Finance Cost Rises 411% to N330.9bn: Consumer Goods Manufacturers Face Funding Pressure Amidst Rising Interest Rates and Foreign Exchange Scarcity

Introduction

Consumer goods manufacturers borrow

In the backdrop of soaring interest rates and foreign exchange scarcity, leading consumer goods manufacturing companies in Nigeria are grappling with severe funding pressure. A comprehensive analysis of the financial statements of these companies reveals that they have turned to expensive bank borrowings to sustain their businesses. Consequently, their exposure to banks surged to a staggering N1.834 trillion in the first half of 2023, representing a 24.5% increase compared to N1.473 trillion in the corresponding period of 2022 (H1’22). Data obtained from 11 prominent companies listed on the Nigerian Exchange Limited (NGX) reveals a jaw-dropping 411.2% rise in finance costs from borrowing, amounting to N330.972 billion in H1’23, compared to N64.745 billion in H1’22.

Factors Driving Rising Finance Cost

Consumer goods manufacturers borrow

The primary driver behind the escalating finance cost is the steady increase in the Monetary Policy Rate (MPR) by the Central Bank of Nigeria (CBN), which currently stands at 18.75%. The MPR serves as a benchmark for determining the interest rate charged by banks. As this rate continues to rise, companies are faced with higher borrowing costs, impacting their overall financial health.

Leading Consumer Goods Manufacturers

Consumer goods manufacturers borrow

The 11 leading companies in Nigeria facing funding pressure include Nestle Nigeria Plc, Unilever Nigeria Plc, Cadbury Nigeria Plc, Nigerian Breweries Plc, Dangote Sugar Refinery Plc, and NASCON Allied Industries Plc. Others on the list are Guinness Nigeria Plc, MCNICHOLS Consolidated Plc, BUA Foods, P Z Cussons Nigeria Plc, and International Breweries Plc.

The Impact on Manufacturers and Recommendations

Consumer goods manufacturers borrow

Analysts and investment experts have expressed concerns about the high cost of borrowing from banks, emphasizing that capital market equity remains the most viable financing option for manufacturers looking for long-term solutions to meet operational needs. They suggest that manufacturing companies consider Commercial Papers (CPs) as a short-term financing alternative to reduce finance costs and avoid banks’ stringent conditions.

Top Five Borrowers

Consumer goods manufacturers borrow

International Breweries takes the lead in the borrowing chart, experiencing a relative increase of 175.5% to N305.300 billion in H1’23, up from N110.799 billion in H1’22. Unilever Nigeria follows closely, with its borrowing escalating by 109.3% to N49.943 billion from N23.859 billion in H1’22. Guinness Nigeria secures the third position with a rise of 103.6% to N63.755 billion in H1’23, compared to N31.309 billion in H1’22. Nestle Nigeria takes the fourth spot, with its borrowings surging by 79.9% to N264.436 billion from N147.006 billion, while Nigerian Breweries grabs the fifth position, borrowing N253.153 billion, a 13.9% increase from N222.249 billion.

Analysts’ Recommendations

Consumer goods manufacturers borrow

Commenting on the situation, Tajudeen Olayinka, an investment expert and CEO of Wyoming Capital and Partners, highlights the importance of considering the impact of borrowing on production capacity and cost. He states that well-thought-out borrowing for enhancing production efficiency can be positive for the company and its shareholders. However, borrowing that fails to improve production efficiency can lead to negative consequences for the company’s value and shareholders.

David Adonri, an analyst and Vice Executive Chairman of HighCap Securities Limited, acknowledges that borrowing for working capital finance is common among manufacturing companies, especially in an inflationary environment with rising raw material costs. He suggests that more manufacturers should explore issuing Commercial Papers (CPs) to escape the stringent conditions attached to bank credits, as CPs provide higher volume of funds at lower interest rates.

The Government’s Role

Consumer goods manufacturers borrow

Regarding government intervention, Adonri asserts that administrative intervention through the CBN has not been very effective in efficiently allocating credit in the economy. He believes that fiscal intervention, such as subsidies to manufacturers to enhance production, and monetary policies aimed at lowering interest rates, could be more impactful in reducing finance costs for manufacturers.

Conclusion

Consumer goods manufacturers borrow

The rising finance cost faced by leading consumer goods manufacturers in Nigeria is a critical concern that warrants immediate attention. As interest rates and foreign exchange challenges persist, companies must carefully consider their borrowing strategies and explore viable alternatives like issuing Commercial Papers (CPs). Additionally, the government can play a vital role in supporting the manufacturing sector through appropriate fiscal measures and monetary policies to ensure sustainable growth and economic stability.

In conclusion, the challenges posed by rising finance costs call for proactive measures and innovative solutions to safeguard the financial health of companies and foster economic prosperity in Nigeria.

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