Volatile naira sours South African investors’ appetite for Nigeria

South African business owners recognise the vast potential of Africa’s most populous nation, but many are hitting a roadblock—the unpredictable swings of the naira.

With dreams of tapping into Nigeria’s bustling market, these investors find themselves at a crossroads, wary of riding the waves of currency chaos.

“Nigeria is a large and attractive market but the unpredictable swings of the naira make it scary to go in there,” Stephane Cohen, a business owner in South Africa, said.

“Most of the South African businesses have been forced to close shop and that’s not a good look. It means it’s really tough to do business there and that zaps confidence,” Cohen said.

Cohen’s view seems to be shared by several other business owners and investors in South Africa who have hit the brakes on investment in Nigeria since a record-breaking 2019.

Foreign Direct Investment (FDI) inflow from South Africa fell to a seven-year low of $378.49 million in 2023, a sign of waning investor confidence in the country.

A raft of South African businesses have exited Nigeria in recent times, from popular supermarket chain, Shoprite Holdings, to the less-known Nampak, Africa’s biggest packaging company.

“A poll done on South African businesses showed that the number one reason why Nigeria is such a tough place to do business is the currency volatility,” said Dianna Games, CEO of the Johannesburg-based South Africa-Nigeria business chamber.

“If you look at the way the naira has moved against the US dollar since 2014 to date, oh my goodness. Although there’s been some depreciation with the rand, it has been a little bit more stable, and it’s more predictable because it’s market-based,” Games said.

Games however remains optimistic that ongoing reforms in Nigeria aimed at enthroning a market-based pricing of foreign exchange will make it easier for foreign companies to do business there in the future.

Volatile naira takes toll

The naira has indeed been volatile. Between 2004 and 2024, the naira has suffered multiple sudden devaluations against the US dollar.

From approximately N136 to a US dollar in 2004, the currency has weakened more than 12x to N1652/USD as at November 15, 2024, averaging a drop of about 55 percent every year.

The rand, on the other hand, has been more stable, only weakening from 6 ZAR per USD in 2004 to 17 ZAR/USD as of November 2024. That’s an average drop of 9 percent per annum.

The trend in the South Africa’s rand vs US dollar allows SA’s businesses to make adjustments and hedge against currency risk, as the currency devaluations are generally tied to broader economic indicators like trade balance, interest rates, and inflation, which tend to be more stable and predictable in South Africa than in Nigeria.

In Nigeria’s case, the devaluations have been sudden and happened only after efforts to artificially prop up the currency failed. That has left little room for businesses to plan and hedge against currency risks.

Additionally, Nigeria’s forex restrictions, policy-induced distortions in the currency market, and heightened inflation rates have created substantial risk for foreign businesses.

These businesses struggle with the challenge of repatriating profits, pricing goods competitively, and managing costs in a highly volatile currency environment.

The CBN’s occasional restrictions on accessing foreign currency to curb devaluation also exacerbate these issues, contributing to liquidity challenges for foreign-owned companies.

Currency reforms gone bad

The appointment of Olayemi Cardoso as CBN governor late last year has sparked a raft of reforms from floating the currency to raising market rates to a record high in order to stabilise the currency and make it more market-driven.

The reforms have led to a steep decline in the currency, which has shed over 80 percent of its value since the reforms began.

Critics say Nigeria put the cart before the horse by floating the currency before securing significant dollar inflows. The naira depreciation has hurt businesses and slashed the purchasing power of consumers.

Foreign firms operating in Nigeria, who must report their sales to their parent companies in dollars, have been the worst hit.

S.A firms retreat

In the last decade, several prominent South African companies have withdrawn from Nigeria, citing currency volatility and challenging economic conditions as primary reasons.

Shoprite Holdings

Africa’s largest food retailer announced its exit from Nigeria in 2020, selling its stores to local operators. Shoprite cited currency volatility, supply chain issues, and difficulties in repatriating profits as the main reasons for its departure.

The currency devaluation made it increasingly difficult for Shoprite to operate profitably in Nigeria, given the high costs of importing goods and the challenge of maintaining competitive pricing amidst rising inflation.

Shoprite’s exit from Nigeria and some other African markets to focus on its core South African market did not prove too costly for the retailer, which recorded improved profit and margin in its first financial report since exiting Nigeria.

The Cape Town-based retailer grew trading profit by 14 percent to 5.4 billion rand ($358 million) in the six months through January 2, 2022, with trading margin improving to 6.0 percent from 5.7 percent six months prior.

Trading profit at its South African supermarket business rose 16 percent to 4.9 billion rand ($319 million) in the period, according to the financial statement released this week, which means it contributed 90.7 percent to the total profit reported by the group.

In full-year 2023, Shoprite posted record revenues of 219.5 billion rand, 17 percent up from the 187.5 billion rand recorded in 2022, a further sign that for Shoprite, it’s no Nigeria, no problem.

The year 2024 was even much better for Shoprite. Its sales rose by 9.7 percent to 240.7 billion rand, boosted by both its upmarket and discount grocery brands.

Shoprite’s exit was not solely due to its loss-making Nigerian operations but because the new CEO Pieter Engelbrecht was not as bullish about expanding across Africa as his predecessor, according to Dianna Games of the SA-Nigeria business chamber.