Analysts warn of earnings slide as firms battle naira crunch

A naira crunch sparked by the redesign of high-value currency notes in Nigeria is doing more harm than good to businesses in Africa’s largest economy, with analysts now warning of a potential decline in earnings in the first quarter of 2023.

The worst reading of private sector activity since the COVID-19 pandemic, according to Stanbic IBTC’s Purchasing Managers Index (PMI) reading for the month of February, already serves as a precursor of what is to come.

The PMI, which is a leading indicator of economic activity and can be used to forecast gross domestic product, fell to 44.7 in February from 53.5 the month before.

The primary reason for the contraction in the PMI was the redesign and cashless policy of the Central Bank of Nigeria (CBN), which resulted in a material reduction in cash in the economy, thereby limiting trade, particularly in informal and open markets.

Currency in circulation declined by 58 percent in January 2023 to N1.39 trillion from N3.01trillion in December 2022, while currency outside the banks declined by 72 percent in January 2023 to N789 billion from N2.57 trillion in December 2022.

The cash crunch resulted in steep contractions in both outputs and consumer orders and that made firms scale back on purchasing and hiring activities.

Only last week, Nigerian Breweries Plc, the local unit of Heineken BV – the world’s second largest brewer, said it had its worst February in 15 years after the central bank drained about N2.1 trillion of cash from the economy and left consumers with less cash to buy beer.

Nigerian Breweries depends on cash for about 80 percent of its retail sales, according to Chief Executive Officer Hans Essaadi.

The beer maker is but one of several other businesses reeling from the naira crunch in Nigeria where cash is king.

“We see increased downside risk to the top line and consequently earnings of listed companies, given the reduced activity in February 2023,” said Muyiwa Oni, head of equity research at Stanbic IBTC Bank.

“We see the consumer companies as the most at risk of negatively impacted earnings from the cash crunch, while we see the financials as the least affected from an earnings point of view in the near term,” Oni said in a note to investors. “Barring a sharp reversal of the cash reduction in the system, we could potentially see subdued economic activity in March 2023 as well.”

Read also: Nigerians reject old naira notes, await CBN

The CBN began replacing old N200, N500 and N1,000 notes with new ones last December but hasn’t provided enough cash to go round, triggering a cash scarcity that’s intensified in recent weeks.

The move seemed rushed in a country where 40 percent of the population is unbanked and there’s only 4.5 bank branches for 100,000 adults.

Glitches in banks’ payment systems have also increased as the systems appear to be unable to accommodate the material increase in the volume of transactions resulting from the shift away from cash.

Nigeria’s top court ruled that the old N500 and N1,000 notes should remain legal tender till December 31, 2023 but the CBN has remained silent, even though some banks are now dispensing the old notes.

A slowdown in corporate earnings would deal a blow on Nigeria’s fragile economy as it typically leads to a slowdown in job creation as companies try to manage costs.

That will be a bitter pill to swallow in a country where only one in three people are employed.