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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.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade long experience in the global financial market.

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Economy

Africa’s Economy to Contract by $236bn in Value in 2020 Says AfDB

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Investors

African GDP to Contract by $236bn in Value Says AfDB

The African Development Bank (AfDB) has said the ravaging COVID-19 pandemic could cost the entire African continent about $236.7 billion in cumulative Gross Domestic Product.

The bank disclosed this in its latest report on African Economic Outlook (Supplement) released on Tuesday.

The bank predicted that the damage could be far greater if the impacts of the pandemic persist on the continent beyond the second quarter of the year. It said this could lead to a bigger contraction in Africa’s GDP in 2020.

According to the bank, the continent’s Real GDP could contract by as much as 1.7 percent this year if the virus has a shorter duration. This represents about a 5.6 percent decline from the January 2020 prediction.

However, under a long term scenario into the second half of the year, this could result in a deeper contraction in GDP.

This, the bank said could lead to 3.4 contraction, up from the 1.7 percent projected under the shorter duration and represents a decline of 7.3 percent from the previous projection before the outbreak.

It, therefore, said the combined loss due to the COVID-19 pandemic in Africa could range between $173.1 billion and $234.7 billion in 2020-2021.

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Economy

Brent Crude Oil Maintains $43 Per Barrel Despite Surge in US Inventories

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Oil

Brent Crude Oil Sustains Upsurge Despite Rising US Inventories

Brent crude oil, against which Nigerian oil is priced, sustained its upsurge at $43 per barrel on Wednesday during the London trading session despite a report showing a build-up in the U.S. crude inventories in the week ended July 3, 2020.

Brent crude oil

According to the U.S Energy Information Administration (EIA) report released on Tuesday, crude oil production in the U.S is expected to decline by just 70,000 barrels per day from the 670,000 bpd previously predicted to 600,000 bpd.

While this was below the projected decline, it also points to a build-up in U.S stockpiles and suggested that oil production from the world’s largest economy may not decline as previously projected in 2020.

“The EIA’s forecast of a lower decline in U.S. output was partially offset by its outlook for firm demand recovery, which limited losses in oil markets,” Hiroyuki Kikukawa, general manager of research at Nissan Securities said.

“Still, expectations that the Organization of the Petroleum Exporting Countries (OPEC) and allies would taper oil output cuts from August and softer U.S. equities added to pressure,” he said.

The EIA projected that global oil demand will recover through the end of 2021 as demand was predicted to hit 101.1 million barrels per day in the fourth quarter of the year.

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Economy

Illegal Withdrawals: Rep To Investigate NNPC, NLNG Over $1.05bn

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House of representatives

Rep To Investigate NNPC, NLNG Over Illegal Withdrawal of $1.05bn from NLNG Account

The Nigerian House of Representatives has concluded plans to investigate illegal withdrawal of $1.05 billion from the account of the Nigerian Liquefied Natural Gas Limited (NLNG) by the Nigerian National Petroleum Corporation (NNPC).

The decision followed the adoption of a motion titled ‘Need to Investigate the Illegal Withdrawals from the NLNG Dividends Account by the Management of NNPC’ moved by the Minority Leader, Ndudi Elumelu, on Tuesday.

The House adopted the motion and mandated its Committee on Public Accounts to “invite the management of the NNPC as well as that of the NLNG, to conduct a thorough investigation on activities that have taken place on the dividends account and report back to the House in four weeks.”

Elumelu said, “The House is aware that the dividends from the NLNG are supposed to be paid into the Consolidated Revenue Funds account of the Federal Government and to be shared amongst the three tiers of government.

“The House is worried that the NNPC, which represents the government of Nigeria on the board of the NLNG, had unilaterally, without the required consultations with states and the mandatory appropriation from the National Assembly, illegally tampered with the funds at the NLNG dividends account to the tune of $1.05bn, thereby violating the nation’s appropriation law.

“The House is disturbed that there was no transparency in this extra-budgetary spending, as only the Group Managing Director and the corporation’s Chief Financial Officer had the knowledge of how the $1.05bn was spent.

“The House is concerned that there are no records showing the audit and recovery of accrued funds from the NLNG by the Office of the Auditor-General of the Federation, hence the need for a thorough investigation of the activities on the NLNG dividends account.”

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