Nigeria recorded economic growth of 2.3 percent in 2019, a further acceleration of recovery from the 2016 recession. Even at this pace, the growth when compared to annual population growth, which hovers between 2.6 percent and 3 percent, is limited and recovery weak according to international consulting giant KMPG.
Compounding these are the unanticipated economic shocks that have trailed the emergence of the coronavirus (COVID-19) pandemic in the first quarter of 2020, expected to have severe implications on the wider economy and business environment this year and the next.
Against the backdrop of a challenging business environment, KPMG Nigeria recently released the Top 10 Business Risks in 2020/2021, a robust and comprehensive view of the top risks for the year and the next based on the perspectives of key players in the risk management process – board members, C-suites, risk managers, and internal audit executives.
The report, the third edition since the Risk Consulting Practice of KPMG in Nigeria started publishing in 2016, highlights the impact of COVID-19 on the macro-economic outlook of Nigeria and in each of the key business risks that had been prioritized by the respondents.
This reflects the significant anxieties executives have continued to have over regulatory uncertainties as a result of increased regulatory scrutiny and sanctions within the country. It also includes uncertainty about the actions to be taken by regulators to cushion the impact of the coronavirus pandemic on the country. The scope covers tax laws, the minimum wage amendment act, Police Trust Fund Act, among others.
Fiscal & Monetary Risk
The fiscal policy risk has been elevated by the COVID-19 impact and a sharp drop in oil prices below the initial budget benchmark, leading to a downward review of the government 2020 budget benchmark and the expenditure pattern. This will lead to a reduction in economic activities and consumer spending. The risks and opportunities around monetary policies are also critical given the role the Central Bank has to play in the tight fiscal environment. The channel through which the monetary policy directly impacts corporates is credit, specifically lending rates.
Foreign Exchange Volatility Risk
This carried an extreme impact especially among multinational corporates for reasons like importation and capital repatriation. The oil price movement in 2020 is expected to remain weak due to low oil demand triggered by COVID-19 and oversupply.
In 2019, Nigeria’s foreign reserves depleted by $4.42 billion ending the year at $38 billion. Presently, the reserve is down to around $35 billion and continuous free fall of the foreign reserve increases the risk of devaluation. “Against the background of the collapse of investor confidence in the wake of the COVID-19 crisis, global financial conditions, the principal determinant of capital flows to emerging and frontier markets have tightened.”
With the country now outside the electoral cycle in 2020, KPMG does not expect the manifestation of this form of political risk which is defined by the prospects for the disruption of business on account of political instability, unlike last year.
“Another way that political risk impacts the business community is through policies that emanate from the political process. The risk arises when the political harmony leads to policies that are unfavorable for businesses because, in that event, the absence of a mitigating opposing political force to contest and debate such policies or to prevent their enactment and implementation is elevated.”
Technology Infrastructure Risk
This risk examines the inadequate information technology infrastructure and enterprise resource planning system to effectively and efficiently support the current and future needs of businesses. “This risk can be considered the highest in the financial sector despite huge investments by banks into upgrading and acquiring new digital technology tools like cloud computing, artificial intelligence, and diverse software. Technology, media, and telecommunication industry consider this risk as number 2 risk.”
The business ecosystem is rapidly evolving across different sectors and economies. Advancement in digital technology has continued to enable business innovations and agility across the world. Cybersecurity directly affects the resilience of organizations, economy, and individual safety. ‘The volume, sophistication, and the ever-involving nature of cyber-attacks in recent times, demands every organization to adopt innovative approaches to the management of cybersecurity risks.”
Customer Attrition Risk
This risk examines the loss of key customers and patronage resulting from perceived or actual inability to meet customers’ expectations. Customers expect organizations to keep up with their demands and will often compare their experiences across sectors using the best experience as the baseline for all others.
“Additionally, the shape of the economic landscape over the last few years has made customers more sensitive to the quality of experience they receive and their perception of value for money. There are higher attrition risks and a decline in brand loyalty in some sectors.”
Talent Shortage/Attrition Risk
This looks at the level and quality of skills, knowledge, and experience required to achieve business objectives and/or sustain growth.
Changing skills in demand, increased talent mobility, shifting employee expectations and the integration of human and intelligent automation are reinventing the workplace’. The 2 key factors that contribute to widening talent gap are quality of education and talent migration/brain drain of highly skilled Nigerians to countries like the United States, Canada, the United Kingdom, Australia.
Business Continuity Risk
Organizations are faced with several threats of potentially disruptive and unexpected adverse developments in their operating environment, including pandemic, wars, terrorist attacks. This risk can impact the profitability and cash flow for an organization due to an immediate decline of revenue and ultimately the going concern of a business if not adequately managed.
This risk examines the ineffective frameworks, processes, or practices by which the organization is controlled and directed. In today’s corporate world, a sound corporate governance system has become a strong determinant of companies’ economic fortune, operational sustainability, and longevity.
In addition, it sets the tone for the relationship between the board of directors, management, employees, and other stakeholders including the regulators. It also provides a framework for transparency, fairness, and accountability leading to profit maximization, promoting investors’ confidence, and ultimately creating jobs.