- June 7, 2018
- Posted by: admin
- Category: Eczellon Insight
Recently, KPMG released the second edition of its report on top business risks in 2018/2019. The report talks about the risks that are considered to be of highest concern to Nigerian executives. This result is based on a survey of 94 top business executives in order to obtain their views and what they see would affect their businesses in various sectors which include, the consumer & industrial markets, energy & natural resources, financial services and telecommunications sectors.
According to the survey carried out by KPMG, these risk areas are of great concern to Nigerian executives across most industries and organisations.
Foreign Exchange Risk
Despite stringent measures put in place by the Central Bank of Nigeria in order to bring the country out of recession, corporate organizations are still affected by the devaluation of the Naira. Therefore, business executives are more concerned about foreign exchange and its impact on profitability. The report shows us what happened to businesses both in the financial and non financial service sectors of the economy.
In the non-financial service sector, high FX rates have significantly increased the cost of sales for companies. In the financial sector, the depreciation of the Naira has increased the size of non-performing loans and weakened the capital adequacy ratios of Nigerian banks. Furthermore, corporates who had foreign-currency denominated exposures saw significant increase in their debt liabilities, which weakened their balance sheets.
And it is worthy of note that Nigeria is still behind the levels of foreign exchange liquidity generated from export proceeds and capital inflows in 2013. This despite improved terms of trade and significantly higher capital inflows (in part due to the introduction of the I&E FX window), which helped ease concerns about FX availability and rate stability in 2017.
As a result of this, executives are enjoined to continually monitor the country’s trade level, external reserves, policy direction and capital inflows which could impact FX availability and rates.
Fiscal and Monetary Policy Risk
Executives are also considerably concerned about the effects that this risk may have on their strategic planning and the management of their core operations.
Directly or indirectly, corporates face risks emanating from uncertainty about the direction of fiscal or monetary policy. Uncertainty is often heightened during adverse economic circumstances, which may compel policy reactions that distort the decision-making function of corporates. Nigeria’s macroeconomic challenges in the past few years have induced a number of policy reactions, some of which have been consequential for businesses. Some of the policy changes over the last few years that heightened these risks include the following:
- In 2015, the CBN, placed a ban on a list of 41 importable items for which prospective importers could not access FX at the official window. In addition, between September 2015 and July 2016, the direction of monetary policy shifted in opposing directions across 5 decision cycles, which depicted a movement from tightening to easing within a 10-month period, a scenario which was challenging to planning at the business level.
- The reluctance of policy makers to increase the tariffs or fully deregulate certain sectors due to the perceived socio-economic impact on the masses, at the detriment of growth within the Nigerian private sector. This includes the downstream sector, the power sector, amongst others.
- The delay in passing the 2018 federal budget has created uncertainties within the Nigerian economy.
This reflects the significant anxieties executives continue to have over regulatory uncertainty and sanctions in light of increased regulatory scrutiny within the country. A recent wave of landmark fines issued against major commercial players signal significant drive towards the implementation of stricter regulatory compliance, following years of relatively lax enforcement.
Over the past two years, more than 10 companies across various industries have been hit with fines ranging from N1 billion to N1 trillion. Several organisations are periodically sanctioned by their industry regulator and a number of listed entities are being examined, suspended, or fined for flouting one post listing requirement or the other.
The regulatory environment in Nigeria is complex and creates challenges even for companies that strive hard to be compliant. The country has an array of legislations and by-laws to regulate almost every area of economic activity. The abundance of laws also means that there are frequently overlaps, creating room for arbitrary interpretation or ambiguity. For instance, operators have to deal with two or three regulatory bodies, functioning independently of, and sometimes in competition with, each other.
According to the report, within this challenging state of regulatory uncertainty, there is also an opportunity for companies to improve their local positioning and risk management approaches. In the short term, organisations can achieve this by developing and maintaining an up-to-date regulatory rulebook as a comprehensive repository of all regulations impacting it.
The rulebook may be further enhanced by automating the process for notifying responsible officers of their compliance obligations and escalating noncompliance to supervisors in a timely manner. It should also set up relevant oversight structures at the board and management level for periodically monitoring and receive assurance on regulatory compliance. Subsequently, organisations are encouraged to conduct periodic compliance audits and invest in internal capacity building around compliance issues.
In the long term, companies should develop a framework for engaging and managing their regulatory stakeholders. This includes identifying the regulators, prioritizing them based on defined criterion and developing new strategies for managing them with a view to building sustainable relationships not just with regulators but across a broader base of key public sector stakeholders. This will help to ensure a structured and consistent approach to managing regulators while streamlining the company’s time and efforts.
The global price of crude oil and its volume of production in Nigeria were the main advantages of recovery in 2017 and they will be critical in 2018. The international oil market is positively poised for Nigeria at the moment and is expected to remain so for the rest of the year due to combined effects of the OPEC/Non OPEC output restriction and global economic growth. Against this backdrop, oil prices are expected to hover around a $55– $70 range, which is comfortably above the benchmark price of $47b indexed in the national budget. The sustained calm in the Niger Delta will also lead to an increase in oil production, which will make the government’s 2.3 mbpd assumption in the budget attainable.
The 2019 Elections
The 2019 elections is a critical factor that will drive the business decisions and sentiments of the public and private sector players within the Nigerian business environment in 2018/19. The 2019 elections is likely to increase fiscal spending, consequently pushing up inflation. The uncertainties surrounding elections may also slow down or reverse capital flows, which could in turn mount pressure on foreign exchange.
Uncertainties surrounding periodic elections in democracies tend to induce a cautionary posture in the international direct and portfolio investment community about the safety of investments in the destination economies.
The report anticipates that capital inflows would become slower in the second half of 2018 as the electoral rhetoric intensifies, with the potential for portfolio investors with significant positions to head for the exit by the first quarter of 2019 when the polls hold. Investors who make this move will linger in a wait-and-see mode for the outcome of the polls before undertaking a general assessment of the risk-reward situation as the post-electoral scenarios unfold. The upshot of this is the potential for reduction in the levels of available FX liquidity in the domestic market.
Apart from the five risks listed above, the report also highlighted the following risks amongst the major risks that executives are worried about: brand & reputational risk, customer attrition risk, liquidity risk, insecurity risk and interest rate risk.