Petrol price, naira, interest rates take toll on consumers

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MONDAY AUGUST 1 2016 – Analysts that specialise in consumer matters usually find something positive to say about Nigeria’s middle class and consumer prospects, even if it is in the depth of economic worries.But not so any longer in the country, where players in the fast-moving consumer goods (FMCGs) market have been left scratching their heads about the future of their business in an economy now in recession.

The share scale of the recession has been exceptional compared to other emerging market economies that are going through the turbulent times.

Africa largest economy slipped into recession in 2015 and confirmed now in recession by the Minister of Finance, Kemi Adeosun last month, after two periods of negative growth, companies dumped their workforce rapidly, a huge number of small businesses closed shops and rating agencies including Moodys downgraded after the country’s external reserve came under huge pressure exacerbated by currency controls by the Central Bank of Nigeria (CBN) that created so much uncertainty.

Some commentators are already suggesting the recession could turn the bad corner into a depression. All the numbers are currently looking miserable. Indices of the equities market are still in decline. The All-Share Index (ASI) declined by 6.55 percent from 29,597.79 in June ending to 27,659.44 by July 22 2016. Market capitalisation equally dropped by 6.26 percent from N10.17 trillion. Headline inflation is at 16.48 percent, ‘’a reflection of structural factors including high cost of electricity, high transport cost, high cost of inputs, low industrial activities and high prices of both imported and domestic food products,’’ according to the CBN.

As the chaos has taken hold, consumers have been burnt badly. Now analysts at RenCap say they expect the Nigerian consumer to come under further strain in the second half of 2016 as the Naira prospect remains dire. RenCap notes that the consumer sentiment of the majority of Nigeria’s households has been negative for five years this is according to the consumer confidence index (CCI) which has been negative since 3Q11. They, as well as a host of economists, don’t believe a recovery in oil output would help lift consumption either, at least not in the near term.

RenCap said in their report that it comes as no surprise to them that consumer confidence and the more market-driven parallel FX rate are negatively correlated in import-dependent Nigeria, where all fuel and one-quarter of the food consumed are imported.

‘’As we see the naira weakening further in the short term, consumer confidence is likely to worsen and consumption fall. The downside for the consumer may be mitigated by the fact that most imports are being transacted at the parallel FX rate (NGN365/$1).’’

Consumer predicament is certainly compounded now with the hike in July of Monetary Policy Rate (MPR) by 200 basis point, from 12 percent to 14 percent. Distributors of consumer goods are already having a field day passing on higher interest rates on working capital loans to consumers as earlier predicted by RenCap.

 

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