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Spurring market growth through investment in infrastructure

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With almost 22 per cent losses recorded at the stock market in the last three years, exacerbated by the COVID-19 crises; there has been no respite for investors. But more worrisome is that in the near term, the outlook remains uncertain, an indication that the search for respite by stakeholders may not come sooner.

Indeed, uncertainty in the domestic and global economy, due to COVID-19 has hit hard on the equities sector of the Nigerian Stock Exchange (NSE),

Nigeria’s economy had been grappling with weak recovery from the 2014 oil price shock to the 2016 economic recession with the gross domestic product (GDP) growth tapering around 2.3 per cent in 2019.

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Last week, the International Monetary Fund (IMF) announced that the Nigerian economy would witness a deeper contraction of 5.4 per cent and not the 3.4 per cent it projected in April 2020. However, the global lender expects Nigeria’s economy to rebound by 2.6 per cent in 2021.

IMF said the forecast is influenced by the larger than expected storms to global value chains due to the coronavirus, affecting global demand for goods and services.

Regrettably, investments in infrastructure in Nigeria were merely heard, but not on the ground.

For many investors, Nigeria remains an important part of their long-term Africa portfolio strategy, and rightly so. Between 2005 and 2015, Nigeria’s economy grew by an average of 6.5% annually, driven largely by record revenue receipts from crude oil sales, which funded the country’s consumption-led growth model and propelled it to become the largest economy in Africa in 2014.

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Also, not only does Nigeria possess the continent’s largest and one of the fastest-growing domestic markets, but it also accounts for an estimated 29% of Africa’s total GDP (2016). In addition, the strong economic growth it experienced between 2005 and 2015, helped create new consumer groups with significant pent-up demand for goods and services.

However, despite Nigeria’s economic success in the last decade, strong economic growth was not followed by the required infrastructure investments and the infrastructure stocks have become inadequate to support its large population and level of activities.

As such, Nigeria is currently experiencing the effects of its overdependence on oil, and underinvestment in infrastructure, agriculture and solid mineral.

But experts at the weekend insisted that there is a nexus between infrastructure development and capital market growth.

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A Professor of Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Sheriffdeen Tella, admitted that improvement in infrastructure would stimulate capital market activities.

According to him, this would invariably lead to the expansion of businesses requiring the demand for more investments capital, which is ultimately sourced through the local bourse.

He said: “There is an indirect relationship between infrastructure and the capital market. Infrastructure, particularly power, port development and communication promote production and outputs in industry, which invariably lead to expansion of businesses requiring the need for the demand for more capital for investments and thus resort to the capital market.

“There is a need for more investments in power generation and distribution as well as communication and port development if the capital market is to grow faster. The 2020 budget has been severely affected by COVID-19 pandemic requiring adjustments, which did not really affect funds allocated to infrastructure.

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“But, infrastructure requires special intervention, which is being addressed through bond issues, a capital market instrument. Hopefully, if the returns on bonds are properly invested, we will continue to witness turnaround development in infrastructure with spill-over benefits on the capital market.”

As noted, emphasis on recurrent spending does not grow the stock market, as there is a correlation between CAPEX and stock market performance.

But CAPEX is sacrificed whenever there is a shortfall in government revenue. To narrow this gap, according to the National Integrated Infrastructure Master Plan, Nigeria needs to invest $3trillion in infrastructure over the next 30 years – $100 billion annually in other words.

This translates to a yearly investment of N36 trillion.

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Unfortunately, the entire revised FGN Budget for 2020, is a mere N10.5 trillion, a far cry, at just 29 per cent of the estimate, even if all of it goes into infrastructure.

CAPEX are funds used to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment. This type of financial outlay is also made by companies to maintain or increase the scope of their operations.

Nigeria’s infrastructure stock represents only 35 per cent of the GDP far below that of other countries, due to its inability to mobilize sufficient non-oil tax revenue.

For Company Income Tax (CIT), a major source of revenue in the Federation Account, active taxpayers represented only 5.6% of the registered taxpayers in 2016.

A Professor of Capital Market and Head of Banking and Finance Department at the Nasarawa State University, Keffi, Uche Uwaleke, at the weekend, argued that stock market tends to perform better in any year the government spends more money on CAPEX compared to when it is lower.

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He said: “This evidence has been in existence over the years. This can be explained by the fact that capital expenditure, especially on infrastructure, is an expenditure that promotes economic development. “This gives a lot of confidence to domestic and foreign investors to invest in the stock market. Also, the injection of development funds into the economy leads to improved liquidity some of which will flow into the stock market and boost performance.”

Furthermore, there has been an astronomical fall in the share price of listed firms across sectors at the Nigerian Stock Exchange (NSE) in the past five years, owing to illiquidity and low investors’ confidence triggered by the current weak macro-economic situation.

For instance, the market capitalisation, which stood at N15.691 trillion on January 26, 2017, stood at N12.862 trillion as at June 24, 2020, representing an N2.829 trillion fall or 21.9 per cent loss. Also, the All-Share Index, which opened at 43,773.76 during the same period, lost 19,118.71 points or 77.5 per cent, plummeting to 24,655.05.

This is despite impressive earnings and dividend announcements by listed companies. For instance, the tier-1 banks with an acronym- FUGAZ, which is First Bank, United Bank of Africa (UBA), Guaranty Trust Bank (GTBank), Access Bank, and Zenith Bank returned double-digit returns at the end of the 2019 and 2020 financial years.

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Therefore Uwaleke insisted that the government should ensure that the share of CAPEX in the annual budget is gradually increased, while systematically reducing recurrent spending.

He argued that “Doing so will spur the capital market, and create room for the overall development of the economy. Budget 2020 allocation to capital expenditure will boost the stock market. I think the government plans to spend more on capital expenditure especially on infrastructure this year than in 2019.

“The execution of critical projects in the power and transport sectors, in particular, has the potential of boosting investor confidence in the nation’s stock market and the economy in general.”

Partner/Chief Operating Officer, KPMG Professional, Wole Abayomi, noted that when infrastructure funds are floated through the Exchange, it deepens the market and stimulates activities at the Exchange.

However, he argued that Nigeria has a significant infrastructure deficit beyond the financial capacity of the government, blaming this for the infrastructural challenges being witnessed in the country presently.

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Abayomi insisted that the only way to bridge the gap is through public-private partnerships. “We have seen this in developed countries, such as the UK, which actually pioneered private finance initiative in the early 90s, and South Africa on our continent. There is a significant pool of private capital for infrastructure development out there, which will only come to us if we create the enabling environment to attract them.

“Locally as well, we have long term funds, such as life insurance and pension funds, which can be mobilized to fund infrastructure development. But whether global or local, the investors’ needs are the same. Therefore, he stressed the need to ensure that policy, fiscal, legal and regulatory environments are conducive for investors to stake their capital in infrastructure development.

“That is what we need to fix to give them the comfort and assurance that their capital is safe, and their ability to recover their capital and returns thereon will not be at risk. While our infrastructure deficit is a significant opportunity for private investment, private capital will remain elusive until we have the enabling policy, fiscal, legal and regulatory framework, and our political risk is reduced to the barest minimum.”

Furthermore, he suggested that the government should do more by enacting an overarching public-private-partnership fiscal, legal and regulatory framework for infrastructure development in the country.

He added: “The Presidential Executive Order (Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme Order) No. 007 of 2019, is a step in the right direction on road infrastructure.”

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