Naira devaluation pushes listed firms’ forex debt near N4tn

The dollar debts of 15 listed companies have hit about N3.76tn as of the end of December 2023, according to The PUNCH analysis of their annual reports filed with the Nigerian Exchange Limited.

This marks about a 109.74 per cent increase year-on-year from N1.79tn recorded in 2022 on the back of the depreciation of the naira.

In dollar terms, the companies’ total debts, including trade payables, Letters of Credit, and dollar-denominated loans, rose by 6.59 per cent to $4.15bn from $3.89bn in the previous year.

The reviewed companies which cut across different sectors of the economy, ranging from telecoms to the real sector to the oil & gas sector include Dangote Cement, BUA Cement, Lafarge, Dangote Sugar, NASCON Allied Industries,  Cadbury, Unilever, Nestle, International Breweries, Nigerian Breweries, Guinness, TotalEnergies Marketing, Seplat, MTN Nigeria and Airtel Africa.

On June 14, 2023, the Central Bank of Nigeria announced the harmonisation of the segments of the foreign exchange market into the National Foreign Exchange Market domiciled on the FMDQ.

Since the development, the Nigerian currency has struggled against other foreign currencies and weakened over the months, although the different segments of the market achieved a convergence earlier this year.

Following the exchange reforms, the naira went from about 471/$ to 755/$ at the Investors and Exporters window on June 14, 2023.

However, the Naira closed the year at 911/$, signalling a significant drop in six months.

In a commentary in February, Fitch Ratings put the drop in the value of the naira at about 40 per cent saying “The Nigerian naira was recently devalued sharply (end-2023: 899/USD; 13 February: 1,516/USD; about 40 per cent devaluation), exceeding our expectations of a more moderate depreciation in 2024. The large devaluation is the second within a year (70 per cent devaluation since end-2022) and has converged the official exchange rate with the parallel market rate.”

As of Friday, the naira closed at the FMDQ window at 1,485.99 per dollar, which shows that the firms would need about N6.16tn to pay off their dollar-denominated debts, although some have gone the route of debt-to-equity conversion to get the debt off their books, especially for intercompany loans.

In its annual report for 2023, Dangote Cement reported N362.32bn dollar loans higher than N257.04bn in 2022. These included loans from Bulk Commodities Inc (N49.25bn), short-term loans from banks at N267.35bn and long-term loans from banks in dollar terms worth N45.72bn.

The President of Dangote Industries Limited, Aliko Dangote, has been quite vocal regarding the toll the continued devaluation of the naira has had on businesses.

While speaking at the last Annual General Meeting of Dangote Sugar Refinery, Africa’s richest man, said that the local currency depreciation was the company’s biggest challenge in 2023.

He said, “The biggest mess created was the devaluation of the naira from N460 to N1,400. You can see that almost 97 per cent of companies in the food and beverage business, none of them will pay dividends this year. But we will try and get out of it.”

Another player in the cement space, BUA Cement, reported N320.27bn from trade payables and borrowings. Its dollar exposure as of 2022 had stood at N34.99bn.

Recall that middle of 2023, the International Finance Corporation, a subsidiary of the World Bank Group, in collaboration with African and European partners provided a financing package of $500m to BUA Cement Plc to boost its expansion drive.

Lafarge Africa, which said it was mostly exposed to the dollar currency risk, indicated in its annual report that lower figures as its borrowings and trade payables stood at N25.25bn from N18.96bn in 2022.

It also has foreign currency denominated balances Euro, Great Britain’s Pound (GBP), Swiss Franc (CHF) and South African rand (ZAR).

Still in the manufacturing sector, Dangote Sugar reported N346.73bn compared to N189.84bn indicating an increase of about 82.65 per cent year-on-year from Letters of Credit, trade payables and amount due to related parties. In notes on its foreign currency risk, the company said, “The Group reviews its foreign currency exposure, including commitments on an ongoing basis. The Company expects its foreign exchange contracts to hedge foreign exchange exposure.”

Its sister company, NASCON Allied Industries reported lower figures in terms of dollar exposure at N27.43bn as of December from trade and other payables. The same item stood at N12.96bn in 2022.

Cadbury Plc has an outstanding intercompany loan valued at N7.03bn ($7.71m) owed to its principal shareholder, Cadbury Schweppes Overseas Limited, as of December 2023, which has now been converted to equity.

The loan was $16.58m, representing the principal ($15.00m) and accrued interest ($1.58m) as of 2022.

In addition to trade payables, which were due to intercompany partners for the purchase of finished goods, recharges and invoices for other services rendered to Cadbury Nigeria Plc as well as some other foreign suppliers, the company reported dollar debts worth N12.88bn lower than N18.60bn.

Unilever’s dollar-denominated debts dipped to N3.71bn from N9.92bn, this was from trade payables and loans.

Nestle in its annual report indicated dollar-denominated debt of N410.44bn. This included Intergroup Loan and other payables.

At the company’s last AGM, the chairman, Gbenga Oyebode, disclosed that the foreign exchange loans from its parent company, Nestlé S. A. Switzerland, were necessary to keep the company running.

He said, “There was only one reason your company took foreign currency loans; it was the inability to source foreign currency in the country. It was not because it was the preferred way. Over the last five to six years, your company has been unable to source the foreign currency it needs to run the business.

“Yes, your company took foreign loans, but those foreign loans were the only way we could have kept this company alive. So, we had to do business and if you ask me, personally, having a parent company like Nestle that was willing to commit to Nigeria consistently over the period.”

In the brewery space, International Breweries, reported N354.72bn (2022: N142.39bn), while Nigerian Breweries had N234.26m from N62.84m and Guinness Nigeria saw its foreign debt more than doubled to N79.42bn from N36.74bn.

In the oil and gas sector, TotalEnergies Marketing, recorded N34.94bn from trade payables, higher than N12.26bn in 2022, Seplat  Energy Plc saw its trade payables and borrowings at N759.25bn from N527.69bn

In the telecoms sector, MTN Nigeria recorded N624bn from dollar loans from the European Investment Bank, Africa Finance Corporation, trade loans and an Access Bank facility executed in August 2023.

In its investor presentation from its results for the year ended 31 March 2024, Airtel Africa Plc revealed that the foreign currency component of the operating company debt stood at N398.81bn (2022: N274.07bn).

Another major issue that contributed to increased dollar obligations for major firms was the protracted forex backlog that left many firms unable to pay foreign suppliers for requisitions.

The protest by the manufacturers came despite claims by the CBN that it had successfully cleared all valid foreign exchange backlogs, effectively eliminating a legacy burden.

A  statement by the bank said, “The Central Bank of Nigeria has announced that all valid foreign exchange backlogs have now been settled, fulfilling a key pledge of the CBN Governor, Mr Olayemi Cardoso, to process an inherited backlog of $7bn in claims.

“Clearance of the foreign exchange transactions backlog is part of the overall strategy detailed in last month’s Monetary Policy Committee meeting to stabilise the exchange rate and thereby curb imported inflation, spurring confidence in the banking system and the economy.”

In a recent interview with The PUNCH, the Director-General of MAN, Segun Ajayi-Kadir, said that its members have lost at least N1.5tn in the last six months due to the CBN’s delay in settling the forex backlog of manufacturers.

He said, “Within the last six months, our companies have incurred not less than N1.5tn in forex-related transaction losses. By the time our results are out for Q1, in terms of the performance of companies, this will be very clear.”

Similarly, in an exclusive interview with The PUNCH, the President of the Manufacturers Association of Nigeria, Francis Meshioye, said the forex requests by his members were yet to be cleared.

According to Meshioye, the lingering status of the forex requests by manufacturers, which remains unmet, has taken a negative toll on many businesses.

Meshioye said, “Surely not. They have not cleared it. We know there are a lot of issues surrounding forward contracts, especially forex that is due to be paid. The agreement is that the money (forex) should be paid at a future date, and the future date has passed.

“They are in arrears. This is a concern to the manufacturers because it has a lot of effects, not only on the manufacturers but the country as a whole. In the first instance, you will lose your credibility.”

In an interview with The PUNCH, the Vice Chairman of  Highcap Securities Ltd, David Adonri, described the increased exposure of firms to currency risks as worrisome, especially in situations where firms are unable to tap the derivatives market to hedge against currency depreciation.

He further stated that the apex bank’s inability to clear the forex backlog of many firms had left companies vulnerable to increased foreign currency risks.

Adonai said, “What is happening is a complete disaster for Nigeria’s financial economy and it also points to some dishonesty arising from the false claim by the CBN that they had settled all the backlogs.

“Now, some companies are saying that that is not true. That is a falsehood and a misleading statement from a regulator. It is very shameful. What the CBN may be trying to cover up is that we are still enmeshed in a serious balance of payment crisis.

“If we cannot settle the backlogs, that is an impending danger for the economy because the foreign suppliers may revolt and cut off credit lines to Nigerian manufacturers which can cripple the economy. So, those people who are managing this situation are playing with fire.”

On his part, the Director of Research and Strategy at Chapel Hill Denham, Tajudeen Ibrahim echoed the role played by mounting dollar debts on the profitability of companies in the 2023 financial year.

According to him, the severity of the depreciation of the naira, coupled with a paucity of tools to hedge against foreign currency risks left many companies susceptible to the attendant economic shocks that followed.

He said, “The companies were faced with naira devaluation which negatively impacted the value of their dollar loans by expanding significantly. It negatively impacted their interest expense which pulled down their profitability.

“We have limited hedging instruments in this country. That is the reality. One way they could have hedged was to buy non-deliverable forwards, but such instruments were not considered by the companies.”