Faced with an economic squeeze, Nigeria has devised a masterplan to energise its capital markets. But while major companies are gradually starting to list on the Nigerian Stock Exchange, low liquidity and inflation are acting as a brake on recovery. Chris Stein reports.

Nigeria stock exchange

A year after Nigeria’s government passed an ambitious plan to revamp its capital markets, low trading volumes, high inflation and a lack of economic policy direction have investors voicing doubts over whether stocks and bonds can power the growth of Africa’s most populous country.

After years of promising growth rates backed by high oil prices, Nigeria has entered recession in 2016, following two quarters of contraction that were driven by a slowdown in oil production, intermittent fuel shortages and a much-criticised monetary policy.

Nigeria’s ‘capital market masterplan’, a framework released in 2015 to overhaul the country’s stock and bond trading over the next 10 years, is jeopardised by low market liquidity and high inflation caused by the recession, according to analysts and fund managers.

“It’s one thing to have a developmental framework on paper. It’s another thing to actually put it into action,” says Bayo Adeleke, national secretary of the Independent Shareholders Association of Nigeria. “If the economy is a little more buoyant, I think we’ll be able to face this proposal for the capital market and look at areas we can accelerate.”

Progress made

The masterplan aims to get the capital markets growing in line with annual gross domestic product (GDP), expand participation in the markets and increase their overall competitiveness, and progress has been made towards some of these objectives. An e-dividend platform was launched in July 2015 to get unclaimed dividends to their rightful owners, according to a report published in January this year from Lagos-based Vetiva Capital Management.

The Securities and Exchange Commission has also unveiled regulations to get instruments compliant with Islamic law traded on the marketplace.

“Many of the frameworks that should launch this market to where it should be are already in place,” says Pabina Yinkere, head of research at Vetiva. “I think what is holding back the markets right now is the state of the economy. If we see improvements in the economy, it should help boost trading volumes.”

Hit by the 2008 crisis

Nigeria’s stock and bond indices were battered by the 2008 financial crisis. A June 2015 central bank study said total stock market capitalisation dropped by 62% between March 2008 and March 2009.

The recent recession has not helped matters. Cashflows into Nigeria have fallen because of the global drop in oil prices and a series of attacks by militants on its petroleum infrastructure. Oil is Nigeria’s top export and vital to its economy.

President Muhammadu Buhari took office last year amid a scarcity of dollars caused by the plunge in the crude oil price. He resisted devaluing the naira, but instead spent Nigeria’s reserves and imposed import bans and capital controls to keep the currency’s value pegged at about N200 to the dollar for more than a year.

Index provider MSCI cited the capital controls when it ordered a review of Nigeria’s status earlier this year, although ultimately it decided to keep Nigeria on its frontier market index. Barclays and JPMorgan Chase were not so kind; both recently dropped the country’s bonds from their emerging market indices.

Currency woes

Nigeria is heavily reliant on imported fuel and consumer goods. With foreign exchange scarce, importers went to the parallel market to buy dollars, pounds and euros at expensive rates, which drove inflation to 17.1% in July, its highest level since 2005. The previous month, the government relented on its monetary policy and allowed the naira to float. But the value of the dollar remains about 30% higher on the parallel market than at the bank rate.

This currency uncertainty has made a huge dent in investor confidence, particularly among foreigners looking to get into the Nigerian Stock Exchange (NSE), according to Bismarck Rewane, CEO of Lagos-based Financial Derivatives Company Limited.

“We have a situation where, in dollar terms, because of currency volatility and currency weakness, the stocks are cheap. But relative to their earnings, they’re not that cheap,” says Mr Rewane. “International investors have been unwilling to take any advantage on opportunities. Because the return on investment, after discounting for possible exchange rate depreciation, may not justify the risks.”

John Ashbourne, Africa economist at London’s Capital Economics, says investment in the country’s capital markets is too small to drive GDP growth. The trading volume of equities on the Nigerian Stock Exchange is just N273m, or about $843,000.

Investment levels of between 20% and 30% of GDP are necessary for an economy to reach high-income status, he adds, but the NSE’s valuation of about $30bn is just 6% of GDP. By comparison, nearby Ghana’s stock exchange is valued at the equivalent of 39% of GDP.

“Nigeria’s capital markets are shallow and poorly developed. They can play a role, certainly, but really transformative investments in infrastructure would probably require foreign capital as well,” says Mr Ashbourne.

ETFs fail to excite

Besides equities, bonds and exchange-traded funds (ETFs) are traded on the exchange. The capital markets plan also calls for derivatives to be traded, but that has yet to begin. Uptake of ETFs has been slow: Vetiva rolled out ETFs about three years ago, but Mr Yinkere says many traders are not interested. “Even understanding what an ETF is has been quite a challenge. The acceptance of new products hasn’t been that great,” he adds.

Investors view the bond market more favourably. Thanks to a pension reform bill passed in 2014 that raised the limits for monthly contributions, pension funds have emerged as major investors in the fixed-income market. Mr Yinkere says the funds have about N6000bn, or $19bn, saved up.

Nigeria plans to spend N1750bn on infrastructure this year, and plans to borrow from the local bond market, in addition to external funding from the World Bank, the Export-Import Bank of China and the African Development Bank.

But Emeka Ogumka, head of treasury and investments at Lagos-based Cornerstone Insurance, believes that even with yields in the mid to high teens, inflation is a deterrent for insurers, another major player in bonds. “It doesn’t provide me with a hedge, because I have long-term liabilities. If I get into a point with a bond, say a 10-year bond at a yield of 15%, inflation at the last count was 17.1%. So already, my return is negative,” he says.

Deji Tunde-Anjous, managing director of AXA Mansard Investments, disagrees, however. He believes that inflation will level out over time. “One would argue that the long-term path of inflation would not average at current level,” he says. “It would be less of a concern for us because we’re taking a multi-year view. For someone investing solely for the short term, that would be much more of a concern.”

Initial public offerings (IPOs) are another area of stagnant growth. There were no IPOs on the NSE in 2015, and few in 2014. Mr Adeleke blames this on prevailing attitudes about Nigeria’s investment climate. “Some people are scared to approach the market for an IPO because if you don’t make a certain percentage, the IPOs will not be regarded as successful and you’ll have to refund some people’s money,” he says.

New faces on the NSE

Many major industries, such as the telecoms and oil majors, are not traded on the NSE. That may soon change. As part of a settlement with the Nigerian government over missing a deadline to disconnect unregistered mobile users, South Africa’s MTN Group is expected to list on the exchange.

Mr Yinkere expects more companies to follow the example of Africa’s largest mobile phone company in listing. “After MTN, I don’t think the others will be regulatory driven. It will be more voluntary,” he says.

As part of reform efforts led by Mr Buhari’s administration, the state-owned Nigerian National Petroleum Corporation is also considering an IPO in 2018, according to Mr Yinkere. Power companies that were privatised under former president Goodluck Jonathan’s administration may also look at joining the exchange, as may the country’s railways, which are slated for privatisation.

Governance has slowly improved among companies that have listed, according to Mr Yinkere. Banks led that particular charge, along with Dangote Cement, owned by Africa’s richest man, Aliko Dangote.

Analyst calls after major announcements or earnings statements are now the norm. The NSE also launched in 2014 a corporate governance index. A high rating on that is required for a company to be listed on the exchange’s premium board.

Mr Ashbourne says there is still progress to be made in terms of oversight. He points to Nigeria’s balance of payments from 2014 (the most recent year for which data was available) that showed 'net errors and omissions' worth 2.5% of GDP. “This is almost $15bn illicitly flowing out of the country in order to be invested or stashed abroad,” he adds.

Mr Yinkere says for the progress of the capital markets to continue, liquidity must increase. “If companies see that there are values in being listed, that they can come to this market and raise money and the market is close to efficient in pricing, [and] that the market is transparent, then it can encourage listings,” he says.


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