The New Year is upon us and there are five things corporate boardrooms in Nigeria must critically examine in preparing for the year.
Naira downside
The first thing and probably the most important is what the New Year holds for the naira.
With the naira set to buckle under the weight of lower oil prices and an OPEC-induced production cut, businesses must put foreign exchange hedging strategies in place.
That simply means converting a good chunk of cash currently denominated in naira to dollars.
That way, in the event of a naira devaluation or depreciation due to a drop in the supply of foreign exchange into Nigeria on the back of lower oil prices and production, businesses are sufficiently shielded from revaluation losses.
Brent crude, the benchmark grade for Nigerian oil, ended the year at $53.8 per barrel, the lowest since July 2017. That’s lower than the $60 benchmark price in the 2019 budget. This year has only begun, but this could be an early sign of a bumpy ride for oil revenues and dollar inflows.
Worse still is that Nigeria cant pump more than 1.6 million barrels of oil daily this year, a limit imposed by the Organisation of Petroleum Exporting Countries (OPEC) to rid the market of a supply glut and lift oil prices.
Speculative activities will also be rife in the New Year, as dollar demand by investors betting on the naira to weaken will only add to pressure on the exchange rate.
Besides, this could also be the year the naira starts to yield to rising interest rates in the US and most developed markets, which have hammered emerging market currencies from the South African rand to the Mexican Peso.
The Central Bank of Nigeria (CBN) did a good job fighting off any material depreciation in 2018, but that was a CBN that had close to $50 billion in external reserves at the peak of its powers.
Given the outlook for oil revenues, this year holds new prospects for the apex bank whose constant dollar supply last year to defend the naira cost it as much as $7 billion.
Higher cost of production
The second thing businesses must brace for in the new year is higher cost of production. If the naira weakens, it becomes more expensive for businesses to import raw materials and other inputs, thereby stoking production costs.
Businesses must therefore consider looking for local alternatives, where possible, for the raw materials needed for their production process.
They should also limit or out rightly eliminate foreign debt, particularly if they do not have foreign exchange receivables to mitigate the possible foreign exchange risk.
The borrowing burden
Another thing every business must know going into 2019 is that borrowing costs will rise. It would become more difficult to get credit, at least from the banks, at affordable rates as the government could be set to crowd out the private sector for the third year running.
The 2019 budget has a deficit of N1.859 trillion and the government plans to borrow about N1.65 trillion from a mix of foreign and local creditors.
However, the outlook for oil earnings puts the government’s revenue target of N6.9 trillion at risk.
In the event that revenues underperform, as they have done in the last three successive budgets, then the government will be forced to borrow more which will drive yields on government securities higher and make it more expensive for the private sector to raise capital.
While fixed income investors may enjoy higher yields in 2019 than in 2018, businesses may suffer under rising interest costs.
Bearish stock market
The fourth thing businesses should prepare for in 2019 is a possible bearish stock market.
The Nigerian stock market shivers when oil prices catch a cold. When oil prices decline, investor sentiments take a hit and appetite for stocks wane and vice-versa.
After a torrid 2018, where stocks succumbed to a loss of 18 percent, 2019 may hold little bright prospects for one of Africa’s worst- performing stock market.
For businesses looking to go public in 2019, there might be need for a rethink as it is never a good time to face investors when sentiments are sour. It could see the company undervalued because buyers are scarce.
In a reflection of how undervalued Nigerian stocks currently are, the average Price to Earnings ratio, which is a measure of listed companies’ valuations, is at a record low of 9 times, as foreign portfolio outflows and political uncertainty deals a tough blow on stocks.
At the most recent market peak in 2014, stocks were valued at 15 times earnings. That means investors paid N15 for each naira earned by listed companies.
Possible petrol price increase
An increase in retail petrol prices cannot be ruled out this year as the subsidy burden on the government grows.
At N145 per litre, the amount Nigerians are paying for fuel is heavily subsidised by the government.
The political cost of hiking petrol prices has often deterred the current administration from moving to hike petrol prices like Saudi Arabia and Mexico have done recently.
However, after the election in February, that excuse fades.
In the event that there is a hike in petrol prices, it would trigger inflation and reduce purchasing power of households. Add the expected naira depreciation this year and the picture is worse.
Businesses could begin to soften the expected blow from reduced consumer purchasing power to create affordable products and services that moderate the strain on consumer wallets. Goods with elastic demand could also suffer but those with inelastic demand will be in good stead.
LOLADE AKINMURELE
