Firms consider hedging as forex crisis affects performance

Bisola David
Bisola David
Firms consider hedging as forex crisis affects performance

Many of Nigeria’s major corporations have suffered enormous losses as a result of the Central Bank of Nigeria’s devaluation of the naira. and financial experts have suggested using hedging as a tactic to prevent more losses.

The Punch reported that following the release of the company’s financial statement for the first half of the year, Nestle Nigeria, one of the leading Fast Moving Consumer Goods companies in Nigeria, recently made the news.

The company had grown accustomed to reporting profits on its financials after being established over time as a multinational with widespread currency in the Nigerian market.

However, Nestle Nigeria, the largest FMCG business by market capitalization listed on the NGX, recorded a pre-tax deficit of of N86.5bn in its H1 financial statement.

The loss was mostly caused by an N123.7 billion forex loss. With -N49 billion in retained earnings, the corporation may have a difficult time paying dividends to shareholders this year.

The former governor of the Central Bank of Nigeria, Godwin Emefiele, was suspended, and the central bank moved quickly to float the naira and let the currency be determined by market forces to establish its true value.

Investors reacted in response to the ruling, which had been eagerly anticipated, and a bull market ensued, increasing the market capitalization of the Nigerian Exchange Limited to an all-time high.

Despite the long-term advantages that analysts believe the decision will bring about, the short-term effects have been disastrous for businesses that have experienced an increase in their dollar-denominated commitments.

For manufacturers, the ongoing naira devaluation had resulted in higher expenses for importing raw materials for use in manufacturing. However, the immediate impact has been the erosion of profits as seen in the financial statements posted by listed firms on the NGX.

As some of Nigeria’s largest corporations continue to suffer significant losses, financial experts believe that, while the circumstances that caused the losses were unavoidable, companies can still play a number of cards to help them hedge against exchange rate fluctuations.

A finance expert at the Pan-Atlantic University in Lagos, Associate Professor Olusegun Vincent, criticized the companies’ foreign currency-denominated commitments in an interview with The Punch as the main cause of the losses incurred by the enterprises.

He claimed that companies must actively work to protect themselves from currency depreciation in order to avoid getting caught in this whirlwind. He suggested that the initiatives might involve investing in foreign currencies and staying away from excessive international indebtedness.

The vice chairman of Highcap Securities Limited, David Adonri, supported the notion in a similar manner. Hedging against currency-related risks is still the most effective way to protect a business from potential losses brought on by currency devaluation, in his opinion.

Adonri advised businesses to think about using hedging instruments like currency-forward contracts, which are by nature resistant to fluctuations in exchange rates.

“The foreign exchange market is now predictable because the rate is now determined by the market,” he claimed.

“As a result, the financial management of a company that heavily relies on foreign exchange can now study the market and protect themselves against currency risks using data before hedging against currency risks.”

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