MNC executives view Nigeria as one of the foremost risks facing their SSA portfolios due to the country’s lackluster growth. On my recent trip there, during which I spoke to executives, journalists, industry experts, and bankers, I found this pessimism gives an incomplete picture. While FMCG firms in particular are reporting that their customers’ purchasing power is under pressure, dollar shortages that plagued the economy recently have eased. Government policy is also slowly becoming more accommodative of the private sector, and most MNCs remain insulated from the country’s major security challenges. On top of that, after five quarters of recession, the economy is now showing signs of growth due to subtle policy shifts and higher oil revenues. We anticipate GDP growth of 1.6% YOY in 2018 and 2.6% YOY in 2019.
The reality, however, remains that MNCs selling to consumers are likely to see only moderate increases in sales as the economy returns to growth. This is because chronically high inflation—forecast at 16.5% YOY for 2017 and 12% YOY for 2018—continues to undermine spending power and prevents consumers from trading back up to the premium products they abandoned during the recession. Take Weyinmi, who lives in an upmarket suburb in Lagos. She told me she substituted her usual premium European brand detergent for a cheaper, locally-produced alternative because she found that price increases were squeezing her living standards. High inflation is also impacting MNCs’ pricing decisions. A general manager of an FMCG firm, for instance, told me that he will likely have to raise prices by 50% before the end of the year.
Foreign currency availability also remains problematic for some MNCs, many of which have struggled to access dollars at competitive rates in recent months. While the availability of dollars is better than a year ago, restrictions in access will continue, especially for MNCs that have no local manufacturing presence. Although the new NAFEX foreign currency window (introduced by the central bank earlier in 2017) has become the primary conduit for accessing dollars for most companies, MNCs with limited access to foreign currency will be forced to rely on parent company support. A common approach taken by dollar-starved FMCG firms is where they ask their parent company for overseas loans denominated in euros or dollars, which allows them to procure goods overseas that are then shipped to Nigeria.
The policy landscape is looking somewhat more favorable for MNCs. Since President Muhammadu Buhari returned from three months of sick leave in London, he has continued to support reforms to the business environment that were introduced during his absence by Vice President Osinbajo. Recent government decisions suggest the government is also softening its approach to the role the private sector plays in delivering government services – for example, the Federal Government awarded concessions for the running of Lagos and Abuja airports to private sector firms. These developments mirror the sentiment of executives in Lagos, most of whom believe the government will maintain its slightly more pro-business approach over the coming year.
In addition, most MNCs remain insulted from the country’s high-profile security challenges. Although Boko Haram remains active in the north east, the impacts of its insurgency are unlikely to impact the operations of MNCs that are typically focused on Lagos and Abuja. Furthermore, mounting tensions between the government and Biafran separatists are not expected to spiral out of control, and any unrest that does occur will likely be contained to the country’s south east.
For our latest updates and insights, FSG clients can access the client portal.
Photo credit: Matthew Kindinger