The majority of companies in Nigeria's consumer goods sector holding foreign currency-denominated debts faced more expensive letters of credit (L/Cs) amongst other financial hardships in 2023 as a result of the weakened naira, according to a report published by Meristem Securities.

The Lagos-based capital market conglomerate says that since Nigeria's liberalisation of foreign exchange windows in June 2023, the value of the naira against the US dollar devalued significantly by around 45 per cent.

By December 2023, it had reached an all-time low, trading at 1099 naira to the US dollar in the official window and 1310 naira to the US dollar in the parallel market.

Debt burdens and forex losses

Companies holding foreign currency-denominated debts - including Nigerian Breweries, Nestlé, Guinness, and Cadbury - faced higher debt burdens and substantial foreign exchange losses as well as more expensive L/Cs due to the debt revaluation.

Across the entire consumer goods sector, for those companies that heavily rely on the importation of raw materials, the weakened naira translated into significantly higher import bills, thereby leading to a substantial increase in production costs.

Adverse conditions

These adverse conditions placed significant strain on the profitability of these industry players, leading a number of them to report after-tax losses in the second and third quarters of 2023, according to Meristem.

It says that by September 2023, foreign exchange losses for major players in the industry stood at 472 billion naira (US$534 million), further underscoring the magnitude of the challenge posed by the Nigerian currency's depreciation on the financial health of consumer goods companies.

Guinness and Dangote

Meristem says finance costs for Guinness in the third quarter of 2023 soared by nearly 88 per cent year-on-year, primarily due to a more than 96 per cent year-one-year rise in debt stock (L/Cs and related party loan) and losses from remeasurement of foreign currency balances, resulting from the depreciation of the naira.

Revaluation of L/Cs and foreign vendor balances due to the devaluation of Nigeria's currency against the US dollar meanwhile precipitated losses of 184.8 billion naira (US$940 million) at the cement and sugar companies in the Dangote Group, West Africa's largest conglomerate and one of the largest on the African continent (DC World News, 2 August 2023).

The Meristem report, Shifting Landscape for Consumer Goods Players, can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.