Fresh Inflation Fears As Top Firms Lose N656 bn To Forex Market Woes

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InflationMany of Nigeria’s big companies across various sectors of the economy may be gasping for breath following the sustained scarcity of foreign exchange (forex) resources.

This also comes against the backdrop of a sharp rise in the exchange rate in the latter part of the second quarter of 2023, Q2’23.

The companies had taken forex loans for imported raw materials and other operational inputs earlier before the recent forex depreciation.

Consequently, the companies are now recording massive losses arising from the revaluation of their forex-related operations.

Financial findings from the recent reports filed by some quoted companies in the Nigerian Exchange Limited, NGX, indicated that about 20 of them recorded an all-time high of N656.1 billion forex losses in the first half of 2023, H1’23.

This figure represents a quantum surge of 709.3% over N81.1billion billion the companies recorded in the corresponding period of 2022, H1’22.

However, some industry observers noted that the losses were not restricted to the 20 firms adding that all-sector aggregate losses could amount to over three trillion Naira in H1’23 alone.

The reports of the 20 leading firms showed that most of their profits and retained earnings for the period under review were affected significantly as some of them recorded outright losses.

The 20 companies are:

MTN Nigeria, Nigerian Breweries, Dangote Cement, Lafarge Africa, Guinness Nigeria, GSK, Beta Glass, Unilever Nigeria, Seplat Petroleum, Dangote Sugar and Julius Berger.

Others include Total Energies, MRS Oil, ETERNA Oil, Nestle, Cadbury, NASCON Allied Industries, Transnational Corporation and Notore Chemical Industries.

However, analysts believe these companies will recover most of the losses through upward pricing of their products and services in the second half of this year, H2’23.

Companies’ details

Meanwhile, leading the pack of forex losses is MTN Nigeria, with N131.1 billion as against N13.6 billion it recorded in HI’22. It was followed by Nestle Nigeria which recorded N123.7 billion as against N4.8 billion in HI’22. The company had become accustomed to posting profits on its financials.

However, in its H1’23 financial report, Nestle recorded a pre-tax loss of N86.5 billion, which indicated that the forex loss of N123.7 billion actually eroded what would have been an N37 billion profit.

With retained earnings of N49 billion, the company faces an uphill battle in paying shareholders’ dividends this year.

On the third position in the chart is Dangote Cement posting forex-related losses of N113.6 billion as against the N40.65 billion it reported in H1’22.

Nigerian Breweries, NB  followed in the big losses chart recording N85.3 billion up from N7.3 billion recorded in H1’22.

The Company’s retained earnings declined to N32.59 billion in H1’23 from N99.56 billion in the same period of 2022.

Unilever Nigeria was another company that took a hit as the company’s forex revaluation losses increased to N14.36 billion in the second quarter of 2023 from N1.06 billion in Q1’23.

The company said the revaluation loss arose from foreign currency-denominated balances related to trade loans.

Experts/analysts’ comments

Following the suspension of former Governor of the Central Bank of Nigeria, Godwin Emefiele, the apex bank moved towards a revaluation of the naira in the forex market while consolidating the market windows.

The decision was a long-awaited one and was welcomed by investors who rallied to cause a bull run that raised the market capitalization of the NGX to an all-time high.

However, despite the long-term benefits that experts and analysts believe the decision will occasion, the short-term repercussions have been devastating for companies who have seen their dollar-denominated obligations rise.

Fiscal authorities should consult CBN ahead of policy decisions — Uwaleke
 Commenting on the forex loss, the President, of the Association of Capital Market Academics of Nigeria, ACMAN, Prof  Uche Uwaleke, said: “The sudden floatation of the naira is to blame because the policy caught up with a lot of companies that had a lot of dollar-denominated loans as well as translation losses in respect of  companies with foreign subsidiaries.”

On way forward, he said: “Going forward, the fiscal authority should always consult with the CBN before announcing policies to do with the monetary authority.”

Companies should revise risk framework — Highcap Securities
 In his own reaction, Vice Executive Chairman and analyst at Highcap Securities Limited, David Adonri said: “The FX loss suffered by manufacturing and foreign companies in H2 2023 was due to floating of the Naira which caused massive depreciation in the official market. As a result, the unhedged currency risks of the companies crystallized.

”Incidentally, the companies affected grew their turnover in H1 2023 but their bottom lines were eroded by the FX losses. The losses may affect their full-year profit and dividend payout to investors.”

On the way forward, Adonri stated: “The public policy change is likely to remain. Consequently, enterprises that require FX to operate, must revise their risk management framework so as to adapt to the current change. It is also necessary for them to look inwards for their inputs or device means of earning in hard currency.”

Losses likely to continue — APT Securities

Commenting as well, Managing Director/CEO, APT Securities & Funds Limited, Mallam Garba Kurfi said: “The conversion into single exchange rate led to FX losses. This is due to FX loans and other outstanding liabilities which were rated at official exchange rate but not into market rate.”

On the way forward, he said: “These losses are likely to continue as long as their liabilities remain in their books and the naira keeps losing value. This can only be reduced by the time the naira starts gaining against the US Dollar or we are able to pay off the outstanding liabilities.”

Affected companies to pass losses to consumers — Fidelity Securities

In his comment as well, analyst and Head of Research and Investment at FSL Securities Limited, formerly Fidelity Securities, Victor Chiazor, said: “The FX losses recorded by most companies on the stock exchange was clearly as a result of the free float of the Naira. A lot of companies that had dollar liabilities were largely affected as well as banks that had entered forward contracts and had to meet those obligations at the new FX rates.

”However we also saw a few companies benefit from revaluation gains especially most of the banks and these gains have been significant enough to boost their profit levels for the period.”

On the way forward, he said: “We expect this income or loss position to be one-off as the companies will eventually adjust to the new exchange rates.

”For those that were negatively affected by the free float, especially those in the consumer goods space, the high exchange rate level will negatively weigh profit levels going forward except they are able to pass these costs to their final consumers as we expect FX pressure to continue until the country’s FX inflows and foreign reserve improves.”

It will have implications on inflation — Wyoming Capital

In his own submission, the analyst and CEO at Wyoming Capital and Partners said: “We must understand that the economy is going through a very necessary adjustment program that allows the Naira to freely float against major currencies around the world, including the US dollar.

”Accordingly, companies that had net foreign currency liabilities would naturally be affected by immediate depreciation of the Naira, while those with net foreign currency assets would have an improvement in their financial positions. That’s what has happened generally to the public companies you mentioned.

”The implication is that those companies that have been negatively affected would need to work around their products and services by right-pricing them for possible recovery from loss positions.”



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