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Nigeria Companies’ Build N3.05trn Cash Buffer Amid Macro-Shocks

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Nigerian companies are sitting on a cash pile as they continue to build a buffer against macroeconomic shocks brought on by rising inflation, spiraling interest rates, and foreign exchange crisis.

The top 55 non-banking stocks listed on the main stock NGX index, held N3.05 trillion of cash and equivalents and short-term investments on their balance sheet as at September 2023, according to their latest publicly available financial results that was compiled by MoneyCentral.

That is up 19.48 percent from that the previous year.

Consumer goods sector companies, cement makers and telecommunications companies combined accounted for the biggest share of this cash pile with reserves of nearly N2.30 trillion.

Higher borrowing costs as a result of a hike in interest rates by the central bank and economic uncertainty have forced companies to review their overall financial strategy with focus on improving their liquidity.

Abiola Rasaq, former head of Investors Relations at United Bank for Africa (UBA), said some firms are taking loans now to buy inventory of raw materials well ahead of time, given the depreciation of Naira, general inflationary environment and rising interest rate.

“In a rising interest rate and high inflation environment, stockpiling inventory is typically a strategy to enhance profitability,” said Rasaq.

“Many firms would seek to shorten their cash conversion cycle by reducing credit sales or at least credit sale period/cycle whilst taking advantage of any opportunity to delay payments to suppliers/vendors, as a way to enhance their liquidity. These generic issues and some other circumstantial factors may account for your observation about the increasing cash position of firms,” said Rasaq.

Nigeria’s Gross Domestic Product (GDP) grew by a tepid 2.54 percent (year-on-year) in real terms in the third quarter (Q3) of 2023.

The country’s annual inflation rate rose to 27.33 per cent in October from 26.72 per cent in the previous month, the National Bureau of Statistics (NBS).

The removal of subsidies on fuel and the unification of exchange sent Naira to a range of N1,000, exacerbating the already anemic situations of companies that are already struggling with imported inflation.

Companies like to maintain a cash (and liquid assets) buffer to allow them to maneuver effectively, especially in times of economic uncertainty, pay dividend, and fund future expansion plans like investment in research and development (R and D) and finance mergers and acquisitions activities.

There has been an increase in debts, which means that firms have not been using their cash reserves to pay down outstanding loans.

There are indications that firms are not using their cash to reduce debt as higher borrowing costs indicate tapping the debt market to fund future expansion plans becomes expensive as rising finance costs continue to soar.

Data gathered by MoneyCentral shows debt by non-financial firms was up 38.37 percent to N8.25 trillion in September 2023 from N5.96 trillion the previous year.

Higher borrowing costs and foreign exchange losses due to the abrupt devaluation of the currency to spur foreign direct investment have pressured profit, but there is light at the end of the tunnel as entities that posted net losses could turn a profit since  such transactions (FX losses) are a one-off event.

The largest manufacturers collectively incurred N466.02 billion in foreign exchange losses as at September 2023, as consumer goods firms are the hardest hit by the economic uncertainties.

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