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Will foreign portfolio investors flee Nigeria again?
There are concerns brewing over the likely implication on Nigeria’s financial markets if foreign portfolio investors decided against rolling over their stock of open market operations (OMO) bills at maturity, and took the option to sell and exit Nigeria.
The last time foreign portfolio investors fled Nigeria, it contributed to a five quarter long recession between 2016 and 2017.
Deciding against rolling over their OMO holdings could be triggered if foreign investors started to fret over falling oil prices and the steady decline in external reserves and saw the possibility of a diminished carry trade opportunity in Nigeria.
That scenario could well be on the cards. The Coronavirus outbreak has pushed oil prices below Nigeria’s budget benchmark which will cause all sorts of problems for government finances and foreign exchange inflows if it stays lower for longer.
The external reserves is also down some $8 billion since the start of the year with scope to slide further as the CBN defends the naira against the odds.
To keep foreigners happy with OMO bills, the CBN may need to raise yields which will come at a price too expensive seeing that the country already runs a current account deficit.
As an alternative way out, sources say the CBN may look to enter into swap arrangements in which dollars are exchanged for OMO bills if a large chunk of foreign investors choose not to roll over their positions.
Foreign portfolio investors and commercial banks are the sole players in the CBN’s short-term bills, after the apex bank in October last year barred local institutional investors from accessing the market.
As of August, the share of foreign portfolio investors in the CBN’s OMO market stood at N6.2 trillion ($17.1 billion), about 44.3 percent of the total N14 trillion worth of bills, according to latest CBN data.
What private equity investors are doing to hedge FX risks in 2020
The risk of currency depreciation has been the biggest worry for private equity investors in Nigeria since 2014 and it’s no different this year.
The naira has shed more than 70 percent in the past five years and that has been a nightmare for several private equity investors who manage dollar funds.
But private equity investors are being proactive and finding ways to hedge against any potential naira depreciation.
“With Coronavirus, we forecast oil prices could go as low as $40 per barrel so we are preparing for a world in which there could be a devaluation,” said Gbenga Adetoro, a partner at Africa Capital Alliance.
“We took hard lessons from 2008 and 2014; so in our plans with our companies, there’s a devaluation built in this year,” Adetoro, who spoke at a private equity event organised by the Private Equity and Venture Capital Association (PEVCA) and Rand Merchant Bank, said.
Adetoro will prefer a gradual decline in the exchange rate rather than the CBN’s dogged pursuit of a stable exchange rate that didn’t end well in 2016.
Danladi Verheijen, CEO of Verod Capital, is ensuring his private equity firm is buying companies at discounted value to minimise the impact of any naira depreciation.
“We are focused on great investments, not buying great businesses so that we are less impacted by devaluation,” Verheijen said. “The last transaction we closed is one where every product is exported which also helps minimise the risk of currency devaluation.”
GSK’s plan to split into two
The UK-based parent company of consumer healthcare maker, GlaxoSmithKline Nigeria, has announced a two-year separation programme that will split the company into two entities.
The first entity will be a biopharma company with an R&D approach focused on science related to the immune system, use of genetics and new technologies; and the second, a new leader in Consumer Healthcare.
According to the management, the program targets the delivery of £0.7 billion of annual savings by 2022 with total costs estimated at £2.4 billion (of which £1.6 billion is cash).
The Programme is expected to deliver improved operating performance, with meaningful improvements from 2022.
GSK Nigeria Plc’s 2019 full-year revenue increased 12.8percent to N20.78bn from N18.41bn. The company’s cost of sales surged 20.5percent to N15.05bn from N12.48bn leaving gross profit at N5.73bn from N5.92bn.
Selling and distribution expenses jumped 7.4percent to N3.28bn from N3.1bn while Administrative expenses dropped to N1.92bn from N2.24bn. Profit Before Tax for the period stood at N605million from N617million.
Revenue from consumer healthcare segment which consists of oral care, over-the-counter (OTC) medicines and nutritional healthcare; stood at N6.27bn from N6.45bn, the segment also recorded a profit of N214million from a loss of N255million in 2018. Revenue from Pharmaceuticals segment consisting of antibacterial, vaccines and prescription drugs, stood N14.50bn from N11.95bn
Oil prices rebound on hope that cure for coronavirus has been found
Oil prices jumped by 4% on Wednesday after it was reported that scientists had developed a drug against the fast-spreading coronavirus, an outbreak that continues to weigh heavily on global economic activity and oil demand.
The World Health Organisation played down the media reports, saying there were “no known effective therapeutics” against the virus.
Nigeria’s mining ambition
Nigeria expects its mining sector to grow to 3% of GDP within the next five years from just 0.3% currently as the government seeks to diversify the economy away from oil, the minister for mines and steel development said on Wednesday. Nigeria has been trying to boost the sector as part of efforts to diversify its economy. Gold, lead, zinc, limestone and coal are among seven strategic minerals Nigeria has identified for investment.