Nigerian Capital Markets

(The transition from crisis ridden to world class standards) By Arunma Oteh DG SEC

At Policy Dialogue

Theme
Nigeria There must be few other countries on earth with such a glaring mismatch between their actual state and their extraordinary potential
The Economist August 2, 2007

Background
Snapshot of Nigeria

Nigerian economy is approx. $220bn in size.

2nd largest in SSA and growing at an average of 4-5% p.a in the last five years. Economy is overly dependent on oil and to a limited extent on gas. The worlds 7th largest exporter of oil.

Background
Member of OPEC, 10th largest oil reserves and 6% of the worlds cocoa. It accounts for 41% of West African GDP and 47% of its population. Its economic transformation is far ahead of its political transition.

Its financial markets lag its economic and resource potential.

The Reform Agenda

After decades of policy ambivalence the Nigerian Government accepted the need and inevitability of a broad economic reform agenda.

Recruited a reform team.

Articulated a robust and comprehensive reform agenda to address its macroeconomic challenges.

Macroeconomic Objectives
To achieve a sustainable and accelerated rate of real GDP growth. To meet the millennium development goals in this decade. To diversify the economy away from excessive dependence on oil & gas.

Macroeconomic Objectives
To make the country domestically and internationally competitive as a destination for investment flows.

To insulate the economy from exogenous shocks.

Economic Performance
Achieved increase in GDP overtime to an average of 4-5% in the last 5 years. Performance is nominally average but comparatively sub-optimal.

Peer group oil producers and mineral dependent economies have outperformed Nigeria. Resource potential remains huge but country faces daunting constraints and challenges.

Economic Reform Milestones

Massive external debt rescheduling obtaining a sovereign credit rating from CRA. Introducing a culture and structures for fiscal responsibility. Institutionalizing the excess crude account and due process.

Economic Reform Milestones

Constructive engagement with the multilaterals. Adopting the PSI and other reform oriented programmes.

Recent Crisis
Timing of the global financial crisis of 2008 was anticipated but magnitude was grossly underestimated. Like most meltdowns it was preceded by a commodity boom. The crisis manifested in the form of a subprime mortage crisis.

Followed by sustained default in the collateralized default swap markets.

Recent Crisis
The credit crunch exposed the huge risks assumed by global banks. The U.S played the biggest part in triggering the global credit crisis. It was feared that this crisis will be equal and similar to the great depression of 1929-3.

Global Recovery Has Commenced

World economic growth that had contracted sharply in 2008-9 has started expanding. Greater co-ordination between G7, G20 and most countries forestalled a global depression.

Banks were supported and failing Institutions amputated across the advanced economies.
The interventions were co-ordinated and fiscal stimulants were initiated in a calculated and deliberate manner.

Nigeria Economic Crisis

Nigerian economy benefited immensely from the pre-crisis commodity boom. Oil price reached an historical high $140pb in 2008. The Nigerian stock market broke all records and was a destiny for both hot and cold money.

Nigeria Economic Crisis

Creating a huge asset bubble.

The Nigerian economy was to later contract and suffer a severe slowdown.
The stock market crashed, leaving the banks reeling.
Issues and Challenges Arising from Crisis

The banking system and crisis is a subject of a massive banking reform process.

Pre-Appointment Assessment The 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 N9.55bn and N2.76bn in 2008 and 2009 respectively There were 30 applications considered for new listings in 2009 as against 70 in 2008

Statistical Summary of Market Performance in 2009

2008 Market Capitalization (N trn) NSE All-Share Index Total Turnover Volume (shares) Total Turnover Value (Ntrn) 9.56 31,450.78 193.14 2.4 2009 7.03 20,827.17 102.85 0.69 % change (26.5) (33.8) (46.75) (71.43)

Average Daily Volume (units)

Average Daily Turnover (Nbn) New Issues Approved (Ntrn)

775.65
9.55 2.6

414.73
2.76 0.28

(46.53)
(71.1) (89.3)

Number of Listed Companies

213

216

1.41

Statistics
Market Cap. as a % of GDP
60

50

40

30

20

10

0 2006 2007 2008 2009

Market Performance in 2010

ASI-MARKET CAP CHART
Year to date
6,900.00 6,700.00 6,500.00 6,300.00 6,100.00 5,900.00 5,700.00 5,500.00 5,300.00 5,100.00 21,000.00 23,000.00
ASI advanced by 22% in 6 weeks between March 1st and April 19

29,000.00

27,000.00

25,000.00

4,900.00
4,700.00 4,500.00 1/4/2010 2/1/2010 2/8/2010 3/1/2010 3/8/2010 1/11/2010 1/18/2010 1/25/2010 2/15/2010 2/22/2010 3/22/2010 3/29/2010 4/5/2010 4/12/2010 4/19/2010 4/26/2010

19,000.00

17,000.00

Market Capitalisation

NSE All-Share Index

3/15/2010

Post Crisis Assessment of Capital Market

Markets still reeling from the fallout of global and domestic crisis. Market rallies of 2006-08 were artificial and unsustainable.

Created a bubble and destabilized the banking system.

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

Post Crisis Assessment of Capital Market

The broker/dealer community are believed to be mostly technically insolvent. The equity market pricing mechanism is inefficient, opaque and subject to manipulation. The instrument composition ratio of equities/bonds is skewed in favour of equities.

Post Crisis Assessment of Capital Market

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.

Key Objectives
Stabilize markets.

Earn and restore confidence .

Develop and build a virile bond market and realign the bond/equity ratio. Institute a strong corporate governance culture amongst quoted companies.

Key Objectives
Build regulatory capacity and effectiveness in regulation, enforcement and oversight. Build and protect investor confidence and interest.

Tactical Response
Outlined comprehensive disclosure requirements for operators. Insisting that Brokers/dealers submit returns. Constructive engagement and closer working relationship and oversight of the NSE. Reviving previous initiatives that became dormant and overlooked. Updating the rules and guidelines.

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 and operators.

Strategic Initiatives
Early warning detector systems to identify bubbles in the making. Revamping the HR strategy.

Emphasis on recruitment, training and retention.

Nurturing and building strong relationship with donor nations, multilaterals and agencies.

Strategic Initiatives
Improving inter-agency communication, co-ordination and control of the market. Develop a matrix of indicators for identifying signs of systemic imbalances and weakness within the capital market

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 to N2.76bn 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

Accomplishments Soft Wins

Intangibles and soft wins Unequivocal signal of Zero-tolerance and no business as usual. Institutionalizing and maintaining the capital market forums and communication channels. Updating and communicating the rules to the market.

Accomplishments Soft Wins

Engaging and development of a rapport with both domestic and international financial journalists. Developing and strengthening relationship with peer country and regional regulators of capital markets. Capital market transaction fees have been slashed .

Accomplishments Soft Wins

i.e market induced rather than regulator mandated consolidation. Peer group review mission with U.S. completed next steps and lessons being implemented. Systemic issues arising from recent financial turbulence have been internalized and changing investor operator and regulator behaviour

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 bonds have increased.

Accomplishments - Hard Wins

Code of ethics and corporate governance now being widely discussed but not broadly adopted. New issues pipeline now increasing after a two year evaporation.

Outlook

Case Study-South Africa

Strategic Initiatives
embarked on various promising strategic initiatives. the strategy to promote the growth of capital markets was articulated in 2008 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 and markets.

The Asian Experience

In 2009, the Indonesia stock market index was up by 85.85% from 2008 The performance in 2009 was a complete reversal from the performance in 2008
When stock markets all over the world suffered 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

The Asian Experience Cont.

Mumbai stock index increased by 263%; from 6,602 at the end of 2004 to 17,343 at the end of 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

Asian Experience Cont.

Nigeria ASI decreased by 13%; from 23,844.45 in 2004 to 20,827.17 in 2009 Forces that work positively for the Indonesian capital market include:
Increasing awareness of Indonesians of the benefits and risks of investing in the capital market Rise in the size of the Indonesian middle class Effective interaction with regulatory bodies