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Placing the Capital Market on Nigeria’s economic agenda

In a recent article by the Economist proffering “sensible ideas for reviving America’s entrepreneurial spirit” the magazine argued that the country’s growth machine was in trouble because the three most powerful pistons of the machine had been malfunctioning for over a decade. The capital market was listed as the first of these pistons along with innovation and a knowledge economy. The Economist puts the capital market as the root of America’s economic prowess saying that the “United States once boasted of the world’s most friendly capital markets”. Buttressing the importance of the capital markets, Robert Litan and Carl Schramm point out in a new book, “Better Capitalism” that the lull in America’s initial public offerings (IPOs) is down from an average of 547 a year in the 1990s to 192 since then. This IPO drought has cut the supply of new high growth companies. According to the authors, given that companies less than five years old may have provided almost all the 40m net jobs the American economy added between 1980 and the financial crisis that could represent dismal news for the unemployed.

If the capital market is this important to economic growth owing to its multiplier effects on job and wealth creation it is quite worrisome that economic planners have chosen to snub the market even to the point of derision. Policy makers who have snubbed the capital market could be pardoned for oversight especially when weighed against the pronouncements of the hawks who have boasted in public forum that they would adopt policy measures to “squeeze the equity markets”. For a country that boasts of its ambitions to be among the top 20 economies by 2020, it would remain a global marvel how this grandiose ambition can be achieved without carrying the markets along.

That is why the parley between the capital market community and the Minister of Finance (who also doubles as the Co-ordinating Minister of the Economy) which held in Lagos in July came as a welcome relief. The Nigerian equities market was heavily deflated by what started off as a price correction in March 2008 but later snowballed into a full blown market crash. Despite the bullish rally of the last three months, the benchmark index is still less than half of what it was at its peak. Some doomsday analysts even argue that owing to the losses suffered by investors (especially at the retail end) that it will take collective amnesia of a new generation to ignite interest in the equities market once again. 

The higher than expected yields in government debts even gave local institutional investors a compelling reason to shun the equities market. Despite the high yields on government debts, as long as the truism that equities offer higher returns on the long term than bonds still stands, then even institutional investors especially pension funds who think long term will still need to keep equities on the radar. This insight may have informed the keen interest of foreign portfolio investors in the Nigerian equities market. Despite the exposure of these FPIs to foreign exchange risks and double digit inflation, 80% of the total trades on the Nigerian bourse in the last year were driven by the FPIs.

When will the Nigerian companies start raising equity capital again?

We must appreciate that a capital market in its simplest of definitions is a place where the government and business enterprises can raise long-term funds. However, the current market downturn has sapped the market of capital raisingactivities especially when adjudged against the 2007 era when First Bank alone raised over N600 billion in one swoop. Capital raising by firms last year from equity offerings was roughly below N5 billion at a time companies are still in dire need of capital. Firms that seek listing on the exchange must see commercial sense behind the decision. It is not a decision that can be entirely driven by emotion. The ability of Nigerian capital market operators to serve as intermediaries steering long term funds to fill capital investment needs could just be the silver lining into the exchange.

But the Nigerian equity market is currently an inaccurate mirror of the economy

It is quite true that the Nigerian equities market is not a true representation of the broader economy. The market capitalisation of the NSE at $52.83 billion pales into insignificance for instance when it is compared to South Africa’s market value of over $600 billion. The Nigerian economy has corporations that can truly help with catching up. If press reports are anything to go by, the listing of the telecoms firms alone can add another $45 billion to the market’s value. It is baffling that with agriculture’s contributions to GDP, it only represents a minute fraction of the value of the equities market. Even at its five year peak in 2007 when agriculture contributed 42.2% to GDP, the market capitalisation of the quoted agriculture companies contributed a miserly 0.36% to the market value. That the sector has only five companies listed is even a more damning commentary.  In order to attract more interest to the capital market,  the country need to put the capital market on the economic agenda.

Government should start the process by listing state-owned companies 

Following the government’s decision to liquidate NITEL, perhaps one should ponder if this exercise would have been necessary had the firm’s shares been listed ab-initio.  Every round of sale of NITEL attracted criticisms especially on the transparency levels being adopted around the sale. When there was no transparency issues around the sales process, preferred bidders failed to muster the cash resources to execute the deal. However, with the benefit of hindsight one might wonder if NITEL would have been the contraption it is today if the government had sold off some of its stake through an offer for sale on the exchange. Our suggestion especially at this times when the government plan to privatise some of its assets is that while the government seeks for core investors, the divestment process should also include giving other Nigerians a chance to retain a portion of this commonwealth by offering minority stakes on the exchange. With this we will avoid the asset stripping that has bedevilled some of the privatised enterprises in the past.

Why it is important to list government owned corporations?

According to Hans Christiansen and Alissa Koldertsova in an OECD article on Corporate Governance, the main direct contribution of exchanges to corporate governance has been listing and disclosure standards and monitoring compliance. According to them, “stock exchanges have established themselves as promoters of corporate governance recommendations for listed companies”. It has been allegedthat Nigeria’s age old problem of cronyism and patronage affected the performance of some of the privatised entities especially since some of the new core investors were not able to deploy sufficient capital and expertise to achieve the intended turn-around effects. Listing a portion of some of the government’s shares would have helped safeguard disclosure levels and transparency standards in these entities post privatisation. And it is pertinent that the government must not follow this same path when selling its stake in the PHCN entities. The NSE must become the guardian angel of privatised entities to avoid the pitfalls of the past.

The creation of a vibrant OTC market for equities would also help

Nigeria is long overdue for an active over the counter (OTC) exchange in the mould of the American NASDAQ. This would serve as a platform for non-listed companies with a large number of shareholders to exchange their shares even without public listing. Thus firms like WAMCO and MTN will be able to expand their current OTC framework beyond registrar brokered deals. The OTC platform will also serve as an intermediary for firms that seek to test the markets prior to their full listings on the exchange in the route that Facebook adopted. Thus companies will have been able to test investors gauge for their shares and fully appreciate the impact of listing.