Onyema: With Transparency, Capital Controls May Address Market Imbalances


Tokunbo Adedoja and Obinna Chima in Kigali, Rwanda

Although the decision of the Central Bank of Nigeria(CBN) to hold on to capital controls as measures to limit the flow of foreign capital out of the economy has been widely criticised, the Chief Executive Officer of the Nigerian Stock Exchange (NSE), Mr. Oscar Onyema, has said the monetary policy could help address shocks and imbalances in the economy.

Onyema, who spoke in an interview with THISDAY on the sidelines of the just-concluded World Economic Forum (WEF) on Africa that took place in Kigali, Rwanda, said the policy could work for the country in the short-term, but stressed the need for transparency in the allocation of foreign exchange.

Following the drop in crude oil prices which led to a significant drop in the country’s earnings, the central bank imposed certain restrictions in its bid to preserve the nation’s foreign reserves and protect the naira. These measures include a ban on access to forex by 41 items from the official forex window and the introduction of a demand management strategy in the allocation of forex, among others, have not gone down well with a lot of investors.

But speaking to THISDAY, Onyema said: “Our view is that you cannot copy the western world fully and willingly. We have to look at the peculiarities of our own economy. Economies have been known to successfully use capital controls in the short-run to address certain imbalances and shocks in the market place or in the economy, and then transit into a medium to longer term policy that allows for controlled fluctuations in currency.

“So, our view really is that it could work in the short-term if there is transparency in the allocation of foreign exchange. There need to be transparency not just at the Central Bank of Nigeria’s level, but at the banks’ level. Not just transparency as to who has received what, but what are the rules around who gets what.

“Is it first-in, first-out? Is it last-in, first-out? Is it by pro rata? Those are the kind of transparency that international investors and even the indexers like MSCI for example, would like to see in order to continue to keep us within the index and in order to continue to consider us as a viable investment destination.”

The NSE boss, who also said he was concerned about the volume of foreign portfolio outflows from Nigeria’s financial markets as revealed in banks’ returns on forex utilisation published weekly, urged investors not to panic. He said the economy would come out from its challenges stronger.

Onyema, however disclosed that the foreign portfolio investors were moving into countries such as Egypt and Vietnam, because of the perceived higher returns in those markets.

He explained that the NSE was certainly concerned about the exit of foreign portfolio investors.

Onyema added: “A lot of these foreign portfolio investors are actually institutional money. These are monies that are tracking an African index, a global emerging market index or a frontier market index and they have investors that are expecting returns. They consider country risk; they consider opportunities in deciding where they put money. As you know, we live in a global village. So, if you are running a frontier market fund for example, Nigeria is one of many countries you can put money.

“So, what are the things that would make you put your money in Nigeria? The first thing is that you have to consider the economy of that country, you have to consider the ease of bringing in your money and taking it out, you have to consider the growth opportunities in terms of the companies you actually want to buy into, you also have to consider the limitations on your portfolio or the portfolio policy, for example, some companies would say you can’t take more than five per cent stake.

“So, these determine how you allocate money. In Nigeria, as you know, we have had commodity price shocks which have really affected the economy. This is because our economy depends quite a bit in terms of foreign revenue on crude oil. Whereas the Gross Domestic Product (GDP) is diversified, government’s revenue is really tied to crude oil. And because government plays such a big role in our economy, when the government sneezes, the economy catches cold.”

Continuing, he said: “So, the stock market is just reflecting what is happening in the economy. And so, these investors have currency risk that they feel they do not have clarity as to how that currency risk would play out. So they are rotating out of Nigeria into other countries like Egypt, Vietnam and the rest of them.

“We note that because of the way financial markets are working right now globally, you do not want to limit your market to only a domestic affair, but you certainly do not want it to be dominated by foreigners. You want a good interplay between the various types of investors in terms of foreign versus domestic; in terms of holding period – short versus long; in terms of investing philosophy – contrarian versus momentum, and the rest of them.

“All of that playing together helps to establish deep and liquid market and markets that gives investors the confidence that they can easily come in and out. So, we are concerned, we are monitoring the situation, we are talking to investors, both domestic and foreign and we have ramped up our efforts in terms of government relations to report what we are seeing and to look for new ways and solutions that would continue to make our market attractive to all investors.”

Responding to a question on efforts by the NSE to bring back retail investors to the market, Onyema advised stock market investors to develop a solid investment plan, just as he stressed the need for them to always engage professionals to guard them.

In addition, the NSE boss also advised investors to take a portfolio approach to investments and also long term view to investing.

“Stick to your plan. And over long period of time, no assets class gives you a higher return than equities. So, equities must form the foundation of your portfolio. However, you must diversify. You must have exposure in fixed income, real estate and other asset classes in order to balance the fluctuations in your portfolio.

“So, my advice to investors is that this is a great time to buy, stocks are on sale, but do not do a one-off purchase, do it as part of a portfolio and continue to monitor and build your portfolio and take a long term view. Again, use professionals,” he stressed.