A few weeks ago, Stears provided a positive forecast for the Nigerian FMCG sector, despite facing major challenges from the broader macroeconomic environment.
The positive outlook was premised on the assumption that the new Bola Tinubu administration would dare to be different from his predecessor and take bold steps to MNGA (Make Nigeria Great Again).
However, no one foresaw how daring Tinubu would be from his first day in office on May 29th. Addressing the nation and foreign investors for the first time as President, Tinubu made it clear that the 46-year-old fuel subsidy that has drained some generational wealth from Africa’s largest economy was finally gone. He also stated that his administration would work to ensure a unified exchange rate to reduce arbitrage opportunities and stimulate investment flows.
Removing subsidies and unifying the exchange rate (devaluing the official rate closer to the parallel market rate) are two bold reforms multilateral institutions like the IMF and World Bank have long clamoured for, to no avail, until now.
But let's not get carried away. It will get worse before it gets better; just ask Egypt. In the medium term (3 - 5 years), fuel subsidy removal should translate to economic benefits as freed-up government revenues could now be deployed into other critical sectors like infrastructure, education and security. However, in the short-term (1-2 years), it has dire inflationary consequences (higher transport and input costs) that further squeeze consumer disposable income and earnings growth potential for FMCG companies.
As such, efficiency (reduced redundancy) and effective cost management will be of utmost priority to the management of these companies.