|
Listen now
|
As it is inevitable that the central bank will keep up with hiking interest rates as inflation is expected to significantly rise following subsidy removal and the depreciation of the Naira, corporate treasurers will be striving to cut costs and pay down debt.
Interest costs at listed Nigeria companies rose by 25.41 percent to N414.98 billion in the first quarter from a year earlier, as the Apex bank clings to aggressive monetary policy, according to data gathered by MoneyCentral.
Nigerian Breweries Plc, Nestle Nigeria, Guinness Nigeria, and Geregu Power are among the corporations that have seen their interest costs surge. Nigerian Breweries, interest expense soared to N19.32 billion in the first quarter from N2.96 billion in the same period a year earlier.
Those increases, alongside higher costs elsewhere — including for wages, materials and energy — are forcing companies to scale back on expansion plans, putting a brake on employment while most have downsized.
Higher interest expenses also erode profitability or result in bankruptcies as rising borrowing costs balloons the weighted average cost of capital, potentially resulting in less investment.
Additional rate increases by the CBN could result in even higher interest spending.
The Central Bank of Nigeria (CBN) has increased the Monetary Policy Rate (MPR) to 18.50 per cent to tame price rises.
Nigeria’s annual inflation rose to 22.41 percent in May on a year-on-year basis from 22.22% in the previous month, the National Bureau of Statistics (NBS) said.
Analysts at CSL Stockbroker said the unification of exchange rate will balloon the cost of production for companies that import raw materials and that they will be forced to pass on the cost to the final consumer.
“Importers of eligible items at the I&E window will now have to source FX at a higher rate and will likely push the associated increased costs to the end consumers resulting in an increase in the price of goods and services, especially imported goods,” said the analysts.
“Consumers still processing the impact of the removal of fuel subsidies will now have to deal with an additional increase in prices of goods and services associated with a depreciation of the currency. Empirical evidence shows a strong pass-through effect of changes in the exchange rate on consumer prices,” said the analysts.
A move by the central bank to keep rates “higher for longer” will squeeze firms with weak credit ratings. It is worth paying attention to large companies with higher ratings could suffer a sharp drop in interest coverage ratio due to a persistent high interest rate environment.
A few years ago, companies took advantage of low interest rates and tapped the debt market for financing existing debts and bolstering working capital, but yields started climbing in the second quarter of 2022 when central bankers embarked on aggressive tightening to tame an inflation exacerbated by the war between Russia and Ukraine.
The Nigeria 10 year government bond has a 14.247% yield, and that compares with a yield of 4.19 percent as of November 5 2020, according to data from World Government Bonds.