In the last 10 years or so, Nigeria has made remarkable progress in capital market development. The menu of available asset classes has been expanded to include Exchange Traded Funds; market infrastructure has been modernised and strengthened with the platforms for over-the-counter trading namely the NASD and FMDQ now established. Improved regulation and confidence building measures by the regulators have contributed in no small measure to lift the market.
Specifically, the Securities and Exchange Commission has undertaken a number of initiatives to boost investors’ confidence notable among which are the establishment of the National Investors Protection Fund meant to cushion the adverse effect of losses suffered in the capital market, the e-dividend policy designed to minimize cases of unclaimed dividend, the Direct Cash Settlement scheme which ensures that investors receive their money directly whenever securities are sold, the corporate governance scorecard for companies listed on the Nigerian Stock Exchange and the recapitalisation of capital market operators which has gone a long way in curbing sharp practices in the market.
As a complement, the NSE implemented minimum operating standards for market operators as well as launched the Premium Board, which offers issuers the benefits of greater visibility and opportunities to raise capital. Undoubtedly, these measures have sent the right signals to the investing public with regard to rules enforcement and market discipline.
While these are encouraging developments, the country’s capital market continues to trail behind that of peer countries. The flagship securities exchange, the Nigerian Stock Exchange, is small compared to the major international exchanges, with a total market capitalization of circa $80 billion (about N23 trillion, according to data from the NSE) with just 166 listed companies, compared to the Johannesburg Stock Exchange for example with equities capitalization alone a little shy of $1 trillion representing over 280 per cent of South Africa’s GDP and over 380 listed companies not to mention the New York Stock Exchange whose market capitalization is about $21 trillion with more than 2000 listed companies.
At less than 20 per cent of the country’s GDP, the current size of the capital market constrains its role in national economic development. Market liquidity as measured by trading volume and turnover is comparatively low. The issuer base is not diversified. More specifically, industry composition in the stock market is concentrated in a few sectors namely consumer goods (especially Nestle and Nigerian Breweries) and industrial goods (driven by Dangote Cement).
The major equity index (NSEASI) has significant weights in banking stocks, which are sensitive to business cycles. In contrast, agriculture and technology sectors critical for economic diversification take up a much smaller proportion. Most of the systemically important corporations such as the International Oil and Telecom Companies are not listed on the stock exchange. Foreign investors are significant players in the equities market often dictating the pace of market activity. This leaves the market vulnerable to external shocks.
Local institutional investors such as pension funds and mutual funds are less active in the equities market with asset allocation concentrated in government bonds and Treasury Bills generally considered safe and liquid.
The private bond market is very small compared to that for the government. According to the ‘NSE Q1 2018 fact sheet’, outstanding FGN bonds as of March 30, 2018 stood at circa $29.5 billion (about N9 trillion), state and municipal bonds about $1,85 billion (or N565 billion) while corporate bonds amounted to only about $900 million (or N9 billion). Thus the private fixed income market is not a significant long-term financing source for companies due in part to the crowding out effect from government borrowings
There is a consensus among capital market players that integrating the Nigerian capital market master plan into the country’s Economic Recovery and Growth Plan will position the market for sustainable growth. It is disheartening to note that the government’s ERGP seems not to recognize the place of the capital market in capital formation and economic growth. How else does one interpret the fact that throughout the 140- page ERGP document, no mention was made of government’s plan for the capital market.
In contrast, in Malaysia and other emerging economies, sections of even annual budgets are devoted to addressing government incentives for the capital market. Take the 2018 Malaysia budget for example, it has a section on ‘Tax incentives for Malaysia’s capital market’ in which ‘the budget proposes a three-year exemption on stamp duty for exchange-traded funds in order to promote Malaysia’s capital market and make it internationally more competitive’. In addition, ‘the budget offers tax relief for venture capital companies and income tax deductions for environmentally and socially responsible Islamic bond issuers’. This is a country that is currently implementing a second capital market development blueprint after successfully implementing the first 10-year capital market development plan.
Back home, the President’s Democracy Day speech, more like a state of the nation address, which had 37 paragraphs would have made a great deal of difference to the investing public if it had devoted at least one paragraph to developments in the capital market in the last three years with emphasis on government’s plans to help uplift the market.
By not accommodating the capital market, it missed an opportunity to celebrate the modest gains recorded by the market in the last three years given that equities capitalization between May 29 2015 and May 29 2018 had actually increased from about N11 trillion to about N14 trillion. This oversight seems to be the consequence of not having a capital market advocate in the government’s economic team.
To address this, the Director General of the Securities and Exchange Commission and the CEO of the NSE can be made members of the economic team to provide useful information as well as proffer suggestions on how to mainstream capital market development in national economic plans. Some other countries have even gone a step further than just having a strong capital market representation in the government’s economic team.
In Egypt for example, the Chairman of the Capital Market Authority serves on the Board of the Central Bank of Egypt. The reason is obvious: listed banks, supervised by the central bank, also come under the regulation of capital market authorities. In amending the CBN Act of 2007, consideration can be given to including the Director General of the SEC as a member of the CBN Board as is the practice in other jurisdictions.
Indeed, there are compelling arguments why government intervention could spur capital market development. Studies have indicated that enabling government policies significantly influence issuer demand for capital markets funding. China is one good example of this trend. In emerging markets in particular, privatization or listing of state-owned enterprises has proven to be one of the strongest levers for influencing issuer demand.
In Nigeria, only a few of the privatized state owned enterprises have been listed on the Exchange. As noted by Tony Elumelu, the Chairman of Heirs Holdings, listing of privatized and systemically important entities helps to create a middle class, which, like SMEs, is the engine of growth of modern economies. In a lecture delivered to the joint session of the National Assembly sometime in June 2016, Elumelu had urged the government to make it possible for the Nigerian public to invest in the oil and gas sector through the creation of a Special Purpose Vehicle which can be floated on the Nigerian Stock Exchange. His recommendation is valid today as it was some two years ago.
It is not for nothing that Saudi Arabia’s state-owned oil giant Aramco, the world’s largest oil company, is currently walking the plan for a public share offering on the Saudi Arabia domestic stock exchange with a potential international listing expected afterwards according to a report in the Wall Street Journal.
The listing of Aramco on the Tadawul is seen as the centerpiece of the Crown Prince Mohammed bin Salman’s efforts to reshape the Saudi economy and reduce the nation’s reliance on oil revenues. It is gratifying to note that Nigeria’s Vice President Yemi Osinbajo reportedly said a few days ago that the federal government had not given up on its plans of selling down part of its stake in its joint venture with oil companies. For better outcomes, the process should involve the stock exchange.
In a similar way, government policies can be used to lead more issuers into the country’s capital market. It is instructive to note that the MTN Ghana historic Initial Public Offering is a pre-condition given to it by Ghanaian telecom regulators for the company’s acquisition of the 4GLite license expected to advance its competitive position in the market.
Nigeria, the capital market was neither factored in during the licensing of the Telecom companies nor did it play any prominent role in the privatization of the power sector save for the requirement that the investors commit to floating the companies on the stock exchange within five years post-acquisition.
But for the fine imposed on MTN Nigeria by the regulators, the company probably would not have given serious thought to listing on the Nigerian Stock Exchange. Going forward, government enterprises and companies strategic to the nation’s development must demonstrate, as a pre-privatization or licensing requirement, a commitment to list a given percentage of the company’s shares on the NSE within a specified period after commencement of business.
It goes without saying that tax policies have a strong influence on the development of capital markets. Malaysia created tax policies to deepen select asset classes, including fully exempting domestic investors from income tax on the interest from fixed income instruments while Singapore employed incentives to attract the private sector, including tax exemptions and access to business opportunities such as mandates from the sovereign wealth fund. The Nigerian government can toe a similar path by granting tax incentives to companies that are willing to list on the stock exchange as well as rewarding already listed firms through government patronage and preferential business access. It bears noting that listing promotes transparency and access to information, makes for corporate governance and mandates full disclosure, which helps, in objective compilation of data.
Little wonder the bulk of the revenue from Companies Income Tax come from listed companies according to data from the Federal Inland Revenue Service. So it is equally in the interest of the government if many companies are quoted on the stock exchange.
At another level, sovereign wealth funds and public pension funds around the world have become large holders of company shares. Perhaps the best-known example is the Norwegian sovereign fund with US$880 billion under management, of which more than 60 per cent is invested in equities. Equally, pension funds are critical to longer-term capital market development. Nigeria’s pension funds are estimated to be in excess of N7 trillion and are still growing. The policy adopted by Chile in the deployment of pension assets is one good example with lessons for Nigeria. The National Assembly should bear this in mind with a view to increasing the limits on pension funds’ investment in the stock market. The approved multi-fund structure for pension funds investment is already a step in the right direction. Given that the country’s debt market is crowded by government’s debt instruments which continue to guarantee high returns over equities effectively shutting out the private sector, the government’s current debt strategy of rebalancing the debt stock in favour of external debts should be sustained for now. It should equally be borne in mind that budget delays and policy somersaults are a hindrance to capital market growth not least because they create uncertainties in the minds of investors regarding the direction of government policy.
Undoubtedly, widening the retail investor base would help to de-risk the market and detach it from the apron-string of foreign investors. This will require a great deal of education efforts including developing financial markets courses in secondary and tertiary educational institutions.
Singapore launched numerous initiatives to reinforce financial literacy in the country both at the undergraduate and graduate levels. Singapore’s universities tailored courses to address the growing needs of the financial sector.
The National University of Singapore for example introduced a graduate program offering a degree in financial engineering. Nigeria can do likewise. The National Universities Commission should encourage Universities to introduce degree and graduate programmes in capital market studies.
The government through the Central Bank of Nigerian can help to sponsor educational programs targeted at a broad spectrum of investors in Nigeria. And speaking of the role of the CBN, who says the apex bank given its fast assuming toga as the ‘’only game in town’’ cannot invest in the stock market, playing the role of ‘’market maker of last resort’’ especially if there is nothing in the CBN Act of 2007 that precludes it from doing so.
According to ‘London MarketWatch’ some leading central banks have become major players on world equity markets. The Swiss National Bank, a well-known large public-sector equity owner was reported to have 15 per cent of its foreign exchange assets (or $72 billion) in equities at the end of 2013!
It goes without saying that the independence of the apex regulator is crucial to market development. To this end, the National Assembly is called upon to amend the Investment and Securities Act 2007 to give the management of SEC the needed independence to effectively regulate the market.
That said, capital market development in Nigeria should be a key policy issue going forward to foster savings and investments for inclusive growth. Indeed, the Nigerian capital market presents various untapped opportunities for sustainable economic growth and it is time the government recognized this by taking more than a passing interest in the affairs of the nation’s capital market.
By Uche Uwaleke
The Guardian Newspaper