Did you know that the stock market in Nigeria recorded one of the highest daily performances when Former President Goodluck Jonathan called President Muhammadu Buhari to congratulate him for winning the presidential election in 2015? Yes, an action seemingly as ‘little’ as this can cause disruptions – positively or otherwise.
There are usually uncertainties surrounding the outcomes of general elections. These uncertainties result to the slowdown of business activities and particularly decision-making, especially for long-term businesses or investments during election years. Because of this, inflation and cost of living may increase. However, this is not peculiar to Nigeria. It happens everywhere in the world. Particularly because the private sector operators (both domestic and foreign), will want to know the policies of the incoming government before they commit capital (especially long-term capital) for investments.
How you can protect your wealth, and guard against possible inflation, and rise in the cost of living this election year and going forward?
Some countries and markets have inflation adjusted investment instruments, particularly bonds, real estate related instruments and commodities notes. Returns on these instruments are tied to inflation rate – if inflation rate is rising, the return of such instruments will increase. But we don’t have most of these instruments in Nigeria.
Some sophisticated investors identify defensive stocks and invest in them to protect their wealth against inflation. Defensive stocks are stocks that provide consistent dividends and stable earnings regardless of the state of the overall stock market. Examples of such stocks in Nigeria are: MTN, Airtel, Dangote Cement, Nestle, Lafarge, etc. One can also invest in bonds or commercial papers of companies that are producing quality goods. Some of them may not be able to generate yields that will match up inflation rate, but they will reduce the erosion that inflation will bring to the value of their investments. Some investors may also invest in Dollar denominated investments either Eurobonds or real estate investments, depending on their accessibility to FX fund and the level of risks they are willing to undertake.
Different economic agents (households and firms – either large corporates or small businesses) are impacted in different ways by the high inflation rate in the country and they must respond in different ways depending on their circumstances.
Negative effects of rising inflations rate for Businesses – Large Corporates or Small:
- This affects their costs of production and if they are not able to shift the cost to the final consumers in the form of increases in prices, their profit margins will drop. This will in turn reduce their ability to expand production, employ more people and raise capital.
- It may also affect sales because the ability of the consumers to buy their products may reduce.
- They may not be able to meet their debt obligations to their creditors and may not be able to reward their shareholders with good dividends and reduce taxes they pay to the government.
- Businesses producing non-essential products/services may close operations because of low patronage from consumers.
Survival Strategies to Cope with Rising Inflations Rate:
- Small businesses may leverage their associations/trade unions to engage in bulk purchases of raw materials or goods for resale at cheaper rates to save some production costs and improve profit margins.
- Businesses may need to re-assess their product/services portfolios to ensure that they produce goods/services that meet the basic needs of their target market. They can also produce goods/services that have low price elasticity – products/services that consumers will continue to buy despite increase in their prices.
- Companies may also review their procurement strategies to buy bulk to enjoy some bulk buying discounts.
- Companies may also consider local alternatives to key raw materials as opposed to imported raw materials, where possible.
- They may improve on their technology to deliver their products and services cheaper to the consumers. For example, some companies are now going “paperless” to reduce paper consumption. Some are also adopting virtual work option or online shops to reduce physical shops.
- Some companies that depend heavily on debt may consider other forms of capital whose returns are not obligatory – equity or non-cumulative convertible bond/preference share as opposed to pure loan.
- Companies can also adopt a different packaging method to reduce packaging material costs.
- Businesses that can do export business will also benefit from the current development in the country to earn foreign exchange to grow revenue that is inflation adjusted.
- They can also consider outsourcing non-essential services to a third party who can deliver such services better if this will reduce cost and service delivery to the consumers. Example is logistics.
Negative effects of rising Inflation rate for Individuals/Households:
- It reduces their ability to purchase goods and services produced by the firms.
- It reduces their ability to save for the raining days since the amount of money they spend on current consumption increases, which in turn can affect the amount of money that is available for banks to lend to business and ultimately lead to increase in interest rate in the economy.
- Standard of living of the people may reduce since they live on fixed salary.
- Although there may be agitation for an increase in salary/wages from the business and government, the success rate of such agitations maybe low since businesses and government are also struggling with rising costs of operations.
- There may be restructuring in the spending pattern of households.
Survival Strategies to Cope with of Rising Inflations Rate:
- Consider bulk purchases to enjoy discounts. Friends or close family members may come together to buy consumers goods together to enjoy bulk buying discounts.
- The individuals must re-assess the things they spend money on to ensure that they eliminate frivolities from their lists.
- Consider earning some additional passive income to increase available money to spend on basic needs.
Post-Election Financial Trends
Since 1999, we have noticed that few months to the general elections, monetary authorities through the Central Bank of Nigeria (CBN) would put in place tight policies to curb the rising inflation rate which is usually associated with high electioneering spending. After the election, such policies would be relaxed and measures to stimulate economic activities will be implemented. These post-election measures usually have positive impacts on the financial market:
- The private sector, would take investment decisions that were suspended prior to election.
- Capital market, including the stock market, would appreciate.
- Bank lending activities increase, as well as the demand for bank loans.
- There’s increase in foreign capital inflows (both portfolio and direct investment) as the election fears disappear after a successful election.
We saw some elements of monetary policy tightening that the CBN implemented sometime in November 2022 to reduce the high inflation rate associated with electioneering spending. These are clear indications of a repeat process which we have witnessed before in previous election cycles.
Businesses that people can go into without the fear of being negatively affected by inflation
- Any business that provides basic needs of the people such as food, water, shelter, clothing, healthcare, transportation, and educational services will be a good business to enter at this time. Although inflation will still affect such businesses, the owners will have greater ability to shift the costs of such businesses to the final consumers.
- Any business where the business owner can generate major foreign currencies, such as Dollar and Pound Sterling will be good to manage inflation in Nigeria.
Zero planning can take a lasting toll on your financial security. No one can predict what experiences you will encounter in life. However, there are steps you can take to prepare for the unforeseen. Follow trends, listen to the news, learn from experts, seek financial advice from professionals, ask questions and create a financial security net to fall back on. Then – maybe – you will be counted amongst those who have achieved financial well-being.
Excerpts from a Twitter Space conversation with Stella-Marie Omogbai, Executive Director, FSDH Merchant Bank Limited.