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Outlook for the Nigerian capital market in 2014

Regulators and operators in the Nigerian Capital market must have been busy since the last quarter of 2013 planning and strategizing for 2014.

The apex regulator of the capital market, the Securities and Exchange Commission (SEC), must have been looking at how its regulatory tools fared in 2013 and sharpening its saws for 2014. Being statutorily charged with capital market development, in addition to its regulatory role, SEC must also have taken stock of its initiatives in the last year, done an impact assessment and prepared for 2014.

Investors and potential investors must also have been busy analyzing how they fared in respect of returns and potential returns and strategizing for 2014. Their confidence in the market in 2013, will determine how they play in 2014.

As a prelude to visioning for 2014, we must take a look at the market in 2013. How was it regulated? What transpired in the primary and secondary segments of the market and what were the market infrastructure and development initiatives? These will assist in determining whether regulation, operations and initiatives of 2013 can be counted on as credible foundations for 2014. Beyond these, however, exogenous factors to the market, for example the general state of the economy, the environment for capital market regulation and operations as well as global developments will have bearing on the market in the 2014.

The budget, its early or late passage, its impact on the financial sector, alternative investment outlets, monetary and fiscal policies impacting on savings and investments, foreign and local investors’ attitudes will play crucial roles in the 2014 outlook for the Nigerian capital market

The market in 2013

The fortunes of the capital market were good in 2013, showing considerable recovery coming from 2012. The All-Share-Index (ASI) closed November at 38,920.25 points compared with the 28,028.80 for the same period in 2012. Total market capitalization closed at N18.39 trillion (with equities market capitalization of N12.45 trillion and debt at N5.94 trillion) and Exchange Traded Funds (ETF) N 0.29 billion. The market also recorded improvement of 43.21 per cent, 14.78 percent and 56.14 per cent in number of deals, volume and value of securities traded respectively in November compared with the same period in 2012. The number of listed securities, however, dropped to 254 as at November from 256 in December 2012. The Net Asset Value of the 52 regulated Collective Investment Schemes stood at N146.12 billion as at Nov. 2013.

The Nigerian bond market witnessed the first supra- national bond floated by the International Finance Cooperation (IFC) early in 2013 worth N12.0 billion while monthly domestic bond issuance programme of the Federal Government was sustained with the floatation of N823.34 billion allotted in 29 issues. Total new issues were 51 worth N951.60 billion compared with 42 worth N926.58 in the corresponding period in 2012. Equity issues thrived with 117 new issues worth N94.28 billion, Corporate Bonds 10.58 billion, Sub National Bonds N11.4 billion, Supra National Bonds N12 billion and Federal Government of Nigeria (FGN) bonds N823.34 billion.

The level of participation in the market, which favoured foreign investors at 66.8% and 61.4% in 2011 and 2012 respectively, is now skewed in favour of domestic investors (50.05%) as at September 2013. The market statistics clearly show improvement over 2012 apparently due to better regulation, better investor confidence and absence of shocks that could have traumatized the market. Will the trend continue into 2014?

According to reports from the Central Bank of Nigeria (CBN), the on-going reforms in the various sectors of the economy are yielding positive results.

In the second and third quarters of 2013, real output is said to have grown by 6.2 and 6.9 per cent respectively and projected to grow by 7.7 per cent by the end of the fourth quarter. The investment climate is said to have been conducive brought about by a predictable macro economic environment which has ensured sustained inflow of foreign capital into the economy. Aggregate foreign capital inflows stood at N7.79 billion at the end of the second quarter of 2013 compared with US 4.53 billion in the second quarter of 2012.

The reports also say that while Federal Government spending overall in 2013 has not been significantly higher than 2012, oil revenues have continued to decline in spite of relative stability in oil price and output when compared with preceding years. As a result, excess crude savings have fallen from about $11.5 billion at year end 2012 to less than $5 billion on November 14. External reserves have remained in excess of $45 billion only because of a massive inflow of portfolio funds.

Outlook for 2014    

According to Dr. Kingsley Moghalu, Deputy Governor, Financial System Stability at the Central Bank of Nigeria (CBN), following the economic performance in 2013, the Nigerian economy is expected to grow strongly in 2014 with the growth to be driven by high oil prices and robust domestic demand. He believes that the reforms targeted at various sectors of the economy will also impact the economy positively. The reforms are:

Government efforts to improve transportation network and port reform

The expected passage of the Petroleum Industry Bill (PIB)

The modernization of agriculture through improved seedling and value chain initiatives

Financial sector reform through financial inclusion

Power sector reform

The licensing of private refineries

Dr. Moghalu also expects that the development in the external sector will be favourable and concludes that the outlook for the financial sector in 2014 is bright.

Commenting on the capital market, Dr. Moghalu believes that “Nigeria will have competitive edge in the international capital market in 2014 owing to robust growth, high reserves level, stable exchange rate and clement investment climate. The interest rate differential between Nigeria and most developed countries will continue to be a source of attraction for global capital flows to Nigeria. The retention of the BB – rating for Nigeria by Fitch and Standard and Poor’s rating agencies is an indication of the conduciveness of the country as an attractive investment destination. Nigeria is also expected to remain a low-risk debtor country which is an indication of its credit worthiness”.

I believe that sufficient foundation has been laid for the capital market to thrive in 2014. The regulatory initiatives as exemplified  by new rules and regulations put in place by the SEC, the vigorous implementation and enforcement regime, new capital adequacy requirements for operators announced in December and other new regulatory initiatives by the Nigerian Stock Exchange, market regulation can be said to be responding well to the market.

The story is not quite the same with the capital market development initiatives and implementation, which, in my opinion, have been more or less ad hoc and not sustained. In 2013, the Alternative Securities Market    (ASEM) of the Stock Exchange was launched. It is really not different from what obtained in the past except for the change of name. However, it is too early to determine its impact. That will be done in 2014 and we should be looking at the number of listed companies. The National Association of Securities Dealers (NASD) Over-The-Counter (OTC) market, launched in 2013 after decades of planning, can also only be evaluated in 2014, after a year of its existence. The key to measure its impact will be how much liquidity it has brought to the market.

The year 2014 is obviously a year to watch the Nigerian capital market. With the privatization of the power sector and other reforms and initiatives it should be a good year. I cannot agree less with  Dr. Moghalu, Deputy Governor of the CBN that “ while the overall outlook for 2014 appears mixed, there is a need to sustain and consolidate current efforts to address the lingering challenges of insecurity, infrastructural deficits as well as the threats to oil production such as pipeline vandalism, crude oil theft etc.

There is also the need to give greater attention to the diversification of the Nigerian economy away from the current over-dependence on oil export in order to avoid the vagaries in the international oil market and their attendant adverse effects on the domestic economy.” And by extension, on the financial system and the capital market.

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