Onyema : Nigeria Will Come Out Stronger from Economic Downturn



The Chief Executive Officer of the Nigerian Stock Exchange, Mr. Oscar Onyema, in this interview with Tokunbo Adedoja and Obinna Chima at the just concluded World Economic Forum on Africa in Kigali, Rwanda, expressed optimism that despite the challenges of the Nigerian economy, the nation will come out stronger. Onyema also spoke on other issues affecting the market. Excerpts:

If you follow the weekly reports on returns on forex utilisation  by banks, you will observe the huge amount of capital outflows by foreign portfolio investors every week, as the head of the NSE, are you not concerned about this trend?

We certainly are concerned, but we also understand the reasons for the outflows. In order to understand that, you have to understand the reasons for the inflows in the first place; a lot of these foreign portfolio investors are actually institutional money. These are monies that are tracking either 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 prices 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. 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. So, we need to realise that we are competing in global setting and we have to make our economy attractive to investors, both domestic and international. 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, 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.

In specific terms, what measures do you think should be put in place to halt these capital outflows and possibly attract new investors into the market?

I think it is important to understand that the government is taking a much broader macro view and so, understanding the economic blueprint of the government in the short to medium term is very important. It needs to be well articulated and highly disseminated so that everyone can understand the sound box we are playing. Once that happens, fiscal and monetary policies would find their level within that box. And once that happens, investors would be able to make investment decisions within that box. I think that, that is the way to go. This is because markets do not like uncertainty. So, when you have that level of certainty and consistency with regards to policy, people can then adjust for currency risk and other kinds of risks and make investments. That would also help to ginger economic activities, especially now that we have clarity around the budget

In this case, what role is the country’s present monetary policy stance playing?

Well, that is a difficult question for me to answer.

We asked that question because you spoke earlier about currency risk being one of the factors responsible for the exit by portfolio investors?

I mean the feedback we are getting from investors is that they do not like capital controls and that they do not like a fixed exchange rate regime. Having said that, 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 used 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 needs to be transparency not just at the Central Bank of Nigeria’s (CBN’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.

Can you take us through the implication of the MSCI’s latest decision on Nigeria?

Really, their initial concern was the ease at which you can bring in money and take out money from a forex perspective for an investor, and whether investors are still able to replicate the index in their portfolio allocations. They started a consultation process and we engaged very actively with them to explain what was going on. We got very good support from the Central Bank of Nigeria in explaining what was going on and measures that the central bank is taking to ease the flows of forex in and out of the economy. They (MSCI) has two milestones: The first one was that they just completed a re-balancing and in their consultation what they wanted to know was if the Nigerian companies that make up the MSCI Frontier market index should be rebalanced or should they be held static. So, they made the decision to hold them static and continue to watch. The second milestone was in country constitution: So, which countries should be in the index? So, we continue to engage with them and we can help to address all open issues and we will put them in front of policy makers and we can talk directly to investors that are tracking these indexes. As you know, the central bank and the government are doing a lot of work around currency swap, a lot of work in trying to make it clear that they are trying to address the supply and demand side of forex. The demand side from an import-substitution perspective, from controls as to what you can buy using the official rate. Then on the supply side, they are doing swap to bring in dollars. So, providing more clarity around that is something we are trying to do so that these indexers, because it is not just the MSCI, there are quite a lot of indexers that are also considering the position of Nigeria such as Standard & Poor’s, would understand the issues. So, we think engagement is very important, communication with clarity is also important. We also believe that given the level of clarity to address the supply and demand side, that by the June reconstitution, we shall continue to have Nigeria on the index.

You were recently re-appointed as the CEO of the NSE, what have you set out to achieve in your second tenure?

Well, we have done a lot of work to try to execute the transformational strategy for the first five years and now we have transitioned into a growth strategy that will increase our footprint across Africa and position us to be a viable listing destination for companies that are doing business across the continent. We believe that our fortunes are highly tied to the fortunes of Nigeria. We are a great believer in Nigeria and we hope we can do a better job of reflecting the Nigerian economy in our market. So, bringing in companies from oil and gas, telecoms, from the utility space, power companies for example, water and the rest of them. So, doing a lot of these things helps to create a foundation and listing is the foundation, from which we can then create products, indices, Exchange Traded Funds, support corporate bonds and as you know we are also working on derivatives,  and the rest of them. So, in the next five years, we want to continue to deepen and broaden our product offerings, we want to complete our demutualisation  process that gives us the flexibility to do other kinds of transactions such as mergers and acquisitions, to unlock liquidity for our members and to allow us to drive a more aggressive growth agenda and also to facilitate better corporate governance and the rest of them. So, derivatives, demutualisation, more products in terms of more listings, more liquidity are a few of the things we want to do. In the context of demutualisation, getting regulation at a place where we minimise conflict of interest is also something we like to accomplish. So, if I am able to accomplish these things with my team, with guidance from my board, I will be very happy towards the end of this tenure. Obviously, sustainability, proper succession planning are things we think are very important. So, grooming the next generation of leaders is something we are also focused on.


Companies have started releasing their results and we observed a southward slope in terms of their profits. Is this an indication of a larger problem in the economy and what is the outlook like?

You know companies do not operate in vacuum, they operate within an economy. The economy has high linkage with the companies. So, the companies that have reported are reflecting the slow down in the economy and we believe that with the signing of the budget, if the government is able to implement the budget, it would unlock so many other areas because it would have a multiplier effect. Regardless, we are just going through a cycle, we have gone through this before and we would come out of it stronger. The question is how long is the slowdown going to last? That is not entirely outside of our country if we make the right decisions, if we implement those decisions, we could shorten the down cycle and you will see it reflected in the numbers of these companies. That is from a macro view. In a rising tide, all the boats would go up. So, from a company-to-company specific, it still goes down to the ability of the management to execute their strategy. That is where you begin to see emergence between winners and losers in particular industries. So, I cannot speak on a company-to-company specific basis, but from a macro perspective, in a low tide, all the ships would come down and in a high tide, everybody goes up. Now, the people that would go up more, depends on the execution of strategy from the management.

Can we have an update on the demutualisation of the NSE?

As you know, the Securities and Exchange Commission released rules which created a framework for demutualisation about two years ago. So, what we are doing is following that path to execute on our demutualisation. We started out by going through a process to select our financial, legal and tax advisers and we have created a project plan which we are now executing. We are engaging with all of our stakeholders, our members and regulators, and the rest of them. We are on track. We would be doing a few things in the public domain in the next few weeks to close our register and to begin to execute the demutualisation plan. We have done quote a lot of work and I can assure you that it is taking a lot of my time because this is one of the projects we said we want to deliver.

What measures are you putting in place to once more attract retail investors back to the stock market?

Well I believe that a lot of retail investors got their finders burnt in 2008 during that market down turn abc have not fully recovered. That was their first major experience with regards to a significant market downturn. Having said that, you will notice that by 2014, we had recovered a lot of those losses and the index got to about 44,000 before this next round of market downturn. So, markets go up and come down, it is a cycle. Investors have this mantra: Buy low, sell high. But in reality, they buy high and sell low because of panic. My advice to investors us for them to develop a solid investment plan. If you are going to do that type of thing, you need a professional to guard you. Take a portfolio approach to investments and take a 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 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.