consequent downward shift in the naira exchange rate to around N295 per dollar from N197.50 previously, severely impacted its cost of sales and was the primary driver behind the gross margin contraction.
The performance has been in line with the trends seen with other consumer goods manufacturers who have reported earnings so far.
It is believed that a large chunk of the other (non-operating) losses will likely be related to forex.
Unilever Nigeria’s sales were down eight per cent, while PBT and PAT were both down -95 per cent. Whilst the company would still be able to grow its top-line in the near term, the outlook on its earnings remains conservative until strategies to mitigate the effect of forex challenges are reflected in its financial performance.
Nigerian Breweries’ PAT of N8.6 billion fell by -24 per cent year-on-year. Although sales of N79.8 billion declined marginally by two per cent, a combination of factors, including a nine per cent rise in operating expenses, a 447 per cent increase in net interest expense and a gross margin contraction by 46 per cent resulted in PBT declining by 36 per cent.
Similarly, Lafarge Africa reports second quarter 2016 results also showed no obvious positives. The company reported a pre-tax loss of N28 billion, driven by forex losses of N27.5 billion. The pre-tax loss was primarily driven by an unrealised forex loss of N27.5 billion, and made it the third consecutive quarter of negative earnings for Lafarge.
Diamond Bank’s second quarter results which were released last week showed a doubling of the PAT to N10.3 billion. This contrasts with a 35 per cent year-on-year decline in PBT to N3.8 billion. Compounding the picture, loan loss provisions grew by 55 per cent to N10.2 billion.
Likewise, FCMB Holdings results showed that PBT grew markedly by 271 per cent to N14.1 billion. The stellar growth in PBT was largely driven by forex gains of N15.3 billion.
The gains from forex were also the major factor behind the 78 per cent growth in pre-provision profits to N40.3 billion and overshadowed a 506 per cent growth in loan loss provisions.
Quoting the Nigerian Export Promotion Council (NEPC), Head, Equity Research, FBNQuest Olubunmi Asaolu, disclosed that half of its registered exporters are inactive.
“We suspect that forex sourcing challenges have stifled activity as most inputs used in processing export products are imported,” he said.
Job losses have also become regular occurrences in the economy. Royal Dutch Shell Petroleum Development Company (SPDC), Addax Petroleum Development Company and other key operators in the oil sector sacked thousands of their workers within the first quarter of this year. No thanks to the falling oil prices and the need to stay in business. SPDC had announced its plan to offload 10,000 members of staff and direct contractor positions in 2015 and 2016. There were also thousands of job losses in the banking, insurance and manufacturing sectors.
Real estate sector also hit
According to Rewane, the Vacancy Factor Index (VFIX) for second quarter of this year came in at 72 per cent for the month of June. The report shows a 72 per cent rise in the number of vacant properties based on the housing stock as at January, last year, within highbrow neighborhoods of Lekki, Victoria Island and Ikoyi. These areas are proximate to the central business district or downtown areas of the Lagos metropolis.
Rewane said: “As a lagging economic indicator, the housing sector is likely to remain flat until the stimulus has transmitted through the system. Our expectation is that a point of inflexion of the index will be evident in first quarter of next year.”
The CBN had on June 20, commenced a flexible exchange rate regime to address currency pressures and uncertainty.
There was a convergence of rates as the official market depreciated by 40 per cent to N282 to dollar and the parallel market rate appreciated to N335 to dollar before falling to N355 to dollar in the first week in July 2016.
Although this policy change is a move towards the right direction, its impact on the real estate sector is neutral at this time. Building materials used for construction are part of the 41 items restricted from the official forex market. They include cement, roofing sheets, iron rods, wooden doors and ceramic tiles. Their prices are subject to parallel market fluctuations, thereby increasing the cost and final prices of housing. For example, the price of cement has gone up by 10 per cent from N1, 500 to N1, 650 per bag as a result of exchange rate fluctuations.
However, the impact of the new forex policy is likely to bring in new foreign investors via portfolio and direct investments. The inflow will push up housing demand and supply. But this is not expected until the second half of next year.
Ruling out a quick recovery for the real estate sector because that market has a time lag to return to equilibrium, Rewane said: “We expect demand for housing locally to shrink further initially due to lower disposable income and a move from prime areas to more affordable locations.
“We also expect, in the short-term, new developments under construction. This will increase the supply of properties. From the fourth quarter of this year onwards, we project a pickup in activities as the economy gradually recovers mainly through demand for housing by expatriates.”
Textile industry in disarray
Hundreds of textile mills wound up production because of poor funding and smuggling. This has resulted to job losses and mass unemployment.
Times were when cities such as Kaduna, Onitsha, Aba, Kano, Asaba, Funtua, Gusau, Lagos and a host of others were known for their textile mills that employed hundreds of thousands of workers. Today, those mills have not only been abandoned, they stand as sad monuments to their glorious past.
But relive seems to underway after. The CBN governor has announced a planned bailout for the textile industry as a way of diversifying the economy and creating job opportunities.
He said the funds would be released in a single-digit interest rate and long tenured loans for easy accessibility to stakeholders in the cotton, textile and garments segment.
Emefiele said: “A subsector that once employed over one million hardworking Nigerians is now almost completely dominated by imports from Asia…the central bank under my leadership is prescribing to work with the industry to come up with holistic solutions for the long term sustainable development of the sector.”
Stakeholders proffer way out
To Asaolu, the resuscitation of the agricultural sector is the answer for the much-desired turnaround in the economy. He said the Buhari administration has unfolded its roadmap for growth titled: “The Green Alternative”, which the Ministry of Agriculture presented to the Federal Executive Council (FEC) penultimate Wednesday.
The initiative seeks to increase agricultural activity by 85 per cent in crop production, and 15 per cent in livestock and other non-crop produce. If implemented effectively, it is expected to grow the sector’s share of non-oil exports earnings to 75 per cent, thus serving as an alternative significant source of foreign exchange earnings.
“Although the CBN’s flexible forex market regime is yet to gain full traction, non-oil exporters are now able to convert their export proceeds at a (broadly) market determined rate. This should spur growth within the sector over the medium term,” Ashaolu said.
United Bank for Africa (UBA) Group Managing Director/Chief Executive Officer Phillips Oduoza said the challenge of operating a mono-commodity economy, as is the case for Nigeria, lies in the over-reliance on one commodity, exposing it to headwinds from fluctuations in commodity prices with attendant pressures on the country’s currency, thereby affecting the economy’s health and performance.
He said the economy is on the verge of a recession due to over reliance on oil that has experienced a price drop of about 70 per cent within the last 18 months.
Oduoza said: “The solution therefore lies in the adoption of diversified economic policies by the government in order to ward off these incidences of mono-commodity driven macro-economic headwinds.”
Debt Management Office (DMO) Director-General Dr. Abraham Nwankwo said the government’s efforts at revitalising agriculture, solid minerals and manufacturing, among others, will impact positively on the economy in the next three to five years.
According to him, Nigeria’s growth will no longer be determined by crude oil prices with a diversified economy.
The DMO chief who said much revenue would be derived from taxation, added that the country’s low comparative tax revenue to the GDP ratio, currently at about seven per cent against the 18 per cent average in most developing countries, will improve when the productive sectors of the economy are deepened.
He said through taxes, government can secure funds to finance major developmental projects that will galvanise the economy and impact positively on the people’s lives.
Nwankwo said the country has been unable to exploit up to 25 per cent of opportunities in agriculture.
He said: “We need to achieve internal food security and have the opportunity to export agro-based products in processed form. Imagine the variety of food stuffs from savannah to the deserts, all the various legumes, roots and others that can be grown from these environments.
“If we effectively exploit agriculture, the major consumer of our forex like agro-based raw materials, rice, fish, poultry, wheat, will be taken care of and government will save billions of dollars from these imports. We have the capacity to produce these products and even export to other countries.”
Consumers groan
Renaissance Capital’s (RenCap’s) Sub-Saharan Africa Economist Yvonne Mhango said she expects consumers to come under further strain in the second half of this year as the naira weakens, petrol prices rise and interest rates increase.
She said: “A recovery in oil output would help lift consumption, but not in the near term as we think the government’s talks with the Niger Delta militants are likely to be protracted.
“The consumer sentiment of the majority of Nigeria’s households has been negative for five years. This is according to the consumer confidence index (CCI) which has been negative since third quarter of 2011.
“We found Nigeria’s consumer confidence to be correlated with the petrol price, forex rate, interest rates, and oil output (in order of strength). Our outlook on the consumer is premised on our view of the aforementioned variables.
“In import-dependent Nigeria, where all fuel and one quarter of consumer good are imported, it comes as no surprise to us that consumer confidence and the more market-driven parallel forex rate are negatively correlated.
“This correlation tells us that a stronger naira ameliorates consumption, as consumer goods become cheaper. As we see the naira weakening further in the short term, consumer confidence is likely to worsen and consumption fall. The downside for the consumer may be mitigated by the fact that most imports are being transacted at the parallel forex rate.”
Mhango explained that fuel’s importance in Nigeria’s economy cannot be understated.
She said: “Not only is it necessary for vehicles that transport passengers and distribute goods, it also powers houses and factories. So, when fuel prices increase, the share of disposable income leftover for other goods and services falls.
“We believe this explains the negative correlation between petrol prices and consumer confidence. A weakening naira implies that petrol prices are set to increase in the short term.
“As incomes in Nigeria are flat or falling, higher energy prices mean less disposable income available to consume other goods and services. We see this resulting in a further deterioration in consumer confidence in second half of this year.”
As its direct response to the increasing lending rate and consumers’ confidence fall, the Monetary Policy Committee (MPC), at its meeting last month, raised benchmark interest rate from 12 to 14 per cent.
“We think the relationship between the lending rate and consumer confidence may be partly due to distributors of consumer goods passing on higher interest rates on working capital loans to consumers”, Mhango said.
Chief Economist, Africa Global Research at Standard Chartered Bank, Razia Khan, said that as Nigeria continues on the path of forex liberalisation, fuel price deregulation, transparency initiatives, revenue mobilisation boost, power sector reforms, all with a view to easing the economy’s transition to lower oil prices, and creating the foundation for more sound long-term growth, the MPC decision was seen as step taken in the right direction.
The RenCap economist said: “The decision to raise the monetary policy rate despite growth concerns will give investors a clear signal on the authorities’ intent to sustain forex reforms. This should be well-received by investors.”
The Managing Director of Financial Nigeria International, Jide Akintunde, said that while the country awaits the GDP data for second quarter to officially confirm the country is in a recession, the discussion should now be how to end the negative growth.
Akintunde said: “Ending a recession is a fire-fight; it requires powerful short-term policy measures. After examining the ammunition available to the policymakers, my conclusion is that the 2016 budget is the most effective weapon. But the federal government seems lackadaisical in implementing its fiscal plan. This suggests the recession will be here for some time – longer than necessary. However, we need to save the economy,” he said.
According to him, the CBN is not completely without credible tools in reversing this recession, even though its anchor interest rate is blunt. CBN’s special monetary interventions, including funds targeting lending to Small and Medium Enterprises (SMEs), agriculture, power sector and non-oil exports, are important.
To him, fighting a recession can prove even more challenging, but the government must do all it can to end its knack for turning a crisis into a disaster.
END
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