Reports of a decline in business confidence

The CBN’s latest Monthly Business Expectations Survey Report for July 2018 shows the business confidence index at 13.6 points, indicating less optimism on the economy when compared with 34.7 recorded in June. The survey had a sample size of 1,050 businesses covering services, industry, wholesale/retail trade and construction. A response rate of 94.7% was achieved. There is a direct correlation between a country’s business terrain and its macroeconomic environment. This latest survey still points towards a stable macroeconomic outlook. However, the slippage in the index reading tells us that a cautious approach was the favoured stance of respondents in July.


  • The mild optimism in July was driven by the opinion of respondents from the services (9.3 points) and industrial (3.6 points) sectors while those from the construction and wholesale/retail trade sectors represented just 0.4 and 0.3 points respectively of the total.

  • In contrast to May and June, respondents were visibly pessimistic on access to credit as the sub-index posted a contraction at -3.5. Banks are generally cautious about lending to the private sector to keep a lid on non-performing loans. At its latest meeting, the monetary policy committee called on the CBN to incentivise the commercial banks to increase lending to the private sector through a differentiated regime for the cash reserve requirement. If implemented, this could provide direct long-term bank credit at 9%, with a minimum tenor of seven years and two years’ moratorium.

  • We suspect banks would welcome this on-lending as it would improve their overall net interest margins. However, the impact could well be muted as on-lending is subject to the credit quality of players within prescribed sectors as well as overall demand.

  • The survey pointed towards a positive outlook for employment. The services, wholesale/retail trade sectors and construction have the best prospects for job creation at 28.8, 22.2 and 20.5 points respectively. For the latter, optimism could be due to the potential impact from capital releases under the 2018 budget, from which construction should be a chief beneficiary.

  • As for inflation, the general expectation is for a slowdown in the headline rate for August. Our view is different: the run of positive base effects has come to an end. Furthermore, we see pressure on food prices from insecurity in important growing areas. We see a rise in the inflation headline rate to 11.5% y/y in August from 11.1%.

  • The survey also captured the outlook for business confidence in August. Based on data from respondents, the business confidence index is projected at 58.7 points. When we consider our trend analysis, the projected outlook has been significantly high for the past five months. In our opinion, it is unlikely that the index will come close to this projection in August.

  • Notwithstanding, we expect business confidence to remain positive. However, if consumption patterns remain uncertain, this could result in a lower reading for overall business confidence in coming months.

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