Kenyan multinationals with subsidiaries in South Sudan have lost billions of shillings to devaluation of the neighbouring country’s currency.
The cost of living in South Sudan hit a cumulative three-year rate of 1,285.3 per cent in December.
The runaway inflation has also led to a 97.3 per cent depreciation of the South Sudan pound against the US dollar, diluting the value of assets denominated in the local currency — including cash and loans held by the Kenyan companies.
The South Sudan pound is currently trading at 109.3 units to the dollar compared to 2.95 units at which it was fixed until December 2015.
KCB Group, Stanbic Holdings and CIC Insurance Group have reported combined net asset losses of nearly Sh5 billion in their South Sudan operations in the year ended December.
The losses were deducted from the companies’ respective total income, lowering their net earnings in the review period.
Analysts say the end of hyperinflation can leave companies with a gain or loss, which they will carry as the value of their assets as they enter a period of relatively stable cost of living.
“If the hyperinflation ceases, the (accounting) standards are clear that the last reported gain or loss is the carrying amount,” said Sammy Onyango, the chief executive of consultancy firm Deloitte East Africa.
KCB took the biggest hit among the listed firms that have announced their 2016 full year results, announcing a loss on net monetary position in South Sudan of Sh3.4 billion in the year ended December.
This reduced its profit before tax to Sh29 billion compared to Sh32.5 billion before the asset loss was deducted.
This saw KCB rely on its mainstay Kenyan unit to report a flat net profit of Sh19.7 billion as South Sudan’s performance weighed down the overall international business.
“The contribution of the international business dropped to less than five per cent as a result of the devaluation of the South Sudan pound and accounting for the hyperinflationary environment in the country resulting in an overall negative impact on net monetary position,” KCB said in a statement.
Stanbic Holdings reported a loss of Sh1.1 billion at its South Sudan unit due to the hyperinflation, contributing to a 23 per cent increase in operating expenses to Sh10.7 billion in the review period.
This saw the lender’s net profit drop 9.9 per cent to Sh4.4 billion.
CIC’s net profit also fell 83.4 per cent to Sh188.1 million from Sh1.1 billion, partly due to a loss of Sh297.5 million brought by the currency’s devaluation.
Accounting standards require companies operating in hyperinflationary economies to disclose gains or losses on their net monetary positions.
South Sudan, Venezuela and Sudan are currently classified as hyperinflationary economies defined as having a three-year cumulative cost of living increase of more than 100 per cent.
Hallmarks of hyperinflation include distrust of the local currency, with the general population preferring to store its wealth in non-monetary assets or in a relatively stable foreign currency.
Credit: Business Daily