SEC chief continues Nigerian capital markets clean-up job

Capital markets were at the heart of Nigeria’s financial turmoil four years ago. Their collapse in the 10 months from March 2008, a period in which the country’s main equity index saw almost two-thirds of its value wiped out, led to foreign portfolio investors fleeing and a crisis in Nigeria's banking sector from which some lenders are only just recovering.

The rehabilitation of the capital markets has thus been a priority for the government. The process has largely been led by Arunma Oteh, who was brought in to head Nigeria’s Securities and Exchange Commission (SEC) in early 2010, and is viewed as one of the country’s key economic reformers.

For Ms Oteh, improving corporate governance standards was crucial. Her immediate task was to restore the trust of investors in bond and equity markets riddled with insider trading and schemes in which several banks inflated their own stock through margin lending – sometimes even to shell companies they had set up specifically for that purpose.

“The foundation of a market is trust and integrity,” says Ms Oteh, a graduate of Harvard Business School who came to the SEC from the African Development Bank. “We started off by saying: ‘We will not tolerate any market infraction. We will do whatever it takes to send that message to the market, because that is what will restore investor confidence’.”

Unenviable task

As such, Ms Oteh has had to take on some of the most powerful financial figures in Nigeria. Shortly after she took office, the SEC dismissed the head of the Nigerian Stock Exchange (NSE) for poor oversight during the crisis and set up a tribunal that saw more than 200 people questioned about alleged market infringements.

Such moves have scarcely made life easy for Ms Oteh. She was suspended for a month in 2012 before being cleared of mismanaging SEC funds. Many analysts believe the allegations levelled against her were concocted by legislators and bankers that had the most to lose from her reforms.

Despite such setbacks, few commentators doubt that Nigeria’s markets are far cleaner than they were before 2009. Attesting to investors regaining their confidence, the main equity index, the All-Share Index (ASI), increased 35% last year, making it one of the best performing indices globally (it was up a further 19% in the first two months of 2013).

Overseas buyers have largely led the recovery and are behind about 70% of trades. “Over the past three years, since we started the reform programme, what we have seen is that foreign institutional investors are getting much more familiar with the fact that Nigerian stocks are undervalued,” says Ms Oteh.

The ASI, which stood at 33,500 in late February, is still far below its peak of 66,000 in March 2008. But while it is unlikely to reach such heights again in the near term, most investors are confident it will continue to rise this year.

Cultural shift

The SEC’s reforms have involved trying to change the culture of Nigeria’s equity market. Ms Oteh says that before 2008 there was ‘euphoria’ among local retail investors, who did not fully appreciated the risks associated with shares. “People didn’t understand that the capital markets are really for investing for the medium to long term,” she says. “Retail buyers just packed into the market because they thought they could make a quick buck. There were stories of people selling their houses because they thought: ‘These markets are just rising. I want to participate in that’.”

One of the SEC’s solutions has been to promote collective investment schemes similar to US mutual funds or UK unit trusts. Today, fewer than 200,000 Nigerians are part of such schemes. But given the country’s population of 160 million, analysts say the number could rise to 5 million in the next five years. “The opportunity is enormous,” says Ms Oteh. “Encouraging retail investors to participate in the capital markets through collective investment schemes first helps them to diversify their risk. And more importantly, they can leverage the expertise of a professional.”

A long-term aim for Ms Oteh is to see Nigeria graduate from a frontier market, as it is still viewed by most global investors, to an emerging market. Its addition to JPMorgan’s local currency emerging market bond index last October, which led to billions of dollars of inflows from abroad, was a step forward. But the SEC knows the market capitalisation of NSE has to climb substantially before that target is fulfilled.

The value of equities and bonds on the NSE stood at N13,840bn ($116bn) at the end of September last year. Nigerian policy-makers have a bold ambition to increase it to the equivalent of $1000bn by 2016. “It is absolutely feasible,” says Ms Oteh.

She acknowledges, however, that plenty more firms will have to go public for it to become a reality. The government’s privatisation agenda should help create more listings in the medium term, particularly in the power sector. Officials are in the final stages of selling 17 generation and distribution companies to international and local buyers, some of which are likely to launch initial public offerings (IPOs) of their assets. Bankers say this would be a huge boost to an exchange that still has no utilities listed on it.

The upstream oil industry is another that is barely present on the equity market, despite the commodity being responsible for more than 90% of Nigeria’s export earnings. The government’s attempts to get more local companies involved in oil exploration and production, which foreign firms currently dominate, are making some headway. Several such businesses – Seplat, Orient Petroleum, and Niger Delta Exploration & Production among them – have recently said they will consider listing to fund their expansions.

Families to go public?

The SEC is also keen for Nigeria’s four main mobile phone operators – Airtel, Etisalat, Globacom and MTN, who between them have 100 million subscribers – to launch IPOs. That they have opted not to so far is down to them having strong cashflows and being able to get bank funding cheaply, as well as their owners not wanting to dilute their shareholdings. But Ms Oteh, who has held discussions with the companies’ management about them listing, is confident that they will eventually.

One of the main problems the SEC faces is convincing large family-owned companies, of which there is no shortage in Nigeria, to tap the capital markets. The NSE recently created a team to travel around the country and explain to these businesses the benefits of going public, such as helping them improve their operating structures and ensure their long-term survival. Ms Oteh cites the example of Dangote Group owner Aliko Dangote, who listed several of his firms on the NSE. The subsequent growth of these firms has led to him being ranked by Forbes magazine as Africa’s richest man and viewed as an icon by Nigerian entrepreneurs. “Because [he took his businesses public], he has been able to grow them outside of Nigeria,” she says. “It wouldn’t have happened if he didn’t list on the NSE.”

Much is happening to reform the bond market, too. Sovereign debt dominates, accounting for almost 70% of the bonds on the NSE. But issuance by corporate borrowers and state governments, who are increasingly looking to fund infrastructure projects themselves instead of relying on the federal government, is picking up. The SEC is promoting bonds not only as a source of long-term funding, but as instruments that increase transparency in the public and private sectors. “In a democracy, what you’re trying to do is deepen accountability,” she says. “Coming to the capital markets brings more transparency because your books are opened to scrutiny by rating agencies and accountants.”

She adds that Nigeria is unique in requiring borrowers to report quarterly on how they are using bond proceeds. “There is no other market in the world where you have a monitoring of the use of proceeds,” she says. “That is something we introduced for greater scrutiny.”

Institutional investors

Building Nigeria’s institutional domestic investor base is critical, not least to increase liquidity and reduce the country’s dependence on foreign investors who are quick to exit at signs of trouble locally or among emerging markets in general. The insurance sector is rising rapidly, albeit from a small base, thanks to changes that have made some forms of protection compulsory. Pension funds, whose assets have expanded from almost nothing a decade ago to $20bn today, mostly put their money into government bonds. But Ms Oteh believes they will soon start to diversify their investments.

“In the past nine years, pension funds have been very conservative, with good reason,” she says. “They were building from nothing. But from now, more money will flow into equities.”

Nigeria’s capital markets would be severely tested if oil prices collapsed again as they did in mid-2008, something which exacerbated the sell-off in local stocks. Ms Oteh insists, however, that the SEC’s reforms – as well as the revitalisation of the banking sector and the central bank having built up substantial foreign exchange reserves in the past three years – mean they stand in far better stead today. “In the crisis people exited,” she says. “The country had to react and it depleted its reserves. But we’ve got enough of a buffer today. And the domestic investors, particularly the institutional ones, would also provide some immunisation against a crisis.

“We are better prepared. People have learnt from the crisis. It shocked everyone. There is now great appreciation of the importance of risk management.”