IN view of the removal of subsidy on the price of Premium Motor Spirit (PMS) by the Federal Government of Nigeria, we sought to assess the short-term impact of this development on corporate credit in Nigeria in 2012. Our evaluation looks at how the new policy will impact corporate issuers, existing and potential, and addresses the following critical issues amongst others: 1) the estimated impact of the new policy on projected revenues, cost of sales and other expenses, and; 2) 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.Our current outlook on corporate credit for 2012 is neutral as we anticipate a slowdown in growth, demand and savings and increase in price levels before the benefits of the subsidy removal materialise.DemandGenerally, we foresee 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.Inventory levelsAs a result of the slowdown in demand, companies may have to carry high inventory levels, with the attendant costs, due to unsold stock. On the other hand, stock may be sold at significant discounts to attract cash, which will equally reduce operating cashflow, free cashflows and profitability. Otherwise, companies may resort to increasing wholesale credit sales to boost sales volumes.Increase in short-term borrowingConsequently, we believe a combination of weak demand, increase in trade debtors and or high inventory levels will result in higher working capital requirements and increase in short term borrowing at higher interest rates. Therefore, the resultant increase in financing charges will further exert pressure on companies' profitability and cashflows.We therefore expect that corporate decision makers will start to develop plans that will ensure that: 1) product demand remains at appreciable levels; 2) inventory management is more efficient by adopting suitable production strategies such as Just-In-Time (JIT) inventory strategy and; 3) 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.Odukoya is Vice President of Dunn Loren Merrifield, an investment outfit
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