Watching Brief

The year 2009 is shaping up as a transitional one for Nigerian capital markets, with investors still cautiously trading as the effects of slower economic growth and restructuring in the dominant banking sector play out.



In September, the Nigerian Stock Exchange (NSE) clocked up a turnover of 9.05bn shares, with a total value of N66.01bn ($434.2m), with 123,106 deals completed, according to the bourse's monthly report. This represented an 8.7% decline in trading volume from the previous month, and a 4.0% fall in value, following respective drops of 0.1% and 5.03% in August.



The overall picture for the first three quarters of 2009 is sharply down on the same period of last year, with volumes falling to 75.3bn shares traded, 45.6% lower than 169.63bn units in January-September 2009, and value dropping to N508.7bn ($3.3bn), down 74.5% on N2.23trn ($14.6bn).



The Nigerian Stock Exchange All-Share Index (NSE ASI) fell 944.10 points, or 4.1%, through September to 23,009.10. The index has fallen 29.84% from 31,450.78 at the close of 2008.



Meanwhile, market capitalisation totalled N7.81trn ($51.8bn) at the end of September, dropping 1.43% on the month and down 18.3% from N9.56trn ($63.6bn) at the end of last year, though comfortably above the 2008 nadir of N6.21trn ($41bn).



There are several reasons for the NSE's sluggish performance, most of which fundamentally stem from the impact that the global economic crisis has had on Nigeria. The IMF has forecast that the country's growth will be trimmed to 2.9% this year, from 6.0% in 2008 and 7.0% in 2007, while declining oil revenues have slowed the flow of cash into the economy and government coffers.
Furthermore, the tightening of credit worldwide has seen capital flows to shrink, while investors have retreated, particularly in some emerging markets.



There are also domestic issues that have affected the NSE's performance, which, like many of the world's markets, has yet to show strong signs of recovery. Part of the slow turnabout may be due to a partial correction that has lingered in the markets, following meteoric 74.73% growth in market capitalisation in 2007.



The country's banking sector, which has been notoriously vulnerable to crisis, has also hampered growth. Banks dominate the NSE, accounting for 71.3% of transactions by value in September; four of the five biggest companies on the bourse are banks, alone accounting for nearly 17% of market capitalisation.

The IMF praised Nigeria's banking sector in June, saying that "Financial stability has been sustained in the face of severe pressures related to global and domestic developments. This success reflects the well-capitalised banking system and crisis-related actions of the central bank."



Nonetheless, Nigeria's banks have been far from immune. The NSE has reflected the impact of the tightening in liquidity and the drying up of interbank lending on banks. The results of the Central Bank of Nigeria (CBN) stress tests over the summer, which five banks failed due to large non-performing loan portfolios, prompted a $2.5bn bailout, the resignation of senior management and a suspension of trading for the banks involved.



With analysts now expecting another wave of consolidation, with 23 banks potentially being reduced to 15, investors may continue to hold back until the dust has settled and potentially expensive mergers and acquisitions have gone through.



Ongoing concerns about regulation and irregularities may also be holding the exchange back from full-blooded recovery. On October 19, it emerged that the Securities and Exchange Commission (SEC) was mounting an investigation into price manipulations by certain unspecified "market operators" unbeknownst to the NSE and brokers. The SEC is due to call those accused for questioning on November 9, the organisation said in a statement, adding that it "would impose appropriate sanctions on erring operators found to have engaged in acts that have brought disrepute and erosion of investors' confidence to the capital market". Those accused of committing criminal acts will be reported to the Economic and Financial Crime Commission.



While the equity market has had a difficult year, investors have sought to move into the growing government bond sector, seen as a safe haven in uncertain times. Demand for government debt has soared through 2009. In the first nine months of the year, Federal Government of Nigeria (FGN) bond turnover totalled 13.31bn units worth N14.02trn ($93.2bn), more than doubling from 6.81m units and N6.82trn ($44.8) in the same period of 2008. Total bond turnover reached N1.9trn ($12.5bn) in September alone.



The bond market's dynamism has increased pressure for the relaunch of a corporate bond market, which Nigeria has not had for two decades. With demand on the NSE still relatively low, bond issues would be an excellent way for companies to raise capital. Some reform of legislation would be necessary, though changes are already in the pipeline, including easing asset-allocation rules for pension funds, which would give them more scope to invest in highly rated bonds.



Given its past vulnerability to capital flight and financial sector instability, Nigeria's capital markets have rebounded better than expected in the wake of the global crisis. Local press has reported increased bullishness in October, which could indicate rising positivity in the domestic and global economy. NSE officials have also noted the opportunities for value-buyers, and, with long-term growth prospects excellent, many companies' shares are likely to appeal as recovery stocks at present. As the efforts of the well-respected CBN reinforce banking sector progress, confidence should return to the market, at least towards those institutions with a clean bill of health. Meanwhile, the bond market goes from strength to strength, but the process of reform, and the drive to cut out malpractice, is still far from over.