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Financial Management in Troubled Times

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Friday, September 2nd, 2016
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Resource dependent African economies are facing hard times on account of weak diversification and over dependence on revenues from commodity sales in the face of a global crash in commodity prices. By contrast, a few (some post-conflict and some reform-led) African economies like Cote D’Ivoire (CDI), Senegal, Rwanda, Ethiopia, Mozambique and Uganda are still experiencing appreciable growth with projected 2016 GDP growth rates ranging between 6% and 10.5%.

With the official release of 2016 Q2 GDP figures (two weeks late) the Nigerian economy is now confirmed as being officially in recession, having contracted for the second consecutive Quarter, -0.36% in Q1 and -2.06% in Q2. This comes after a decade of impressive and consistent average growth of above 6%. Consequently, the economy has dropped two places from its exalted position of the largest African economy.

Other African countries are impacted similarly to varying degrees. These economies have witnessed a massive drop in revenues compounded in some cases by other factors such as dwindling production levels (due in Nigeria to the resurgence of militancy in the oil-rich Niger Delta region) as well as security, corruption and governance challenges across the Region. The Federal Government of Nigeria recently reported a N1.9tr (USD6bn) deficit in Q2 representing 96.4% above the provisional deficit of N555.49bn (USD1.76bn) referencing a massive decline in federally collected revenue from both oil and non-oil sources.

Key highlights of Nigeria’s current macro-economic challenges, replicated in many other commodity dependent African markets like Angola, South Africa, Zambia and Ghana include: –

Rising Inflation – Double digit inflation is back firmly in Nigeria (CPI of 17.1% in July) catching up with Ghana’s 17.2% in 2015.

Currency devaluation – Persistent fall in domestic currency values in the last 18 months. The Nigerian situation has apparently been exacerbated by economic policy uncertainty and inconsistency. This has featured an allocation to religious pilgrims at N197 to 1USD, to students and imports on the permitted list at about N300 while the parallel market remains at up to N410 for 41 items on the banned list.

Unemployment Rate– Unemployment rate in Nigeria as at Q2 2016 was 13.3% compared to 8.2% in the same period in 2015, rising by 1.2m less jobs in Q2 2016.

Inventory levels are at an all-time high in warehouses whilst manufacturing companies are operating at capacity levels in the range of 50% (down own from 53.7% in Q4 2015). International Airlines are simultaneously shrinking the number of flights to Nigeria, doubling air tickets and also relocating their operational hubs to neighbouring Ghana.

Corporate performances impaired by provisions for currency devaluation, cancelled LCs and lack of access to foreign exchange for imported raw materials and equipment amidst rising interest rates and inflation, crashing stock prices and shrinking property values.

The impact on credit to the troubled oil industry and other affected companies has led to rising NPLs in some banks and the Central Bank recently replaced the Board of a bank on grounds of poor governance. Whilst assuring all of the health of the Banks, the Central Bank has been advised by observers to avoid interventions that may be perceived as disruptive.

Another development is the persistent challenge faced by State Governments in meeting salary and contractual obligations which has led to a couple of bail-outs by the Central Bank which do not appear sustainable as a long term measure. Some States are taking the more balanced approach of restructuring their debt obligations whilst seeking to grow internally generated revenues (IGR). However, a benefit of devaluation of currency should be the easing of domestic currency cash available to the states and federal Govt.

Measures such as a recent directive to Banks to concentrate forex allocation to manufacturers and a request by the Federal Government for emergency economic powers are moves to improve the economy. The effectiveness of these measures will be seen in implementation.

Against the background of these developments companies need to figure out survival strategies for such a time as this.

This article explores some of such strategies and seeks to proffer options for consideration by companies operating in these markets.

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Businesses and organizations in challenged economies like Nigeria, South Africa, Angola and Ghana may need to refocus their operations and explore some of the following options:

Low end disruption

One key effect of recession is to increase the possibility of Low-end disruption in established markets. Economically challenged buyers who are currently over served by existing market leaders will be more easily attracted to low-end discount products. This was the origin of the disruption by the “Sachet technology innovation of the 80s by products like Cowbell Milk during the last recession in Nigeria Commoditization and unbundling of erstwhile specialized services to reduce unit costs to consumers and provide greater choice will create both an opportunity and a threat to established providers.

Product Offerings and Service Outlets

Economic realities and cash shortage will favour mid-cycle, retail shopping models. Waning interest in luxury and high-end consumer goods whilst the large and young populations continue to favour investment in agriculture, food processing and education.

The significant devaluation of local currencies favour businesses which provide local substitutes for imported raw materials. This also favours an investment in locally produced ready to wear and customized fashion items as increased cost of imported goods bite harder into consumers’ budget.

Similarly, there should be a rise in demand for quality private education for middle class parents who can no longer afford to send their children abroad due to high foreign exchange rates.

Domestic businesses are encouraged to earnestly seek local substitutes for imported raw materials and develop cheaper products for low-end consumers.


Expansion of distribution and sales via exportation becomes very attractive as a means of earning higher revenues because of the impact of domestic currency devaluation. This is a great time to cultivate the diaspora market. Platforms which promote African cultural products to foreign and diaspora markets are a great idea for this time, for example: Electronic distribution methods, Digital sales outlets, platform distribution and open architecture methods are innovative ways to increase sales at lower customer acquisition costs.

Financing Structure

This is certainly a time for companies to re-examine their funding structure and consider the following:-

  1. Debt restructuring to lengthen tenors of existing obligations and ease cash flows.
  2. Restructure to reduce / minimize foreign currency exposure.
  3. Replacing short term debt with equity and other types of patient funding
  4. Vendor finance, supplier credit and other alternative funding options.


At the beginning of 2016, we adopted the twin themes of Efficiency and Effectiveness at United Capital. This was to help us ride the storms we saw ahead in the macroeconomic sphere. These helped us to deliver superior performance in H1 even as we performed the unexpected feat of growing revenues in a depressed economy whilst simultaneously reducing operational costs in a highly inflationary environment (with inflation at 16.5% as at June 2016 and 17.1% by July). Steps undertaken included stripping loss making products with persistent adverse outlook to a bare-bone structure and demand driven allocation of resources, ie concentrating resources in market segments experiencing high demand. This approach was aided by our well diversified portfolio of negatively correlated products which enables certain divisions to thrive even as others struggle.

Corporate players will certainly benefit from efficiency driving technologies at this time. One of our more successful and yet simple cost saving initiatives has been our paperless office rule which grossly reduced our stationery consumption expenses.



Liquidity created by selling already optimized assets at peak values puts you in a position to make strategic value enhancing acquisitions at discount prices due to the effect of recession on asset prices. For these investments to be justifiable, the target acquisitions must be assets being acquired for their long term strategic values especially from synergies to be exploited and not portfolio acquisitions for short term gain as they may need to be carried at very low book values for a while.


In conclusion, the outlook for many emerging and frontier economies with high dependency on commodities as their major revenue source face huge challenges such as currency devaluation, high unemployment and rising inflation which have produced a tough business environment. It comes as no surprise that adverse results such as high inventory levels, reduced manufacturing capacity, downsizing of personnel, crashing stock and property markets as well as rising interest rates also exacerbated by ineffective economic management.

In order to survive the harsh macroeconomic times currently faced by many African countries, businesses and organizations need to be more creative and consider reorganizing their financing structures, operations as well as product and service offerings through options such as low end disruption models and varied distribution channels. Attention needs to be paid to efficiency measures and more effective deployment of liquidity to maximize emergent opportunities.


Toyin F Sanni LLM. FCS. FIAPM

Group CEO, United Capital Plc / President IAPM Nigeria

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