Market News

THE growing use of dollar-denominated loans by Nigerian companies earning revenues largely in naira is emerging as a major threat to shareholder value, as currency depreciation can wipe out otherwise strong operating performances, a new report by Chapel Hill Denham, has warned.

The investment research firm said the biggest risk facing investors in Nigerian, and other frontier-market equities may not necessarily be poor management, weak corporate governance or sluggish economic growth, but the currency in which companies finance their operations.

According to the report, companies that generate predominantly naira revenues should finance their assets with naira equity and naira debt, rather than dollar-denominated parent-company or related-party loans.

It said such a balance-sheet structure provides a natural hedge against currency depreciation, while foreign-currency debt creates a mismatch that can turn a sharp fall in the domestic currency into a major loss for shareholders.

The report noted that exchange-rate depreciation is broadly predictable over long periods, even though the timing and scale of individual devaluations remain difficult to forecast.

Chapel Hill Denham examined exchange-rate and inflation data for nine major African economies and India between 1990 and 2025.

It found that annual currency movements remained difficult to predict, with inflation differentials accounting for only 14.6 percent of year-to-year exchange-rate movements.

Over longer periods, however, the relationship became considerably stronger. The study found that long-run inflation differentials with the United States explained 98.3 percent of currency levels across the 10-country sample.

The pass-through coefficient was 0.962, close to the one-for-one relationship expected under purchasing-power parity.

Nigeria was among the countries with the strongest long-term relationship, suggesting that the naira’s long-run trajectory has broadly reflected the country’s inflation differential with the United States despite sudden and difficult-to-time devaluations.

For foreign investors, the report said, this creates a high return hurdle when investing in naira assets without currency hedging.

Chapel Hill Denham estimated that where purchasing-power-parity depreciation is about 15 percent annually, as it approximates for Nigeria, an investment would need to generate more than 30 percent annual growth in naira terms to deliver a 15 percent annual return in US dollars.

By comparison, markets with annual currency depreciation of about 3.5 percent would require local-currency returns of about 18.5 percent to achieve the same 15 percent dollar return.

Kenya and Morocco, with depreciation of about seven percent, would require about 22 percent local-currency growth, while Angola and Ethiopia, with depreciation of roughly 25 percent, would require about 40 percent.

The research said investors buying naira-denominated assets with unhedged dollar capital are therefore exposed not only to market volatility but also to a compounding currency translation loss that could overwhelm operating gains.

Nigeria-India contrast

The impact of foreign-currency borrowing was highlighted through a comparison of listed subsidiaries of Unilever and Nestlé in India, Nigeria, Indonesia and Malaysia.

According to the report, Indian subsidiaries, which were largely funded through internally generated cash and local-currency debt, significantly outperformed their global parents in dollar terms.

Nigeria produced the opposite outcome.

Nestlé Nigeria and Unilever Nigeria recorded comparatively strong operating performances in naira terms, but their dollar returns were weakened by naira depreciation and exposure to dollar-denominated related-party and shareholder loans.

Over a 22-year period, Nestlé Nigeria generated an annualised naira return of 14.9 percent, higher than the 13.6 percent recorded by Hindustan Unilever in rupees.

However, Nestlé Nigeria’s annualised return in dollar terms was only 3.4 percent, compared with 9.9 percent for Hindustan Unilever.

The difference, the research argued, was not simply a reflection of management quality or business performance.

While the Indian subsidiary carried little or no foreign-currency debt, the Nigerian companies had substantial dollar-denominated related-party financing.

When the naira depreciated sharply in 2023 and 2024, the naira value of those liabilities increased dramatically, putting pressure on shareholders’ equity.

Nestlé Nigeria, for instance, recorded a foreign-exchange loss of £290.7 billion in 2024, temporarily pushing its reported equity into negative territory, the report stated.

Investors urged to look beyond earnings

Chapel Hill Denham said the experience demonstrates that strong earnings growth, powerful brands and good corporate governance do not necessarily shield shareholders from currency mismatches.

It advised investors to pay particular attention to companies’ debt notes and related-party financing arrangements when assessing Nigerian equities.

The report also noted that Nigerian equities remain relatively cheap compared with major global markets.

It estimated that the broad Nigerian equity market was trading at about eight to 11 times forward earnings, while the MSCI Nigeria Index traded at 7.75 times trailing earnings at the end of July.

This compares with roughly 20 to 23 times forward earnings for the S&P 500.

The research firm said the opportunity in Nigerian equities, therefore, is not simply about buying assets because they appear cheap.

Rather, investors need to identify companies whose balance sheets are structured in a way that allows their local operating growth to survive the impact of naira depreciation when translated into dollar returns.

The report’s central message is that the quality of a company’s earnings cannot be separated from the currency structure of its balance sheet. For Nigerian companies earning mainly in naira, dollar debt can transform currency depreciation from a macroeconomic challenge into a direct destruction of shareholder value.