South African business owners recognise the vast potential of Africa?s most populous nation, but many are hitting a roadblock?the unpredictable swings of the naira.

With dreams of tapping into Nigeria?s bustling market, these investors find themselves at a crossroads, wary of riding the waves of currency chaos.

?Nigeria is a large and attractive market but the unpredictable swings of the naira make it scary to go in there,? Stephane Cohen, a business owner in South Africa, said.

?Most of the South African businesses have been forced to close shop and that?s not a good look. It means it?s really tough to do business there and that zaps confidence,? Cohen said.

Cohen?s view seems to be shared by several other business owners and investors in South Africa who have hit the brakes on investment in Nigeria since a record-breaking 2019.

Foreign Direct Investment (FDI) inflow from South Africa fell to a seven-year low of $378.49 million in 2023, a sign of waning investor confidence in the country.

A raft of South African businesses have exited Nigeria in recent times, from popular supermarket chain, Shoprite Holdings, to the less-known Nampak, Africa?s biggest packaging company.

?A poll done on South African businesses showed that the number one reason why Nigeria is such a tough place to do business is the currency volatility,? said Dianna Games, CEO of the Johannesburg-based South Africa-Nigeria business chamber.

?If you look at the way the naira has moved against the US dollar since 2014 to date, oh my goodness. Although there?s been some depreciation with the rand, it has been a little bit more stable, and it?s more predictable because it?s market-based,? Games said.

Games however remains optimistic that ongoing reforms in Nigeria aimed at enthroning a market-based pricing of foreign exchange will make it easier for foreign companies to do business there in the future.

Volatile naira takes toll

The naira has indeed been volatile. Between 2004 and 2024, the naira has suffered multiple sudden devaluations against the US dollar.

From approximately N136 to a US dollar in 2004, the currency has weakened more than 12x to N1652/USD as at November 15, 2024, averaging a drop of about 55 percent every year.

The rand, on the other hand, has been more stable, only weakening from 6 ZAR per USD in 2004 to 17 ZAR/USD as of November 2024. That?s an average drop of 9 percent per annum.

The trend In the South Africa?s rand vs US dollar allows SA?s businesses to make adjustments and hedge against currency risk, as the currency devaluations are generally tied to broader economic indicators like trade balance, interest rates, and inflation, which tend to be more stable and predictable in South Africa than in Nigeria.

In Nigeria?s case, the devaluations have been sudden and happened only after efforts to artificially prop up the currency failed. That has left little room for businesses to plan and hedge against currency risks.

Additionally, Nigeria?s forex restrictions, policy-induced distortions in the currency market, and heightened inflation rates have created substantial risk for foreign businesses.

These businesses struggle with the challenge of repatriating profits, pricing goods competitively, and managing costs in a highly volatile currency environment.

The CBN?s occasional restrictions on accessing foreign currency to curb devaluation also exacerbate these issues, contributing to liquidity challenges for foreign-owned companies.

Currency reforms gone bad

The appointment of Olayemi Cardoso as CBN governor late last year has sparked a raft of reforms from floating the currency to raising market rates to a record high in order to stabilise the currency and make it more market-driven.

The reforms have led to a steep decline in the currency, which has shed over 80 percent of its value since the reforms began.

Critics say Nigeria put the cart before the horse by floating the currency before securing significant dollar inflows. The naira depreciation has hurt businesses and slashed the purchasing power of consumers.

Foreign firms operating in Nigeria, who must report their sales to their parent companies in dollars, have been the worst hit.

Read also: Naira recovers after three days of losses in official market

S.A firms retreat

In the last decade, several prominent South African companies have withdrawn from Nigeria, citing currency volatility and challenging economic conditions as primary reasons.

Shoprite Holdings

Africa?s largest food retailer announced its exit from Nigeria in 2020, selling its stores to local operators. Shoprite cited currency volatility, supply chain issues, and difficulties in repatriating profits as the main reasons for its departure.

The currency devaluation made it increasingly difficult for Shoprite to operate profitably in Nigeria, given the high costs of importing goods and the challenge of maintaining competitive pricing amidst rising inflation.

Shoprite?s exit from Nigeria and some other African markets to focus on its core South African market did not prove too costly for the retailer, which recorded improved profit and margin in its first financial report since exiting Nigeria.

The Cape Town-based retailer grew trading profit by 14 percent to 5.4 billion rand ($358 million) in the six months through January 2, 2022, with trading margin improving to 6.0 percent from 5.7 percent six months prior.

Trading profit at its South African supermarket business rose 16 percent to 4.9 billion rand ($319 million) in the period, according to the financial statement released this week, which means it contributed 90.7 percent to the total profit reported by the group.

In full-year 2023, Shoprite posted record revenues of 219.5 billion rand, 17 percent up from the 187.5 billion rand recorded in 2022, a further sign that for Shoprite, it?s no Nigeria, no problem.

The year 2024 was even much better for Shoprite. Its sales rose by 9.7 percent to 240.7 billion rand, boosted by both its upmarket and discount grocery brands.

Shoprite?s exit was not solely due to its loss-making Nigerian operations but because the new CEO Pieter Engelbrecht was not as bullish about expanding across Africa as his predecessor, according to Dianna Games of the SA-Nigeria business chamber.

?Shoprite?s pull back from Nigeria and Kenya was due a change of leadership. The new leadership didn?t have as much appetite for Nigeria, and the company is now doing really well in South Africa,? Games said.

?They?ve reinvested a lot of money in South Africa. They (Shoprite) pulled back on the African story, but put down bigger roots at home,? Games told BusinessDay during an interview in Johannesburg.

During a September investor call, CEO Pieter Engelbrecht credited Pick n Pay?s strong performance in 2024 to increased investments within its home market of South Africa.

Nampak

Nampak sold its Nigerian can-making unit, Bevcan, to Alucan Investment for $68.5 million (N103.8 billion) in May 2024.

The sale of Bevcan, Nigeria?s second-largest manufacturer of beverage cans, was part of Nampak?s effort to raise 2.7 billion South African rand ($147.8 million) to pay its debt.

Nampak acquired Bevcan Nigeria in 2014 for $180.6 million, suggesting the company recorded a $109.5 million loss on the asset sale.

The company said In its financial statement that the devaluation of the naira and removal of petrol subsidy triggered a $54.7 million loss in 2023 and an impairment loss of $84.8 million on Bevcan Nigeria.

The sale of Bevcan Nigeria came after Nampak closed its metal business in Nigeria and sold its property, equipment and machinery to Twinings Ovaltine Nigeria Limited for N7.5 billion.

Nampak said it made a decision to close its Nigeria Metals business from July 31, 2023 ?due primarily to subdued demand for metal can products manufactured by this operation.?

?Nampak, which is Africa?s biggest packaging company, exited Nigeria this year. They had two businesses in Nigeria and they have sold their businesses. Part of the problem they faced was a forex issue and so on, and also because it affects the bottom line and they were in a lot of debt in South Africa,? Games said.

Pick n Pay

South African grocery retailer, Pick n Pay, said it will sell its 51 percent stake in a joint venture. CEO Sean Summers said last month that the decision was part of a broader restructuring strategy outside its home market.

Pick n Pay, which entered Nigeria less than five years ago through a partnership with A.G. Leventis, operates two stores in the country.

The retailer made Its Nigerian debut despite the exit plans of other major retail players in the market, venturing where many competitors saw challenges.

Famous Brands

Famous Brands, a leading South African fast-food operator, has begun scaling back its Nigerian operations, recently selling around 19 of its restaurants, according to Games.

The company Initially entered the Nigerian market in 2013 through a strategic partnership with UAC Restaurants Limited, securing a 49 percent stake in UAC?s Mr Bigg?s brand?the largest and fastest-growing quick-service restaurant chain in West Africa.

Through the UAC partnership, Famous Brands gained access to Nigeria?s burgeoning market while adding to its portfolio of popular South African brands, including Steers, Wimpy, Debonairs Pizza, Fishaways, and Mugg & Bean. Alongside its restaurant operations, Famous Brands also manages a manufacturing and logistics business, underpinning its presence across the food service industry.

While the 2013 acquisition marked an ambitious step towards continental expansion, Famous Brands has since begun scaling back, reevaluating its growth plans in the region.

Sun International

South African gaming and hospitality giant, Sun International Limited, restructured to tackle post-COVID debt, with its exit from Nigeria forming part of its strategy to streamline operations in core markets.

In April 2024, Sun International reached an agreement to sell its Nigerian assets to Rutam Finance Company Limited (RFC) for approximately $14.4 million.

The deal included Sun International?s 43.3 percent stake in Tourist Company of Nigeria PLC (TCN), the operator of Lagos? Federal Palace Hotel, for $1.875 million. Additionally, the group settled its entire $12.675 million debt to RFC, effectively finalising its exit from Nigeria. Sun International also plans to sell its remaining 6 percent stake in TCN at a later date.

Mr Price Group

Mr Price, a South African retailer specialising in budget clothing, exited Nigeria in 2020. The company reported foreign exchange volatility and an inability to repatriate funds as primary factors in its decision to leave. Mr Price?s decision was aligned with a broader trend of South African retailers finding Nigeria?s currency instability unmanageable.

Tiger Brands

South Africa?s largest food company, Tiger Brands, sold its 65 percent stake in its Nigerian subsidiary in 2015 after facing persistent financial losses. The company reported that currency issues, including the inability to access dollars at favorable rates and sharp devaluations, severely impacted its Nigerian operations. The naira?s volatility added to its financial challenges, as it could not keep up with the costs of importing raw materials for its products.

Truworths

This South African fashion retailer left Nigeria in 2016 after five years, citing the inability to access foreign currency for imports and escalating costs due to currency devaluation. Truworths found that operating in Nigeria was unsustainable due to high tariffs, taxes, and a challenging currency environment, which directly impacted profit margins.

Woolworths Holdings

In 2013, Woolworths exited Nigeria, citing ?the high cost of doing business? in the country as a primary reason. Currency instability, along with regulatory challenges and high operational costs, contributed to Woolworths? exit, as the retail giant found it challenging to operate profitably in a volatile currency environment where input costs could suddenly surge due to naira devaluation.

Other South African firms to have exited Nigeria recently include: Sun International and Famous Brands.

Old Mutual

Old Mutual, the South African financial services giant, has also recently exited Nigeria?s general and life insurance markets, selling these divisions to British firm Emple Group.

The move Is part of Old Mutual?s broader strategy to focus on higher-growth, profitable markets while streamlining operations across its portfolio.

Despite the sale, Old Mutual is retaining a footprint in Nigeria through its investment branch, Africa Infrastructure Investment Managers (AIIM).

AIIM remains actively invested in Nigeria?s renewable energy, midstream gas, and digital infrastructure sectors. (Business Day)

Update news