Worsening Business Environment
OpenLife Nigeria has gathered that the unending chaotic and choking business environment have combined to threaten Nigeria’s manufacturing sector.
In like manner, available information from the International Air Transport Association, IATA, indicates that Foreign airlines are at break point and could exit Nigeria’s airspace anytime soon.
According to available information, the manufacturing sector suffered a 400 percent increase in net foreign exchange loss to N466 billion in nine months ending September, reflecting the severe impact of the foreign exchange (Forex) market regime.
Sector operators said the current forex situation has compounded the pressures emanating from the removal of oil subsidy, Russia/ Ukraine war among other adverse developments.
The operators said the sector now bleeds from multiple points as a result of exchange rate revaluation losses.
Consequently, information contained in the financial reports of the top 17 manufacturing companies listed on the Nigerian Exchange Limited, NGX , indicated that while their gross earnings rose as they increase the prices of their products, their profits crashed as a result of the multiple pressure points eroding their financial stability.
Data from the financials of the big manufacturing firms on the Exchange showed a net foreign exchange loss of N466.02 billion in the nine months ended September 2023 (9M’23) representing an overwhelming increase of almost 400% from N93.219 billion loss recorded in 9M’22.
The data showed that while the combined gross earnings of the firms grew by 23.4% to N4.4 trillion in 9M’23 as against N3.6 trillion in 9M’22, the companies recorded a 24.6 percent decline in combined Profit Before Tax, PBT, to N505.148 billion in 9M’23 as against N670.089 billion in 9M’22.
Cost of consumer goods
The trend is reflected in the increased cost of producing consumer goods, which are mostly essential commodities used regularly by households.
These include foods and beverages, toiletries, over-the-counter medicines, cleaning and laundry products, plastic goods, and personal care products, among others.
Findings reveal that while the companies increased the prices of their products in response to the inflationary pressures on their operating cost, this has resulted in low volume of patronage from the consumers whose income has equally been eroded by inflation.
The situation has now combined with losses they recorded in foreign exchange revaluation just as the higher exchange rate also increased the cost of foreign input forcing them to either close some production lines or scale down output below break-even points.
Data from the National Bureau of Statistics (NBS) showed that the inflation rate in Nigeria closed 9M’23 at 26.72%. The figure has since risen to 27.3 %percent as at the month of October 2023 and is projected to rise further this month, possibly sustained to year end.
Also, the Naira value against the US Dollar which stood at N448.04/US$ at the beginning of the year (2023) crashed to N832.32/US$ as at end 9M’23 following the Central Bank of Nigeria (CBN) foreign exchange reforms in mid-June.
Foreign investors in manufacturing pulling out
The protracted foreign exchange scarcity which affected Cadbury Nigeria on raw material imports, has forced its management to pass on costs to consumers by hiking prices.
The same goes for GlaxoSmithKline, GSK, Nigeria. But this has already proved unsustainable, forcing the company to announce plans by its parent company, GSK UK Group, to end manufacturing operations in Nigeria.
The Company said further that it would explore a third-party direct distribution model for its pharmaceutical products.
Unilever Nigeria is another multinational consumer goods company discontinuing the manufacturing of its homecare and skin-cleansing brands.
Just last week, Procter & Gamble, P&G, an American multinational involved in manufacturing of fast moving consumer goods (FMCGs), announced its plan to discontinue their manufacturing operations in Nigeria due to the harsh operating environment.
Blue chips bleeding
The blue chip manufacturing companies, most of which are multinationals suffered more from forex revaluation losses.
Leading the pack in this adversity is Nestle Nigeria which lost N127.5billion to forex revaluation loss, thereby eroding its profitability.
Dangote Cement recorded a huge forex revaluation loss of N99billion which seems to have dampened what would have been a supper profit in the 9M’23.
It however made a surprising 20.5% rise in profit to N404.9billion as against N335.900 billion in 9M’22, at the backdrop of a rise in gross earnings to N1.5 trillion in 9M’23 from N1.2 trillion in 9M’22.
A forex revaluation loss amounting to N86.8 billion eroded Nigerian Breweries’ profitability as giant beverage multinational declared a total loss amounting N78.2 billion during the period despite a modest 2.1% growth in gross earnings to N401.7 billion from N393.3 billion.
Another brewer, International Breweries was hit with N39.9 billion forex revaluation loss which escalated the company’s operating losses before tax to N43.5 billion as against N2.8 billion it recorded last year. This is despite the 14.6% increase in gross earnings to N183.8 billion from N160.4 billion in 9M’22.
BUA Foods reported a forex revaluation loss of N33.3billion which moderated what would have become a super profit growth at 50% to N111.4bilion from N74.3billion in 9M’22, at the backdrop of 81.0% increase in gross earnings to N524.4billion as against N289.8billion in 9M’22.
Similarly, its sister company, BUA Cement posting N24.8 billion in forex revaluation loss which dampened its profitability with a 3.4% decline N85.7 billion from N88.8 billion despite the rise in gross earnings to N335.9billion as against N262.6billion in 9M’22.
Other significant forex revaluation losses were recorded by Cadbury Nigeria which reported N20.7billion revaluation loss which eroded its profit forcing the firm to declare a loss of N10.2 billion as against a profit of N4.0 billion it recorded in 9M’22. This is despite the 39.2% increase in gross earnings to N59.2 billion from N42.5 billion in 9M’22.
GloxoSmithKline seems to be showing heavy bleeding on all fronts. It posted a forex revaluation loss amounting N11.3 billion and its PBT declined 0.8% to N0.722 billion from N0.716 billion just as gross earnings went down massively to N10.9 billion from N20.4billion.
Similarly Lafarge Cement reported forex revaluation loss amounting to N9.4 billion. But the firm also reported increase in gross earnings at N289.1 billion as against N269.9 billion in 9M’22 , with PBT growing by 13.4% to N61.2 billion from N53.9 billion.
Unilever Nigeria recorded forex revaluation loss of N2.9billion as the company’s profitability was making a rebound by 937.4% to N4.9billion from N0.5 billion on the backdrop of a rise in gross earnings to N81.6billion from N64.8billion in 9M’22.
Vitafoam recorded a forex revaluation loss of N3.8billion which contributed to the 14.4% profit decline to N6.2billion from N7.2billion in 9M’2 despite a rise in gross earnings to N52.8billion from N46.3billion in 9M’22.
Okumu Oil also recorded forex revaluation loss amounting to N2.9billion. But its PBT grew by18.7% to N29.2billion from N24.6billion in 9M’22 at the backdrop of a rise in gross earnings.
Guinness Nigeria reported that its profit went down 5.6% to N3.8billion from N4.04 billion at the backdrop of N1.9billion forex revaluation loss, despite growth in gross earnings at N59.5 billion as against N52.849 billion in 9M’22.
Notore Chemical recorded a forex revaluation loss of N1.8billion which added to its massive rise in losses amounting N66.2billion as against N0.95billion loss in 9M’22.
The bad result also came with a massive decline in gross earnings to N12.7billion as against N32.9billion in 9M’22, and recorded.
Nascon Allied reported a slim forex revaluation loss of N.6million and its profit grew massively by 282.0% to N16.3billion from N4.3billion in 9M’22 at the backdrop 45.6% increase in gross earnings to N59.1billion as against N40.6billion in 9M’22.
One of the surprising results is Dangote Sugar which did not record any forex loss, and its gross earnings increased by 7.4% to N309.713 billion from N288.320 billion in 9M’22, but it ended up posting a loss before tax of N41.3billion as against a profit of N36.3billion in 9M’22.
Analysts /Experts react
Reacting to this development, Tajudeen Olayinka, who is the CEO, Wyoming Capital and Partners said: “A long the local foreign exchange market continue to react to the vagaries of demand and supply side imbalances, so long economic agents with net dollar liabilities will continue to be impacted negatively by depreciation and foreign exchange losses.
“This was responsible for the huge losses suffered by those manufacturing companies you mentioned. And it will remain so until the affected companies are able to put measures in place to recover losses through necessary hedging and repricing of earning assets.”
On the implication of these losses, he said: “ The implication of these losses to the companies and economy in general is a continued elevation in inflation and further deceleration in output growth.”
Also reacting, David Adonri, the Executive Vice Chairman, HIGHCAP Securities Limited said: “The nine months increase in forex losses by manufacturing companies in 2023 is due to the huge depreciation of the Naira following deregulation of the foreign exchange market in June 2023.
“The loss was transmitted to the manufacturing account of manufacturers through their outstanding forex liability to foreign suppliers of manufacturing inputs. Notwithstanding the improvement in their revenue, the FX losses overwhelmed their Profit.
“The losses were so colossal that some of the manufacturers have lost their shareholders fund. Many others have wound down their businesses and are at the verge of exiting the country. The losses have become a threat to the existence of many of the manufacturers.”
On the implication of the losses, he said: “Government should not expect to receive income tax from the wounded companies this year. Loss of capital will definitely take a toll on the capacity utilization of the manufacturers affected, resulting in layoffs and scarcity of their products.”
Solution
On the way forward, he said: “Government needs to engage with the manufacturers to address this threat to their existence. However, the losses will be recovered in due course as the economy adjusts to the new market reforms and price level.”
Reacting, Victor Chiazor, The Head of Research of Research and Investment said: “Most of the manufacturing companies suffered severe Forex losses because most of them import their raw materials for production from outside the country.
“And given the floating of the Naira which happened in the second quarter most were forced to provide more Naira to accommodate their production inputs. This exchange rate difference was significant enough to weaken their profit levels and even throw some of the manufacturers into loss after tax for the 9 months period.”
Going forward, he said: “We may see a direct transfer in the cost differential as most manufacturers will have no option than to pass this cost to the final consumer which will eventually lead to lower sales volume and most likely lower profitability for the company.
“This would also slow down activity level in the economy as a continuous rise in the price of goods and services will weaken the purchasing power of the consumer and overall weaken consumption.
“The government will need to find a way to stabilise the FX market to enable businesses plan as well as find incentives for some critical manufacturing businesses all of which would assist in keeping these businesses afloat.”
Foreign airlines at break point, may exit Nigeria’s airspace — IATA
There are indications that foreign airlines may be planning to exit Nigeria’s airspace soon at the backdrop of the worsening operating environment.
This is coming amidst several exits of foreign businesses from the country this year, the latest being Procter & Gamble of United States, which announced their decision pull out last week barely months after another multinational corporation, GlaxoSmitKline, took similar step.
The key challenge, according to the airline operators, remains the inability to raise the foreign currency required for their operations as over $792 million of the funds are still trapped in Nigeria, a development that is currently threatening their operations globally.
In Nigeria, foreign airlines collect Naira for their tickets to customers and exchange the same for foreign currencies for their operations.
But they have been lamenting their inability to get the exchange executed through the official foreign exchange market due to the scarcity of foreign exchange resources.
The development has already seen the UAE’s flag carrier, Emirates Airlines which exited the country’s airspace last year still refusing to come back despite intervention from President Bola Tinubu.
President Tinubu had directed the Central Bank of Nigeria, CBN, to create a platform for quarterly reconciliatory meetings with foreign airlines to address the backlog of their fund.
But till date, nothing has come out from it, as there have neither been any meeting or funds released to any of the airlines.
It was also responsible for the move by the airlines to close down their lower fare inventory to travelling agents across Nigeria, denying them access to issuing tickets emanating from other countries into Nigeria in a bid to reduce the backlog.
Aviation World gathered that, travellers from Nigeria pay about N2.5 million for economy tickets to London, Heathrow airport, also, flying with KLM Royal Dutch, over N2.6 million flying with Virgin Atlantic, while with Lufthansa which is among the highest at N2.7 million.( Travellers from Ghana, South Africa, among other countries in the region which have to cover more distance to Heathrow than Nigeria pay about N400,000 to N500,000, for the same grade of tickets.
However, the International Air Transport Association, IATA, Regional Vice President Africa & Middle East, Kamil Al-Awadhi, during a media presentation with African journalists at the IATA Global Media Day in Geneva, called on the Federal Government to take the matter seriously.
He listed Nigeria as the country with the highest amount of airlines’ blocked funds at $792m followed by Egypt, $348 million, Algeria, $199 million, AFI zone, $183 million and Ethiopia, $128 million.
He said: “It is getting to a breaking point for the airlines. They are contemplating stopping operations.
Nigeria should look into this to resolve the issue. The airlines don’t have the cash to expand their operations”.
“Ethiopia is seeking a way to resolve this issue even though the blocked fund is rising.
The first step for us to solve these blocked funds is for both parties to engage. If parties don’t engage, it is very difficult to move forward.
“I have not been able to engage with Nigeria’s CBN Governor, he said he would engage with me when he had a solution.
He is not promising but I have engaged with the Aviation Minister who is very understanding, new to the position, or maybe wowed by the situation he inherited will help to resolve the matter.”
“The airlines in Africa are owed $34 million. That $34 million is blocked.
Depreciation has set in on the money. They have already lost $10 million because of depreciation. That is not fair for the airlines because they have paid all the dues to the operators of the airports. Every due has been paid for. They carry Nigerian officials on these flights and they can’t get their money.”
On the state of aviation in Nigeria, Al-Awadhi said with 25 percent interest on loans, high airport taxes, and insurance premiums which it said was six times more than anywhere in the world, it would be difficult for Nigerian airlines to make a profit.
“Any airline in Nigeria operating outside of Nigeria has a cheaper operating cost and better prices than Nigerian airlines.
“Every airline has its challenges and it depends on where it operates. To answer this question, I will use Nigeria as an example. Nigeria has two most expensive airports; their fuel is higher than elsewhere in the world, and insurance is six times more expensive than anywhere else in the world.”
Contents, outside headline, Vanguard
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