Why did corporations lose billions of naira due to currency losses?

    According to BusinessDay’s analysis and analysts, the naira’s depreciation is having a substantial impact on the books of Nigeria’s largest corporations, with 11 listed firms posting N716.8 billion FX losses in the second-quarter results season.

    The top bank decided to float the naira in the Investors’ and Exporters’ Window of the foreign currency market about two weeks after President Bola Tinubu vowed to unify the nation’s numerous exchange rates. The naira has since plunged from N471/dollar to N870/dollar.

    MTN Nigeria, Nestle, and Dangote Cement, the three largest corporations, account for 51.5 percent of the total N716.8 billion FX losses in the first half of 2023.

    “According to the firm’s draft audit report for 2022, it has lost over N650 million, which I am well familiar with. According to a senior chief financial officer, it is due of the various FX rates.The firm, he said, “used to pay the government about N100 million in taxes, but its profit before tax in 2022 is less than N30 million.”

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    The insider warned that businesses will be confronted with “very serious issues” in the upcoming months.

    According to Olufisayo Ademilua, senior consumer products analyst at CardinalStone securities, “for companies with short-term borrowings, the payment could probably impact their subsequent cash flow when they pay up.”

    According to Ademilua, the type of borrowings will determine how these FX losses be realized.

    “However, a corporation may have flexibility in amortizing if a significant portion of its borrowings are long-term debt. We also believe that the source of borrowings may have an impact on how these loans are repaid. firms that borrowed money from their parent firms, for instance, may be given greater leeway in terms of payment, she continued.

    One of the largest manufacturers of commodities in Nigeria, Unilever, had its revaluation loss climb from N1.06 billion to N14.36 billion in the first half of 2022, while its restructuring costs went from N0.48 billion to N2.36 billion.

    According to Unilever, the revaluation loss resulted from balances with trade loans that were denominated in foreign currencies.

    The consumer products company also mentioned that the write-off of raw and packaging materials as a result of the suspension of production in the home care category and related redundancy costs were included in the restructuring costs.

    According to Ademilua, several enterprises used hedging products because they expected the naira’s depreciation.

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    The majority of consumer goods businesses, she said, use derivatives to protect themselves from foreign exchange concerns, so these statistics could represent their full-year performance.
    She noted that corporate reorganization is more important when discussing how FX losses might result in layoffs.

    “For companies that might engage in acquisitions, it might result in a decrease in the labor force, while other companies that plan to divert or sell off a part of their business could lay off workers,” said Ademilua.The Center for the Promotion of Private Enterprises’ chief executive officer, Muda Yusuf, stated that companies having foreign currency exposure due to borrowing in foreign currencies will be negatively impacted by the naira devaluation, which results in losses.

    According to him, the companies will benefit from having foreign currency assets like savings and investments in Eurobonds, but the value of debt a few months ago will be lower than it is today since naira devaluations have raised the value of debt with a foreign currency denominator.

    According to Yusuf, “FX losses for these firms are a one-time adjustment and it is not going to happen all the time because exchange rate risk has now materialized.” He also noted that because the firms with FX losses are already victims of the exchange rate risk, they may hedge for future transactions.

    The unification of exchange rates, according to analysts at CSL Stockbrokers Limited, would push businesses that import raw materials to raise their manufacturing costs, which they will then have to pass along to customers.

    “Importers of eligible goods at the I&E window will now have to source FX at a higher rate and will probably pass the associated increased costs to the end consumers, resulting in an increase in the price of goods and services, especially imported goods,” they stated.

    “Consumers who are still adjusting to the withdrawal of gasoline subsidies will now have to cope with an extra rise in costs for products and services due to a devaluation of the currency. Changes in the currency rate have a significant impact on consumer prices, according to empirical research.

    Read More: NaijaEcho