NIGERIA- High finance costs are eating into the earnings of Nigeria’s largest brewing companies threatening their ability to meet their financial obligations and by extension the future viability of the industry.
According to a recent investigation published by a local daily The Sun, the high finance costs are a result of FX transactions done from the parallel market.
Forex is crucial for brewers as they need it to pay for materials sourced from abroad and to service dollar-denominated loans.
Forex costs has however risen significantly following the depreciation of the Naira, Nigeria’s local currency, by 40% against the dollar.
Net finance costs for Nigerian Breweries, Guinness Plc, and International Breweries Plc, the three largest breweries in the country, are for instance reported to have risen to N117 billion as a result of the surge in forex costs.
Nigerian Breweries, the country’s largest brewer by market share., is reported to have suffered an 848.7 percent year-on-year(y/y) surge in net finance charges to N96.22 billion.
The higher costs are attributed to a 10.7x jump in net loss on FX transactions (N85.26 billion), stemming from its foreign currency payables.
Its closest competitor Guinness Plc suffered the same fate with net finance costs rising 435.9 percent in H1 2023 to N5.31 billion in H1 2023 as compared to N619.65 million in the same period last year.
As a result of the higher finance costs mainly attributed to forex, the maker of Guinness beer declared a loss of N18.2 billion for 2023, compared to N15.7 billion profit in the previous year.
Meanwhile, International Breweries’ net finance costs surged by 221.6 per cent y/y to N5.60 billion in Q2 2023, primarily driven by a substantial rise in finance costs.
Industry analysts believe that if the situation worsens, the brewers might not be able to easily service their dollar-denominated loans nor be able to import critical raw materials.
Worse still, the full-year earnings of the breweries might be impacted by the current double whammy of acute shortage and pricey forex.
“Our FX reserves is around $33 billion while the net liquid position is far lower, which means that in real terms the CBN does not have the required FX liquidity to meet the current FX demand,” explained Head of Research at FSL Securities, Victor Chiazor.
“Hence, it is why these companies are clearly struggling and this if it goes on longer, might affect their 2023 earnings”.
Guinness Nigeria, which suffered a net loss due to high forex costs, is however taking steps to remedy the situation.
“If liquidity improves, our plan is to actually pay off everything we owe on hard currency to reduce our vulnerability,” Finance and Strategy Director Emmanuel Difom said.