Nigerian Businesses Groan Under High Interest Rate Costs

Nigerian Businesses Groan Under High Interest Rate Costs

Nigerian businesses have started to feel the impacts of higher interest rate costs on their financial scorecard or earnings results in 2023, analysts said in an email shared with MarketForces Africa.

In their respective earnings release in the first quarter, companies in the fast-moving consumer goods segment saw their margin decline amidst uncertainties and higher borrowing costs.

On average, average production costs have increased steeply in the last 12 months amidst uncertainties – including rising energy costs and inflationary impacts on household wallets.

Ahead of the inflation figure release, analysts said the consumer price index is expected to gain weight as interest costs begin to weigh on average production costs in the private sector.

Interest payments are surging as higher interest rates start to feed through into corporate results, the trend which started in April 2022 when the Central Bank of Nigeria switched to monetary tightening.

A steep increase in key policy rates has reset money pricing. Nigeria’s benchmark interest rate has increased 700 basis points, from 11.50% in April 2022 to 18.5% in May 2023. The monetary authority‘s hawkish fist was directed at inflation fighting, unfortunately, this has been ineffective.

Prices of goods and services continue to surge, pushing headline inflation to 22.22% in April and analysts are already projecting consumer price index could double down due to fuel subsidies removal.

Amid all these corporate margin dilutive developments, Nigeria’s naira is falling even ahead of a decision to devalue the local currency. Listed companies are already groaning under sizeable foreign exchange loss records due to naira weakness, raising import costs.

In its market report, analysts said cheap pandemic-era refinancing moderated the impact of higher rates until recently. Nigerian Companies have started to see their net finance costs surging on new borrowings, although there was also an increase in interest income for some.

Some of the chief financial officers that provide insight said higher borrowing costs were limited to new borrowing, and refinancing, in that order, and banks remain the core beneficiary.

Nevertheless, rate pressure is starting to work its way through to cash flow statements. The first quarter results season.  Analysts said persistent inflation pressures and economic resilience give little reason to expect a reversal of interest rate pressure over the next year.

MarketForces Africa gathered that pressure on corporate credit quality from higher interest costs would build slowly in the financial year 2023 ahead of expected reforms. Interest rate reversal is quite unlikely in 2023 given the steep inflation rate, LSintelligence Associates said in an email.

The multifaceted consulting firm said a higher interest cost is a clear and present threat to credit quality, especially those under global ratings coverage and listed companies. 

Most Nigerian companies will look toward refinancing to maintain liquidity, potentially locking in current higher rates. #Nigerian Businesses Groan Under High Interest Rate Costs Access Bank Controls 19% of Nigerian Banking Assets