Purchasing Managers Index (PMI)
FBN’s PMI reading rose to 58.5 points in August from 56.3 points in July. According to the FBN report, output, employment, new orders and suppliers’ delivery time all expanded while stocks of purchases declined marginally in the review period. However, all five subindices remained in the positive territory. The improved access to foreign exchange (FX) through CBN’s sustained FX interventions and improved utilization of local input substitutes by manufacturers led to the continuous expansion in the manufacturing sector. On the other hand, the CBN’s PMI declined marginally to 53.6 points from 54.1 points in July. In the review period, raw materials, inventories and suppliers’ delivery time grew at a faster rate while production, new orders and employment levels grew at a slower rate.
We expect the manufacturing sector to remain in the positive territory with PMI readings for the coming month above 50, indicating an expansion.
The average ongrid power output from the national grid in August was 3,352.97MWh/h, 0.08% higher than July’s average output of 3,350.45MWh/h. Despite this marginal improvement, the sector lost approximately N38.32bn. The sector was hampered by high frequency constraints and gas constraints in major power stations. The power sector load summary from the 13th to 20th of August showed an average of 1,000MW being rejected daily by Power Distribution Companies (Discos) and a total of 8,391.05MW rejected within eight days.
The Transmission Company of Nigeria (TNC) as at September 7th revealed that Nigeria was only able to generate 3,264MWh/h despite an increase in national demand to 19,100MWh/h, due to the TNC transmitting below its current capability of 7,000MWh/h. Transmission remains the weakest link in the power value chain in Nigeria as power cannot be distributed to specific geographical locations due to the technical difficulties TNC faces. As at September 15th, average ongrid power output declined sharply by 41.3% to 2,310MWh/h.
This was due to a sharp fall in system frequency from 50.36Hz to 48.50Hz Lagos, Osogbo, Kainji, Jebba and Shiroro lost supply. Egbin ST6 and Sapele I were also out of service. in Nigeria as power cannot be distributed to specific geographical locations due to the technical difficulties TNC faces.
We expect stable power generation in the month of September. However, we expect a decrease in power supply from the month of October. This is mainly attributable to the start of the dry season and further rejection of generated energy from power plants by Discos in Nigeria. However, the relative peace in the Niger Delta will help to drive hydro power.
Headline inflation eased marginally to 16.01% in August, declining for the seventh consecutive month in 2017. This implies that base year effects are waning. However, the core inflation rate moved in the opposite direction with headline inflation, increasing by 0.1% to 12.3% in August. The contributions with the highest increases were pharmaceutical products and maintenance, clothing materials, furniture and furnishings, nondurable household goods, books and stationary, shoes and other footwear, motorcycles, and passenger transport by air.
The upward trend in the food basket was bucked as food inflation declined marginally to 20.25% from 20.28% yearonyear in the month of July. Although there was a decline in food inflation, it is still above 20%, due to poor weather conditions in specific northern states reducing agricultural produce. Highest increases recorded in price level of the food basket included meat, fish, bread and cereals, vegetables, coffee, tea and cocoa, and milk, cheese and egg. Meanwhile, imported food inflation rose marginally to 14.42% from 14.11% in July, which could be linked to the currency volatility in the exchange rate market
In the coming months, we expect further weakness in the influence of base year effect on inflation. The harvest season is fast approaching and as such, food prices are expected to ease as a result of seasonality.
Markets opened at N215.44bn long in August relative to July’s opening position of N130.69bn long. Average liquidity in August was N107.96bn short relative to the average opening position in July of N89.65bn long. Reduced liquidity in the money market is attributable to a rise in OMO sales that amounted to a total of N974bn (N779bn in July) and a fall in FAAC disbursements to N467.9bn from N652bn in July. Average NIBOR (OBB, O/ N and 30day) was 27.48% pa in August, compared to 17.68% in July. The OBB and O/N rates were as high as 105% pa and 107.75% pa respectively as at the 9th of August. However, the rates fell significantly to 7.33% pa and 8.42% pa respectively as at August 31st.
As at the 8th of September, the average liquidity in the system was N59.24bn long and the OBB and O/N rates as at the 15th of September were higher at 11.33% pa and 12.17% pa respectively. In the secondary market, average yields on Treasury Bills ranged between 16.93% 17.77% for the 91 to 364 day bills as at the 15th of September. Lending rates have remained flat at an average of 25%.
Interest rates movement are a function of market liquidity. We expect the volatility in the interbank rates to remain in September, driven by CBN OMO and forex sales mopping up naira liquidity in the banking system. The Monetary Policy Committee (MPC) meeting is set to hold September 2526. If the CBN maintains status quo (MPC rates of 14%), we do not expect to see any changes to shortterm interest rates and the level of liquidity in the market. However, there is increased pressure on the CBN to reduce the MPR due to positive GDP growth by 0.55% in Q2’17, decline in headline inflation rate to 16.05% and the election cycle around the corner. If this happens, we expect shortterm interest rates to decline and market liquidity to increase.