Market News

BY  Damilola Aina and Temitope Aina

The aggressive interest rate hike implemented by the Monetary Policy Committee of the Central Bank of Nigeria in an attempt to tackle inflation made manufacturers repay N1.595tn owed to Deposit Money Banks and other creditors in the first half of 2024, The PUNCH reports.

This amount repaid as interests and loan principals was a 143.76 per cent surge from the N654.27bn spent by 11 top companies in the first six months of 2023, according to an analysis of their financial statements ending June 2024.

The amount spent on loan repayments during this period is reflective of the high interest-rate operating environment, with the country’s benchmark rate at a whopping 27.25 per cent.

On Tuesday, the Monetary Policy Committee of the Central Bank of Nigeria for the fifth time this year voted to increase the monetary policy rate, which measures the benchmark interest rate, to 27.25 per cent.

This new rate, a move that stunned the financial markets, is an increase of 50 basis points from 26.75 per cent announced by the apex bank in July 2024.

It also reflects an 850 basis point or 8.5 per cent increase in interest rates under the current leadership, which took office a year ago and continues the spate of interest rate hikes going as far back as May 2022 when the hawkish monetary policy actions began.

The Governor of CBN, Olayemi Cardoso, has maintained that the bank would continue to tighten monetary policy to combat the high inflation rate.

The continued hike triggers sharp rises in banks’ lending rates, and the borrowers are made to cough out more money to service their loans.

Financial analysts have noted that the sustained increases in the Monetary Policy Rate were adding to the financing cost burden on the manufacturers, stressing that the amount used to repay loans could enhance or expand their leading to more employment and economic growth.

The Organised Private Sector has also expressed fears that the interest rate hike of the Monetary Policy Committee of the Central Bank of Nigeria may worsen bad loans in various Deposit Money Banks.

But the situation varies across sectors, as the policy increased the combined net interest income of eight Nigerian Deposit Money Banks by 163.19 per cent, reaching N4.79tn in the first half of 2024. This figure was a surge from N1.82tn in the same period last year.

The bank’s performance was fueled by a broadened loan portfolio and higher yields on interest-bearing assets, leveraging favorable economic conditions.

While the financial sector reaps significant profits, manufacturers are contending with rising interest rates and expensive financing.

This is because when interest rates rise, banks can charge a higher rate on their variable-rate loans and a higher rate on their new fixed-rate loans hence earning more interest income, but when rates fall, banks are at risk as interest income declines.

Meanwhile, several manufacturers are tallying their losses amidst low purchasing power of consumers affecting sales.

Findings by The PUNCH showed that 11 top manufacturers spent a combined sum of N1.595tn on repaying loan principals and interests between January and June 2024.

This figure indicates an increase of 143.76 per cent or N940.62bn.

These companies include Dangote Cement, Nigerian Breweries Company, Nigerian Flour Mills Company, Honey Well, BUA Foods, BUA Cement, e-Tranzact International, International Breweries Plc, Notore Chemical Industries Plc, Nestle Nigeria, Unilever Plc, and Dangote Sugar.

The hike also compelled the players to quickly repay their debts to avoid increasing costs.

According to The PUNCH analysis, Dangote Cement repaid the highest amount of loans and interest in H1 2024, as it spent about N708.26bn on principal and interest repayments.

The cement company spent N90.31bn on interest payments and N618bn on the repayment of loans. The 2024 figure was a 398 per cent increase from N142.21bn paid in the corresponding period of 2023.

This was followed by BUA Foods with a combined loan and interest repayment of N319.18bn from N28.61bn in 2023, representing a 1,015.624 percentage increase within the review period.

Third on the list is the Nigerian Breweries Company with a spending of N173.43bn on loan repayment. The figure was however a decrease from N189.72bn spent in 2023.

BUA Cement also spent N117.25 on loans, a reduction of 16.69 per cent from N140.75bn in 2023.

Next on the list is the Notore Chemical industries with N104.4bn loans and interest spending. This company spent only N33.1bn in 2023 for the same purpose.

Other companies including Nestle Company spent N98.65bn to service its debts, HoneyWell company spent (N2.77bn), Flour Mills of Nigeria spent N221m on repaying loans, e-Tranzact International (N49.89m), Unilever (N809.73m) and Dangote Sugar with spending of N177.49m.

In its financial report, Unilever Plc stated that the high interest rate has emerged as a risk to its operations stressing that, “Overdrafts issued at variable rates expose Unilever to cash flow interest rate risk.”

The report added, “Cash flow and fair value interest rate risk Unilever’s interest rate risk arises from bank overdrafts and bank loans. Borrowings issued at fixed rates expose Unilever to fair value interest rate risk.

“Unilever analyses its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, and alternative financing.

“Based on these scenarios, Unilever calculates the impact on profit and loss of a defined interest rate shift. For each simulation, the same interest rate shift is used for all currencies. The scenarios are run only for liabilities that represent the major interest-bearing positions.”

Similarly, Dangote Sugar stated that interest rate risk refers to the potential fluctuations in the fair value or future cash flows of a financial instrument due to changes in market interest rates.

“The Group is exposed to fluctuations in interest rates on its borrowings. The Group pays fixed/floating rate interest on its borrowings. The company actively monitors interest rate exposures on its investment portfolio and borrowings to minimise the effect of interest rate fluctuations on the income statement.

“The risk on borrowings is managed by the company by maintaining an appropriate mix between fixed and floating rate borrowings. All loans, cash and cash equivalent are fixed interest-based and therefore the company does not have any exposure to the risk of changes in market rates,” the company stated.