The devaluation of the naira is having a significant impact on the books of Nigeria’s biggest firms as 11 listed firms posted N716.8 billion FX losses in the second-quarter earnings season, according to BusinessDay’s analysis and experts.
About two weeks after President Bola Tinubu promised to unify the nation’s multiple exchange rates, the apex bank decided to float the naira at the Investors’ and Exporters’ Window of the foreign exchange market. Since then, the naira has fallen from N471/dollar to N870/dollar.
Three of the biggest firms which are MTN Nigeria, Nestle, and Dangote Cement account for 51.5 percent of the total N716.8 billion FX losses in the first half of 2023.
“There is a firm that I know very well that has lost close to N650 million as reflected in its draft audit report for 2022. It is because of the differences in FX rates,” a senior chief financial officer told BusinessDay.He added, “This is a company that used to pay about N100 million tax to the govt in the past but its profit before tax in 2022 is less than N30 million.”
“Very serious issue firms are going to face in the coming months,” the source noted.
“For companies with short-term borrowings, the payment could likely impact their subsequent cash flow when they pay up,” Olufisayo Ademilua, senior consumer goods analyst at CardinalStone securities said.
Ademilua stated that the realisation of these FX losses depends on the nature of the borrowings.
“However, for companies that have a large chunk of their borrowings as long-term debt, the company could have leeway in amortising. We also think that the source of borrowings could affect the payment of these loans. For example, companies that took debt from their parent companies could receive more leniency in payment,” she added.
Revaluation loss of Unilever, one of Nigeria’s biggest manufacturing goods firms rose to N14.36 billion from N1.06 billion, while restructuring cost increased to N2.36 billion from N0.48 billion in the first half of 2022.
Unilever stated that the revaluation loss arose from foreign currency-denominated balances related to trade loans.
Additionally, the consumer goods firm noted that the restructuring cost included the write-off of raw and packaging materials due to the halt in production in the home care category and associated redundancy expenses.
Ademilua said some firms anticipated the naira devaluation, which explains why some companies were engaged in hedging instruments.
She cited an example of most consumer goods companies that are engaged in derivatives to hedge against foreign exchange risks, saying these numbers may reflect their full-year results.
Discussing how FX losses can lead to laying off workers, she said laying off workers depends more on business restructuring.
“For companies that could be involved in acquisitions, it might lead to a decrease in the labour force while other companies that plan to divert or sell off a part of their business could lay off workers,” Ademilua said.Muda Yusuf, chief executive officer, of the Centre for the Promotion of Private Enterprises, said firms with foreign currency exposure as a result of borrowings in foreign currency will be hit by the naira depreciation which results in FX losses.
He stated that foreign currency assets such as savings and investment in Eurobonds will lead to a gain for the firms but the value of debt a few months ago will be lower than it is now as naira devaluations have led to an increased value of debt denominated in foreign currency.
“FX losses for these firms is a one-time adjustment and it is not going to happen all the time because exchange rate risk has now materialised,” Yusuf said, adding that the firms with FX losses can hedge for future transactions because they are already victims of the exchange rate risk.
Analysts at CSL Stockbrokers Limited said the unification of the exchange rate will increase the cost of production for companies that import raw materials and that they will be forced to pass on the increase to the final consumer.
They said: “Importers of eligible items at the I&E window will now have to source FX at a higher rate and will likely push the associated increased costs to the end consumers resulting in an increase in the price of goods and services, especially imported goods.
“Consumers still processing the impact of the removal of fuel subsidies will now have to deal with an additional increase in prices of goods and services associated with a depreciation of the currency. Empirical evidence shows a strong pass-through effect of changes in the exchange rate on consumer prices.”