Nigerian companies raised spending on plant, property and equipment (PP&E) in January to June, underscoring the resilience of capital expenditure amid a slow growing economy and dampened business confidence.
Firms raised capital expenditure by 19.10 percent to N293.74 billion in the second quarter of 2019, data gathered by BusinessDay shows.
The current figure is however lower than the N312.15 billion recorded in 2017 when the introduction of a new foreign exchange regime and a rebound in crude oil price paved the way for companies to access dollars for purpose of importing raw materials and equipment.
Analysts say capital investment by large corporates has been slow because the level of growth doesn’t encourage investment in productive assets.
When people buy homes, and spend more on food, then companies will acquire assets to meet demand.
“There hasn’t been much investment in in physical asset as the country is yet to recover from the recession of 2016,” said Johnson Chukwu, managing director and CEO of Cowry Asset Management Limited.
“The economy is not optimising its resources so a lot of companies are not operating at full capacity,” said Chukwu.
The country’s gross domestic product expanded 1.94 percent in the three months through June from a year earlier, according to a recent data from National Bureau of Statistics (NBS).
That compares with a revised expansion of 2.1 percent year on year and 2.38 percent in the first quarter (Q1) and the fourth quarter (Q4) of 2018.
After the aftermath of the 2016 recession, growth in the economy is still stuck below the pre-recession and pre-oil price shocks levels.
While there is a gradual recovery, many sectors are yet to recover from the clear downturn in the economy.
Nigerians are getting poorer with over 50 percent of a population of 200 million live on less than $1.92 a day, while the country overthrew India to become poverty capital of the world.
A high inflationary environment, hike in the price of fuel, and currency devaluation has kept consumers in check as unemployment rate is at all-time high of 23 percent.
To compound the woes of manufactures are the menacing gridlock at the Apapa Port, huge levies imposed by government and regulatory authorities, and epileptic power supply.
The manufacturing sector is one step away from recession as it contracted by 0.10 percent in the second quarter of the year that compares with an expansion of 2.40 percent in the last quarter of 2018.
“If the house hold do not consume, the economy will not grow,” said Ayodele Akinwunmi, analyst at FSDH Merchant Bank.
Analysts at United Capital in their second quarter economic outlook expect the momentum in the Nigerian economy to remain tepid, below population growth of 2.6 percent.
“This is predicated on the continued operating challenges in the economy and absence of the implementation of major policy reforms thus far during the quarter,” said analysts at United Capital.
“Notably, growth in the Manufacturing, and Construction sector that largely depends on government spending should receive some boost in H2-19 as the newly formed cabinet set out to implement the 2019 budget,” added analysts at United Capital.
Analysts say federal government should as a matter of urgency formulate structural policies that will translate into job creation and reinvigorate the economy. They added that government should refrain from policies that spook investors, and that no country can grow without copious foreign direct investment.
Breaking down the capital expenditure by Nigerian companies shows that while the dominant cement makers spent N84.0 billion on the acquisition of assets, the figure is 6.02 percent of the total value of property plant and equipment in the balance sheet.
“Volumes are weak due to poor economic conditions in the private and public sector, which means capital utilization has been low,” said Tunde Bakare, Industrial Goods analysts at Afrinvest Limited.
Increased spending on infrastructure by the private and public sector will help underpin demand (cement volumes), as the country has a housing deficit of 17 million.
The consumer goods firms have scaled back on expansion plans as cumulative capital expenditure spend fell by 20 percent to N44.44 billion as at June 2019, while the ratio of acquisition of property plant to equipment to value of property plant and equipment stood at 4.0 percent.