Kayode Akinkugbe, Managing Director, FBN Merchant Bank: Interview

Interview: Kayode Akinkugbe

How would future US Federal Reserve interest rate rises impact trading activity in Nigeria?

KAYODE AKINKUGBE: Monetary tightening in the US increases the cost of borrowing in dollars. It can make the US domestic markets and assets more attractive to investors on a risk adjusted basis, compared to emerging markets, such as Nigeria. Although rates in Nigeria are significantly higher than in developed economies, some investors may be less willing to take the risk. However, tightening in the US exposes those sovereign credits of countries with weak external balance sheets. Nigeria is not in this group since its external indebtedness and debt service – in both the public and private sector – is limited, and its official reserves provide a reasonable cushion. We also doubt that the federal funds rate will peak anywhere near the level of previous cycles.

What can be done to increase international public offerings (IPOs) being launched in Nigeria?

AKINKUGBE: IPOs are a challenge in all stock markets without ample liquidity. Generally, there needs to be a compelling reason to list on the local market, for instance, privatisation. A shining example of this was the sale of Safaricom stock in Kenya, which garnered significant attention from international investors for the Nairobi market. However, far more stock will be sold on a leading market without liquidity issues, such as that of London or New York. Robust market valuations are a boost to IPOs. There is a positive relationship between the level of the stock market index and the launch of IPOs. The introduction of the Nigerian Autonomous Foreign Exchange (NAFEX) in late April has clearly boosted sentiment, and in turn, fuelled the benchmark index of the Nigerian Stock Exchange All Share Index which was in negative territory as recently as the second week of May, yet on the 22nd of August was 38% ahead on the same basis. Offshore portfolio investors ignored the market when foreign exchange (forex) was scarce and there were delays in repatriating sales proceeds and dividends. While interest has returned, it is not yet at scale as some investors remain on the sidelines.

An IPO also requires a stable macroeconomic environment. Again, Nigeria currently resides in a grey area in that respect. The economy is adjusting to the fall in oil price that began in mid-2014 and is also emerging from a recession, from which the recovery is slow. Two further requirements are a sound regulatory environment and competitive listing costs. The Nigerian Stock Exchange (NSE) would have greater appeal if the MSCI Nigeria Index was not threatened with “reclassification” to stand-alone market status on account of concerns over forex liquidity. If these concerns were addressed it would probably enjoy an increased weighting on the MSCI Frontier Market index. MSCI is to review the case in November of this year. Attracting IPOs in Nigeria will be a challenge, but forex reforms and tentative economic recovery provide encouraging signs.

What opportunities are there to deepen the corporate bond market in Nigeria?

AKINKUGBE: All stakeholders have a strategic interest in developing this market. Issuers can benefit from reduced pressure on cash flows while investors can benefit from more products and the opportunity to diversify risk and invest in long-term assets; government can fund long-term infrastructure assets; regulators and SROs can host these instruments; and intermediaries can provide risk management products and liquidity in the instruments. For now, the market capitalisation of listed corporate bonds is less than N300bn ($1.1bn), compared with N8.1trn ($28.6bn) for Federal Government of Nigeria bonds. The main players are the Pension Fund Administrators, who have a hold-to-maturity mindset with these bonds, and state government issues. To deepen the corporate bond market and attract international firms, we must nurture and grow the investment community, create products that will attract investors and enable them to diversify risk.