Despite multiple trading platforms, a variety of debt instruments and a range of institutional investors, both domestic and foreign, Nigeria’s capital markets are relatively underdeveloped. According to a PwC article published in January 2018 titled “External Debt Issuance: Towards Capital Market Development”, Nigeria’s capital markets accounted for only 11% of GDP in 2017, compared to a global average of 98.5% in 2016. Additionally, the authorities have not yet solved investors’ liquidity challenge and most domestics firms’ difficulties accessing finance. Furthermore, Nigeria wants to use capital markets to raise funds for infrastructure, the need for which is greater than what the federal budget and funding mechanisms are able to provide.
However, observers have noted the untapped potential of Nigeria’s capital markets, with the government working to encourage investment through a raft of regulations. Reforms to the sector are expected to play a role in infrastructure development in the near future, as new rules for pension funds are set to allow individual account holders to select risk-based investment approaches. Additionally, the Pension Fund Administrators are expecting a flurry of investment pitches for infrastructure bonds, funds and other vehicles to back major projects. New rules for allocation across asset classes could also result in greater demand for equities and non-sovereign bonds in the short term.
Capital markets played a key role in the domestic financial crisis of 2008, one that unfolded at the same time as the global financial crisis, but was caused by internal factors. In 2004 Charles Soludo, then the governor of the Central Bank of Nigeria (CBN), raised the minimum capital requirements for banks from N1bn ($3.2m) for existing institutions and N2bn ($6.5m) for new entrants to N25bn ($80.8m). One of the ways banks raised capital was through share sales, and in some cases they extended credit to would-be buyers to pay for those transactions. Soludo’s intent was to consolidate the banking sector, and he succeeded. However, in the process, immense pressure was placed on the Nigerian Stock Exchange (NSE) in the rush to raise capital. When share prices dropped and undercut shareholders’ ability to repay the loans used to buy those stocks, a solvency crisis unfolded that required bailouts of multiple lending institutions. The episode made clear that Nigerian investors needed alternatives, and the authorities have since been working to develop a market with greater breadth and depth. “The financial service value chain is shallow,” Chinedu Onyia, managing director of Parsifal Partners, a Lagos-based management consultancy, told OBG. “There needs to be more ways to raise capital. Businesses have friends and family, and high-street banks, but that is all.”
The NSE, which is the country’s main securities exchange, began operations in 1961 as the Lagos Stock Exchange ans was rebranded in 1977. According to the NSE, by the second quarter of 2018 there were 280 listed securities, of which 169 were equities, 54 federal government bonds, 24 corporate bonds, 23 state and municipal bonds, nine exchange traded products and one supranational bond. Average daily volume registered 384.1m units, down from 414.3m in the same period of 2017, and average daily value traded stood at N6bn ($19.4m), up from N4.1bn ($13.3m). The shares of domestic and foreign investment activities were balanced in the January-May 2018 period, with the former accounting for 50.5% of activity and the latter 49.5%. Market capitalisation dropped from an all-time high of N16.2trn ($52.4bn) in January 2018 to N11.8trn ($34.1bn) in mid-October that year.
Equities are traded on three boards: the main board, the premium board and the Alternative Securities Market. The premium board has seven listings: four banks, two cement producers and one of the largest local oil and gas producers in the country, Seplat Petroleum Development Company. The Alternative Securities Market is a platform for smaller companies and had nine listings as of June 2018. Similar to the Alternative Investment Market platform of the London Stock Exchange, companies listed on the NSE’s Alternative Securities Market are guided by a financial advisor on how to meet regulatory obligations.
The NSE has 13 indices, including ones for premium and alternative listings and indices that track sector performance. The benchmark index is the NSE All-Share Index, which has declined in six of the past 10 years, with a 6.2% drop in 2016 being the smallest deviation. By the end of 2017 the value of the All-Share Index was around 38,200. In 2018 the index’s value fell in seven of the first nine months of the year and by October 18 that year it was 32,457. Three companies comprise roughly 49% of market capitalisation in the All-Share Index: Dangote Cement with 29.6%; Nestlé Nigeria with 10%; and Guaranty Trust Bank with 9.3%. The top 30 shares account for about 90% of total value, primarily n the financial services, materials and consumer staples sectors. However, the top of the market is more diversified than it used to be: in 2018 the those three sectors accounted for 27-33% of the overall index, compared to in 2009, when financial stocks alone – spearheaded by banks – accounted for 47% of market capitalisation.
Domestic names dominate the top-brokers list for NSE trading, including United Capital Securities, CSL Stockbrokers, Meristem Securities, FBN Securities and Chapel Hill Denham Securities. Two major global names include Russia’s Renaissance Capital and Stanbic IBTC, a member of South Africa’s Standard Bank Group. The top-ten brokers accounted for about 70% of trading value and almost half of trading volume in the first half of 2018. There are 196 licensed dealers, though many of them are small businesses accounting for little or no activity, and due to the structure of the stock market, they are not benefitting from being listed. “The exchange owns assets across the nation and a lot of retained profits,” Layi Olaleru, managing director and head of financial advisory at local ARM Securities, told OBG. “There is no way to benefit from the profits the exchange generates, so for now we have most of the members just waiting for a way out.”
However, it is widely anticipated that such conditions will change with the market consolidation that is expected to follow the signing into law of the Demutualisation of the NSE Bill by President Muhammadu Buhari in late August 2018. The NSE is set to be incorporated, and shares will be made available on the exchange itself through an initial public offering (IPO). Demutualisation is a phenomenon that has been embraced by many markets around the world: of the 64 members of the World Federation of Exchanges, 56 have demutualised, including the Johannesburg Stock Exchange in 2006 and the Nairobi Stock Exchange in 2014. Nigeria’s demutualisation bill is expected to diversify the NSE’s operations and increase its access to capital.
In a bid to attract key listings to the NSE, a number of regulatory reforms were rolled out in 2017. In June the Securities and Exchange Commission (SEC) announced new rules and amendments to the existing regulatory framework, including the introduction of rules for fund management operations and changes to the rules on infrastructure funds. A lack of infrastructure development has been identified by key players as holding back overall economic development. According to the Infrastructure Concession Regulatory Commission in July 2017, Nigeria loses N2trn ($6.5bn) yearly, or 2% of its GDP, due to poor infrastructure. As demand for infrastructure funds outweighs the supply of financiers, it is hoped that changes to infrastructure fund regulation will incite more activity in the segment.
Over the Counter
Whilst the NSE has long been the platform for trading in both equity and debt securities, the Financial Markets Dealers Association has added an over-the-counter solution for secondary market trading of fixed-income securities, derivatives and currency, called FMDQ. The trading platform was launched in November 2013 as a private sector offering and gained popularity in 2017, when currency spot trading and derivatives were offered to help stabilise the naira. At the end of 2017 the exchange offered quotes for 182 government debt securities worth N37trn ($119.6bn) and 83 corporate debt securities worth N1.6trn ($5.2bn). Over $10bn in foreign exchange future contracts were traded and annual average turnover registered N124trn ($400.9bn).
Nigeria’s National Association of Securities Dealers (NASD) has established another over-the-counter exchange known as the NASDAQ. It is focused on secondary-market trading of equity and fixed-income instruments through two trading platforms. One is a NASDAQ OMX platform, leased from the NSE, and the other is an electronic inter-dealer system developed by NASD. According to the “Supporting Recovery” 2017 report by NASD, there were 34 securities and traded bonds worth N12.1bn ($39.1m) by the end of the year. The results reflect a slump in activity in line with macroeconomic growth. In 2015 the value of trades stood at N50.9bn ($164.6m), before dropping to N4.7bn ($15.2m) in 2016 and N4.3bn ($13.9m) in 2017. The market is dominated by consumer goods, which accounted for 43% of trades, and oil and gas, with a share of 36%. Trading activity during the year reduced as the number of trades executed on the NASD OTC market decreased by 42.7% on the previous year.
Nigeria is also home to AFEX Nigeria, once known as the Abuja Securities and Commodities Exchange, and now in the process of being revived as the first privately owned commodities exchange in the West Africa region. The revival project has been led by Tony Elumelu, the chairman of United Bank for Africa. Elumelu is also the founder of Heirs Holdings, which has partnered with global holdings company Berggruen Holdings and US-based investment consultancy 50 Ventures on a system it hopes will help price discovery for primarily agricultural commodities. The objectives of the AFEX project include offering farmers warehousing for their harvests and sales contracts to be fulfilled in an over-the-counter setting. According to farmers who use its system, once fully developed, they expect that they will be able to increase their income by 25% and reduce post-harvest losses by 7% to 15%. They can also access credit of up to N5m ($16,200) from United Bank of Africa and perhaps other banks in the future.
The next big development in the capital markets sector is most likely to be the IPO of MTN Nigeria, the country’s main telecoms provider. “This is going to be the biggest IPO in the country’s history,” Olaleru told OBG. “It will help to change the perception of the market.” MTN is set to be the first IPO since 2015, and is expected to add liquidity to the market. Between 2013 and 2017 the market managed just four sales worth $760m. From 1999 to 2015, the value of IPOs totalled N319bn ($1bn). The most recent IPOs came in 2015, from Seplat Petroleum Development, a locally owned oil and gas company, and Transcorp Hotels, formerly Transnational Hotels and Tourism Services, the hospitality subsidiary of Transnational Corporation of Nigeria. Since then, plans for IPOs have been delayed as a result of subdued market conditions, falling oil prices and Nigeria’s reliance on crude exports.
Slow-growing IPO markets are found across the developing world, and the situation is no different among African nations. Governments across the continent have been trying creative solutions to coax more companies to the market. In Uganda, the South African mobile telephony giant MTN’s operating licence expired in the second half of October 2018. In the preceding month the Cabinet had agreed to renew the licence under the stipulation that local operators list on the stock exchange. In Ghana, MTN agreed to list in return for access to the local broadcast spectrum. That IPO, under way since the summer of 2018, is the largest in Ghanaian history and represents the first instance in which shares can be purchased through a mobile money service, specifically, MTN’s MoMo Wallet, which has 6.2m users in Ghana as of mid-2018.
MTN Nigeria agreed to list in 2016, as part of a settlement in which it pledged to pay a $1bn fine for failing to disconnect unregistered subscribers. MTN Group, which is based in South Africa and is Africa’s largest mobile service provider, has missed multiple deadlines to list its Nigerian unit, which it is now expected to do with the Nigerian Communications Commission by May 2019. Continued spats between the firm and government in September 2018 over its tax bill and capital importation may also push back the IPO (see analysis).
Beyond MTN, the sector may see an increase in IPOs if its local energy sector sticks to existing plans. Efforts in the past two decades to put smaller oil and gas fields in the hands of local firms have transferred about a fifth of existing production to them, and these companies are now in search of capital to develop their upstream assets. In March 2018 the local energy firm Sahara Group said it was considering an IPO, reviving a plan shelved in 2015. “After we made the announcement back then, the entire market crashed, oil prices went down, and so we put the plans on hold,” Tonye Cole, executive director and co-founder of Sahara Group, told international media in March 2018. He said he wanted to spend the money buying more productive acreage, with the aim of boosting oil production from 25,000 barrels per day to 100,000.
As of mid-October 2018 other local firms exploring an IPO included Skyway Aviation Handling, Nigerian Reinsurance and Indorama Eleme Petrochemicals. Despite global price volatility, the upcoming IPOs related to oil – including that of Sahara Group – show the sector’s dominance in the market. “Nigeria’s non-oil economy is still very small in comparison to the country’s oil sector, despite successes in the agriculture, ICT and creative industries,” Chamberlain Peterside, executive chairman and CEO of Lagos-based financial services firm Xcellon Capital Advisors, told OBG.
Sovereign bond issuance predates independence in Nigeria, but the current era of bond sales started with the federal government’s establishment of the Debt Management Office (DMO) in 2003, which organised federal-level issuance under a single entity. States are now permitted to issue bonds if at least 60% of their revenue of the previous year is from internal sources, such as collected taxes. In 2017 only Lagos State and neighbouring Ogun State met that threshold. Most states are largely or almost entirely reliant on transfers from the government, and do not meet the 60% threshold (see Economy chapter). The DMO is also reviewing state-level bond issuances to ensure sustainability among state governments.
In more recent years the focus has been on dollar-denominated borrowing at the sovereign level. With the country benefitting from a $18bn debt relief deal in 2005, granted by the Paris Club, a group of global major creditors, Nigeria was well positioned when the appetite of global investors rose earlier this decade for dollar-denominated eurobonds from developing countries. In 2017 Nigeria sold a record $4.8bn in eurobonds, spread across two issuances, with a 10-year maturation period and the other with 30. According to the DMO’s 2017 annual report, total bond market capitalisation was up by 34% from N6.9trn ($22.3bn) in 2016 to N9.3trn ($30.1bn). As of October 2018 the country had sold seven eurobonds and raised $8bn.
Policymakers next hope to see a revival of markets for corporate bonds, as well as for instruments like infrastructure bonds and green bonds (see analysis). In February 2018 the government pledged to use some of its eurobond revenue to cut back on domestic issuance, with the hope that investors will then turn their attention to commercial paper instead. Infracredit, a joint venture between private sector entrepreneurs and the Nigerian Sovereign Investment Authority is designed to address that need. It has a mandate to focus on brownfield assets that require capital, as well as new projects. Another alternative source of infrastructure financing is the Chapel Hill Denham Nigeria Infrastructure Debt Fund, the first of its kind in the country after its launch in July 2017.
The commercial paper market is dominated by large corporations, such as Nigerian Breweries, Nestlé Nigeria and Dangote Cement. Major sales include one from MTN Group, which in May 2018 indicated plans to raise N400bn ($1.3bn) in the year. Other companies considering a sale include the African Export-Import Bank, Fidelity Bank, Wema Bank, Medview Airline and Jaiz Bank. Some Nigerian corporates other than Dangote have also borrowed in dollars or plan to in international markets, such as Union Bank, which has hired multinational investment bank Citigroup to arrange an issuance programme of up to $250m. “The commercial paper industry can take on a lot more,” said Oluseun Olatidoye, head of debt capital markets for FBNQ uest, the merchant bank owned by First Bank of Nigeria, told OBG. “There are just a few big companies issuing commercial papers to fund their working capital requirements. Fast-moving consumer goods could be the next sector to access the bond market this year.”
“Improved earnings are driving interest in equities, and this should support IPOs, follow-on equity offerings and rights issues,” Funso Akere, chief executive of investment bank Stanbic IBTC Capital, told OBG. “Sound macro-conditions should lift bond and commercial paper issuances, as companies take advantage of low inflation and interest rates to raise short and long-term funding from debt capital markets.”
Capital markets in 2019 will largely be shaped by the outcome of MTN’s potential IPO, as well as the degree to which regulatory changes alter the investment patterns of pension funds. Should the MTN listing materialise and fund managers increase their investments, such activities could deliver a long-desired boost to liquidity.