The devaluation of the Naira in June 2023 caused quite a shock in the Nigerian business environment with many companies accruing losses due to their foreign exchange exposures.
Many Nigerian companies in the fast-moving consumer goods sector (FMCG) telecom, and brewing industries, saw strong declines in earnings due to losses caused by changes in foreign exchange rates.
“Nigeria’s dependence on volatile oil prices makes it difficult to predict the future trajectory of the foreign exchange market. The value of the naira will be determined by the balance between the inflow of foreign exchange into the country,” Seasan Adeyeye, a portfolio manager at ARM Securities said.
Nigerian businesses across various sectors rely heavily on imported goods and services to support their production processes. This dependence on imports often exposes them to the risks of foreign exchange fluctuations, particularly when the local currency weakens.
Companies heavily reliant on imported raw materials or components have found themselves bearing the brunt of the FX strains, with their bottom lines taking a significant hit.
“Various firms that rely on imported raw materials had more exposure to foreign exchange leading to a spike in foreign exchange loss,” Mustapha Umaru, equity research analyst at CSL Stockbrokers Limited said.
In their latest separate financial statement, FCMG companies recorded the highest foreign exchange loss amounting to N269.50 billion in the first nine months of 2023 from N13.56 billion in the same period of 2022.
The same development plunged the cement makers too, who recorded N135.37 billion as foreign exchange loss compared to N78.62 billion recorded in the same period of 2022.
Read also: Operating costs, FX losses erode downstream oil firms’ profits by 24%
The telecommunication sector also is in the heat of the wave, with MTN communications recording N232.83 billion compared to N27.87 billion recorded in 2022, while Airtel Africa Plc recorded a $471 million loss in the first nine months of 2023.
Umaru noted that for telecommunications, exposure to exchange loss came from expansion in network spectrum, and equipment needed to build network coverage.
Adeyeye also noted that telecommunications companies incurred significant losses due to their dollar-denominated tower contracts. The volatility of the foreign exchange market resulted in substantial losses when these contracts were converted to local currency.
The brewery makers are not left out as they recorded N129.68 billion as foreign exchange loss against N8.32 billion recorded in the same period of 2022.
The health sector, too, has not been spared the adverse effects of FX volatility recording N13.192 billion compared to N1.57 billion recorded in the same period of 2022, with a major player in the industry, GSK exiting Nigeria because of the foreign exchange problem.
Africa’s most populous nation relies heavily on imported drugs, active pharmaceutical ingredients and equipment used in drug manufacturing from China, India, Malaysia and the Netherlands.
Pharma West Africa, a major pharmaceutical exhibition in Africa, said that over 70 percent of medicines in Nigeria are imported, with medicines accounting for a chunk of the country’s total healthcare spend of $10 billion.
Everything in the pharmaceutical industry is imported from raw materials to packaging, according to Gabriel Idahosa, deputy president of the Lagos Chamber of Commerce and Industry (LCCI).
In June 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 N1,150/dollar.
The unrelenting volatility of the naira against major global currencies has thrown companies into a state of uncertainty, making it difficult to plan effectively and secure sustainable growth.
Business activity in Nigeria contracted for the first time in seven months, according to the Purchasing Managers’ Index (PMI) report.
According to the latest monthly PMI by Stanbic IBTC Bank, the headline index dropped to 49.1 in October from 51.1 in the previous month. Readings above 50.0 signal an improvement in business conditions, while those below show deterioration.
“Central to the challenges for firms in October was the sharpest rise in overall input prices since the survey began almost a decade ago. Purchase costs were up rapidly, largely due to currency weakness but also the lingering impacts of the removal of the fuel subsidy,” the report said.
The revaluation effects of these companies’ foreign currency transactions and liabilities pushed their obligation in naira term upward, according to their separate result reviewed by BusinessDay, forcing their respective profits to drop.
“The depreciation of the naira has increased input costs and overall business expenses for Nigerian companies. To maintain profit margins, these businesses have passed on these increased costs to consumers, resulting in higher prices for goods and services.” Umaru said.
Adeyeye noted that FMCG companies can reduce their vulnerability to foreign exchange losses by increasing their backward integration efforts, which involve producing more of their inputs domestically. Additionally, FMCGs can employ forward contracts to hedge against foreign exchange volatility.
“For a company that relies on FX to source its input, what they can do is to enter a forward FX contract to mitigate any volatility or expected volatility,” Adeyeye said.
Industry Breakdown
FMCGs
Fast-moving consumer goods (FMCG) firms in Nigeria have been particularly vulnerable to the FX crisis, facing a multitude of challenges that threaten their stability and growth. They collectively recorded a cumulative foreign exchange loss in the first nine months of 2023 amounting to N269.50 billion from N13.56 billion recorded in the same period of 2022.
Nestle recorded the highest exchange loss in the first nine months of 2023 amounting to N127.46 billion from a gain of N1.96 billion recorded in the same period of 2022.
Dangote Sugar Plc recorded a foreign exchange loss of N91 billion in the first nine months of 2023 from N14.33 billion recorded in the same period of 2022.
Nascon Allied Industries Plc recorded N69 billion from N0.445 billion recorded in the same period of 2022.
Bua Food Plc recorded a foreign exchange loss recorded N33.28 billion.
Cadbury Nigeria Plc, a manufacturer of confectionery products recorded N20.69 billion in the period under review.
Unilever Nigeria Plc however recorded a gain of N2.92 billion from a loss of N0.48 billion recorded in the same period of 2022.
Read also: OPEX, FX losses weaken Nigerian Breweries’ profit
Brewery makers
The Nigerian brewery industry has been hit hard by the FX crisis. The devaluation of the naira has made it more expensive for breweries to import raw materials and components. This has led to a significant increase in production costs.
The brewer-maker recorded a loss of N129.68 billion from a loss of N8.32 billion recorded in the same period of 2022.
Nigeria breweries recorded the highest loss of N86.83 billion followed by International breweries amounting to N39.96 billion and Guinness Nigeria Plc which amounted to N2.96 billion.
Cement makers
The Nigerian cement industry, a cornerstone of the nation’s infrastructure development, finds itself navigating turbulent waters amidst persistent foreign exchange (FX) losses.
The unrelenting volatility of the naira has cast a shadow over the industry, posing significant challenges for cement makers struggling to maintain stability and growth.
The cement makers collectively recorded N135.37 billion as their foreign exchange loss in the first nine months of 2023 from N78.62 billion recorded in the same period of 2022.
Dangote Cement recorded the highest loss in FX loss amounting to N99.02 billion, followed by Bua Cement amounting to N26.93 billion and then Lafarge Cement recording N9.42 billion in the period under review.
Read also: Consumer firms to sidestep FX losses from naira volatility in 2019
Telecommunications sector
The Nigerian telecommunications industry, a vital engine of economic growth and connectivity, finds itself grappling with the persistent headwinds of foreign exchange (FX) losses.
The unrelenting volatility of the naira poses significant challenges for telecom operators navigating a complex landscape of currency fluctuations and economic uncertainties.
MTN recorded a foreign exchange loss of N232.83 billion in the first nine months of 2023. Airtel Africa recorded a loss of $471 million.
Health sector
The healthcare sector in Nigeria has been hit hard by the FX crisis, with a major player GlaxoSmithKline (GSK), a British multinational pharmaceutical and biotechnology company, exiting the market.
The health sector saw its foreign exchange loss increase by 740 percent to N13.19 billion in the first nine months of 2023.
GlaxoSmithKline recorded the highest FX losses of N11.29 billion followed by Fidson which amounted to N1.01 billion, May and Baker amounted to N0.89 billion and Neimeth amounted to N0.31 billion in the first nine months of the year.
