As Nigeria lets naira float, Kenya Airways braces itself for forex losses

Saturday June 18 2016

Central Bank of Nigeria Governor Godwin Emefiele gives a press conference on the naira devaluation during a media briefing in Abuja on June 15, 2016. AFP PHOTO | PHILIP OJISUA

Kenya Airways is facing more cash flow pressures from exchange losses expected from the effective devaluation of the Nigeria currency this week.

Nigeria is one of four countries from whom Kenya Airways has been unable to retrieve $25 million paid to its agents because of a foreign exchange crunch. The others are Angola, Mozambique and South Sudan, whose earnings from exports have been hit by low commodity prices, notably that of oil.  

The devaluation of the Naira, going by the black market exchange rates, could see the remittances shed up to half of their value in dollar terms. There are also no guarantees that hard currency will be readily available to back future sales.   

Nigeria is set to let the Naira float on Monday, a move expected to lead to a sharp devaluation given that the black market rate of 370 units to the dollar is barely half the official exchange rate of 197 Naira.

For Kenya Airways, which has its West African operations headquartered in the country, the expected inflationary pressure is also likely to constrain travel, dampening its revenue growth in the market.

“We sell in African markets through agents, but we have been unable to get dollars to repatriate our money. As with any business, we have some problematic debtors from whom we are actively trying to recover funds. We are such a cash flow business that when you have blocked funds somewhere, it has a direct impact on the business,” Kenya Airways chief executive officer Mbuvi Ngunze said last month.  


Several airlines affected

Kenya Airways is not the only affected airline. According to the International Air Transport Association, a number of foreign airlines, including United Airlines from the US and Iberia from Spain, recently stopped flights into the country after they were unable to repatriate up to $575 million in ticket sales.

For the better part of this year, Nigeria has been grappling with severe foreign-exchange shortages due to a plunge in the price of the country’s major foreign exchange earner — oil.

Unlike other major petroleum producers such as Russia and Angola, Nigeria was slow to liberalise its currency and diversify its economy, leading to the current crisis. Russia and Angola have allowed their currencies to fall after crude prices collapsed.

On Thursday, Nigeria said it would take approximately four weeks to clear a $4 billion backlog of foreign exchange demand, and hoped the floating exchange rate would be pegged at 250 naira to the dollar. That would represent a devaluation of 36 per cent.

“We’re talking about an open, transparent two-way system. The exchange rate would be purely market-driven. The bank will intervene in the market to buy or sell foreign exchange on a need-to basis,” said Nigeria’s Central Bank Governor Godwin Emefiele. He added that the Bank would select up to 10 primary dealers through which the naira would be traded.

Diplomatic talks

Kenya’s Transport Cabinet Secretary James Macharia said the government intended to start diplomatic talks with Nigeria and South Sudan on releasing the funds belonging to Kenya Airways and other businesses operating in the two countries.

“There are ways of resolving it. If we get a counter party in Kenya who is owed some money in that country, then they can do a swap. This is one of the things I would be encouraging Kenya Airways to do. I will get an update on this from them in the coming week over this issue,” Mr Macharia said.

Analysts say that for firms operating in the market, if the billing currency is naira, then the effect will be a reduction in revenue in hard currency terms.

A quick search shows that some agents charge the airfares in naira, meaning that the airline will have to book losses once the devaluation takes place.

“If, however, the billing is in hard currency then the direct effect is minimal,” said Mercyline Gatebi an analyst at Kingdom Securities. Kenya Airways could also start migrating to online sales denominated in hard currencies in markets prone to hard currency shortages.