Capital expenditure by Nigeria’s largest firm’s fell 25 percent in 2016 as a raging recession and slumping company profits led businesses to hold tight on spending amid rising inflation and falling demand.
Investment in property plants and equipment by the 30 largest listed firms on the Nigerian Stock Exchange (NSE), or the NSE – 30 slumped by N142 billion last year to N430 billion from N572.8 billion in 2015.
Worst hit sectors include oil and gas down 57 percent year on year, construction negative 80 percent and industrials down 43 percent, according to data compiled by Businessday.
“In the period of recession businesses do not expand their capacity. Most of the businesses could not have engaged in expansionary investment,” said Johnson Chukwu, Managing Director/ CEO of Cowry Assets Management Limited, by phone.
“There was severe dollar scarcity last year and most of the firms would have deferred their capital expenditure plans,” said Chukwu.
A near 50 percent slump in the average price of crude oil between 2015 and 2016, led to a 36 percent naira devaluation in June 2016 as the Central Bank of Nigeria (CBN), finally succumbed to pressure and adjusted its naira – dollar peg.
The devaluation meant property and equipment (which are mostly imported) became more expensive for firm’s to buy amid a slowdown in the economy and weaker company profits.
Nigeria’s economy contracted by 1.5 percent in 2016, the first negative growth rate since 1991 while after tax profit for the NSE-30 firms which make up some 90 percent of equity market capitalisation slid 3 percent.
Companies held off spending last year as concern over the outlook for the Nigerian economy and policy choices mounted.
“The foreign exchange limitation continues to pose challenges for corporates’ day-to-day operations, capital expenditure (capex) and financing activities,” Moody’s Investors Service said in a recent report on Nigerian corporates.
“Imported cost inflation will continue to pressure corporates’ margins as they struggle to fully pass on increases in input costs to customers.”
The rigid foreign exchange rate imposed by the government for most of last year failed to slow inflation which at 16 percent has essentially doubled since early 2016.
Over two years, dollar usage in the economy has almost halved, with Nigeria’s non-oil sectors struggling to adjust to limited dollar liquidity, given the typically high import content of inputs and the delay associated with sourcing domestic substitutes, according to Moody’s.
A rebound in companies capital spending would help support growth as the Nigerian Government budgets to spend a record amount of money for the second straight year in a bid to stimulate the reeling economy.
The Federal Government headed by President Muhammadu Buhari has proposed spending a record N7.4 trillion ($23 billion) in 2017.
While impressive that is still equivalent to less than 10 percent of nominal GDP estimated at N125 trillion for YE 2017 by the International Monetary Fund (IMF).
Conoil (-91%), Julius Berger (-80%), Forte Oil (-60%), Dangote Cement (-47%) and Seplat Petroleum Development Corporation (-45%) had some of the steepest decline in capital spending in 2016 as they cut costs and pursued greater operational efficiencies.
A pickup in private sector investment, along with stimulus from the expansionary budget , could provide a boost to domestic demand and generate a larger impact on the economy which is estimated to grow at just 0.8 percent this year.