The biggest risk for investors in Nigerian and other frontier-market equities may not be the quality of a company’s management and governance or the pace of local growth. It is the currency in which that company borrowed.
A report by Chapel Hill Denham argues that exchange-rate depreciation is broadly predictable over long periods and that companies which fund local-currency operations with dollar debt can erase otherwise strong operating results when their domestic currencies weaken.
The study’s core conclusion is simple: companies generating naira revenue should finance assets with naira equity and naira debt, rather than dollar-denominated parent-company or related-party loans.
That balance-sheet structure creates a natural hedge against depreciation, while dollar debt turns currency weakness into an equity-destroying event
FX is the structural risk
The report tested currency performance across nine major African economies plus India, using annual exchange-rate and inflation data from 1990 through 2025. It found that annual currency moves remain difficult to predict, with inflation differentials explaining only 14.6% of year-to-year exchange-rate movements.
Over decades, however, the relationship was much stronger. The report found that the long-run inflation differential with the US explained 98.3% of the level of currencies in the ten-country sample, with a pass-through coefficient of 0.962, close to the one-for-one outcome implied by purchasing-power parity.
Nigeria was among the countries with the strongest long-term fit: suggesting the currency’s long-term path has broadly reflected Nigeria’s inflation differential with the US, despite abrupt and difficult-to-time devaluations.
The Nigerian hurdle
For a dollar-based investor, predictable depreciation creates a demanding return hurdle. Chapel Hill estimates that, where purchasing-power-parity depreciation is about 15% annually—its approximation for Nigeria—an investment needs to produce more than 30% annual growth in naira terms to deliver a 15% dollar return.
| Annual currency depreciation | Illustrative markets | Local-currency return needed for 15% USD CAGR |
|---|---|---|
| About 3.5% | India | About 18.5% |
| About 7% | Kenya, Morocco | About 22% |
| About 15% | Nigeria | More than 30% |
| About 25% | Angola, Ethiopia | About 40% |
The conclusion is that an investor who buys a naira-denominated asset with unhedged dollar capital is not merely taking volatility risk. The investor is also carrying a compounding translation drag that may overwhelm operating gains.
India-Nigeria contrast
The report compares listed subsidiaries of Unilever and Nestlé across India, Nigeria, Indonesia and Malaysia to isolate the effect of funding structure. The Indian subsidiaries, which were locally listed and largely funded through internal cash generation and local-currency debt, substantially outperformed their global parents in dollar terms.
Nigeria produced the opposite result. Nestlé Nigeria and Unilever Nigeria showed comparatively strong local-currency operating performance, but their dollar returns were weakened by naira depreciation and exposure to dollar-denominated related-party and shareholder loans.
Over 22 years, Nestlé Nigeria compounded at 14.9% annually in naira, a faster local-currency return than Hindustan Unilever’s 13.6% return in rupees over the same period. But Nestlé Nigeria generated a 3.4% annual dollar return, while Hindustan Unilever delivered 9.9% in dollar terms.
The distinction, according to the research, was not simply management quality. The Indian subsidiaries carried little or no foreign-currency debt, while the Nigerian subsidiaries had meaningful dollar-denominated related-party financing. When the naira weakened sharply in 2023 and 2024, those liabilities surged in naira value, reducing equity.
Nestlé Nigeria recorded a ₦290.7 billion foreign-exchange loss in 2024, temporarily pushing reported equity negative, according to the report.
Investment implications
The report’s broader point is that governance remains important but does not, by itself, protect shareholders from currency mismatch. It recommends investors examine the debt note, particularly related-party financing, rather than relying only on earnings growth, brand strength or board quality.
It also places Nigeria’s broad equity market at roughly 8 to 11 times forward earnings, while the MSCI Nigeria Index traded at 7.75 times trailing earnings at the end of July. That compares with approximately 20 to 23 times forward earnings for the S&P 500, according to the research.
The potential reward is therefore not simply buying cheaper Nigerian assets. It is identifying the subset of companies whose balance sheets allow local operating growth to survive conversion into dollar returns.
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