By Chinwendu Obienyi and Chukwuma Umeorah
Barring any unforeseen circumstances, Bola Ahmed Tinubu , the All Progressive Congress presidential candidate in the February 25, 2023 election and Nigeria’s President -elect will be sworn in today as the 16th President of the Federal Republic of Nigeria.
Tinubu alongside his Vice-President elect, Kashim Shettima, know from the onset the enormity of economic challenges that will be facing the administration which will include; shoring up government revenues, creating jobs, creating wealth, attracting foreign capital and restoring confidence in the economy.
Some of these economic issues aforementioned are structurally, decade long challengesthat had defied efforts of successive administrations while others have metastasized recently but still needed to be resolved for Nigeria to move forward as a nation.
Expectedly, several administrations have sometimes taken different approaches to address these challenges but one missed opportunity has been the absence of a clear market driven approach. From the economic point of view, one of missed opportunity that has not been effectively leveraged is the nation’s capital market where the government at national and subnational have failed to tap the market to fund infrastructure development.
When President Muhammadu Buhari defeated the incumbent President Goodluck Jonathan in February 2015, investors were upbeat that there would a resurgence for the Nigerian economy.
The peaceful handover of power from Jonathan to Buhari which brought back investor confidence that was lost before the election due to apprehension.
In response, Nigerian stocks gained most in the world, with the yield on a $500 million Eurobond offered by the country falling to the lowest level since December 2014 due to a growing confidence.
However, soon after Buhari was sworn in, that boom suddenly turned to bust as all the market indices began to tumble.
By August 2015, the stock market had lost N2.5 trillion due to what the Lagos Chamber of Commerce and Industry, LCCI, described as “lack of policy clarity and economic direction.”
While Nigeria burnt, Buhari fiddled. The urgency needed by the economy was not matched by Buhari’s responses, according to analysts. They pointed out that one of the regrets of the economy was was his failure to keep the inflation rate at a single digit he met it when he came.
As a result of rising inflation, the real rate of return on equities was -10.91 per cent in 2021, while bonds recorded -10.65 per cent. The situation has deteriorated further since inflation climbed to above 22 per cent.
Headline inflation rate increased to 22.22 per cent on a year-on-year basis in April.
This is according to the consumer price index (CPI) released by the National Bureau of Statistics (NBS).
The figure was 0.18 per cent points higher compared to the 22.04 per cent recorded in March 2023. The NBS said on a year-on-year basis, the headline inflation rate in March 2023 was 5.40 per cent higher than the rate recorded in April 2022 at 16.82 per cent.
Furthermore, foreign investors’ confidence in the market continued to wane during the eight years of President Buhari’s leadership. Statistics obtained from the Nigerian Exchange Limited (NGX) website showed that foreign investor’s participation in the market was 54 per cent in 2015. It fell steadily to 17 per cent in 2022 and currently at 4 per cent as at April 2023. This is due to the scarcity of FX and capital control by the Central Bank of Nigeria (CBN) have resulted in many foreign investments trapped in Nigeria.
However, this is not to say that Buhari’s administration did not have an impact on some sectors most especially, the capital market. When he took office, market capitalisation was N16.88 trillion (equities 68 per cent, bonds while others were 32 per cent).
By May 2023, the capitalisation had risen to N28.373 trillion, bonds N22.383 trillion, ETF N9.666 billion) while the number of listed securities stood at 325 (equities 157, bonds 97, ETF 12 and funds 59). The figures were higher than the 2015 figures of 280 for the number of listed securities (equities 196, bonds 52, ETF 4 and funds 28). Also, the exchange became a demutualized entity under his administration.
But when compared to its contribution to GDP, a 13 per cent is an indication that the capital market needs to be strongly leveraged being that it is a platform for businesses to access funds from a broad range of investors, enabling businesses to expand, innovate and create new job opportunities. Just as importantly, a robust capital market can reduce the susceptibility of an economy to external shocks, by reducing currency and duration mismatches in raising funds.
Not surprisingly, capital markets were the enablers and funnel for growth in many of the developed economies that exist today. For example, much of the 19th century rail construction in the US was financed through private investment. Entrepreneurs and business people, such as Cornelius Vanderbilt invested heavily in building rail lines to connect cities and transport goods.
These individuals and their companies, such as the New York Central Railroad and the Union Pacific Railroad, issued stocks and bonds to raise the necessary capital. Firms like J.P. Morgan & Co. also played a central role in providing financial services to the railroad industry.
Over the past few decades, China has experienced rapid economic growth fueled in part by its capital markets. The Shanghai Stock Exchange and the Shenzhen Stock Exchange are two of the largest stock exchanges in Asia, and Chinese companies have raised significant amounts of capital through initial public offerings (IPOs) and other securities offerings.
Also, the UK has a long history of using capital markets to finance its economic growth, from the financing of the Industrial Revolution in the 18th and 19th centuries to more recent developments in the financial services, technology, and renewable energy sectors. However, the African continent has had limited success due to a variety of factors, including political instability, weak regulatory frameworks, and underdeveloped financial systems but there has been notable solutions to national challenges in Africa, using the capital markets. South Africa is a leading example here. A lot of the exponential growth in the mining sector in South Africa was enabled through its vibrant capital market. It is however not surprising that the exchange recently said it will be looking to position itself as a platform to support the incoming administration by focusing more on attracting listings, enhancing liquidity through margin lending and developing new products regarding digital assets, non-depository receipts this year.
Its Chief Executive Officer, Temi Popoola, disclosed this during the NGX 2022 market recap and 2023 outlook.
He said, “We are faced with liquidity, revenue, sources of capital from assets that are stale or meant to be monetized and at the heart of what we will be looking to do is use listings as a vehicle for meeting strategic aspirations of the new governments. The new listings that we have had in the last 18 months have been responsible for 15 per cent of the trading in 2022 and how do we get more listings to the exchange?
We will continue to do our bid to address this and we will be doing that through advocacy, creating the right environment. We will drive technology companies to the exchange following technology board listing rule approval, enhance liquidity through margin lending and investors’ education (We are working with the CIS, ASHON to drive this initiative to get more retail investors), forge strategic partnerships with DFIs and banks, create sustainability products like carbon +, develop new products like non-depository receipts, digital assets among others.
We will work with the SEC and other agencies to see how we can drive listings in the technology board. Very soon, you will hear announcements from us in that regard as we are looking to attract the think-tanks within the technology ecosystem to make a push in the capital market”.
According to the NGX CEO, the exchange is also keen on growing Nigeria’s retail participation and boosting investors’ confidence in the market.
Stakeholders’ view
Reacting on how well the market performed in 8 years under Buhari’s administration, the Chief Executive Officer, Crane Securities, Mike Eze, said the market has not done quite badly citing the several listings that drove domestic participation in the market.
He however, noted that the sharp decline in foreign participation was alarminghence his call on the incoming government to eke out better policies.
Eze said, “Considering the very limited policy options available to the incoming government in Nigeria, it is time for a clearly articulated and well thought-out strategy for the capital market as an instrument for addressing many of its most pressing challenges.
Nigeria’s tax receipts ranks as one of the lowest in the world and urgent efforts need to be taken to address this. As businesses grow through capital markets, they generate more revenue, leading to higher tax revenues for the government. The increased tax revenues can then be used to fund public services and infrastructure, such as healthcare, education, and transportation, which further contribute to economic growth. Research has shown that markets lead to improved corporate tax compliance as listed companies are required to disclose financial information to investors. This information can be used by tax authorities to identify companies that are not paying their fair share of taxes”.
For his part, the Managing Director, Highcap Securities, David Adonri, said that 2019 was remarkable for new listings on NGX, Buhari’s administration failed to revive the primary market for equities, causing the capacity of the market to form capital for the real economy to become underutilized.
Adonri urged the incoming administration to reverse the trend by formulating capital market-friendly macroeconomic policies that will make the yield on equities higher than the yield on debt instruments.
According to him, the preponderance of taxes, levies and fees collected by the government from the capital market are already choking the sector, stressing the need for the new regime to revive its privatisation policy and list the privatised companies, including NNPC on the stock exchange.
He added that private enterprises should be compelled to list shares on the exchange to integrate the capital market further with the economy.
Conclusion
The Nigerian capital market has witnessed material innovation, improved regulatory controls and diversified investor base in recent times. These have ensured that the market has improved on transparency, efficiency and accessibility. Although many administrations have yet to fully leverage on the market, the time, however is now for a well-crafted road map to harness the untapped potentials in the Nigerian capital market.