Nigeria Firms Cut Dollar Debt as Central Bank Boosts FX Liquidity

Key Takeaway

• Nigerian firms like MTN Nigeria and BUA Foods are settling overseas debts due to central bank reforms boosting dollar liquidity.
• Central Bank of Nigeria's measures, including a 600 basis point rate hike and currency peg removal, doubled FX turnover.
• Despite improvements, the naira weakened 1.2% against the dollar; sustained liquidity and fiscal responsibility remain crucial for continued recovery.

Nigerian Companies Reduce Dollar Debt

Nigerian firms like MTN Nigeria Communications Plc, BUA Foods Plc, and Cadbury Schweppes Overseas Ltd.’s Nigeria unit have started to pay off their overdue dollar obligations, thanks to recent central bank reforms that increased liquidity in the foreign exchange market. MTN Nigeria notably reduced its letters of credit obligations by 41.6% to $243.4 million from $416.6 million in December. These measures were a response to a prolonged period during which companies struggled to access dollars for repatriating profits or paying foreign suppliers due to a scarcity of greenbacks.

Central Bank Reforms Boost Liquidity

The Central Bank of Nigeria has implemented several reforms aimed at improving liquidity in the foreign exchange market. These include raising its benchmark rate by 600 basis points to attract capital inflows and allowing the market to determine the naira’s exchange rate, moving away from the previous pegged system. These changes have led to a significant increase in FX turnover, with the average daily FX turnover more than doubling from its 2023 lows. Dollar liquidity also saw a 90% jump to $160.8 million in one day, according to Chapel Hill Denham.

Positive Impact on Corporate Performance

The improved dollar liquidity has enabled companies like BUA Foods and Cadbury Nigeria to access the dollars they need from the official market, allowing them to reduce debts and purchase foreign exchange in advance for necessary materials. This situation has provided a much-needed respite for these companies, helping them to pay down debts and cushion the effects of currency devaluation. Finance directors and managing directors from these companies have expressed optimism about their performance for the half-year 2024, attributing this to the increased dollar availability.

Street Views

• Tatonga Rusike, Bank of America Corp. (Neutral on Nigeria's foreign exchange market):

  "Portfolio flows have responded positively to reforms with increased FX turnover. The average daily FX turnover has more than doubled from 2023 lows."

Management Quotes

• Modupe Kadiri, CFO of MTN Nigeria:

  "Utilized the improved liquidity in the foreign exchange market to reduce letters of credit obligations by 41.6% to $243.4 million from $416.6 million in December, in a bid to curb losses."

• Ayodele Abioye, Managing Director of BUA Foods:

  "Dollar availability will no doubt have positive impact going forward and we are optimistic of better performance for half-year 2024."

• Ogaga Ologe, Finance Director at Cadbury Nigeria:

  "Our local-currency cash has dropped because of us being able to buy foreign exchange in advance for the materials we need."