• Manufacturers suffer high operating expenses, shrinking profit margins

Liquidity challenge in the foreign exchange (FX ) market has continued to worsen foreign investors’ participation in the equities market as foreign transactions declined by 60 per cent to ₦62.18 billion in half year (H1), 2023.

Based on this, foreign investors have continued to emerge net-sellers on the nation’s equities market over the last few years.
Although the stock returned N5 trillion gain in H1 as the All Share Index (ASI), an indicator used to measure the performance of listed firms on the exchange, crossed 60,000 mark to hit a 16-year high for the first time since 2008, to close at 60, 108.86 on June 27 from 51, 251.06 at which it opened for the year on January 3, representing an increase of 8, 857.8 points or 15 per cent.

Market capitalisation of listed equities, which opened the year at N27, 915 trillion, closed on Tuesday, June 27 at N32, 729 trillion representing N5 trillion or 15 per cent appreciation.

However, foreign inflows have continued to stagnate in the equities market, plummeting by approximately 69 per cent to ₦21.79 billion in the first half of the year, while inflows from local institutional investors rose by approximately 13 per cent in H1, 2023 to ₦461.78 billion.

As of 2014, foreign investors’ participation outpaced domestic investors, constituting N1,539 billion, while domestic patronage stood at N1,137 billion within the period, indicating that more foreigners participated in the market when the exchange rate was around N164.88/$1.
Also, foreign direct investment inflows within the period were around $4.69 billion, but by 2021, it had dropped to $3.31 billion and now ₦21.79 billion in the first half of 2023.

Last week, there was a slight appreciation of the Naira by 12 basis points, bringing its value to N769.25 against the America Dollar at the I&E FX window.

For the week ended June 30, 2023, the average Nigerian Autonomous Foreign Exchange Fixing (NAFEX) rate was $/₦751.98, compared to $/₦729.98 recorded in the weekended June 23, 2023, representing a depreciation of the Naira against the dollar by 2.93 per cent ($/₦22.00).

On factors that would boost the economy and sustain stock market rebound for the second half of the year (H2), analysts at Vetiva Capital Limited said, the continued implementation of investment-friendly measures and ongoing economic reforms are expected to boost the economy and sustain the market’s positive trajectory.

According to the company’s H1 capital market analysis and H2 outlook, the analysts, however, pointed out that the anticipated upward review of electricity tariffs, influenced by the fluctuating exchange rate is expected to impact negatively on listed firms under the manufacturing sector as the sector will be confronted with heightened operating expenses due to increased electricity costs, potentially resulting in diminished profit margins and necessitating adjustments in pricing strategies.

It also pointed out that consumer spending would reduce significantly as households will bear the burden of higher electricity expenses, leading to a decrease in discretionary spending and a reduction in purchasing power for non-essential goods and services.

“Manufacturers will grapple with amplified costs and potential profitability challenges, while households may need to adapt their spending patterns, thereby affecting businesses reliant on consumer demand,” it stated.

The analysts also stated that the removal of fuel subsidies in the downstream sector is expected to translate into heightened operating costs for businesses, especially those reliant on transportation and logistics.

According to the firm, the direct impact of increased fuel prices on transportation expenses will reverberate through supply chains, potentially necessitating adjustments in pricing strategies.

This means that industries heavily dependent on fuel, such as manufacturing and agriculture, may confront cost pressures that can affect profit margins.

However, it stated that the policy would directly impact the revenue of firms in the sector. “As fuel prices increase to reflect the actual market value, companies in the downstream sector may experience a boost in their revenue from fuel sales.

“This will be accompanied by higher operating costs as inflation rises due to higher fuel prices. The overall impact on revenue lines will depend on the ability of downstream players to pass on the increased costs to consumers.”

It also predicted that the outlook for H2’23 is dependent on several factors, including government policies and global economic conditions.

“Overall, the analysts maintained that the outlook for H2’23 is cautiously optimistic, supported by the government’s commitment to bolstering the economy and attracting investments,” it added.

Director/Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, said there is a need to address the social outcomes of the recent reforms, especially the inflationary pressure induced by the fuel subsidy removal to sustain investors’ confidence.

According to him, urgent steps should be taken to mitigate the soaring cost of living and the escalating operating and production costs, especially for businesses.

Yusuf stated that inflationary pressures might intensify in the near term while the exchange rate is expected to face intense pressure in the short term as the forex demand backlog exerts pressure on the official forex window.

Therefore, he urged the CBN to put in place a sustainable intervention framework to moderate volatility in the forex market to enhance the businesses of listed firms, especially in the manufacturing sector.

“With a better fiscal space, the outlook for lower fiscal deficit, moderation in the growth of public debt, reduction in debt service burden, and an improvement in the macroeconomic stability are very positive. All of these would impact economic growth prospects in the second half of the year,” Yusuf added.