Listed consumer goods firms in Nigeria are feeling the heat of President Muhammadu Buhari’s directive to the central bank (CBN) to freeze dollar sales to food importers.
Since the curious directive became public knowledge last week Tuesday, an index on the Nigerian Stock Exchange (NSE) which tracks listed consumer goods firms showed a 6 percent decline to 510.63 points from 545 points the week before, the lowest since December 2009, with big multinationals leading the slump. The index was down 5 percent on Friday alone.
Nestle plc, the largest company on the index, was down 10 percent as at 2:30pm to N1,143 per share, Friday, from N1,270 the week before the directive.
Unilever plc and Guinness were also down 10 percent, Friday, while UAC fell by as much as 9 percent.
“The FX directive from Buhari, if implemented by the CBN, threatens to dip hands into the already squeezed profit margins of the consumer goods companies,” said Ayodeji Ebo, managing director at investment bank, Afrinvest Securities.
“Some of their inputs are imported, so the FX ban would make it more expensive for them to import raw materials, thereby raising production costs for importers of items like wheat, barley, sorghum, and we are not food-sufficient in these areas,” Ebo, who advises clients on stocks to buy, said.
“Their stocks are selling off because investors are preemptively worried over the negative impact of higher production costs on profitability and return on equity, so it may fall further in the coming weeks,” he said.
The downside of the directive by President Buhari (which three Senior Advocates of Nigeria or SANs told BusinessDay was probably illegal) is the last thing consumer goods firms need at this time.
The consumer goods sector has had a year to forget in 2019 and was the worst performing index in the first half of the year, with a year-to-date loss of 16 percent. The broad market is down 13 percent.
The sector’s woes reflect weak company fundamentals on intensifying market competition and weak consumer discretionary income. That has affected revenue growth even as the weak economy looms large over the sector.
Nigeria’s population has grown at an annual average rate of 2.6 percent over the last five years, but this has not translated to similar revenue growth for consumer goods companies, with economic growth also struggling to keep pace with population growth.
Save for Nestle, which recorded an inflation-adjusted revenue growth (CAGR) of 2.3 percent from 2014 till date, the other consumer names have recorded negative inflation-adjusted revenue growth over the same period.
Nigerian Breweries’ revenue growth in that period was negative at -9.2 percent, Guinness saw a contraction of 8.8 percent, while Unilever and Flour Mills posted revenue contractions of 4 percent and 1.4 percent, respectively.
Analysts attribute the revenue pressure to weak consumer spending, occasioned by rising cost of living, pressure on wages due to currency depreciation, increasing unemployment, diminishing middle income and rising low income.
Whilst there is a fast-growing market for consumer goods in line with population growth, the implied price sensitivity of consumers has resulted to an increased preference for more affordable substitute products.
In response to this, some companies have introduced smaller product units at lower retail prices to better cater for the value segment.
Aggressive competition (domestic and imported) has also continued to pressure prices across the brewery, food, and home and personal care (HPC) markets.
Buhari’s FX directive to the CBN has been met with criticism. Lawyers say the 76-year-old doesn’t have the constitutional right to issue orders to the CBN governor.
Analysts have also picked holes in the claims made by Buhari that Nigeria has attained food sufficiency and warn of the adverse implications of the policy on food inflation.
Countries simply produce what they have comparative advantage in and import other foods.
This implies that Nigeria would continue to import food irrespective of a foreign exchange restriction. That then means food importers will have to source dollars at the parallel market which would be more expensive.
Nigeria spent $2.2 billion on food imports in 2018, according to data from the National Bureau of Statistics (NBS). If that demand went to the parallel market, the naira could weaken considerably against the dollar if nothing is done to boost dollar supply.
More than anything, the policy has exposed Buhari’s poor grasp of economic matters, according to an investment banker who did not want to be named.
“Nigeria is on sell at the moment,” the person said. “The broader interpretation of Buhari’s statement is that policy uncertainty is a big feature of this administration and that has frustrated investors to sell down on the country’s assets.”
A motley crew of economists and analysts are worried that an FX ban for food imports could be counterproductive and spark unintended consequences.
“I’m not convinced that FX controls are the best means of achieving food security,” said Razia Khan, Africa chief economist at Standard Chartered Bank.
Near-term risks might be higher food prices and potentially, the re-emergence of a parallel market premium, according to Khan.
“Focusing on infrastructure (as the government has started to do) is a much better intervention,” Khan said in a series of tweets, Thursday.
LOLADE AKINMURELE
