PwC Nigeria Economics

Business strategies for

surviving a recession

Cyril Azobu, FCA

Partner
PwC Nigeria

February 2017
Economic
Context

Business strategies for surviving a recession January 2017

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 PwC Nigeria Economics

The Nigerian economy has been hit by a sharp decline in crude oil
prices, and more recently, significant production shortages

Brent Spot Price Crude oil production

140 2,500

120 113.02
2,000
100

'000 bbl/day
USD per bbl

1,500
80

60 56.27
1,000

40

500
20

- -
Jan-14 Jan-15 Jan-16 Jan-17

Jul-15
Mar-15

Jul-16
Sep-15

Mar-16
Jan-15

Sep-16
May-15

Jan-16
Nov-15

May-16

Nov-16
Source: NBS Report: OAGF, Appropriation Act
Business strategies for surviving a recession January 2017
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Nigerias economy entered a recession for the first time in recent

years, as the services, manufacturing and crude petroleum sectors
declined sharply

Sector Real GDP

Real GDP Growth Rate (%) Growth Rate (%)
6.54
6.21 6.23 20 Key sectors
5.94
in recession
15 asides
Agriculture
10
3.96 2016:
GDP growth 5
2.84 impacted by
2.35 -
fuel and foreign
2.11
exchange (5)
shortages
(10)

(15)

-0.36 (20)

(25)
-2.06 -2.24

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 Crude Petroleum Agriculture
Services Manufacturing

Source: NBS Report: OAGF, Appropriation Act

Business strategies for surviving a recession January 2017
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Exports and imports have declined sharply following the drop in oil
production volumes and price

Imports and Exports

25 22.17 22.62
21.18
20
16.61
15 12.27 12.39
10.46 10.25 9.27
10 7.96 7.84
USD Billion

(5)

(10) 8.46
9.25
12.62 12.31 11.60
(15) 13.58
15.03 14.58
15.71
(20) 17.74 18.52

(25)
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016
Imports (CIF) Exports (FOB)

Source: Central Bank of Nigeria; PwC Analysis

Business strategies for surviving a recession January 2017
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Tighter regulation on demand in the official market resulted in a

significant widening of spread between the official and parallel
market rates

Exchange Rate (Interbank vs Parallel market)

600

500

400

300

200

100

Interbank (NGN/USD) Parallel (NGN/USD)

Source: Central Bank of Nigeria; PwC Analysis

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Administrative controls on forex have resulted in a reduction in

FDI and FPI

Sources of FX inflows
100 95
94
90
83
80

70

60
US$'Billion

50 46

40
33
30
21 21 21 19 20
20 17
14
10 7 6 5
5 3 3 1 2
-
2012 2013 2014 2015 2016e

FDI FPI REMITANCES EXPORTS

Source: Central Bank of Nigeria; PwC Analysis

Business strategies for surviving a recession January 2017
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The constraints to doing business in Nigeria remain high

Ease of Doing Business Rankings

2013 2014 2015 2016 2017

Ma u r it iu s 19 20 28 32 49
Rw a n da 52 32 46 62 56
Sou t h A fr ica 39 41 43 73 74
Sey ch elles 74 80 85 95 93
Gh a n a 64 67 70 144 1 08
Ken y a 121 129 136 1 08 92
Nig er ia 131 147 170 169 169
Nu m ber of
r a n ked
cou n t r i es 1 85 1 89 1 89 1 89 190

Source: World Bank Ease of Doing Business rankings

Business strategies for surviving a recession January 2017
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Fiscal risks (1/2) Global oil market uncertainties:

Futures markets and consensus forecasts suggest oil
price risks are skewed to the upside. Nevertheless,
Oil with excess capacity in the market and downside
production Reform risks to global growth, a further drop in prices
volumes implementation
remains a possibility
Global oil
market Oil production volumes:
uncertainties Higher
yields Production disruptions owing to the Niger-Delta
conflict presents a key risk to revenues. Moreover,
the last time oil production volumes in Nigeria hit
2.2mbpd was in 2006 under more benign conditions
in the Niger-Delta
Fiscal policy
risks Reform implementation:
A failure to implement key reforms in particular, the
energy sector and the foreign exchange market could
keep investor confidence weak and limit Foreign
Direct Investment and Foreign Portfolio flows

Higher yields:
A potential increase in the domestic bond issuance
pipeline would keep upward pressure on yields, thus
increasing domestic financing costs. We estimate the
size of bond issuances could increase by as much as
35% to N1.29 trillion (2016: N955.7 billion)
Business strategies for surviving a recession January 2017
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Fiscal risks (2/2)

Policy rate:
The need to keep real interest rates positive and
improve the Interest Rate Differential (IRD) as
Policy
rate global interest rates rise suggest the Monetary Policy
Rate (MPR) will remain high

Budget implementation:
Inability to meet revenue targets will require an
expenditure adjustment. Capital Expenditure is
Budget
Fiscal policy
usually the first causality as recurrent (non-debt)
implementation
risks expenditure is treated as non-discretionary

External borrowings:
More volatile global financial market conditions
could constrain external financing, putting
additional pressure on reserves, domestic liquidity,
and credit. Concessionary borrowing from
External Development Financial Institutions (DFIs) would
borrowings usually require an agreement to comply with
stringent reforms. Without cheap funding from these
sources, Nigeria will need to rely on commercial
funding at much steeper rates

Business strategies for surviving a recession January 2017

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Investors, businesses and policy makers should prepare for three
potential scenarios unfolding in Nigeria in 2017: (1/3)
Scenario assumptions
- Oil price reverts back to
2016 average of $45/bbl
based on a rebound in
Scenario 1 : production of shale
Oil production producers and OPEC
shock deepens
along with price - Disruptions in the Niger-
decline Delta heighten and persist
through the year 2017
- Crude Oil production
drops to 1.4mbpd
- Increase in Electricity
Tariff by 30%
Source PwC Analysis
Business strategies for surviving a recession
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PwC Nigeria Economics
Economic and policy outcomes
- A significant contraction in oil sector and
falling government oil revenues persist
- Government pushes for more external
borrowing as domestic yield environment
remains high
- Real output Growth projected at -3.7%
- Pressure on the Naira leads floating of
exchange rate, which could lead to 23.5%
depreciation from the current NGN/USD
305
- Inflationary pressure persist with a
projected average inflation reached
19.01%.
January 2017
14

Investors, businesses and policy makers should prepare for three
potential scenarios unfolding in Nigeria in 2017: (2/3)
Scenario assumptions
- Oil price maintained at
average of $55/bbl.
Scenario 2: - Disruptions in the Niger-
Oil production Delta moderate with Crude
stabilizes Oil production 1.7mbpd
- Increase in Electricity
Tariff by 30%
Source PwC Analysis
Business strategies for surviving a recession
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PwC Nigeria Economics
Economic and policy outcomes
- The Nigerian economy grows by 0.7%
- The pressure on the Naira
moderates with slight depreciation
in the official rate by 4.68% to 320
- Average Inflation rate should
moderate to 14.4%
- CBN strives to narrow exchange rate
differential between the parallel and the
interbank market by increasing FX supply
January 2017
15

Investors, businesses and policy makers should prepare for three
potential scenarios unfolding in Nigeria in 2017: (3/3)
Scenario assumptions
- Oil price ramps up to
$60/bbl.
Scenario 3: - Crude oil production
Oil price ramps reaches 2.0mbpd on the
up along with oil basis of peace agreement
production with militants in Niger-
volumes Delta
- Foreign exchange market is
liberalised further
Source PwC Analysis
Business strategies for surviving a recession
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PwC Nigeria Economics
Economic and policy outcomes
- Economy recovers with 2.8% growth in
real GDP
- Consumption and investment should pick
up, albeit gradually
- Naira appreciates marginally in the
parallel market and stays flat in the
interbank space supported by foreign
investment flows
- Average Inflation rate moderates to
12.5%
January 2017
16
Business strategies for
competitiveness during a recession

Business strategies for surviving a recession January 2017

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 PwC Nigeria Economics

Most corporates are facing a number of financial and operational

pressures

Monitor

Source PwC Analysis

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 PwC Nigeria Economics

Corporates and investors refocusing from growth & expansion to

value sourcing and retention

4 Value Buys
Maturity interventions Revive & Restore Refins & Recaps
Growth interventions interventions
4
Underperformance
4 Growth
4 Distressed

4 4 Crisis
Start Up Carve Outs & Exits
interventions

Time

Insolvency 4

Decline

Source PwC Analysis

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Some strategies for minimizing the effect of the downturn (1/3)
Understand the true
impact of the downturn on
your business
Assess your customers sensitivity to
price/product changes
Assess competitors strengths and
reactions
Be strategic about what needs to be done
to minimise the effect of the downturn
Implement cost reduction to a
minimum efficient level
Conduct a reappraisal of the business
model in all its aspects
Examine the present cost base and
assess the value derived from each cost
category
Target discretionary expenditure to
reduce costs
Source PwC Analysis
Business strategies for surviving a recession
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PwC Nigeria Economics
Identify unprofitable
products and customers
01 02
Analyse the profitability of individual
customers and products
Introduce corrective actions for non-
performing products or customers
Determine effective, future
working capital mgt. for the
business
Monitor account receivables and
payables, inventory and cash mgt
Introduce incentives for early
payments and track customer
performance
03 04
Suppliers should be paid in
accordance with agreed credit terms
unless attractive settlement discounts
are on offer
January 2017
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 PwC Nigeria Economics

Some strategies for minimizing the effect of the downturn (2/3)

Ensure effective Maintain an experienced

performance management
and forecasting
Produce routine and timely performance
reports which provide information on
income and expenditure levels, profits
and expected cash flows
KPIs should have a focus on cash
generation
and well resourced finance
01 02 team
Resource needs in terms of people,
experience and Information
Technology (IT) support must be a
priority for senior management

Strategic Merger &

Ensure appropriate and
sustainable financing
arrangement
Seek more attractive debt
refinancing/restricting options
Identify the structure that best suits the
business and negotiate effectively with
lenders
Acquisition activity
Assets tend to be more favourably
priced in a recession than in a
booming economy
03 04 Be financially and operationally
flexible to take advantage of
acquisition opportunities

Source PwC Analysis

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 PwC Nigeria Economics

Some strategies for minimizing the effect of the downturn (3/3)

Maintain careful tax Ensure constant

planning communication with
01 02 stakeholders
Ensure timely and honest
Explore options to improve your cash
flow position by reducing or deferring communication
tax payments Keep all stakeholders informed about
Implement tax efficient remuneration the threats and opportunities that a
strategies from a Human Resource downturn brings to the business and
perspective actions taken to manage them

Managing foreign exchange

Manage key talent effectively
Motivate and develop high-performers
Recruitment costs and packages could
be less competitive in a downturn, and
this can present opportunities for the
business
risk through strategic
sourcing
Understand the businesses exposure
and develop a feasible mitigation
strategy
03 04 Conduct significant research to
identify existing alternatives to
working with foreign suppliers,
specialist and financial institutions

Source PwC Analysis

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Strategic interventions that will help you preserve value

Identify exit alternatives, sale Conduct a strategic review of

and liquidation process business, developing a long-term
management, liability closeouts Strategic business plan
Exit Alternatives
Mgt. &Business
Assess non-core asset Process streamlining, cost
Planning
disposal and monetization reduction initiatives,
strategies, transaction organizational effectiveness,
Opera-
management supply chain optimization.
Carve Outs tional
IT modernization
Improve-
Value ments
Enhance-
ment
Strategic sourcing,
Drivers
Turn- negotiation with creditor
Contracted
around constituencies re:
Obligations
Corporate turnaround Mgt. amendments and covenant
strategy, crisis and interim resets, covenant compliance
management services scenarios and headroom
Refinan-
Liquidity
cing &
New capital raising (debt/equity), alignment and Cash
Recapitali- Short-term cash and liquidity
of debt obligations with expected cash flows, Mgt.
zation forecasting (e.g. 13 week forecast),
significant cash savings i.e. better priced debt,
capital structure simplification, increased liquidity enhancement strategies,
financial flexibility i.e. covenants, tenor etc. working capital assessment (including
supplier and customer reviews)
Source PwC Analysis
Business strategies for surviving a recession January 2017
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Thank you

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