Analysts predict contrasting outcomes for businesses as FX crisis worsens

Financial analysts have predicted a tale of contrasting outcomes for quoted companies based on their net foreign assets as the naira continued to depreciate against the dollar and other major currencies around the world.

The naira fell as low as N1,482.57 to the dollar on the official market compared with N1,460/$1 quoted on the parallel market. In the 31 days, the naira has lost around 40 per cent of its value.

The latest fall occurred after market regulator FMDQ OTC Securities Exchange said its methodology for calculating closing rates on the currency was revised last Friday to include more data, and that the levels on its computation had changed.

Speaking on how the development could impact on companies’ dividends, Chief Executive Officer of Wyoming Capital and Partners Mr. Tajudeen Olayinka said companies with net foreign assets in dollars are poised to reap abundant profits, while those with liabilities in foreign currency may face significant devaluation or substantial losses.

He noted that some companies adversely affected by foreign exchange losses might have taken proactive measures throughout the year to mitigate these challenges.

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“The truth is that some of those companies badly affected by foreign exchange losses would have repriced their earning assets in the year, in a manner that ensured absolute reduction in year-end losses or return their respective companies to profitability,” he said.

In his own comment, Executive Vice Chairman of Hicap Securities Limited, Mr David Adonri, underscored the ripple effects of the Nigerian Naira’s recent floatation, highlighting significant challenges for import-dependent companies amidst escalating foreign exchange rates.

Adonri emphasized that the surge in the foreign exchange rate has triggered a notable uptick in the cost of production inputs, subsequently driving up the prices of finished goods.

According to him, this surge, in turn, has become a catalyst for inflation across the broader economy. Import-reliant companies, grappling with heightened input costs, may encounter substantial hurdles in passing on these additional expenses to consumers, thereby facing potential profit squeezes.

“With the high foreign exchange rate precipitated by the recent floating of the Naira, the cost of inputs for production has escalated,” he said.

Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe said that with the prevailing foreign exchange (FX) instability, sectoral vulnerabilities are becoming increasingly apparent, with Consumer Goods and Industrial Sector companies poised to bear the brunt of the turmoil.

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Firstly, he noted that the erosion of disposable income among consumers could trigger a shift towards product substitution as individuals tighten their belts in response to economic pressures.

He also added that companies within these sectors may struggle to pass on the full foreign exchange-related costs of their products and services to consumers, fearing a decline in sales volumes due to consumer resistance.

Furthermore, Amolegbe highlighted the formidable challenge of determining product pricing amidst the backdrop of fluctuating FX rates, exacerbating the strain on these sectors.

Particularly concerning are companies within these sectors burdened with foreign loans, as they face the additional risk of escalated repayment costs unless the loans are denominated internally.