Nigerian devaluation to hit South African local firms

The Nigerian economy is reeling, hit by a 40 percent slump in the oil price since June.

For South African firms with extensive operations in Africa’s largest oil producer it spells unwelcome uncertainty.

Based on a Brent crude oil price of $85 per barrel, for Nigeria’s much larger and diversified economy the negative effect on GDP would be 2.7 percent, Standard Bank economist, Yvette Babb says.

For the over 100 South African companies operating in Nigeria, the biggest risk lies in the devaluation of its currency, the naira. Despite Nigeria’s broader economy oil is the key revenue generator, accounting for about 95 percent of export earnings and 80 percent of government revenue.

The naira has already fallen 13 percent against the US dollar since the oil price’s plunge began in June. “There is a lot more to come,” Investec Asset Management industrial equity research head Rob Forsyth says.

He points to a far higher 24 percent fall in the Norwegian krone. Oil accounts for almost 70 percent of Norway’s exports.

In line for the biggest hit is MTN, Nigeria’s biggest mobile network operator. A pivotal profit centre, MTN Nigeria generated 48.4 percent of earnings before interest depreciation and amortisation in the six months to June.

Standard Bank is also vulnerable. “Nigeria is by far its biggest African exposure,” says Evan Walker of 36One Asset Management.

Including Angola and Ghana, West African oil producing countries accounted for 8 percent of the bank’s headline earnings in the six months to June.

The situation will make MTN and Standard shareholders — and other firms with Nigerian exposures such as Nampak, Imperial, Tiger Brands, Sanlam and Old Mutual — keen oil-price watchers. They may be in for a long wait before they see a price recovery.