In this interview with Ndubuisi Francis, Nigeria’s first professor of capital market and Head of Department, Banking and Finance, Nasarawa State University, Prof. Uche Uwaleke spoke about issues in the financial market, the funding mismatch engendered by states borrowing for capital projects, and the need to diversify listing on the Nigerian Stock Exchange, among others. Excerpts:
What is your assessment of the capital market?
In the country today, when you talk about the capital market, we are looking at the two major products that happen to be shares and bonds. In the last three years, you know the market was affected by the recession. But if you look at where the market was in May 2015 when this administration came in and now, you can easily agree that we have recorded some improvement because as at May 2015, the market capitalisation which is one major indicator of market economies was around N11 trillion. On that score alone, you could say the market recorded some improvement, talking about equities segment of the market. But if you look at what has happened here in the last few months (the country was in recession in 2016), in 2017 our stock market was one of the best in the world. As a matter of fact, it was number three with a return of more than 40 per cent– next to Argentina and Turkey.
So, 2017 was a good year for the stock market and in 2018, the market was positive in January to the point that it returned 15 per cent but since February down up till now, the market hasn’t been doing too well. Yes, if you look around, some major macroeconomic indicators seem positive, you have oil prices recovering, foreign reserves, stability and exchange rates and so on, even inflation rates are coming down but in recent times from February up till now we are beginning to notice a reversal in the mood of investors, and that’s happening because of some the challenges we have in the domestic economy, one of which is the delay in the budget passage. Also, the level of insecurity in the country is scaring away investors. We also noticed that interest rate has gone up in the US, the dollar is strengthening while the interest rate is going up following Federal Reserve and normalisation policy you find that investors especially foreign investors who buy our market here are also exiting our market and taking their market to developed countries, particularly the USA.
So, it’s not only in Nigeria, many countries have been affected. With decline in foreign investment it’s also triggering the decline in domestic investment. But overall, in the last three years, I think the market has done more in terms of performance. I said that because a number of policies introduced by regulators also helped to boost confidence particularly in 2017, talking about the investors profession funds, corporate governance call card, recapitalising market operators. So, all of these combined with the stability we had in the foreign exchange market; again let us go by the CBN’s introduction of investors and exporters window, all helped to push up this market and confidence in the economy. There are still challenges in this market like I said earlier, the market is not divorced from the economy.
What do you advise policy makers to do?
We should continue to work on the economy so that the market can be positively affected. There are also specific challenges the market is facing one of which is over-concentration of companies that are listed in the stock exchange. For example, we have three major exchanges. We have the Nigerian Stock Exchange (NSE), FMDQ and others. All of these work together in strengthening the capital market. One challenge we keep having in this market is no diversification of listing. Because of the nature of this economy, we expect to see oil and gas companies, telecommunications, agriculture and so on but unfortunately that’s not the case. But I am happy that MTN has expressed interest in this and any moment from now, MTN will be listed and that will boost the capitalisation that we have in the market. Another major challenge is that the telecoms investors are still low. The participation is about two per cent and why it’s low has to do with the level of awareness about capital market importance in mobilising capital in an economy.
A lot of people don’t know about the capital market so there’s need to scale up the level of sensitisation, awareness campaign about capital market. You find that hardly the government mentions capital market. If you look at the budget, it is not talking about the capital market, the entire document of the ERGP has no word on the capital market. I was just looking at the president’s speech on democracy day like seven paragraphs no word on the capital market. Despite the fact that when the president came in, capitalisation was N11 trillion. As at now, it’s N14 trillion, that is one positive thing that could have been highlighted by the president in that speech but because his advisers have not placed premium on the capital market, that very important aspect was missing.
It was an opportunity they missed. Sometime last year in August 2017, the President of the United States, Donald Trump tweeted that the stock market return was very high in the USA and that doesn’t just happen. That tells you that Trump is already linking his policies to the success of the capital market. What that means is that he understands that capital market is a perimeter for developing the economy. It’s also the same for us here in Nigeria. Government is borrowing right now to finance the budget but we also know that if you develop this market, it can serve as a veritable platform and avenue to finance your infrastructure.
And then you now borrow less from international capital market given that this economy, if we grow it, will contribute more. If you look at South Africa for example, their capital market is about 28 per cent of its GDP because the market capitalization of equities of Johannesburg Stock
Exchange nearly $1 trillion.
For bonds, it’s nearly $100 billion but in our own case in Nigeria, our capital market to GDP ratio is less than 25 per cent. So that tells you that we still have a lot of room for capital market to grow.
In your view, what should be done to change the narrative?
We have to do a lot in respect to capital market literacy and that is why I’m happy that the Securities and Exchange Commission is championing it and trying to ensure that capital market studies is included in the curriculum of secondary schools and efforts are even made that universities come on board and begin to learn more about capital market. If we do that in the coming years, we can be sure that in terms of retail investor base, we would have achieved the critical mass that will now delink us from the apron strings of foreign investors so that even if they are not there, we can survive, given our population and resources. State governments that borrow money from banks for projects, of course, are only engaging themselves in funding mismatch and that is why you find them carrying so much debts. But when you borrow from the capital market and you put it in a long-term project that is self- liquidating, the debt burden will reduce. So, federal and state governments should be discouraged from borrowing from banks to do capital projects, this much is given in the Fiscal Responsibility Act. We should begin to think of incentives, incentivising funds to list on the Stock Exchange.
South Africa has about 400 companies listed on the Johannesburg Stock Exchange. In our own case, we have a little above 150. So, if we have more listings it’s going to help grow the capital market. Another one is physical incentives. The government can reduce maybe tax a bit or ask companies that are listed on the exchange to pay lower tax. Government should be interested in getting companies to list because that way, they will get more revenue, because the companies listed publish their accounts and make it available to government for scrutiny. But when companies don’t list, they hide and evade taxes.
So, we should continue to think of how to bring the multinationals to be listed on our Stock Exchange. That is the only way Nigerians can even benefit from the profits of these multinationals. Shell, for example, can be convinced to list on the Exchange, just a part of its share capital, not the entire thing and the government too can help this market by having some policies that encourage privatisation, recapitalisation and banking consolidation can also help this market a lot and help the banking sector. NNPC, for example government has been talking about unbundling NNPC, half of it can be listed on the Stock Exchange.
Again, one of the things we have also noticed is the election temperature. Investors too are sitting on the sidelines watching. The election fever is likely to have negative impact on this market. And unfortunately for is now, oil price has started going down because Russia and OPEC have said lets lift output. So, you find a situation where the anxiety surrounding the election are already causing tension on the dollar. So right now, there’s pressure on the dollar which is why the CBN is now coming up with some measures like asking the Bureau De Change to access forex from them at least twice a week, saying bank must sell forex to anybody. That tells you banks are already beginning to put pressure on dollar and its the election that is causing it.
There’s this tendency now to grab as much as possible and keep in the septic tank like they do and it’s affecting this market. The market has lost virtually all that it gained in January alone it gained 16 per cent but as we speak it’s just about two per cent, so all those things have been eroded and that’s because of this election and the impact is coming too early. The government needs to make it clear that’s it’s not going to sacrifice the economy because of politics. Some ministers are resigning to go and do politics, and people are already saying it will affect the face of governance. Whether you like it or not there will be debacle created, a new person brought in won’t be as efficient as the person who left because he will take time to learn the ropes, so all of this will create uncertainty in the minds of investors and this market is highly information sensitive and does not like uncertainties.
What are the likely effects of the delayed passage of the budget on the economy?
The late passage of the budget is going to necessitate rushing the implementation of the 2018 Budget and if you rush it, you are likely to inject more liquidity because you are racing against time. It’s going to distort a lot of things and exert a lot of pressure on prices. There’s also the election spending to consider. It’s going to be high; budget implementation is also there. All of this could go to also exert pressure on the foreign exchange market.
It will destabilise the stability we are already enjoying there and once you destabilise stability in the forex market, prices, inflation will go up. You find that these factors necessarily justified the Monetary Policy Committee’s (MPC) decision. Another reason where I tend to support the MPC is where the interest rates are going up in the USA and you are reducing your own. But more than this is the fact that CBN has responsibility to maintain stability not only in the price of goods but also in terms of exchange rates. If you look at the balance of risks, it is better to hold the rates. Let them become clear, let government create policy direction; until we have clarity it will be difficult for the CBN to bring down the rates. So, I think I support the CBN’s decision to hold the rates even though the high interest rate is not going well for the stock market.
