Nige­rian growth de­pends on it trans­form­ing it­self into an in­vest­ment grade econ­omy, writes Tolu Ogun­lesi

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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



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