The recent interest rate hikes in Nigeria has led to a surge in many businesses’ borrowing costs, affecting their ability to stay afloat.
BusinessDay analysis of the latest financial statements of nine firms in the consumer goods industry show a 193 percent jump in borrowing cost to N127.9 billion in the first quarter of 2024 from N43.6 billion in the same period of 2023.
The firms are Dangote Cement Plc, Nestle Nigeria Plc, Nigerian Breweries Plc, International Breweries Plc, BUA Foods Plc, BUA Cement Plc, Cadbury Nigeria Plc, Unilever Nigeria Plc and Nascon Allied Industries Plc.
Since the beginning of the year, the Central Bank of Nigeria (CBN) intensified its efforts to fight the country’s inflation rate which is at record high by increasing the country’s benchmark interest rate known as monetary policy rate.
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Last May, the apex bank raised its monetary policy rate for the third straight time by 150 basis points to 26.25 percent in a bid to fight inflation and defend the ailing naira. That takes the total hikes since February to a combined 750 basis points.
Analysts say consumer goods firms can refinance short term loans with their bankers, issue commercial papers, extend credit lines with suppliers, raise equity to pay off debt and good working capital management can help them manage the impact from the high interest rate environment.
“During a period of high interest rate environment and based on what the consumer goods have gone through so far, they should refinance short term loans with their bankers and use banks with interest rates not as high as other customers,” said Oluebube Nwosu, a consumer goods analyst at Vetiva Capital.
He said some consumer goods firms are already converting loans to equity to manage the high interest rate. “Some are looking at the debt market and issuing commercial papers.”
“Consumer goods firms can also extend credit lines with suppliers,” Nwosu said while adding that the firms can also try to reduce borrowings even if they must still borrow.
“The firms can obtain loans from parent companies and other related parties,” he stated. “However, these are short term fixes but over the medium term there will be hope that the rate will become much more friendly and the environment brightens.”
Further analysis of the statements show that BUA Cement recorded a marginal growth of 10 percent followed by Nascon Allied Industries with 46.2 percent, International Breweries with a growth of 139 percent and Dangote Cement with 162.7 percent growth.
On the flip side, Cadbury Nigeria had a 732 percent growth, followed by Nestle Nigeria with 360 percent, Unilever Nigeria (309 percent), Nigerian Breweries (284 percent) and BUA Foods (278.2 percent).
Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), said high interest rate regimes increase cost of production for consumer goods firms and they can try to pass it on to consumers in the form of higher prices.
“The firms should minimise exposure to high interest rate funds by finding other ways of getting funds such as equity and neglect the debt option of funding business for now,” he said.
The CPPE boss stated that consumer goods firms can make use of development finance such as the Bank of Industry, Bank of Agriculture, Development Bank of Nigeria which borrowing costs are often lower than that of commercial banks.
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A report by Bank of Scotland titled ‘SME and higher interest rates – overcoming the impact’ said Exploring fixed price deals for debt products and energy costs can also reduce outgoings and make financial forecasting easier.
Jennifer Audu, consumer goods and breweries analyst at FBNQuest, said “Consumer goods firms can raise equity to pay off debt but with the banks capital raise then it is not really viable.
“The firms can refinance their debt and pushim maturity dates if possible. They can also have better working capital management which would allow them not raise debt during this high monetary policy rate.
“The best option right now will be a combination of operation efficiency and good working capital management, given that interest rates are elevated everywhere. Blue chip companies can have the advantage of raising capital via right issues to reduce debt burden,” she stated.
Razia Khan, managing director and chief economist, Africa and Middle East Global Research at Standard Chartered Bank, said in a report that these largely stem from the overall tight monetary policy that is in place, resulting in a Naira shortage in the domestic banking system.
“Given the importance of addressing this bottleneck, we expect that there will be near-term changes, allowing Nigeria to see the benefit from potentially larger portfolio inflows,” she stated.
The jumbo interest rate hikes are expected to take a toll on economic growth in the second quarter, according to multiple economists and analysts.
The National Bureau of Statistics (NBS) shows that Africa’s most populous nation saw its Gross Domestic Product (GDP) rise to 2.98 percent in real terms in the first quarter of 2024 from 2.3 percent in the same period of 2023.
Compared to the previous quarter, growth slowed from 3.46 percent in Q4.
“The year-on-year growth makes sense given that in the first quarter of last year, we were affected by the uncertainty about currency replacement, fuel queues, and elections,” Ayo Teriba, CEO of Economist Associates, said.
Over the past one year, inflation in one of Africa’s biggest economies has accelerated to the highest on record largely on the back of the Federal Government reforms such as the removal of petrol subsidy and naira devaluation.
Data from the NBS shows that the headline inflation rose for the 17th straight time to 33.95 percent in May, up from 33.69 percent in the previous month.
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Subdued demand and intense price pressures affected business activity in Nigeria last month as it fell to the lowest in seven months, according to the latest Purchasing Managers’ Index (PMI).
The latest monthly PMI by Stanbic IBTC Bank released on Monday showed the headline index fell to 50.1 in June from 52.1 in the previous month. Readings above 50.0 signal an improvement in business conditions, while those below show deterioration.
“June data signalled a broad stagnation of the Nigerian private sector as subdued demand and intense price pressures led to slowdowns in growth of output and new orders. In turn, employment rose only fractionally,” the report said.
It said there were signs of inflationary pressures picking up, with purchase prices, staff costs, and selling charges all increasing more quickly than in May.
Consumer goods firms are under pressure on margins delivery as they are already dealing with double-digit inflation rate and weak purchasing power of cash-strapped consumers.
“The movement in interest rate and the devaluation impact are the two major elements that are affecting the cost of securing finance for the consumer goods firms,” Abiodun Keripe, managing director at Afrinvest Consulting Limited, told BusinessDay.
He said the companies’ bottom-line will be weaker and margins will become slimmer, thereby affecting their profitability.
“Volumes may not rise quite aggressively or revenue may not increase at a faster pace,” Keripe said.
Uchenna Uzo, professor of marketing at Lagos Business School, said manufacturers in the consumer goods space have been the most hit by foreign exchange volatility because they are highly import-dependent; hence they have incurred very high operating expenses and have had to rely on borrowings to run their day to day operations.
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