Consumer confidence to worsen in H2, says analysts

Consumers in Nigeria will further feel the strain of a weakened economy in the second-half of the year as reduced purchasing power, coupled with the high cost of petrol and an anticipated increase in interest rate bites, according to analyst. 

Consumer Confidence Index (CCI) is how individual consumers feel about the state of the economy which is expressed through their daily actions on spending and savings.

Nigeria’s Consumer Price Index (CPI), which measures inflation climbed 0.9% in June to a new 11-year high of 16.5%. The previous month’s rate was 15.6%, according to the National Bureau of Statistics (NBS), which tracks the index. They added that it was the fifth consecutive month that the index has risen, which they attribute to higher energy prices, imported items and related products.

A Johannesburg-based economist at Renaissance Capital (RenCap),Yvonne Mhango, in a report titled: Nigeria’s Troubled Consumer Petrol Price, Naira and Interest Rates,  said “that a recovery in oil output would help lift consumption. However, she stressed this may not happen in the near term as government talks with militants in the Niger Delta are unlikely to yield positive results in the short term.

Ms. Mhango pointed out that Nigeria’s consumer sentiment has been in the negative for five years. She said that the Consumer Confidence Index (CCI) which has been negative since the third quarter of 2011 is a quarterly survey of 2,000 households, which measures their views on the economy, family wealth and family income. A negative index indicates respondents with an unfavourable view exceed those with favourable view.

“We found Nigeria’s consumer confidence to be correlated with the petrol price, FX rate, interest rates, and oil output (in order of strength). Our outlook on the consumer is premised on our view of the aforementioned variables.

“In import-dependent Nigeria, where all fuel and one-quarter of the food consumed are imported, it comes as no surprise to us that consumer confidence and the more market-driven parallel FX rate are negatively correlated. This correlation tells us that a weaker (stronger) naira dampens (ameliorates) consumption, as consumer goods become expensive (cheaper).

“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,” she added.

Mhango predicted that the interbank FX rate would peak at N390/$1, “albeit temporarily, if genuine price discovery were permitted, before retracing to N320-350/$1 in the first half of 2017.”

“Fuel’s importance in Nigeria’s economy cannot be understated. Not only is it necessary for vehicles that transport passengers and distribute goods, it also powers houses and factories. So, when fuel prices increase, the share of disposable income leftover for other goods and services falls.

“We believe this explains the negative correlation between petrol prices and consumer confidence. A weakening naira implies that petrol prices are set to increase in the short term. As incomes in Nigeria are flat or falling, higher energy prices mean less disposable income available to consume other goods and services.

“When the lending rate is increasing (decreasing), consumer confidence falls (improves). This is what the negative correlation between the two variables tells us. This may surprise those that know Nigerian households to be underleveraged, in part due to low credit penetration, compared with, say, Kenya.”she added.

Commenting on the pressure seen in the foreign exchange market in recent weeks, the Chief Executive Officer at Graeme Blaque Group, Zeal Akaraiwe, pointed out that when the new forex policy came into force about a month ago, many analysts held the view that it was the solution to the country’s perennial exchange rate crisis.

“It is not! People thought once we open the market everything would be okay. But opening the market was necessary for progress, but it was not the solution. The underlining fundamentals have not changed. The fundamentals that affect the currency have to do with balance of trade, which for the whole of 2015, was negative. We are also running a deficit budget,” Akaraiwe, who was a former bank treasurer, noted.

He stressed the need to control the demand for forex in the country, by implementing import-substitution policies.

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