Impact of Forex Instability and Weak Naira on Q3 Performance of NGX Companies 

The Nigerian Stock Exchange recorded a negative return of about 5.39% during the third quarter of 2022 (Q3 2022) with the market depreciating by about N1.48 trillion within the period. The market opened on July 1, 2022, with an ASI of 51,829.67, and ended the quarter with an ASI of 43.745.73. Naira lost 20% of its value within Q3 2022. 

“The parallel market rate of the Naira is inching towards N900/$1. The naira started the year trading at N570/$1”.

In this post, we review the impact of Nigeria’s foreign exchange rate instability and the naira’s persistent weakness on the performance of companies with stocks traded on the Nigerian Stock Exchange. 

According to Mr. Abiola Gbemisola, an equity research analyst at FBNQuest, forex instability has had a significant impact on companies with USD liability exposure. Such companies have suffered a significantly higher cost of servicing their foreign debts. This cost has kept rising as the naira’s value has continuously depreciated against the US dollar and other major currencies. 

 Gbemisola said that unrealized FX losses, especially those related to the cost of importing raw materials, have also significantly impacted the profit and loss of companies on the Nigerian Stock Exchange. This is seen in Nigerian Breweries Plc Q3 2022 results. The company recorded net losses on foreign exchange transactions of about N3.08 billion.

Lafarge Africa, the Nigerian building materials giant, improved Net Sales by 12.2% in Q3 2022 over Q3 2021. But according to Khaled El Dokani, CEO of Lafarge Africa,” The worsening exchange rate situation impacted our Cost of Sales, specifically key supplies indexed to the U.S dollar”.

The company ended Q3 with an EBIT 19.3% lower than in 2021. The story of losses linked to Nigeria’s poorly managed currency is a common theme in the Q3 results of NSE companies. 

Unrealized FX losses

Unrealised FX gains or losses reflect the change in the value of foreign currency-denominated sales/purchase transactions that are recorded in financial statements prior to the settlement of the invoices. For example, a U.S.-based company sells EUR 100,000 worth of motor vehicle parts to a European distributor.

When the business recognised the invoice, the spot EUR-USD rate was 1.10. As financial statements are drawn, the transaction hasn’t been settled still, and the exchange rate has moved to 1.15. The corresponding unrealised FX gain of USD 5,000 is recorded on the balance sheet under the owner’s equity section.

Nigeria Naira, Weak and Unstable Naira

The parallel market rate of the Naira is inching towards N900/$1. The naira started the year trading at N570/$1. The instability of the Naira has been a critical factor in the rising inflation rate in the country. It has also been a critical factor in the poor performance of the Nigerian Stock Exchange (NGX). 

While there has been relative stability (resulting from the CBN’s intervention) in the official market rate of the Naira, the case is quite different in the parallel market rate. At the start of the third quarter on July 1, the Naira traded for about N411/$1 at the Investors’ and Exporters’ FX window. On September 31, at the end of the quarter, it traded for N435, representing a decline of about 6% in the value of the Naira. 

On the other hand, the Naira sold for about N612/$1 on the black market on the 1st of July, 2022. At the end of the quarter, the Naira traded for about N735/$1 representing a decline of about 20%. This significant decline has a significant impact on USD-exposed companies in Nigeria considering the scarcity of forex in Nigeria. 

It seems the price of foreign inputs of Nigerian corporates is at a midpoint between the official rate of the naira and the parallel market rate. It is not certain the percentage of the demand for forex to pay foreign exchange debts that quoted companies are able to source from the Central Bank of Nigeria. 

Why is the naira so weak? 

Within the first 9 months of 2022, oil which is Nigeria’s major source of FX has witnessed a drastic drop in production from about 1.4 million BPD in January to about 938,000 BPD in September. This drop has caused a significant reduction in the amount of FX available to the CBN. The drop in production can be attributed to a myriad of factors. This includes a reduction in the number of oil rigs from 16 in 2019 to 10 in 2022, a shutdown of oil production facilities, and crude oil theft has bedeviled the country. 

While the price of crude oil has skyrocketed as part of the aftermath of Putin’s war, Nigeria seems to be the only member of OPEC missing out on the bonanza.  Various factors drive the naira’s weakness. Oil production and export have fallen. But the principal cause of the naira’s instability is the CBN’s 7-year adherence to exchange rate controls. Nigeria’s apex bank has eviscerated the market-determined price for the naira. 

Other Factors Influencing the NGX Market

According to Mr. Abiola, the negative return of the stock market is attributable to several issues which include weak earnings, low investor sentiment, better fixed-income yields, and a heightened political environment. The two major drivers of investor exit from the stock market are the political environment and attractive fixed-income yields. 

Mr. Abiola further stated, historically, investors are always [wary] in pre-election years. It causes them to move their money into safer investment vehicles (assets). Plus, liquid-mopping policies by the CBN such as raising the MPR have caused an increase in the yield of fixed-income securities by up to 600 basis points year-on-year. Thus, investors have heightened their interests and are increasing their investments in the fixed-income market. 

The scarcity of forex has dampened investor appetite. Many foreign investors have exited Nigeria. This is due mainly to the CBN’s inability to supply them with foreign currency when they want to repatriate their earnings or investment. A similar situation exists with foreign airlines. The airlines have had great difficulty in obtaining forex from the Central Bank of Nigeria. Without forex, airlines cannot repatriate ticket sales (in naira) to their home countries. 

Another factor outlined by Mr. Abiola is the upcoming elections in 2023. Some investors have paused their foray into the Nigerian stock market and await the outcome of the elections. PwC also expressed this sentiment in their Nigerian Capital Market Update report, noting that the coming elections may have an impact on investor sentiment in Nigeria across boards.