Nigerian Capital Markets[1]

8/3/2019 Nigerian Capital Markets[1]

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Nigerian Capital Markets(The transition from crisis ridden to world

class standards)

By

Arunma Oteh DG SEC

At Policy Dialogue


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Theme

NigeriaThere must be few othercountries on earth with such a glaringmismatch between their actual state andtheir extraordinary potential

The Economist August 2, 2007


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Background

Snapshot of Nigeria

Nigerian economy is approx. $220bn insize.

2nd largest in SSA and growing at anaverage of 4-5% p.a in the last five years.

Economy is overly dependent on oil and toa limited extent on gas.

The worlds 7th largest exporter of oil.


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Background

Member of OPEC, 10th largest oil reservesand 6% of the worlds cocoa.

It accounts for 41% of West African GDPand 47% of its population.

Its economic transformation is far ahead of

its political transition. Its financial markets lag its economic and

resource potential.


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The Reform Agenda

After decades of policy ambivalence theNigerian Government accepted the needand inevitability of a broad economic

reform agenda. Recruited a reform team.

Articulated a robust and comprehensivereform agenda to address its macro-economic challenges.


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Macroeconomic Objectives

To achieve a sustainable and accelerated

rate of real GDP growth.

To meet the millennium developmentgoals in this decade.

To diversify the economy away fromexcessive dependence on oil & gas.


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To make the country domestically and

internationally competitive as a destination

for investment flows.

To insulate the economy from exogenous

shocks.

Macroeconomic Objectives


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Economic Performance

Achieved increase in GDP overtime to anaverage of 4-5% in the last 5 years.

Performance is nominally average but

comparatively sub-optimal.

Peer group oil producers and mineraldependent economies have outperformed

Nigeria. Resource potential remains huge but country

faces daunting constraints and challenges.


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Economic Reform Milestones

Massive external debt reschedulingobtaining a sovereign credit rating fromCRA.

Introducing a culture and structures forfiscal responsibility.

Institutionalizing the excess crude accountand due process.


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Constructive engagement with themultilaterals.

Adopting the PSI and other reformoriented programmes.

Economic Reform Milestones


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Recent Crisis

Timing of the global financial crisis of 2008 wasanticipated but magnitude was grosslyunderestimated.

Like most meltdowns it was preceded by acommodity boom.

The crisis manifested in the form of a subprime

mortage crisis.

Followed by sustained default in thecollateralized default swap markets.


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Recent Crisis

The credit crunch exposed the huge risksassumed by global banks.

The U.S played the biggest part intriggering the global credit crisis.

It was feared that this crisis will be equal

and similar to the great depression of1929-3.


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Global Recovery Has Commenced

World economic growth that had contractedsharply in 2008-9 has started expanding.

Greater co-ordination between G7, G20 andmost countries forestalled a globaldepression.

Banks were supported and failing Institutionsamputated across the advanced economies.

The interventions were co-ordinated andfiscal stimulants were initiated in a calculatedand deliberate manner.


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Nigeria Economic Crisis

Nigerian economy benefited immenselyfrom the pre-crisis commodity boom.

Oil price reached an historical high $140pbin 2008.

The Nigerian stock market broke all

records and was a destiny for both hot andcold money.


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Nigeria Economic Crisis

Creating a huge asset bubble.

The Nigerian economy was to latercontract and suffer a severe slowdown.

The stock market crashed, leaving thebanks reeling.

Issues and Challenges Arising from Crisis

The banking system and crisis is a subjectof a massive banking reform process.


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Pre-Appointment AssessmentThe Nigerian Capital Markets Before Jan 4th

2010

Market Structure

The Nigerian Stock Market was at the bottom The index had lost -0.6% cumulatively in the last 2

years (-45.77% in 2008 and -33.78% in 2009) Market cap. was at N4.989trn

There was fragility in the system Investor fright and fatigue

Average daily trades on the exchange was N9.55bnand N2.76bn in 2008 and 2009 respectively

There were 30 applications considered for newlistings in 2009 as against 70 in 2008


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Statistical Summary of Market

Performance in 2009

2008 2009 % change

Market Capitalization (N

trn)9.56 7.03 (26.5)

NSE All-Share Index 31,450.78 20,827.17 (33.8)

Total Turnover Volume(shares) 193.14 102.85 (46.75)

Total Turnover Value(Ntrn)

2.4 0.69 (71.43)

Average Daily Volume

(units)

775.65 414.73 (46.53)

Average Daily Turnover(Nbn)

9.55 2.76 (71.1)

New Issues Approved(Ntrn)

2.6 0.28 (89.3)

Number of ListedCompanies 213 216 1.41


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Statistics

0

10

20

30

40

50

60

2006 2007 2008 2009

Market Cap. as a % of GDP


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Market Performance in 2010

17,000.00

19,000.00

21,000.00

23,000.00

25,000.00

27,000.00

29,000.00

4,500.00

4,700.00

4,900.00

5,100.00

5,300.00

5,500.00

5,700.00

5,900.00

6,100.00

6,300.00

6,500.00

6,700.00

6,900.00

1/4/2010

1/11/2010

1/18/2010

1/25/2010

2/1/2010

2/8/2010

2/15/2010

2/22/2010

3/1/2010

3/8/2010

3/15/2010

3/22/2010

3/29/2010

4/5/2010

4/12/2010

4/19/2010

4/26/2010

ASI-MARKET CAP CHART

Year to date

Market Capitalisation NSE All-Share Index

ASI advanced by 22% in 6

weeks between March 1stand April 19


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Post Crisis Assessment of Capital Market

Markets still reeling from the fallout of global anddomestic crisis.

Market rallies of 2006-08 were artificial and

unsustainable.

Created a bubble and destabilized the bankingsystem.

The bear market correction and crash thatfollowed has led to undesirable consequences.


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The broker/dealer community are believedto be mostly technically insolvent.

The equity market pricing mechanism isinefficient, opaque and subject tomanipulation.

The instrument composition ratio ofequities/bonds is skewed in favour ofequities.


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Instead of the reverse.

Bond market is a fringe and purely an

FGN bond funding market. Confidence has eroded, investors are

fatigued and regulator credibility

questioned.


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Key Objectives

Stabilize markets.

Earn and restore confidence .

Develop and build a virile bond market andrealign the bond/equity ratio.

Institute a strong corporate governanceculture amongst quoted companies.


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Key Objectives

Build regulatory capacity and effectivenessin regulation, enforcement and oversight.

Build and protect investor confidence andinterest.


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Tactical Response

Outlined comprehensive disclosurerequirements for operators.

Insisting that Brokers/dealers submit returns.

Constructive engagement and closer workingrelationship and oversight of the NSE.

Reviving previous initiatives that becamedormant and overlooked.

Updating the rules and guidelines.


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Strategic Initiatives

Transformation agenda for the institution.

A comprehensive upgrade of IT platform

for effective internal communication. Robust supervision of market operators.

Electronic returns from markets andoperators.


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Early warning detector systems to identifybubbles in the making.

Revamping the HR strategy.

Emphasis on recruitment, training andretention.

Nurturing and building strong relationshipwith donor nations, multilaterals andagencies.


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Improving inter-agency communication,co-ordination and control of the market.

Develop a matrix of indicators foridentifying signs of systemic imbalancesand weakness within the capital market


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Accomplishments Soft Wins

The Markets Gradual restoration of volumes The stock market has gained 23.8% YTD Market cap now at N6.24trn

ASI is now 25,789.53 There has been a restoration in volume of trades

Average daily turnover now N3.6bn compared toN2.76bn as at Dec. 2009

Average bond trades (value) now Nxbn Number of new issues has also increased Delisting of moribund companies from the exchange Set deadline for quoted firms to submit results


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Intangibles and soft wins

Unequivocal signal of Zero-tolerance andno business as usual.

Institutionalizing and maintaining thecapital market forums and communicationchannels.

Updating and communicating the rules tothe market.


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Engaging and development of a rapportwith both domestic and internationalfinancial journalists.

Developing and strengthening relationshipwith peer country and regional regulatorsof capital markets.

Capital market transaction fees have beenslashed .


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i.e market induced rather than regulatormandated consolidation.

Peer group review mission with U.S.

completed next steps and lessons beingimplemented.

Systemic issues arising from recent

financial turbulence have beeninternalized and changing investoroperator and regulator behaviour


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Accomplishments - Hard Wins

Stock market is recovering

New tax incentives for corporate bonds

announced. State bond appetite and issues have

increased.

Enquiries in respect of corporate bondshave increased.


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Accomplishments - Hard Wins

Code of ethics and corporate governancenow being widely discussed but notbroadly adopted.

New issues pipeline now increasing after atwo year evaporation.


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Outlook


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Case Study-South Africa

Strategic Initiatives embarked on various promising strategic initiatives.

the strategy to promote the growth of capital markets was articulated in2008

It aims to attract foreign capital to the African market, by allowing investors

access the opportunities that exist in Africa.

The JSEs Africa strategy entails: Creating an Africa Board, providing opportunities for primary and secondary

listing

Creating indices reflecting issuers listed in countries across the continent; Creating a hub and spoke interconnecting model to connect stock

exchanges;

Closer relationships with exchanges to help develop new business andmarkets.


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The Asian Experience

In 2009, the Indonesia stock market index wasup by 85.85% from 2008

The performance in 2009 was a completereversal from the performance in 2008

When stock markets all over the worldsuffered from the global crisis

At the end of 2009, the Indonesian stock

market index was up by 254% in the last 5 yrs from a level of 1,000 at the end of 2004 to

2,534


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The Asian Experience Cont.

Mumbai stock index increased by 263%; from6,602 at the end of 2004 to 17,343 at the endof 2009

Shanghai stock index increased by 258%;from 1,266 in 2004 to 3,262 in 2009

Malaysian Index increased by 40%; from

907.43 in 2004 to 1,271.12 at the end of 2009. Singapore stock Index increased by 39%;

from 2,066 in 2004 to 2,880 in 2009


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Asian Experience Cont.

Nigeria ASI decreased by 13%; from23,844.45 in 2004 to 20,827.17 in 2009

Forces that work positively for the Indonesiancapital market include:

Increasing awareness of Indonesians of thebenefits and risks of investing in the capitalmarket

Rise in the size of the Indonesian middle class Effective interaction with regulatory bodies

Nigerian Capital Markets[1]

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