Uwaleke: Capital Market Investors Need Emotional Discipline to Overcome COVID-19

In this interview with Ndubuisi Francis, professor of capital market and a former Commissioner for Finance, Imo State, Uche Uwaleke, weighs in on the impact of COVID-19 on the Nigerian capital market, advising investors in the market to apply ‘emotional discipline’ in order to weather the storm occasioned by the pandemic. The university don and President of the Association of Capital Market Academics of Nigeria also advised states to issue COVID-19 or pandemic bonds which should be deployed to expand medical facilities and adequately prepare against any future pandemic. Excerpts:

Before we narrow down to the capital market, give us your general impression of the impact of COVID-19 on the country’s economy

The truth, my brother, is that one can never tell the full impact of COVID-19 on the economy as long as the disease continues to confound governments across the world. So, one can only hazard a guess with respect to its impact quantification. So where do I start from: is it the health sector where the number of cases is still rising, the education sector where schools have been shut, the government sector with most Ministries, Departments and Agencies under lock, the banking sector that is grappling with meeting CBN’s Reserve Requirements, the productive sector that is in intensive care unit following disruptions in supply chain and lockdowns strangling the informal sector or the stock market that has bled from all sides since the outbreak of the pandemic? Indeed, it’s been a tale of woes. You must have read that the IMF has already projected that the Nigerian economy will tank this year by as much as 3.4 per cent worse than global average of 3 per cent.

At the macro level, COVID-19 is partly to blame for the sharp drop in crude oil price, the other culprit being the price war between Russia and Saudi Arabia. This has led to depletion of external reserves thereby weakening the ability of the central bank to defend the value of the naira. On this score, the recent upward adjustment of the exchange rate readily comes to mind. It has also resulted in a drop in statutory allocations from federation account to the three tiers. In response, the government has scaled down the 2020 budget slashing the benchmark for crude oil prices from 57 dollars per barrel to first 30 dollars per barrel and now again $20 dollars per barrel as well as production volume consistent with OPEC production cut agreement. The consequence is a reduction in spending plan likely to affect the execution of critical capital projects. The twin shock is that the pandemic is also increasing spending in an unprecedented way capable of widening the country’s fiscal deficit and raising the public debt burden.

Sub national governments will be worst-hit since they depend so much on federation account allocation. Even the VAT revenue from which states and local governments get 85 per cent of collectible revenue will shrink due to reduced consumption from lockdowns in Lagos and Abuja, the country’s economic powerhouse and major sources of VAT. The internally generated revenue of most states will plummet due to movement restrictions constraining the activities of the ubiquitous informal sector. So, in many ways, the tragedy of our situation is that as the epicentre of the disease gradually shifts from Lagos to Kano and other big cities in Nigeria, the human and economic costs will keep mounting leaving in its wake rising unemployment and inflation rates.

How would you rate the government’s intervention so far?

I would score a pass mark thus far especially in the context of what the federal government and the Central Bank have announced. Worthy to mention here is the establishment of a N500billion COVID-19 Crisis Intervention Fund to be used for the expansion of healthcare facilities at the national and state-level as well as provide intervention for states. Also is the expansion of the conditional cash transfer scheme as well as moratorium on government loan schemes such as TraderMoni, FarmerMoni, MarketMoni and on all federal government-funded loans issued by the Bank of Industry, Bank of Agriculture and the NEXIM Bank. I am also told there is waiver of import duty on medical equipment for the treatment of the disease. I am particularly pleased with the plan to suspend deductions from FAAC allocations to States in relation to federal government/CBN loans to States including taking money from the stabilization account component of the Sovereign Wealth Fund to augment allocation to States and Local governments when the situation becomes very critical.

As a supplement, the CBN’s response has been quite remarkable. Even before the federal government unveiled any stimulus package, the apex bank had announced a reduction of interest rates on all applicable CBN interventions from 9 per cent to 5 per cent and a N3.5 trillion stimulus package to support the health and real sectors. This is in addition to the creation of N50 billion targeted credit facility through NIRSAL Microfinance Bank for households and MSMEs. So, I think the interventions so far are commendable although a lot more can still be accomplished.

When you said a lot more can still be accomplished, are there other areas you would like to see the government wade in?

Of course, everybody knows the major challenge will be how well these stimulus packages are implemented considering the huge population that live below the poverty line and the absence of reliable data on households and micro and small businesses in Nigeria. So, I would like to see a closer collaboration and coordination of efforts in this regard. Since state governments receive the bulk of VAT revenue, the federal government should get them to agree to postpone the implementation of VAT increase without prejudice to the generous exemptions contained in the 2019 Finance Act. I also think that the National Assembly should be carried along and some of the interventions should be backed by law. The spending plan is likely to widen the budget deficit outside the bounds set in the Fiscal Responsibility Act of 2007. There may be the need therefore to lift the cap of 3 per cent of GDP with respect to deficit financing for at least a period of 3 years.

Perhaps more than ever before, the government/CBN should ramp up its support to farmers with input loans to minimize the negative impact of the pandemic on food production and by extension the commodity trading ecosystem.

Now to the capital market, how has this pandemic impacted the market both on a global and national scale?

It goes without saying that the pandemic has devastated many economies of the world. Uncertainty fills the air and capital markets have reflected this uncertainty, dampening investors’ sentiments and leaving in its wake steep declines in asset values. Global capital markets are currently in a bear territory. In the US for example, the Year-to-Date returns using the major indicators namely Dow Jones, NASDAQ and S&P have been negative. Ditto for Europe where stock indexes such as the London FTSE, Germany DAX and France CAC are in the red for the most part of this year. Asian counterparts such as Japan Nikkei and China Shanghai index have suffered similar fate. The major Exchanges in Africa notably South Africa, Nigeria, Egypt, Morocco and Kenya are not spared the onslaught. What more evidence does one need?

Back home in Nigeria where the NSE All Share Index has recorded over 10 percent YTD loss as of May 4, the pandemic is taking a toll on the pace of implementing the 10-year capital market master plan which the SEC has been faithfully driving. It is causing a delay in the stock exchange demutualization process already at advanced stage and the introduction of Derivatives products such as index futures which rules, I understand, have already been exposed to the market.

I have read that in response to COVID-19, Italy and South Korea have banned short-selling which is the act of selling an asset that one does not currently own, in the hope that it will drop in value and then one can close the trade for a profit. In addition to banning short-selling, Indonesia has also put in place circuit breakers which are regulatory measures to temporarily halt trading on an exchange. On its part, China has eased rules for borrowers that use corporate stock as collateral effectively loosening margin requirements while in many jurisdictions, the deadline for submitting financial statements and holding AGM has been extended. These are some of the measures market regulators have taken to minimise the impact of the disruption.

Talking about market regulation, what do you make of the response by capital market regulators in Nigeria?

I think they have been quite proactive and consistent with the guidance provided by International Organisation of Securities Commissions and International Federation of Exchanges to maintain the integrity of our market. For example, I am aware that the apex regulatory body, SEC, as part of its COVID-19 response efforts adopted an electronic filing approach for capital market operators and stakeholders and also approved a sixty-day extension for public companies and capital market operators to file their 2019 annual reports and their first quarter 2020 reports. I am also privy to the fact that the Nigerian Stock Exchange activated its business continuity plan by providing remote trading access for Dealing Member Firms which has ensured continued trading during normal hours, a development that could encourage direct transactions by investors which will be positive for the market. Further, it is in the public domain that the SEC is currently coordinating the capital market community’s effort to raise the sum of N1 billion to help mitigate the medical and economic impact of the pandemic on the vulnerable and the less privileged. This is highly commendable.

As a former finance commissioner, how should state governments be responding to the funding and economic challenge posed by this pandemic?

The first challenge is to come up with a realistic 2020 budget against the backdrop of the present economic headwinds. This will entail a lot of cost-cutting measures and prioritization of spending. So, I would advise State governments yet to introduce the Treasury Single Account System to do so and those already operating it to refine it in line with the CBN guidelines. I am aware that this is not the case in many States and sticking to the CBN guidelines on TSA implementation will help plug revenue leakages. By the same token, this is the time to set up an Efficiency Unit in the State if none already exists to curb bloated overheads expenses especially cost of travel, stationery and computer consumables. The need for an efficient procurement system now to ensure value for money and due process with respect to contract awards cannot be overstressed.

In order to reduce financial burden, the size of government should be trimmed and where practicable through rationalization of Ministries, Departments and Agencies. Genuine effort should be made to reduce the number of political aides who should be encouraged to engage in more productive activity. While doing these, priority should be accorded to timely payment of salaries and pensions in order not to stifle aggregate demand and drag the economy of the State into a recession. But first, the state should clean up its payroll by ensuring that all ghost workers are taking out often through a staff biometric exercise.

Turning to the overarching issue of shoring up revenue, effort should be made to widen the tax net leveraging technology. The starting point is to have a data base of tax payers in the state. This won’t be easy though due to the large number of people in the informal sector. So, the challenge is to formalize the sector including through organizing them into business clusters. The introduction of a Central Billing System will go a long way to properly structure revenue collection in any State. The State Internal Revenue Service should be adequately staffed and provided with the necessary tools including internet facilities and vehicles to carry out enforcement and then challenged to deliver on revenue targets. To this end, the sensitization of citizens on the benefits of paying taxes is crucial. It bears repeating that to curb revenue leakage, the state should deploy the right technology to eliminate person-to- government and government-to-person cash transactions. As much as possible, government Receipts and Payments should go through the banks. It also makes for accountability. I suggest that where the state does not maintain a TSA with the CBN, then the Commercial Bank having this account should be convinced to sponsor the IT-based IGR improvement initiatives knowing full well that it will also profit from it ultimately.

For any State government, every kobo counts during this period. Consequently, it should ensure the recovery of any outstanding back duty tax payments especially with respect to Personal Income Tax of staff of federal government agencies located in the state as well as outstanding ground rents of defunct federal government establishments such as NEPA and NITEL. I know that a state government can also rake-in some money by engaging reputable consultants to carry out a forensic audit of government bank accounts with a view to identifying excess/illegal bank charges.

Sometimes I wonder why a State would not take advantage of ‘readily available funds’ such as the ones meant for Universal Basic Education and even the TETfund for State-owned Tertiary institutions when all that is required especially in the case of the former is to provide counterpart funds. Ditto for World Bank funded projects in States such as the RAMP and the NEWMAP. Accessing these will enable the State government free up funds for other critical projects. A number of commercial banks are usually willing to provide these counterpart funds. My opinion is that decisions with respect to nominating a commercial bank and negotiating interest rates should be handled at the level of the State’s Economic team and not left entirely to a single government official.

Then there is the raft of concessional facilities by the CBN for agriculture and SMEs. These include the CAC, AADS and the Anchor Borrower Scheme that come at single digit interest rate. The State government can get one of the Deposit Money Banks to advise on this and facilitate access provided adequate measures have been put in place to ensure they facilities are utilized for purposes meant, create jobs and enhance economic growth of the State with strong prospects for increased IGR. State governments can equally attract some of the CBN COVID-19 interventions funds especially for the health sector or through eligible households and businesses residing/operating in the State. They must also not miss the opportunity provided by the regulatory forbearance to banks by the CBN to review terms and conditions of existing debts. To this end, the State Exco can constitute an inter-Ministerial committee comprising Commissioners for Finance, Budget and Economic Planning, Health, Agriculture and Commerce & Industry that will follow up on all CBN and federal government COVID’19 interventions.

I am aware of some off-shore funding sources chiefly in the form of grants to support agriculture and clean environment that State governments can leverage at this time. An example is the Kuwait Fund. I would advise Commissioners for Finance to have a desk officer in the ministry whose responsibility would be to continuously scan the global environment for sources of concessional facilities and grants that the state can leverage upon.

I am equally aware of an annual grant amounting to 18 million US dollars to be picked up by any state that meets the not-too stringent conditions of the World Bank SFTAS programme. These should represent a low-hanging fruit for state governments. Part of this grant was distributed to 24 eligible states recently with respect to 2018 financial year. As a matter of fact, a number of States that have been faithfully implementing the Federal Government’s Fiscal Sustainable proposals for Sub nationals as well the World Bank’s State Fiscal Transparency and Accountability for Sustainability (SFTAS) programme should have some room for long term borrowing. These states can approach the Stock Exchange with a view to issuing COVID-19 or pandemic bonds that should be deployed to expand medical facilities and adequately prepare against any future pandemic. This also puts the state in good stead for a public private partnership arrangement that can boost medical tourism in the State including establishing a world class medical city. In this regard, the Securities and Exchange Commission may consider relaxing some of the conditions to enable interested states do so.

Considering the huge loss in asset value since the outbreak of the pandemic, what is your advice to investors in the Nigerian capital market?

I am happy you used the word investors and not speculators. For investors, this is not the time to exhibit any panic behaviour. To quote the celebrated Warren Buffett, the investor is expected to ‘supply emotional discipline’ when confronted with a bear market. Part of this discipline should be to take time and identify companies with good fundamentals and sound management preferably those that have long records of dividend payments. A wise investor should bear in mind that diversification is an established tenet of conservative investment. In pursuit of undervalued or what you may call bargain securities, the investor should seek expert advice with a view to determining the margin of safety which is essential to the choice of preferred securities. And let me make this important point: considering that Ponzi schemes tend to thrive during periods of economic hardship, as many studies have shown, investors should not fall prey to the fraudulent antics of their promoters. I am happy that the SEC is on top of this and is creating the necessary public awareness.

Having said that, I am optimistic the market will rebound once the virus is dealt with. I am anxious to witness the return of ‘animal spirits’ to borrow the eternal words of John Keynes. Just as Benjamin Graham noted in his classic titled ‘The Intelligent Investor’, ‘’this too shall pass’’ While we await this glorious dawn, lets continue to observe all standard recommendations to stay free from the novel coronavirus.

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