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Foreign Investors’ Acquisition of Local Firms Over Forex Looms

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DOLLAR CURRENCY
  • Foreign Investors’ Acquisition of Local Firms Over Forex Looms

Unless the Central Bank of Nigeria (CBN) is consistent in making foreign exchange (forex) available for manufacturers to import raw materials that are yet to have local alternatives, foreign investors with access to cheaper funds may acquire controlling stakes in these local firms.

Already, some firms that are unable to sustain their operations, having suffered huge losses in 2016 due to currency adjustments and inadequate access to forex, are being acquired by new investors, while others are exploring the Nigerian Stock Exchange (NSE) by way of rights issue before considering bailout from their parent companies. Indeed, many listed local producers lost over N50 billion in profit across the food, beverages, conglomerates and drug manufacturing sectors.

As it is, the CBN which has been injecting forex into the system lately to stabilise the naira may have to do more to help the real sector. If the low supply of foreign exchange for local production continues, it means the control of the manufacturing sector will slip into the hands of foreign investors even as the growth of local content remains inhibited when returns on investments are repatriated from the economy.

For instance, the parent company of Guinness Nigeria Plc – Diageo – is already planning to take up its rights by way of a debt/equity swap wherein the outstanding foreign currency loan (N20.3 billion as at first half of 2017) from Diageo will be used as payment for its rights in Guinness.
The acquisition of Nigeria’s Swiss Pharmaceutical Company (Swipha), was completed at the weekend with the French generic medicine manufacturer, Biogaran, announcing over 95 per cent stake in the company.

For Nestle Nigeria Plc, its profit after tax was negatively impacted both by the revaluation of foreign loans resulting from the devaluation of the naira and higher income tax provisions due to the expiration of the pioneer status. The company closed the year at N7.9 billion profit from N23.7 billion in 2015.

The capacity utilisation in the nation’s drug manufacturing sector and other productive sectors had dropped to an all-time low of 20 per cent due to inadequate access to foreign exchange for the importation of critical raw materials, mainly active pharmaceutical ingredients (APIs) and machinery inputs. There is also the challenge of competition from poorly regulated markets.

The acquisition of Swipha may have been made possible due to the inability of the Nigerian firm to sustain its operations arising from the high cost of doing business and huge debt.

Guinness Nigeria Plc suffered a loss of N4.7 billion in 2016 from a profit after tax of N1.17 billion in 2015, even as it announced a rights issue price at N58.00, 17% discount, to market price.

The company intends to use the funds to improve its balance sheet given its relatively high debt level (Debt/Equity ratio of 1.3 vs. Nigerian Breweries of 0.1), finance its working capital needs and expand its operations.

The Nigerian Breweries, following the huge forex loss, ended the year with profit before tax of N39.675 billion, down from N54.514 billion in 2015 and profit after tax of N28.416 billion as against N38.05 billion in 2015.

On plans for the acquired Swipha, President of Biogaran, Pascal Brière told The Guardian that the new management’s first priority would be the revitalisation of the company and give confidence to employees on its commitment to a prosperous future.

The President of the Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs, however, dismissed the notion of firms selling their factories to new owners, saying that the CBN had cleared many of the backlogs of foreign exchange, thus, bringing firms back in business.

He said that 2016 was a terrible year for everybody but businesses were able to sustain their operations.

“Situations may be very difficult; it may also be that some businesses are relocating or seeking new areas of investments, but they are not closing down. I know it is part of the things that happened in the course of the forex crisis. Once an area of business is no longer lucrative, chances are that the business divests, but it does not mean that it is closing operations. They may not be doing it exclusively because of scarcity of forex but due to infrastructure challenges, among others,” Jacobs said.

According to a former National Coordinator of Independent Shareholders Association (ISAN), Sir Sunny Nwosu, the move by Guinness to raise capital from the stock exchange, though belated, is in the right direction, considering the need of the firm to sustain its business and enhance shareholders’ return on investments.

The Minister of Industry, Trade and Investment, Dr. Okechukwu Enelamah, has admitted that some of the policies implemented by the Federal Government affected manufacturers negatively.

Enelamah, who made the remarks in an interview with CNN in London, was quoted as saying: “Some policies we passed affected manufacturers in terms of their raw materials and we are correcting those now. We want to discourage dumping and bad practices that happened in the past. But we need to do it in a way that does not hurt local manufacturing.”

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Economy

Nigeria’s Plan to Review Oil Companies’ Gas Flaring Strategies

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Oil

Nigeria is ramping up its efforts to address environmental concerns in the oil and gas sector with a comprehensive plan to review gas flaring strategies of international and indigenous oil companies.

The Minister of State for Environment, Dr. Iziaq Salako, announced this initiative during a national stakeholders engagement meeting on methane mitigation and reduction held in Abuja, Investors King reports.

Gas flaring, a common practice in the oil industry, releases methane—a potent greenhouse gas—into the atmosphere, contributing to climate change and posing health risks to communities near oil facilities.

Nigeria aims to end routine gas flaring by 2030, aligning with global climate goals and commitments.

Dr. Salako explained the importance of reducing methane emissions and highlighted the detrimental effects on public health, food security, and economic development.

He outlined practical steps being taken to tackle methane emissions, including the development of methane guidelines and the engagement of government institutions.

The ministry, through the National Oil Spill Detection and Response Agency, will conduct periodic reviews of oil companies’ plans to ensure compliance with the gas flaring deadline.

Deloitte management consultants will assist in conducting comprehensive forensic audits to scrutinize the legitimacy of forward-contracted transactions.

President Bola Tinubu’s commitment to environmental sustainability underscores the government’s dedication to addressing climate change and fulfilling its multilateral environmental agreements.

The engagement event served as a platform for stakeholders to discuss methane mitigation strategies, existing policies, and implementation challenges.

Collaboration and dialogue among diverse sectors are crucial in charting a unified course towards sustainable methane reduction in Nigeria’s oil and gas industry.

As the country navigates its environmental agenda, ensuring accountability and transparency in gas flaring practices remains paramount for achieving a greener and healthier future.

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Economy

Interest Rate Jumps to 24.75% as CBN Takes Aggressive Stance Against Inflation

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Dr. Olayemi Michael Cardoso

The Central Bank of Nigeria (CBN) has announced a significant increase in the monetary policy rate, known as the interest rate, to 24.75%.

This move disclosed by CBN Governor Olayemi Cardoso during the 294th Meeting of the Monetary Policy Committee press briefing in Abuja, represents a bold step by the apex bank to address the mounting inflationary pressures faced by the country.

With inflation soaring to 31.70% in February, the CBN aims to moderate this upward trend by tightening its monetary policy stance.

This decision follows the previous hike in the interest rate to 22.75% in February, showcasing the CBN’s commitment to combatting inflationary forces.

While the bank opted to maintain the Cash Reserve Ratio at 45%, the significant increase in the interest rate underscores the urgency of the situation and the need for decisive action.

Governor Cardoso emphasized that these measures are essential to stabilize the economy and safeguard the purchasing power of the Nigerian currency.

The 294th MPC marks the second meeting under Governor Cardoso’s leadership, indicating a proactive approach to addressing economic challenges.

The next MPC meeting is scheduled for May 20th and 21st, 2024, highlighting the ongoing commitment of the CBN to navigate Nigeria’s economic landscape amidst inflationary pressures.

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Economy

Nigeria Braces for 10th Consecutive Interest Rate Hike by Central Bank

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Central Bank of Nigeria (CBN)

As Nigeria grapples with persistently high inflation, the Central Bank of Nigeria (CBN) is gearing up to implement its tenth consecutive interest rate hike in a bid to curb the soaring prices and attract investment.

Analysts surveyed by Bloomberg are anticipating a substantial 125 basis-point increase in the key rate to 24%, marking one of the most significant adjustments in the current tightening cycle.

The decision, expected to be announced by Governor Olayemi Cardoso on Tuesday at 2 p.m. in Abuja, comes on the heels of inflation accelerating to 31.7% in February, far surpassing the central bank’s target range of 9%.

This surge has been primarily attributed to the sharp depreciation of the naira, prompting authorities to devalue the currency twice since June to narrow the gap with the unofficial market rate and encourage investor confidence.

While these measures have seen the naira strengthen in recent days and bolstered investment inflows, including a fourfold increase in overseas remittances and significant foreign investor portfolio asset purchases, there remains a palpable need for more decisive action.

Giulia Pellegrini, a senior portfolio manager at Allianz Global Investors, emphasized the necessity for the CBN to intensify its tightening efforts to regain foreign investors’ confidence in the local bond market.

While acknowledging the positive strides made by the central bank, Pellegrini stressed the importance of a more assertive approach to prevent the diversion of investor attention to other frontier markets.

As the Nigerian economy navigates through these challenging times, the impending interest rate hike signals the CBN’s determination to address inflation head-on and foster a more stable economic environment.

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