Some of Nigeria’s biggest manufacturers incurred losses in the first three months of 2024 as their borrowing costs swelled on the back of rising interest rates and a further devaluation of the naira, according to data compiled by BusinessDay.
The latest financial statements of 13 listed consumer goods firms show that seven of them- International Breweries Plc, Cadbury Nigeria Plc, Nigerian Breweries Plc, Nestlé Nigeria Plc, Dangote Sugar Refinery Plc, Champion Breweries Plc, and Guinness Nigeria Plc posted a combined loss of N388.6 billion in Q1.
BUA Foods, Unilever Nigeria, Dangote Cement buck trend
Of the six remaining companies, three which include BUA Cement, Lafarge Africa Plc and Nascon Allied Industries Plc reported a decline in their earnings by 37.6 percent, 65.2 percent and 24.9 percent respectively.
The remaining three posted an increase in profit. They include BUA Foods Plc, Unilever Nigeria Plc, and Dangote Cement Plc which posted a combined profit of N171.9 billion, up from N152.6 billion.
Despite the decline in earnings, the manufacturers’ combined revenue rose 79 percent to N2.27 trillion from N1.27 trillion.
Analysts say the further devaluation of the naira coupled with rising interest rates led to increased operating costs for the companies, particularly the multinationals whose major costs are denominated in foreign currencies.
The naira suffered a near 30 percent devaluation this year following a 40 percent devaluation last June.
The naira devaluation put more pressure on the margins of companies already dealing with double-digit inflation rates and weak purchasing power of cash-strapped consumers.
“A lot of consumer firms had higher finance costs because of FX losses and higher interest rates,” Ayorinde Akinloye, a Lagos-based investor relations analyst, said.
“Despite some of them having good operating performance, their profit declined while others recorded huge losses,” Akinloye said.
Muda Yusuf, chief executive officer of the Centre for Promotion of Private Enterprise (CPPE), also attributed the rising losses of consumer goods firms to the movement in the exchange rate.
“They did not really incur a lot of FX losses last year because the exchange rate was still fixed in a way.
“The interest cost is still a bit straightforward because the tightening on the monetary policy has been consistent for almost two years and it got worse under the present CBN governor,” he added.
Financing costs, also known as the cost of finance, are costs, interests, and other charges involved in the borrowing of money to build or purchase assets.
In Q1, the firms’ finance costs jumped to N616.5 billion from N65.8 billion in the same period of 2023.
Further analysis shows that Nestle reported the highest finance cost of N218.8 billion followed by Dangote Cement (N123.2 billion), Dangote Sugar Refinery (N122.5 billion), Lafarge Africa (N23.1 billion) and Nigerian Breweries (N18.1 billion).
Borrowing cost surges nine-fold
The cost of borrowing is higher because all the banks have reviewed their interest rates in line with the monetary policy rate changes, according to Gabriel Idahosa, president of Lagos Chamber of Commerce and Industry.
“The cost of borrowing has been going up very quickly, and with the volume of working capital you need and linking the exchange rate, there’s a need to borrow more naira,” he said.
George Onafowokan, managing director/chief executive officer at Coleman Technical Industries Limited, said most manufacturing businesses have shrunk as the working capital or funds available to manufacturers have reduced by 40-60 percent.
“If the money for buying raw materials has shrunk by that percent and you don’t have enough dollars to back that up, it means a lower capacity utilisation for manufacturers,” he added.
The Central Bank of Nigeria (CBN) in March raised its monetary policy rate for the second straight time by 200 basis points to 24.75 percent in a bid to fight inflation. In February, the CBN had increased the interest rate by 400 basis points to 22.75 percent.
Before the rate was hiked to 24.75 percent, the apex bank had increased it by 750 basis points to 18.75 percent last July from 11.25 percent in March 2022.
Apart from the MPR hike, the liberalisation of the foreign exchange regime in June weakened the naira from N463.38/$ to N1,354.2/$ as of May 4, 2024. At the parallel market, the naira is being traded at around 1,410/$ as against 762/$ before the FX reform.
Nigerian Breweries bemoaned the naira devaluation and rising interest rates.
“Operating profit grew by more than 1000 percent, underlying the strong topline performance and rigorous cost-saving initiatives in the period,” said Uaboi Agbebaku, company secretary at Nigerian Breweries, in a statement.
“However, due to increased interest rates resulting from the upward adjustments in monetary policy rates and continued volatility in the foreign exchange market, the net loss in the period rose by about 391 percent versus the same quarter in 2023,” Agbebaku said.
Thabo Mabe, managing director at NASCON said the currency devaluation resulted in an “extraordinary” foreign exchange loss of N3.0 billion which depressed their profit after tax to N1.2 billion, a 25 percent decline from the previous year.
“The operational business environment is challenging but we are confident that we are executing a robust strategy that will ensure we surpass our prior year achievements,” he added.
Over the past eight years, Africa’s most populous nation has slumped into two recessions owing to the collapse of oil prices, disruptions caused by the COVID-19 pandemic, and an inability of the government to reform the economy.
Upon his assumption of office last May, President Bola Tinubu implemented bold reforms including the removal of petrol subsidy and naira devaluation to boost revenues for the welfare of its citizens.
However, the reforms have increased inflationary pressures to the highest on record and weakened the purchasing power of consumers, even as businesses grapple with higher operating costs.
Data from the National Bureau of Statistics shows that the headline inflation quickened for the 15th straight time to 33.20 percent in March, up from 31.70 percent in February.
Food inflation, which constitutes more than 50 percent of headline inflation, also increased to 40.01 percent from 37.92 percent.
Rising inflation and sluggish growth in one of Africa’s biggest economies increased the number of poor people to 104 million in 2023 from 89.8 million at the start of the year, according to the World Bank.
Business activity in Nigeria rose to the highest in three months in April 2024 as a result of the improvement in the strength of its currency.
The latest Purchasing Managers’ Index (PMI) also shows that business activity in the country improved marginally to 51.1 last month from 51.0 in March. Readings above 50.0 signal an improvement in business conditions, while those below show deterioration.
Earlier in the year, businesses had pinned hopes on a stronger naira and economy with expectations of improved FX liquidity playing a pivotal role in stimulating foreign inflows. However, the further devaluation towards the end of January affected those expectations.
“Two events are likely to play out for businesses whose inputs or liabilities are dollar-denominated. Some will shut down operations amidst the uncertainty in the FX markets. The sophisticated and competitive ones are likely to begin to budget and price their products in dollars to mitigate the impact of FX instability,” Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said.
He said this is not good for Nigeria’s growth outlook, as economic activity could further deteriorate.
“The economy is becoming smaller in dollar terms, resulting in lower per capita income. This could suggest that the market is now less attractive.”
Experts say the unstable macroeconomic indicators have affected the medium and long-term plans of many businesses which could drive down profitability, lead to more job losses, low tax revenue, threaten the survival rate of many businesses, or trigger more exits of multinationals.
“Everything is going from bad to worse. No company, whether small or micro, can plan or project for the future now because they plan on stable indices. But how can they plan when they are not sure of what the dollar, the interest rates of the banks, or the inflation rate will be tomorrow,” said Femi Egbesola, national president of the Association of Small Business Owners of Nigeria.
According to him, many companies that seem to be alive today are sick and most of them are not making profits. “Many companies will still shut down because they cannot plan. About 10 million businesses have closed shop.”
Muda of CPPE recommended that from the policy perspective, there is a need to have a window for the real sector to have a more concretionary interest rate.
“That is why we need to double down on this development finance window to be able to support the real sector. The sector cannot survive on this market-driven interest rate unless those that are really big and have some monopoly powers,” he said.
