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By Henry Uche
With fluctuations in exchange rate (FX) due to the floating of naira by the Central Bank of Nigeria(CBN), a capital market expert, professor Uche Uwaleke, has proffered strategies for corporate organizations to manage risks associated with its attendant uncertainties in the market economy.
Delivering a lecture at the Strategic Risk Management Forum organised by Risk Managers Society of Nigeria (RIMSON), the don decried that as a result of the float, many corporate organisations have so far reported huge foreign exchange losses which negatively impacted their financial performance in H1 2023.
The expert who spoke on the theme: ‘Foreign Exchange Losses: A Review of Risk Management Lapses in Corporate Organisations’ said blue chips companies like: MTN, Nigeria Breweries, Guinness Nigeria, Nestle Nigeria, Uniliver, Cadbury Nigeria Plc, Airtel and Dangote Cement were most the negatively affected- according to reports.
Uwaleke who is the Director, Institute of Capital Market Studies, Nasarawa State University, maintained that transaction risks, translation risk and economic risks are the major foreign exchange exposures companies had to contend with in a time like this.
Looking at the economic prospect, he highlighted some factors mounting pressure on FX. On demand side they are: Rising inflationary expectations, speculation, huge import bill, huge demand for invisibles, and unmet FX Demand. On the supply Side, they’re: Crude oil theft, non- diversification of export base, weak capital inflows and inadequate/ encumbered forex reserves.
According to him, some of the reasons for risk management lapses are: Weak Hedging strategies, over reliance on import raw materials, poor forecasting framework, significant outstanding letters of credit among others.
However, he affirmed that corporate organisations in Nigeria can manage exchange rate risk with salient tools, for instance: Use of Forex clauses in commercial relationships/contracts, matching revenues and costs in foreign currencies, conducting most supply-chain transactions in naira, hedging arrangements via financial Instruments and currency options.
“Currency options give the company the right, but not the obligation, to buy or sell a currency at a specific rate on or before a specific date. They are similar to forward contracts, but the company is not compelled to complete the transaction when the contract’s expiration date falls due.
“If a company has a strong brand /competitive position, it may consider raising prices to offset adverse movements. A number of banks have embarked on fresh capital raising to hedge against emerging currency risks. “Fidelity bank for instance plans to raise additional capital via issuance of 13,200 billion ordinary shares (a combination of public offer and a rights issue). Also, FBN Holdings Plc has indicated that it will raise funds via the creation of 8,974 billion Ordinary Shares at 50 kobo each by way of rights issue.”
He added that the near term outlook of the forex market in Nigeria points to more volatility. Against this backdrop, he advised corporate organizations to consider dealing with the emerging forex exposure calculatedly.
“A company can avoid forex exposure by only operating in its domestic market and transacting in local currency. Otherwise, it must attempt to match foreign currency receipts with outflows (a natural hedge), build protection into commercial contracts, or take out a financial instrument such as a forward contract or currency option,” he stressed.
