Uncertainty as Foreign Exchange Losses Drag Companies Earnings
A large number of Nigerian companies in the fast-moving consumers’ goods sector see their earnings impacted by foreign exchange losses in the first half of 2021 amidst incessant devaluation of the local currency, Naira, by the apex bank.
With rising demand, dollar scarcity dented efforts by companies in the fast-moving consumers’ goods segment, according to their separate financial statement for the first half of 2021.
This could impact private sector investment, some analysts told MarketForces Africa at a forum organised today while discussing the August edition of Stanbic IBTC’ Purchasing Managers Index produced by IHS Markit.
Based on results submitted to the Nigerian Exchange, listed companies earnings were affected by foreign exchange losses, especially in the foods and beverage segment while breweries witness a similar burden.
Amidst the multi-tiered foreign exchange system, some producers indicate it is easy to access foreign currencies from the open market than banks, citing bureaucracy.
The Nigerian gross domestic product (GDP) expanded by more than 5.0% year on year in the second quarter of 2021, after a tepid outturn earlier in the year.
Although the oil economy contracted by -12.7% year on year as Nigeria was unable to meet its production quota as a member of the oil cartel, the non-oil economy jumped 6.7% in the same period.
For the latter, this is an improvement from the 0.79% year on year growth recorded in Q1-2021, CSL Stockbrokers said in a note, adding that there were at least six key drivers of non-oil growth in Q2, manufacturing sector inclusive.
The investment firm said the manufacturing sector accounted for 8.7% of total GDP in Q2 and grew by 3.5% year on year.
“The relaxation on movement restrictions and lockdowns since Q3-2020 contributed to a pickup in not just economic activity, but also demand and this has supported growth for the manufacturing sector”.
Within the manufacturing sector, food and beverages, its largest segment posted growth of 4.9% year on year compared with 7.1% recorded in the previous quarter – accounted for 50% of total manufacturing GDP.
With the rebound comes access to foreign exchange as most companies’ performance in the segment plunged due to foreign exchange losses booked.
This also heighten pressure on product costs as machinery and raw materials to further production increased in value as CBN devalued the local currency to stem speculative activities in the parallel market.
Similarly, the textile, apparel and footwear segment grew by 1.8% year on year. For the latter, CSL said although Nigeria has a huge appetite for fashion and related industries, textile manufacturers struggle with limited capacity for clothing production, poor patronage, and meagre purchasing power.
“The economic downturn experienced in 2020 resulted in foreign exchange policy adjustments by the Central Bank. Both foreign exchange illiquidity and pricing pose additional challenges for manufacturers”.
Citing some manufacturers’, CSL said foreign currency is more accessible in the parallel market at N527 to a United States dollar but the transaction volumes are not sufficient to cover their necessary dollar-denominated costs.
It said some local manufacturers are considering passing on increased production costs to consumers but also worry that they could lose market share to their foreign competitors due to their relative affordability.
Also, on the supply side, apart from existing structural issues, analysts spotted that heightened insecurity in some areas of the country has disrupted the flow of movement of goods and people.
The headline inflation has been at double-digit year on year each month since February 2016 -however, there have been modest declines over the past months, CSL stockbrokers added.
Other than the impact on household wallets, analysts maintained that the inflationary conditions in Nigeria adversely affect the profitability of the manufacturing sector.
The African Continental Free Trade Area (AfCFTA) is expected to positively impact domestic manufacturing. To maximise the benefits of the agreement, Nigeria’s manufacturing sector needs to be strengthened.
Furthermore, local manufacturers need to significantly improve their service delivery and product standards if they are to be competitive in a burgeoning intra-continental marketplace.
Uncertainty as Foreign Exchange Losses Drag Companies Earnings
