FMCGs are on track for more forex losses as exchange rate woes continue

The FMCG sector in Nigeria is on track for foreign exchange losses due to ongoing exchange rate challenges.

From June to September, the average exchange rate surged by about 20%, from an average rate of N634.56/$ in June to N761.33/% in September.

This trend has continued, with the exchange rate climbing even further, reaching N859.73/$ as of October 19, 2023.

The unification of the exchange rate into a single window on June 14, 2023, had a pronounced impact on the foreign exchange market in Nigeria.

The exchange rate increased significantly, from an official rate of about N462/$ in 2022 to N765/$ as of June 2023.

This sudden and substantial depreciation of the local currency adversely affected major consumer goods companies in the country.

During the first half of 2023, ten leading FMCG companies, including BUA Foods, Dangote Sugar Refinery Plc, NASCON Allied Industries Plc, Unilever Nigeria Plc, Nestle Nigeria Plc, Cadbury Nigeria Plc, PZ Cussons Nigeria Plc, Guinness Nigeria Plc, Nigerian Breweries Plc, and International Breweries Plc, collectively reported foreign exchange losses of about N400 billion, resulting to cumulative pre-tax loss of N246 billion.

With the exception of BUA Foods, Unilever, and Nascon, the remaining companies reported foreign exchange losses.

As the Q3 results loom, there is an expectation that this trend of foreign exchange losses in the consumer goods sector may persist and even worsen.

The substantial 20% increase in the exchange rate during the mentioned period underscores the clear and anticipated impact of these FX losses on the consumer goods sector in Nigeria.

For instance, Unilever’s performance in H1 2023 experienced a stark contrast compared to its Q3 results. While in the first half of the year, Unilever reported foreign exchange gains of N2.834 billion, the recently released Q3 results unveiled a different narrative. In the third quarter, the company recorded a loss related to exchange differences on bank accounts, amounting to N2.921 billion. This of course impacts the Q3 results

Nestle Nigeria Plc, leading the chart in net foreign exchange losses, felt the brunt of the Naira’s devaluation during Q2. This led the company to reevaluate its foreign currency obligations, resulting in a significant exchange loss of N123.79 billion in H1 2023.

This loss accounted for about 89.8% of the finance cost and played a significant role in the pre-tax loss of about N69 billion during that period.

Following Nestle’s experience, Nigerian Breweries also reported substantial foreign exchange losses of about N85 billion. In Q2 alone, Nigerian Breweries incurred a foreign exchange loss of N70.62 billion, contributing to the growth in finance costs and significantly influencing the N67.6 billion pre-tax loss in H1.

In the food product subsector, Dangote Sugar Refinery recorded a noteworthy figure in FX losses.

The company faced approximately N83.1 billion in foreign exchange losses, marking a substantial year-on-year growth of about 1,587%. Dangote Sugar Refinery had to revalue its monetary assets and liabilities for its Nigerian operation, based on the prevailing market rate of N756/$ as of June 30, 2023, resulting in a considerable revaluation loss of N68.7 billion.

This was primarily related to Letters of Credit and foreign vendor balances, also based on the N756/$ rate as of June 30, 2023.

The FX rate, which subsequently closed at around N769/$, is expected to exacerbate Dangote Sugar Refinery’s FX loss situation.

The continuing depreciation of the Naira against foreign currencies is likely to place further pressure on the company’s financial performance, amplifying the already significant FX losses it has experienced.

Other companies within the beverages and brewing sub-sector, including Guinness and International Breweries, also reported net foreign exchange losses.

For International Breweries, there was a combination of realized and unrealized foreign exchange gains and losses. In Q2, the company reported an unrealized net foreign exchange loss of N41.89 billion but managed to realize a net exchange gain of N7.97 billion in the same period. Consequently, this led to a net foreign exchange loss of N36.59 billion during the first half of the year.

PZ Cussons, while affected by foreign exchange losses, reported a loss of N4.954 billion. However, unlike other companies, this loss did not result in a pre-tax loss as the company still recorded a pre-tax profit of N19.87 billion.

The company may be able to navigate the challenges posed by exchange rate fluctuations.