IN view of the removal of fuel subsidy on the price of Premium Motor Spirit (PMS), some financial experts have predicted a slowdown in growth, demand and savings and increase in price levels before the benefits of the subsidy removal could materialise.A financial expert, Mr. Tola Odukoya of Dunn Loren Merrifield took a look at the short-term impact of this development on corporate credit in Nigeria in 2012.His evaluation looked at how the new policy would impact corporate issuers, existing, potential and addressed the critical issues such as the estimated impact of the new policy on projected revenues, cost of sales and other expenses, and the need for issuers of corporate debt to develop strategies that seek to mitigate the impact, if any, on financial performance in view of expected rating reviews in the months ahead.Generally, he saw a continuing contraction in demand within the economy as a result of diminished purchasing power of the average household. This is expected to significantly reduce projected sales volumes across retail and real sectors, he said.Talking about inventory levels, Odukoya said that as a result of the slowdown in demand, companies might have to carry high inventory levels, with the attendant costs, due to unsold stock. On the other hand, stock might be sold at significant discounts to attract cash, which would equally reduce operating cash flow, free cash flows and profitability. Otherwise, companies might resort to increasing wholesale credit sales to boost sales volumes. Increase in short-term borrowing is also expected.Consequently, he said that a combination of weak demand, increase in trade debtors and or high inventory levels would result in higher working capital requirements and increase in short term borrowing at higher interest rates. Therefore, the resultant increase in financing charges would further exert pressure on companies' profitability and cash flows.'We, therefore, expect that corporate decision makers will start to develop plans that will ensure that product demand remains at appreciable levels, inventory management is more efficient by adopting suitable production strategies such as Just-In-Time (JIT) inventory strategy, and greater efficiency is achieved in cash conversion cycle to reduce short term financing requirements.'Overall, we anticipate that 2012 will see a slower expansion in the retail and real sectors due to lower retained earnings or outright losses and or weak or negative free cash flows. This is due to a combination of several fiscal and monetary policies, which include the subsidy removal and current monetary policy stance amongst others. This, in our opinion, will significantly hold back the much-needed growth in the nascent domestic bond market.'We, therefore, expect that in the months ahead, fiscal and monetary authorities will seek to initiate policies that will reverse the negative impact of existing policies by reducing the size of public sector recurrent expenditure, reversing the current monetary policy stance, fast tracking power sector reforms, facilitating the construction of refineries by private sector players and encouraging rapid development of the agricultural sector.
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