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Higher prices loom as businesses rely more on loans to survive

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Nigerians will soon experience another wave of increases in the prices of goods by major manufacturers as most of them now depend more on loans to fund their operations, resulting in higher interest payments and increased cost of production.

Financial Vanguard investigations show that due to scarcity of foreign exchange, general cash flow challenges and other economic headwinds during the period, major manufacturing firms sustained their businesses with bank loans amounting N1.833 trillion in the nine months of the year 2023 , 9M’23.

The amount indicates increased borrowing of about 52.6% higher than the N1.2 trillion in the corresponding period of 9M’22.

Financial experts say the companies may have ended up in a debt trap following the rise in Monetary Policy Rate, MPR regime, sustained by the Central Bank of Nigeria, CBN throughout the review period in order to tame inflation that rose to 28.92 % as at December 2023, a development that triggered rising lending rates across the banking and finance sector.

This development, according to financial experts, indicates that the companies that borrowed huge in the 9M’23 are now caught in a serious debt situation as cost of operating capital is now rising, a situation that will impact their profit negatively, and also restrict their ability to pay higher dividend.

Financial information from 17 leading manufacturing companies listed on the Nigerian Exchange Limited, NGX, showed that the finance cost (interest on borrowing) rose by a significant 332.3% percent to N589.623billion in 9M’23 from N136.379 billion in 9M’22.

The companies include: Nigerian Breweries, Dangote Cement, Lafarge Africa, Guinness Nigeria, Gsk, Beta Glass, Unilever Nigeria, Dangote Sugar, Okomu Oil.

Others are Nestle Nigeria, BUA Cement, Notore Chemicals, NASCON Allied Industries, Cadbury Nigeria, BUA Foods, Vitafoam Nigeria and International Breweries.

Analysts and investment experts have decried the high cost of borrowing from the banks, saying that the capital market remains the best financing option for manufacturers to run on long term funds.

International Breweries led the borrowing chart in absolute term recording N323.25 billion in 9M’23 from N148.99 billion in 9M’22. It was followed by Nigeria Breweries whose borrowing rose to N307.99 billion from N113.69 billion in the corresponding year 2022.

Dangote Cement occupied the third position posting N267.13 billion from N269.19 billion in 9M’22. It was followed by BUA Cement occupying the fourth position as its borrowings rose to N258.26 billion from N97.46 billion while BUA Foods followed as its borrowings surged to N 237.79 billion as against N211.67 billion in 9M’22.

Analysts’ insight

Victor Chiazor, Analyst and Head of Research & Investment at FSL Securities Limited said: “The manufacturing sector will continue to be negatively impacted by the high finance cost, especially given that the banks all responded to the high MPR. Until the Benchmark interest rate is reduced by the CBN, the banks won’t drop their interest rate and the high interest expense will continue to weaken the profitability of manufacturing companies and even throw some of them into loss positions.

“In the course of the year, if we see inflation taper down, the MPC team may begin to ease its hawkish stance and drop the MPR which should lead to a gradual drop in interest rates. However if rates remain high, the real sector of the economy will continue to struggle as the interest rates would be too expensive for businesses to thrive.

Also, though expensive, the option of raising equity capital remains viable especially for those who have impressive earning forecast, strong business model and a compelling story to tell. In the course of the year we may see one or two manufacturing companies raise equity capital from the capital market to support their businesses.”

Commenting on the cost of borrowing, he said: “The astronomical jump in finance cost relative to a midsize increase in actual borrowings by these public companies in a 9-month period of 2023 could have been due to multiplicity of factors around inflation: depreciation of the Naira; re-pricing of loans and other assets by lenders; high input cost; reduction or non availability of suppliers’ credit; etc.

The result of this is more inflationary pressure, as the affected companies are pressured to re-price their earning assets to recover costs or reduce losses.”

On government rendering support to the manufacturing sector, he said: “The government may not be able to assist every sector, except for a few companies who have benefited from CBN intervention funds and single digit interest rate borrowing, most are exposed to more of bank borrowing which will be highly toxic to business operations if interest rates remain elevated.”

Reacting to the increase in borrowing, David Adonri, analyst and Executive Chairman at Highcap Securities Limited, said: ” The manufacturing industry was first battered by the rising inflation throughout year 2023 which escalated their costs. Due to decline in purchasing power of consumers their cost recovery efforts failed to preserve their working capital. Hence, their resort to higher bank credit to keep them alive. With higher credit, finance cost will escalate.

“The second reason behind the balloon of their finance cost is the collateral damage they suffered from floating of the Naira. Their hard currency liability exposures magnified in multiple folds when the Naira suffered heavy depreciation. As a result, they had to borrow more money locally, to meet outstanding obligations.

This year, the factors that pressured them into excessive borrowing may not be replicated. The economy is expected to readjust to a new price level where prices will be more stable. However, to repair their damaged balance sheets, manufacturers may need to refinance their huge debt through the capital market.”

On how government intervention can aid manufacturers, Adonri, said: “The administrative intervention of government in the credit market through CBN has not been very effective. It continues to distort the market mechanism that ought to efficiently allocate credit in the economy. The interventions have also not been appropriately directed to the foundational sectors of the economy.

Fiscal intervention can be by way of subsidy to manufacturers to enhance production while monetary policy should target low interest rate environment. If manufacturing inputs can be internalized through appropriate fiscal measures, then manufacturing cost can reduce to the point where finance cost will become negligible.”

Commenting on the borrowings by manufacturing companies, an investment expert and CEO, Wyoming Capital and Partners, Tajudeen Olayinka, said: “Companies can borrow to improve production capacity and reduce average cost. Where this is the case, such borrowing is considered positive, and could improve fortunes of shareholders of the company. Where such borrowing does not improve production efficiency, it can become negative to the value of the company and make shareholders worse off. This is what most companies try to consider before borrowing from short-term money market or long-term capital market.”

On the benefits of borrowing by manufacturing companies, he said: “Borrowing that improves operational efficiency would naturally benefit customers and other stakeholders. Borrowing must be done to improve shareholders wealth; and customers must have been given thoughtful consideration before embarking on such borrowing.”

However, he lamented that, “Short-term borrowing from banks could be more expensive at this time, especially if we consider the effect of rising inflation and interest rate hike by Monetary Policy Committee of CBN, which has compelled many banks to re-price loans and other financial instruments, leading to higher borrowing costs for firms and public companies. Borrowing from banks could be more problematic at this time.

Regardless of cost implications to public companies, short-term borrowings from banks might have been provided as bridging facilities for more flexible long-term capital already arranged by those companies, or as a way of obtaining working capital. It could also be a sign of weakness in annexing suppliers’ credit by some of those companies.”

On whether the government can aid manufacturers, Adeyinka said: “That could be another way of asking the government to provide financial subsidy, when they are already enmeshed in a fiscal crisis. I think the best way is to allow the market to function, so that assets are properly priced in the long-term interest of the economy.”

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Bandits Abduct Fouani MD, 3 Others ….Demand $1.5m Ransom

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Armed men, on Friday, abducted the Managing Director of Fouani Company, which represents LG and Hisense, along with three Lebanese while travelling by boat in Lagos, PUNCH Online reports.

Although the names of the victims have not been ascertained, it was learnt that they were abducted around Falomo Bridge while traveling from Apapa to Victoria Island.

A source familiar with the incident, who spoke on condition of anonymity because of its sensitive nature, told PUNCH Online that the kidnappers had reached out, demanding ransom.

“Yesterday (Friday) evening, the Managing Director of Fouani company (LG and Hisense) and three Lebanese were kidnapped around Falomo Bridge while traveling from Apapa to Victoria Island by boat.

“The kidnappers have asked for $1.5m,” the source said.

When contacted, the Lagos State Police Public Relations Officer, Benjamin Hundeyin, confirmed the development.

“Yes, it is true. We got the report and we are looking into it. Please, I’m not obliged to state more than that,” he simply said.

When our correspondent asked about the details of the names of the abducted persons, Hundeyin insisted, “I’m not obliged to state the names, when, where and how it happened for now but we are looking into it.”

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SEE Pictures from the National prayers session organised by the national Hajj commission of Nigeria (NAHCON)

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By Kayode Sanni-Arewa

SEE Pictures from the National prayers session organised by the national Hajj commission of Nigeria (NAHCON)

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Group raises alarm over looming food shortage in Southwest

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..… calls on govt to provide security, incentives to farmers

By Kayode Sanni-Arewa

A Yoruba socio-political group, Yoruba Commitment Forum (YCF) has raised an alarm about the looming food shortage in the South West region of the country.

The group said, though, the impending food insecurity is a national crisis, stressing that its impact on Yorubaland is going to be calamitous.

This was contained in a statement jointly signed by Otunba Hon Tayo Onayemi, Barr. Akeem Aponmade,

Barr. Femi Mokikan, Otunba Niyi Sodiya, Mrs. Buky Tunde Oshunrinde and Mrs. Sola Maja, and made available to newsmen in Abeokuta, Ogun State capital.

The YCF attributed the looming food shortage to the invasion and destruction of farmlands by rampaging Fulani herders.

The group, while calling for adequate security of farmers and their farmlands, equally appealed to the federal government to adequately compensate whose farmlands were destroyed and as well give them financial incentives, to encourage them to go back to farm.

The statement titled, “Nigeria’s headaches, food insecurity in Yorubaland”, read, “we have observed that for about seven years now, Fulani herdsmen have been engaging in a relentless destruction of farmlands and settlements in Yorubaland. These criminal Fulani elements resorted to kidnapping, raping, maiming and killing of farmers and Yoruba sons and daughters.

“Neither the governments at any level, nor Fulani herdsmen’s apologists would claim ignorance of the atrocious activities of these ruthless people. Video recordings of their wicked actions suffuse the internet. The end result is that farmers began to be scared off their farms gradually until now when farms have been completely abandoned.

“When this started years ago, foresighted individuals raised concerns; they warned about the potential danger of food insecurity beginning with rising food prices and the need to ensure a stable food supply. It appears that Southwest was deliberately targeted and the invasion of our farmlands was the execution of a conscious plan to starve our people to death.

“We, the Yoruba Nation agitators, cried out for help against the brazen onslaught, but none came from the federal government led by a Fulani man.

“Unfortunately, the hens have now come home to roost as the consequences of our action, and inaction, are now here for real with food shortages and very high prices making it increasingly difficult for our people to access the basic necessity of food.

“Before the current situation spirals out of control, we hasten to inform the government that there is no alternative to large scale farming which Fulani herdsmen have destroyed by waging a war against farmers. Subsistence farming through the backyards, as good as it is, cannot serve the purpose of assuring any people of food security. Farmlands in the South West must be made very safe.

“We state emphatically that the situation whereby a basket of tomatoes is sold for #4000 in the North while the same is sold in Yorubaland for #150,000 is callous, ruthless and unacceptable to us.

We also call for assistance to use cheaper rail transport among others to assist our market men and women. Other regions do this, why not here in Yorubaland?

“Secondly, governments must incentivise farmers whose investments have been destroyed during the war of attrition waged against them by Fulani terrorists. Without government’s financial assistance, there is no way most farmers will be able to go back to farming, even if security of their lives and new investments are assured”, the statement concluded.

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