the steady rise in interest rates, borrowing is now more expensive.
Generally, during an economic turmoil the flight-to-safety phenomenon becomes more visible as a sudden increase in investors’ appetite towards safe assets relative to risky assets is observed. Investments in treasury securities are relatively risk free when compared with equities. In Nigeria there is increased participation in treasury securities; this trend took off this year when yields spiked due to increased government borrowing.
Given the depreciation of the naira, Nigeria’s GDP per capita is now about US$1,512 compared with US$2,462 in 2014. Nigerians have become poorer relative to 2014. This metric affects the flow of foreign direct investments (particularly in the consumer goods space) into the country as most international companies tend to use it as a measure to project the spending capacity/potential of consumers in a country or the purchasing power in dollar terms.
Considering that the economy is mainly government driven and by definition the private sector depends heavily on the public sector, the onus is on the government to generate multiple revenue streams outside the oil sector. Nigeria has a huge informal sector; thereby, widening the tax net should increase revenue generation. Consequently, this would enable the government to improve on infrastructure spend and hopefully stimulate the economy.
Associate on Macroeconomic & Fixed Income Analysis at FBN Capital
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