FX reforms to trigger aggressive local input sourcing, says report

Organisations may freeze new hiring to survive hard times
August Economic Outlook of PwC foresees a sharp depreciation of naira and the resultant increase in the cost of importation could force many domestic firms to adopt a more aggressive local input sourcing.

Recall that the Central Bank of Nigeria (CBN) adopted a more liberal foreign exchange management approach in June – a policy option that ended the hitherto artificial naira value and caused a major adjustment of the value against its peers at the official market. Hence, the local currency lost about 40 per cent of its value overnight.

The report, released by PwC Nigeria, says the negative impact could “provide incentives to corporates to explore local sourcing or backward integration in the medium term”.

The report argues that the FX market liberalisation could gradually attract foreign investments and boost capital inflows in the long term. But in the short-term, it projects, investors will likely adopt a wait-and-see approach.

“This may be a result of the absence of further reforms to strengthen business and economic fundamentals,” it notes.

It also sees the possibility of widespread freezing of hiring plans as companies seek creative ways to optimise costs.

The report also raises concern about the continual inflationary pressure, which is heightened by fuel subsidy removal and FX market liberalisation.

The challenge, it states, will likely reduce the real rate of returns on investment and disposable income, which will continue to weigh heavily on non-discretionary spending.

Reacting to the tightening monetary space, it observes that the cost of borrowing in naira will remain elevated while companies’ finance costs will increase due to “higher interest payments incurred on exposure to foreign currency-denominated loans”.

The Guardian reported that seven quoted Nigerian companies recorded N624 billion in losses in the first half of the year as a result of their provisions for FX losses.

Overall, the report insists, it is a tough time for local companies, which will need to adopt creative survival strategies to weather the storm.

“To achieve customer growth optimisation, corporate organisations should implement the following strategies: adjust pricing and pack architecture using revenue growth management (RGM) analysis to cater to shifting consumer habits, adapt products to accommodate changing demand dynamics by substituting expensive raw materials, leverage post-event analytics for promotion decision-making, renegotiate contracts for better terms and expand distribution through discounters and online platforms to align with evolving consumer buying patterns.”

“To optimise costs across value chains, companies should conduct thorough analyses across the value chain. For overhead costs, they should examine benefits versus pay and consider greater segmentation of reward, implement a hiring freeze and improve visibility of non-payroll expenses,” it states.

It also advises identifying alternative sourcing locations to minimise risk and cost while aligning procurement across business divisions as well as optimising spending through global and local deals.