As a lot of Nigerian businesses tap the low-interest environment to ramp up borrowing to offset liquidity challenges fuelled by the effect of COVID-19, there’s a growing worry that the risk of low economic growth is going to constrain future revenues and increase the burden of debt servicing for firms.
In an economy hit by a double challenge of COVID-19 and collapsing oil price, slow economic activities, declining revenue, job losses and dampened purchasing power are expected to affect the bottom line of most companies and, even worse, make many handicapped to repay their debt.
Ayorinde Akinloye, a research analyst at CSL Stockbrokers, said the biggest risk for many companies would be the inability to generate adequate cash flow to pay back on maturity because of the slowdown in business.
“It is not about having funds, it’s about if there is demand. What use is producing when you cannot sell?” Akinloye asked.
Andrew S. Nevin, partner and chief economist at PwC, said “the economic impact of Covid–19 is just starting”.
“The reality is, we are now seeing the impact down the line in various industries,” Nevin said. “For us in Nigeria, it’s going to be hard to get our economy restored to normal without regretting the trade ties and investment from groups around the world, but that still looks a long way off.“
He said companies and government at all levels need to prepare for a long period of difficult economic times.
Due to the high liquidity challenges of most Nigerian companies amid the decline in business activities, about 27 firms issued commercial papers, bonds and rights issues in the first six months of 2020, as compiled from FMDQ data.
While Nigerian companies took advantage of the low-interest rate environment to raise capital, corporates most preferred the short–term commercial paper (CP) to bonds and rights issue due to the low cost of finance and the short maturity period, according to BusinessDay analysis.
Out of a total of N658.5 billion debt issued in the first half of 2020, commercial papers accounted for 70.86 percent as against the 23.95 percent raised through corporate bonds and 5.19 percent rights issue.
“It presents an opportunity for companies to raise cheap capital and those that have existing bonds raised some two or three years ago when rates were about 15-18 percent can call the bond,” said Yinka Ademuwagun, research analyst at United Capital.
While interest rates in Nigeria have always been high due to the monetary system in vogue since 2009 which sought to use FGN bonds/T-bills and OMO bills as means of attracting US dollars into the country to stabilise the naira, the recent OMO policy by the Central Bank (CBN) which prevents domestic investors from participating in the auction is the key driver of the low interest enjoyed today.
Yields on both T-bills and bonds instruments have hit a bottom record from a double interest rate enjoyed some four years ago, and according to industry analysts, the low yield environment is an opportunity ready to be tapped.
“The current state of the economy will affect the revenue stream of companies, and that is even the reason why they are raising funds because Covid-19 was a shock,” Ademuwagun said, projecting the Covid-19 shock to be short term.
According to ‘Covid-19: A Business Impact Series’, an advisory from KMPG business leaders, effective cash flow management is likely to be critical for many organisations during Covid-19 period as revenues fall and potentially, debtors delay payments or become insolvent.
In what could better describe the pains felt by the businesses due to the pandemic, consumer goods giant, Unilever, reported an underwhelming performance in the first half of the year, after its revenue plunged by more than 40 percent to N14 billion, compared to the N23.4 billion it reported the same period last year.
Across key product segments, revenue declined as both the food and home/personal care (HPC) businesses were down 28.5 percent and 43.3 percent, respectively, to N15.3bn and N12.1bn in H1 2020 from N21.4bn and N21.3bn, a pointer to how the pandemic has dealt a blow to the cash flows of businesses.
Similarly, revenues of Cadbury Nigeria declined by 18.2 percent to N15.9bn in the first half of 2020, from a high of N19.5bn the same period last year.
To at least tame the impact of the crisis on their businesses, many companies, particularly those in the fast-moving consumer goods space, have increased their books of trade receivables, giving stock of goods on credit to customers with the hope they would pay back at a later date after the goods are sold.
Irrespective, the move still doesn’t hold much water due to weak purchasing power of consumers whom the goods are meant to be sold to, thereby resulting in increasing firms’ books on goods returned inwards.
For Unilever, its impairment loss on trade receivables surged by more than 3,000 percent, from N17.4 million in June 2019 to N597.2 million.
More than 35,640 customers of Nigerian banks have restructured loans worth N7.8 trillion after the pandemic crippled business activities, Godwin Emefiele, CBN governor, said during the apex bank’s July Monetary Policy Committee meeting where members voted to leave benchmark interest rate and other key parameters unchanged.
Emiefele said that plans were underway to expand the forbearance levels for businesses, particularly those hard–hit by the impact of the virus, to as much as 65 percent.
This, however, might still not be enough to get the fundamentals of these businesses to their pre-pandemic levels, according to analysts who spoke to BusinessDay.
To a large extent, the success or failure of businesses mirrors macroeconomic realities of a country. When businesses thrive, there appears to be economic prosperity in a country, and vice versa.
For Africa’s largest economy which for a larger part of the last five years has suffered stunted economic growth at an average of 2 percent, the scenario appears not different.
Since 2017 when oil-dependent Nigeria emerged from its economic recession, not only has the country’s economic growth been sluggish but only a few sectors triggered the expansion, further undermining the country’s capacity to create enough jobs to meet the growing number of labour market entrants.
Africa’s top oil exporter which relies on crude sales for around 90 percent of foreign exchange earnings and more than half of government revenue is projected to post as much as 5 percent contraction in 2020.
Analysts recommend government intervention in key sectors of the economy and right policy implementation as some of the stimuli needed to bail Africa’s largest economy from posting its worst recession in decades.
But Nigeria’s planned fiscal and monetary policy stimulus targeted at addressing the economic challenges of Covid-19 are modest compared to its peers, according to the World Bank.
As a share of its 2018 GDP, Nigeria’s Covid-19 stimulus – whether as aid, grants, guarantees, CBN’s monetary liquidity injection, or interest rate – is less than that of Brazil, Angola, Mexico, Russia, South Africa, Ethiopia, Ghana, Kenya, Senegal, and Uganda, the Washington-based lender said in its recent Nigeria Development Update (NDU) report.
“Nigeria’s fiscal and monetary policy response has been modest by the standards of comparable countries, making it harder for the country to avoid recession,” the World Bank said in the report titled ‘Nigeria in Times of COVID-19: Laying Foundations for a Strong Recovery’.
The World Bank explained that the current challenges reflect long–standing shortfalls in human capital, infrastructure and public services, women’s economic inclusion, the business environment, access to finance, and governance.