Nigeria’s capital markets are set for rapid growth. As the government’s reform programme gathers momentum, a number of policy shifts promise to stimulate the already sizzling market.
For some time now, the Nigerian Stock Exchange (NSE) has experienced rapid growth, which has been attributed to the growing confidence of investors. NSE director general Ndi Okereke-Onyiuke says that the upsurge in activity is in part traceable to foreign portfolio investors, who increasingly see the market as combining security of investment with internationally competitive returns. She says that fixed investment by foreign shareholders in Nigerian subsidiaries, such as Guinness Nigeria and Heineken-owned Nigeria Breweries, demonstrates confidence that is noted by portfolio investors.
But she warns that Nigeria’s capital market must sustain its impressive returns to remain attractive. As an emerging market, Nigeria faces significant challenges to establish international acceptance, not to mention meeting the long-term financing needs of the larger economy.
Enormous responsibility
“The exchange realises the enormity of this responsibility and has, on its own, worked a strategy to address the challenge. Part of the strategy is to co-operate with local and international capital market authorities, including partnering with its members to regulate the market in the desired direction,” says Dr Okereke-Onyiuke.
According to her, the NSE’s initiative to automate its trading, clearing and settlement systems has improved market transparency and engendered investors’ confidence. And the innovation of constituting a Joint Monitoring Committee to hear complaints against operators has worked to accelerate the resolution of disputes and promote fair play in the market, she says.
Evolution of the Nigerian capital market dates back to 1960, when the Lagos Stock Exchange was established, becoming operational a year later. In 1977, it was renamed and reconstituted as the Nigerian Stock Exchange. The exchange is the centre point of the capital market and is regulated by the Securities and Exchange Commission. The NSE constitutes a primary and secondary market for trade in equities, bonds and other debt instruments. There is also the Second tier Securities Market (SSM), where listing requirements are less stringent for small and medium-sized enterprises.
Policy changes
Policy changes in the way the federal government manages its domestic debt promise to stimulate the bond market, creating a yield curve and benchmark pricing. The Debt Management Office (DMO) intends to restructure the composition of public debt to accommodate longer tenor instruments like bonds, slashing the current heavy dependence on treasury bills.
The DMO says the government will gradually reduce the use of treasury bills in the next three years, from 60% of domestic debt financing to 20%. “You cannot phase treasury bills out completely. Every country needs treasury bills for monetary policy purposes. In most countries, however, treasury bills make about 20% of the portfolio, as in the UK, whereas in Nigeria, we are talking about 60%,” says DMO director general Muhtar Mansur.
“The goal over a three-year period, and depending on circumstances, is to continue to go to the market to issue longer tenor bonds and retire the shorter tenor bonds. By then we would end up with a portfolio that would reflect a more reasonable structure; one that is common to developing countries,” he says.
According to Mr Mansur, the government will return to the capital market before the end of the year, to issue two tranches of bonds of N20bn ($153m) each as part of a N150bn issuance programme launched last year.
Banks’ role
The Central Bank of Nigeria’s (CBN) directive to raise the minimum capital requirement for banks from N2bn to N25bn poses an interesting challenge to Nigeria’s capital market. It is anticipated that a number of banks, both listed and private, will tap the market in a bid to increase their capital bases.
Though it is too early to predict the eventual demand for funding, stockbrokers are confident that most of the issues would be fully subscribed. And, with the international links that the NSE has established, it is possible that hybrid structures will be considered to accommodate local and foreign investors.
Oceanic Bank, NNB International Bank and Access Bank have all indicated their intention to go to market to raise capital. The anticipated high demand for funds could create an overhang, suppressing market returns in the short term. However, if the CBN succeeds in forcing consolidation, the remaining banks should be stronger and more profitable, which bodes well for the NSE.
Market slide
The increase in minimum capital requirements is not the only headache the central bank is causing the NSE. The market’s slide in August was attributed to a CBN decision to start a gradual withdrawal of public sector funds from the banking system. Though the bank later announced it had only withdrawn N10bn, the market was acting on news reports that up to N74.5bn would be withdrawn. The event triggered a sell-off of shares as banks moved to shore up their liquidity positions. This was a result of banks either recalling loans from customers or liquidating their equity positions. Rising money market rates also attracted funds away from the stock market.
Despite slowing the withdrawal of public funds from the banking system, the CBN has not changed tack on its policy and this, too, is likely to hold the market back over the next year.
Good news for Nigeria’s capital markets is pension reform, mandating public and private pension savings schemes. Under a contributory pension scheme, public sector employees are obliged to contribute 7.5% of their salary while the government contributes 10%. In the private sector, employer and employee can agree on any ratio that amounts to no less than 15% of the employee’s salary.
More significantly, the new law has mandated the creation of the National Pension Commission, which will regulate the management of pension schemes and private sector pension fund managers. Given the country’s history of pension savings being eroded through mismanagement, and more often corruption, the new law augurs well for greater transparency and more prudent investment of pension savings. The mobilisation of savings will also be a positive stimulus for capital market development.
Boosting the market
The NSE is active in other ways to boost the market. It has been instrumental in working with the Ministry of Finance, preparing the country to receive a sovereign credit rating from an international rating agency. The cost of the rating would be subsidised by the United Nations Development Programme (UNDP) under its African Capital Market Forum project. A sovereign rating would provide investors with a country risk guide.
Dr Okereke-Onyiuke says that a bad rating is better than no rating, adding that the NSE, through the African Stock Exchanges Association, had worked with the UNDP in New York to promote sovereign ratings in Africa. She says that Nigeria’s bond market, in particular, would benefit, allowing for issues to be priced relative to international benchmarks. With a credible price guide, investors, particularly foreign investors, would be able to invest with more confidence.
The NSE boss is also urging the government to consider various other measures to stimulate development of the capital market, including government guarantees for some instruments, such as mortgage-backed securities. She would also like to see favourable tax treatment for investors, citing examples in the US of tax relief for municipal bond investors.
