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Investment in stocks growing despite economic challenges, says NSE president

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Council President of the Nigerian Stock Exchange (NSE), Abimbola Ogunbanjo

In this chat with The Guardian’s News Editor MARCEL MBAMALU, Council President of the Nigerian Stock Exchange (NSE), Abimbola Ogunbanjo, speaks on a wide range of economic issues, including the fiscal and monetary policies of government as catalysts for growth. He submits that local investments show signs of growth, even in the face of harsh economic realities and concludes that things are looking up for the Nigerian bourse, especially with the new listings from MTN and Airtel.

What is your take on IMF’s position that Nigeria should remove subsidy and review the nation’s tax policies to grow non-oil revenue?
Fuel subsidy removal has long been a subject of extensive debate among citizens and policymakers. I perceive that it remains a very sensitive topic among Nigerians. As a form of economic intervention, fuel subsidy benefits the society since its provision is expected to raise the standard of living of households through lower input costs, as fuel serves as an input to the production of many goods and services. However, in my view, it is inherently contrary to market demand. The provision of fuel subsidy equals fiscal waste as huge amount of monies that could have been used to fund health, education, agriculture, and infrastructure development are being dissipated on fuel subsidy.

I would favour total but gradual removal of fuel subsidy, as it ultimately will be in the best interest of Nigerians and Nigeria’s economy. Although fuel subsidy removal is warranted, we must bear in mind that subsidy rationalization policy is a risky proposition since the resulting higher fuel price is expected to raise the prices of other goods and services, thereby eroding the purchasing power of many households.

As such, the Government must put in place transitional measures to cushion the effect of its potential removal as well as resuscitate local refineries and encourage more entrepreneurs to establish refineries like Dangote is doing. This subsidy removal model has already been successfully implemented in Egypt and Libya; two oil-producing African countries that instituted similar palliatives to reduce the immediate adverse effect of subsidy removal on their economy.

With respect to the nation’s tax policies, I agree that Nigeria needs tax reforms to impact government revenues but this should be targeted more at broadening the tax base and compliance, not hiking tax rates in a way that stifles growth. Some empirical evidence shows that publicly quoted companies have better governance structures and are more tax compliant and in my opinion should be excused from further tax impositions than already exist. Introducing policy reforms that support a thriving capital market is also relevant to this discourse. Investors will benefit from growth in non-oil sectors and NSE is poised to help non-oil sector firms raise capital to upscale operations and become globally competitive brands.

In what ways would you say that CBN’s 50 basis points drop in MPR impacts the stock market?
In theory, lower interest rates should lead to higher profitability for companies and greater prospects for future earnings. As such, the natural reaction to interest rate cuts would be to see the equities market react positively but unfortunately, this has not been the case in Nigeria. The drag on economic growth and the urgent need for better policies and economic reforms remains a more critical factor.

The rate at which companies delist from the market is becoming worrisome: First Aluminium just declared interest to delist, alluding to the fact that the company’s share price does not reflect its fundamentals due to lack of liquidity. What is the Exchange doing to deepen the market and forestall further delisting?

As a sustainable Exchange, we are committed to providing businesses an adaptable platform to raise capital and grow their companies. The National Council of The Exchange has expanded the approval powers of the Executive Management team to ~70% of all application types, reducing the turnaround time to 5 working days. The goal is to reduce the time and cost of issuances without jeopardizing prudential guidelines.

As part of our listings and retention efforts, we launched the Premium Board in 2015 to showcase deserving companies who have met the highest requirements on liquidity, corporate governance, and sustainability. This board offers issuers the benefits of greater visibility and opportunities to attract liquidity from impact investors, ESG funds and Sovereign Wealth Funds. Interest in the Premium Board from issuers and investors remains high. There are currently 8 companies listed on the Premium Board and the Premium Board Index continues to outperform the All Share Index (ASI), with a 3.86% return as at September 9, 2019; compared to -13.81% return for the ASI.

In addition, The Exchange launched its Corporate Governance Index (CG Index) to provide investors with additional data points, showcase African champions on the world stage and strengthen listed companies by tracking their corporate governance practices. Also, we are developing a co-branded index series with MSCI – a globally recognized index service provider. This index could potentially generate higher-order flow into our market as it showcases the index constituents on a respected, global platform with trusted index methodology. Issuers could leverage on this initiative to attract sustainable funding for their growth objectives.

The exchange plans to introduce a growth board that would cater to a different category of companies. According to the World Bank, SMEs provide at least 45% of the jobs and 33% of the GDP in emerging economies alone. The ASeM board (currently being upgraded to a Growth Board) caters for SMEs, irrespective of their current stage in the growth cycle, to attract investors by adhering to sound corporate governance principles and financial disclosure requirements.

The NSE is continuously seeking to encourage policies and legislation that will create a compelling business environment for companies to use the capital market and increase the appeal of market-based finance to various classes of issuers. Taking feedback from engagement with CEO’s of listed entities and Issuing Houses, the NSE periodically engages with policymakers under the auspices of the Capital Market Master plan Implementation Committee (CAMMIC) to press for tax incentives as well as other competitive benefits for listed companies that will ultimately result in the Government generating more tax revenues.

In as much as the capital market would like to attract as many companies as possible, the decision to be listed rests with the individual companies. All we do is to encourage companies and let them see the benefits of being listed. At the Exchange, we have enhanced our rules to ensure that firms behave in an orderly manner, especially companies that desire to delist voluntarily.

There has been an unprecedented lull in the market since 2018, and then this talk about MTN and Aitel listing on the NSE. What really is the update in terms of those new listings?
As you are aware, MTN recently listed its shares on The NSE Premium Board. This listing opened up the Telecommunications Services sector under the ICT Industry categorisation at The Exchange and was quickly followed by the listing of Airtel Africa Plc.

Whilst these listings have made a significant addition to the total market capitalization, it is proof of the strategic efforts being made by The Exchange to retool itself in many ways to remain an attractive destination for issuers. To this end, we will continue to deploy cutting edge technology for trading and leverage artificial intelligence to reduce market infractions through improved market monitoring and surveillance in a bid to ensure we have a responsive market.

It would appear that many issuers have more interest in debt capital than inequities; what do you see as a reason for this growing attraction to raising debt capital?
The perception that many issuers now have more interest in debt capital than equities might be a misconception, especially with considerable evidence that the Debt Capital Market is largely dominated by sovereign issues which accounts for about 92% of the entire Nigerian Debt Capital Market. The reality is that continuous issuance and high sovereign debt yields are crowding corporate issuers from the market.

Furthermore, there has been a paradigm shift due to the cumulative effect of the uncertainty that surrounded the 2019 general elections, the delay in the appointment of cabinet ministers, the rising insecurity in the country, falling oil prices and the attendant outflow of foreign investments which has impacted market valuations despite strong fundamentals of listed companies. Corporate issuers have now become more risk-sensitive due to the vagueness in the long-term outlook of the economy; increasing short-term working capital raised from the money market through the issuance of commercial papers.

Also, when compared with Equities Capital raise, documentation, regulatory and corporate governance requirements are lower for debt capital raises and this may prove to be more attractive to some issuers.

The Exchange is working assiduously to ensure that we can cater to all the different Issuer types that are currently playing or looking to enter the Nigerian market as well as create a market and solutions that help Government achieve its fiscal responsibilities as well as foster economic growth. We are working on a number of initiatives which we believe will further deepen the debt capital market and promote financial inclusion in Nigeria and are constantly engaging stakeholders such as SEC, DMO and CBN who play significant roles in the debt market.

We also recognize the importance of promoting an enabling environment for issuers and are consistently engaging policymakers to achieve a more favorable policy regime for the capital market. We have seen MPR drop from 14 to 13.5 in March 2019 but we believe more can be done to create a conducive interest environment that fosters economic growth especially for SMEs. We applaud the CBN’s effort in addressing concerns with Fx controls with the introduction of the I&E FX window but a lot more needs to be done from a monetary policy perspective in achieving a stable and favorable interest rate environment.

The Exchange has facilitated the introduction of innovative solutions such as green bonds, savings bonds, Sukuk, and ETFs; attesting to our goal of positioning us as a multi-asset exchange hub to drive economic transformation.

There is this belief that undue dependence on foreign investments has caused apathy. How do you intend to make the market less dependent on foreign ‘influencers’?
The NSE measures success by the size and prosperity of our community of issuers, investors and intermediaries in Nigeria, Africa and the world over. The significant level of foreign investment in our market is a positive indicator of the competitiveness of our market and the attractiveness of our listed companies. Markets all over the world are striving to bring down borders to capital-raising and attract global flows. Just this week, China eliminated decades-old foreign investment limits, in order to boost international participation in its equities and debt markets. While the globalization of markets does have some risks, limiting foreign investor participation would not be in the best interest of listed companies, investors or the wider capital market.

While financial openness and entrance of foreign portfolio investors have fostered significant growth in frontier/emerging markets, capital markets still need domestic demand and supply sides to foster growth. As we seek to continue to attract global flows, growth of the domestic investor base is a key priority for the NSE. We are committed to increasing our impact and ability to create durable wealth for the Nigerian populace, and firmly believe that a vibrant retail investor base is key to the resilience of our market. We are engaging with domestic institutional buy-side, regulators and other stakeholders to ensure regulations around the investment of pension funds, insurance and even the development of fund management industry help drive local participation.

I strongly believe that the National Pension Commission should encourage Pension Fund Administrators to increase their holdings in the capital market as I believe that a sustained liquidity injection by PFAs would rekindle interest and greater participation by investors in the Nigerian stock market. Since 2004 the Assets Under Management (AUM) of PFAs have grown significantly. By virtue of their maturity profile and low leverage, pension funds can be effective at providing equity and long-term debt financing to companies including SMEs and private equity firms. Also, pension funds are able to provide more competitive bidding for corporate issues and hold issuers accountable to attain higher governance standards.

In addition, Products to help hedge risk and broaden exposures are also being introduced. We are also working to restore confidence amongst retail investors and promote financial inclusion through a number of initiatives, products, and partnerships with government agencies and capital market regulators. To stimulate the local investor base, we have grown our product offering over the years – expanded our Exchange Traded Fund market, launched the retail bond programme, rolled out a mutual funds trading platform, amongst others – and broadened the scope of our investor outreach activities. We are leveraging on the Fourth Industrial Revolution (4IR) and the era of digitization to enhance the operation of the market.

The current N11trillion equity market capitalization appears very low compared to other emerging markets; don’t you think this is a big challenge to return of IPO in the market?

At over N13tr, The Nigerian Stock Exchange (NSE) is Africa’s fourth-largest bourse, after JSE, CSE, and EGX. Our market has proven that it has the liquidity to absorb both small and large ticket IPOs as we have proven with Seplat, MTN and Airtel listings. Our observations are that issuers are generally deterred from IPO’s due to considerations on macroeconomic conditions. However, when you consider the NSE’s capitalization vis-a-vis Nigeria’s GDP, you will agree that there are opportunities in untapped sectors.

We will, however, continue to innovate to make the NSE an attractive source of raising capital for unrepresented and underrepresented sectors. We recently made the processes involving listing on the NSE more efficient and cost-effective by streamlining the approval process between the Securities and Exchange Commission (SEC) and the NSE. This is aimed at reducing the regulatory burden on issuers by eliminating duplication of processes between the SEC and the NSE, reducing the time to market for the issuance and listing of securities and ultimately driving more listing on the Exchange.

What measures would you say emerging markets adopted but are lacking in the Nigerian market and why?
Capital markets tend to act as barometers of any economy, and in Nigeria’s case, the performance of The Nigerian Stock Exchange is a reflection of the economic situation of the country. So asides favorable government policies and stable macro-economic environment, we will continue to grow domestic demand, attract new offerings and develop products that facilitate access to capital, hedge risk and drives market liquidity. In my opinion, we need a stronger and more collaborative institutional and regulatory framework as well as better governance and access to funding to trade.

Research recommends that investors should maintain a long-term investment strategy to hedge against short-term price volatility. Would you say that the NSE has done enough to step up investor education on the benefits of long-term deals?

The Nigerian Stock Exchange believes in durable wealth creation and our investor education programmes focus on securities as long term investment instruments. Short term and daily trading have their benefits for those with the requisite understanding of the financial markets and capacity for risk – although it is not recommended for the general public.

Improving financial literacy is at the core of what we do at the NSE because we recognize that the ability to make well-informed financial decisions plays an important part in the ability of individuals to manage financial affairs well, a factor that can have either a negative or positive ripple effect on the economy. It will be recalled that we kicked off our financial literacy programme as a first step in protecting investors in February 2012. This programme is aimed at enhancing investors’ understanding of the basics of investing in portfolio construction, asset allocation, and risk diversification. Over the course of the past 7 years, our concerted series of financial literacy programmes which ranges from our Investors clinics and workshops, annual essay competition, school outreaches, X-tours and Global Money Week celebration has impacted a lot of investors.

In 2017, the NSE launched X-Academy, a professional training institute to empower financial market practitioners in Africa. In a bid to make quality learning accessible and affordable to individuals, corporations, and institutions, we launched the online version of our learning platform, X-Academy e-learning. X-Academy e-learning is redefining learning experiences, as users can now take control of their learning when and where they need it. It is supporting our drive to the building and sustaining financial literacy, by providing accessible, cost-effective and high-quality learning to our ecosystem.

Local investors have not shown active participation in the market since after the 2008 global financial crises. What are your efforts at bringing them back and what is the current local, foreign investors’ ratio?

Our latest investor participation data for 2019, shows domestic flows outpacing foreign portfolio flows to account for 53.4% of equity trading. In recent times we have seen growth in the retail segment, as shown by a 32% increase in equity value traded between 2017 and 2018. However, we also note that there are now more opportunities for retail investors to participate in the capital market outside of the equity sphere, and there is greater participation through pooled funds such as mutual funds and Real Estate Investment Trusts (REIT).

The Exchange will increase its focus on growing retail participation as a key component of a well-functioning and resilient market. At the crux of this is the establishment of a Retail Investor Coverage department, to help us more effectively support the Nigerian populace to create durable wealth. The department is driving our efforts towards: (i) simple, affordable and attractive investment products and services for retail investors; and (ii) innovative financial literacy and investor outreach programs that foster radical change.

To support NSE’s efforts at financial literacy and inclusion, The Exchange recently launched X-Mobile, a dynamic and user-friendly mobile app, to enhance investors’ participation in the Nigerian capital market. X-Mobile provides market participants, especially retail investors, convenient, faster and real-time access to The Exchange’s activities. It features market snapshots, stock prices, market analytics, financial news, dealing members directory, and trade simulation.

Also, as I noted earlier, we will continue to engage the Pension Industry for increased collaboration on capital market development. Ultimately, Nigerian pension funds like their counterparts around the world have a significant role to play in capital market development which should then go on to serve as a catalyst for economic growth.

The current stage of NSE demutualisation is a signal that the process would come to reality. What do Nigerian investors stand to gain upon its completion?
Yes, it has been a long journey and thankfully the NSE is at the cusp of making history after several attempts at demutualizing. Demutualization is certainly important for the growth and development of the Nigerian capital market.

Institutional and foreign investors are weary of trading in markets where enforcement is perceived to be lax and a demutualized NSE will enhance its corporate governance framework in line with global best practice.

With the support of our Members and key stakeholders, the Demutualization Act was passed in 2018. We expect completion of the process to accelerate momentum in the diversification of our client base and revenue streams through greater business flexibility, enhanced market access, and increased efficiency.

For investors, this means that they can become part owners of the NSE by investing in the shares of the company and the Exchange will be in a position to raise funds for new projects by issuing relevant classes of shares and securities to the investing public.


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