Financial Mail - Investors Monthly
THE NIGERIAN BET
Nigerian growth depends on it transforming itself into an investment grade economy, writes Tolu Ogunlesi
But it has to be a long-term play
Starting in July last year, the Nigerian Stock Exchange’s All Share Index (ASI) started to plummet, bashed by falling oil prices and a weakening naira. By the beginning of this year it had hit its lowest level in two years.
It ended January as the worst performing of almost a hundred indices tracked by Bloomberg. The pattern continued for much of the quarter, with Financial Derivatives Ltd, a Lagos-based investment advisory labeling it “a quarter of volatility”.
But in the days leading to and after the recent election, the markets seemed to have heaved a sigh of relief. A 10-day rally — six days before March 28 and four days afterwards — was the longest in two and half years; significant enough to reverse the losses of the last few months.
Foreign investors nervously watching the unpredictable ebb-and-flow might do well to pay attention to people like Aliko Dangote, Africa’s richest man, whose four listed companies — dealing in cement, sugar, salt and flour — account for about a quarter of the NSE’s market capitalisation.
Dangote is qualified to make pronouncements on the market, having been the biggest loser. His personal fortune has dropped from $25bn in March 2014 to $18bn today, as tracked by Forbes. (The share price of Dangote Cement, listed in 2010, has dropped from 250 naira in July 2014 to 150 naira just before the rescheduled March 28 presidential election).
He is unfazed. “If it is a race, I can assure you I will come back stronger. We have had a hard time for now, but the fundamentals of the business are there,” he recently told the Financial Times.
That optimism is shared by Jonathan Berman, CEO of JE Berman Associates, an investment and advisory firm. “No one I know wins in Nigeria betting only on the short term. If that's your play, I'd say take your money off the table. Five, 10 and 15 years from now, a well-crafted investment in Nigeria will be a good bet.”
But that long-term play needs a foundation of efficient regulation, transparency and institutional stability, says Ayoleke Adu, CEO of Morgan Capital, a Lagos-based securities firm.
“For Nigeria to attract long-term foreign investors, like pension funds, it has to transform into an investment grade economy. It cannot be an investment grade economy unless there are strong [regulatory] institutions, and the economy diversifies away from oil.”
This is where the newly-elected Muhammadu Buhari administration again
Reforms have not panned out as planned, and there is already evidence that the borrowers are struggling to service their loans
comes in. “In terms of economic policy, we didn’t get much debate on the election stump,” said Ayo Salami, chief investment officer of the Duet Africa Fund. Weeks after the election, not much has changed in the government’s policy direction, and investors are still trying to guess what the months ahead might hold.
Meanwhile attention will continue to be focused on the market’s historically dominant banking sub-sector. The banking index was the NSE’s worst performing in 2014. It has been a difficult year for the banks, with the Central Bank of Nigeria tightening liquidity controls. Since 2013 the Bank raised the cash reserve ratio — the portion of total deposits which banks are mandated to deposit with the Central Bank — for private and public sector funds, and also reduced the commission that banks are able to charge on customer transactions.
And then there is the exposure of the banking industry to the power sector: more than half of the debt that went into the purchase of privatised state-owned generation and distribution companies came from local banks. At the time the move was hailed, as it suggested that Nigerian banks were now able to play on terrains once monopolised by foreign lenders. But the reforms have not panned out as planned, and there is already evidence that the borrowers are struggling to service their loans. Exposure to oil and gas companies, especially the increasingly ambitious indigenous players, is also cause for concern against the backdrop of low oil prices.
If this continues unchecked, there is the risk of a banking crisis similar to the one in 2008-09 which led to a $6bn bailout and the creation of the Asset Management Company of Nigeria to absorb more than 12,000 non-performing loans at a cost of about $35bn.
Those concerns aside, in February, Fitch, the ratings agency, upheld its “stable” rating for 10 Nigerian lenders — Zenith, First Bank, UBA, GTBank, Access, Diamond, Fidelity, Union and FCMB — conditioned upon the “ability or willingness of the Nigerian authorities to provide support”.
There is the possibility of a change in the leadership of the Securities and Exchange Commission, the government agency that regulates the exchange. An acting chief executive has been in place in the Securities and Exchange Commission since January, when Arunma Oteh’s five-year term came to an end. In March then-president Goodluck Jonathan said a substantive CEO would be appointed in April. With him now in the process of handing over, it is unclear whether that appointment will be on the things he will defer to his successor.
Oscar Onyema, CEO of the Nigerian Stock Exchange, still has two years left of his tenure. Under his watch the exchange has pursued a series of reforms, focusing on expanding access to the markets, improving transparency, and upgrading trading platforms. In 2013 the bourse launched a new trading platform, the “X-gen”. It also launched an Alternative Securities Market to allow SMEs raise inexpensive long-term funding from the market under conditions less onerous than required by an IPO.
But the recent slump has forced him to abandon dreams of creating a $1-trillion market by next year. (The equities market is currently valued at about $60bn). In the meantime he is focused on ending the IPO drought that has afflicted the market since the 2008 meltdown.
Analysts say the incoming government should push for new rules that compel companies operating in the biggest sectors of the economy — telecoms, oil and gas and power — to list on the stock market. Multibillion-dollar companies like MTN (for whom Nigeria is its biggest market, accounting for close to a third of global revenues) and Chevron are not listed on the market, depriving Nigeria of billions of dollars in investable value.
Morgan Capital’s Adu recalls the time, a little over a decade ago, when Chevron made its landmark find in the Agbami field. The US-listed company’s share price soared, but there were no benefits to be had in Nigeria, where it only pays salaries, royalties and taxes, not dividends. “The benefits of listing are huge,” says Adu. “If you have companies like MTN listed they will attract a lot of inflows, boosting foreign exchange, and strengthening the naira.”
No doubt the months ahead will be full of activity, as President Buhari races against time to prove that he means business. There will be new appointments (apart from a cabinet, hundreds of federal positions will be filled, including a presidential economic management team), a possible budget revision, and a slew of probes and anti-corruption measures. The equities market will retain its sensitivity to these moves, manifesting in the sort of “logic-defying” market swings seen in recent weeks.
Adu remains cautiously optimistic. “The [equities] market will go up in the short, medium and long-term,” he says — if the incoming government fulfills its promise to bring transparency to government business. If that happens, instead of the dismal 2014 performance, investors can look forward to the 2013 scenario, when a growth of 40% earned it a place on a list of the top 10 performing markets in the world.
No doubt the months ahead will be full of activity, as President Buhari races against time to prove that he means business