The latest string of results recently released by companies quoted on the Nigerian Stock Exchange provided us with a stark reminder of just how poor economic decisions can favor the very few to the detriment of many.

 

Companies

Since the fall of the price of Crude triggered a slide in the value of the naira, The Central Bank of Nigeria has released several policy measures that has adversely or positively impacted on the earnings of a lot of companies in Nigeria.

As bad as the exchange rate has been for everyone, there are some who have benefitted immensely from the crash of the Naira. We are not talking about small time forex dealers or hand to mouth speculators, rather we are talking about those who have gained billions of Naira from the fact that the naira is the worst currency in the world. We also have those who have suffered immensely from the calamitous fall of the naira.

Take for example, the recently released half year result of some of quoted companies listed below;

Gainers FX Gains (Billions) Losers FX Losses (billions)
GTB 61.2 Nestle Plc 13.1
UBA 12.2 Transcorp Plc 13.8
FBNH 52 Lafarge Plc 28
Dangote Cement 38 NB Plc 5.6
Access Bank 22 Oando Plc 28.6

As the table below depicts, you can clearly see that some of Nigeria’s largest companies in Nigeria have reaped a combined N185 billion from the impact of the depreciation of the Naira in the last 6 months alone.

How was this possible?

It’s pretty simple. When you have cash or indeed assets denominated in foreign currency the value of those assets appreciate considerably when converted in Naira. For example, if you had $ 1,000 in your bank accounts in 2014 it will be worth about N165,000. If you decide not to withdraw the forex, it will be worth about N315,000 based on today’s exchange rate. By merely holding dollar assets, the value of your investments has more than doubled in under two years. That is basically what has happened to the gainers on the left side of the table above.

The opposite is the case for the guys on the right side of the table. Rather than you having $ 1,000 in a bank account as an asset, you borrowed it from someone. When converted to naira it is no longer N165,000 you are owing, it is now N315,000. So, for the guys on the left they have incurred huge exchange rate losses because they had liabilities denominated in dollars and have to service those obligations at the new exchange rate.

This is a classical example of how pivotal, the exchange rate is to the financial survival of companies operating in emerging markets such as Nigeria. It’s worse if these are companies who buy raw materials abroad and rely on foreign “cheap” borrowing to operate.

A lot of smaller companies find themselves in this same awkward situation with few survival options. For most the available option is to close shop.

What lessons have we learnt from all this? Do small businesses, forgo the naira denominated assets for foreign denominated ones? Is it worth it creating value if the resultant income is in naira? How is it that the reward for holding the naira is valuation losses, high interest rates and weak purchasing power.

NAIRAMETRICS

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