Meristem: How naira depreciation impacts companies

The depreciation of the Naira by 49.42% in 2023 has had a significant impact on consumer goods and telecoms firms in Nigeria, according to a recent report by Meristem Research. The report suggests that the financial performance of many companies in the first quarter of this year is likely to mirror that of 2023, a challenging year for businesses in the country. Praise Ihansekhien, Team Lead at Meristem Research, shared insights on the findings during a recent CNBC Africa interview. The research highlights the struggles faced by companies with foreign exchange exposure, such as Nestle and Unilever, which experienced negative returns in the first half of 2023 due to significant FX losses. These challenges are expected to persist into Q1 of 2024 as companies continue to grapple with high FX rates and mounting expenses. Ihansekhien emphasized the unpredictability of the FX market and the difficulties it poses for companies trying to plan their financial strategies. While the CBN governor had hinted at a Naira exchange rate target of 1,200, the current rate remains around 15 to 16 to the dollar, creating uncertainty for businesses. Companies have had to rethink their approaches to managing FX risks in light of the volatile market conditions. Many have renegotiated contracts and implemented new strategies to mitigate the impact of FX fluctuations on their operations. However, the normalization of the FX situation is expected to take time, with unrealized FX losses likely to weigh on companies' earnings throughout the year. In addition to FX challenges, companies are also grappling with rising costs of raw materials, production, and operations in Nigeria. Inflation, fuel prices, and administrative expenses have all surged, further straining companies' bottom lines. The combination of these factors has made earnings projections for the year a challenging task. The first quarter of 2024 has presented companies with a mixed bag of outcomes. While some were optimistic about a revenue boost from a base effect, others faced difficulties due to increased prices and uncertain consumer demand. The balancing act between raising prices to cover costs and maintaining customer volume has added another layer of complexity to companies' financial outlook. Overall, the current environment poses significant challenges for Nigerian companies, requiring them to adapt and innovate to navigate the impact of Naira depreciation effectively. Strategic planning, cost management, and agility will be key factors in determining businesses' resilience in the face of ongoing economic uncertainty.