Wednesday, October 09, 2013
The Nigerian Capital Markets
1. It gives me great pleasure to present the Keynote address at this year’s Standard Chartered Bank Capital Market Forum. I believe our entire market will benefit from the ideas and initiatives that will be discussed here. The Securities and Exchange Commission (SEC) has always supported efforts like this because we recognize the importance of boosting capacity in our capital market.
2. The theme of this event “Managing Risk in a Thriving Sub-Saharan Capital Market” is apt and timely particularly because of the weak global risk outlook and because of our efforts to ensure a risk resilient market. The 2008 crisis which was triggered by the global financial crisis represents bitter lessons of what can happen when insufficient attention is paid to regulation and risk. As a consequence, the goals of SEC’s reform agenda have included immunizing our market against external shocks by having a deeper, broader and more institutionalized market.
3. I therefore intend to use this opportunity to talk about the reforms we have been implementing since January of 2010 and the results of those initiatives. Thereafter I will give an overview of emerging risks facing the global securities markets focusing on significant ones facing us and how we can manage or mitigate them.
4. In 2010, we had the very important task and responsibility to lead the market into recovery from the crisis and to build and develop a world-class capital market that can better withstand future crises. Our understanding has always been that the Nigerian economy needs such a world-class capital market that is fair and efficient to fully actualize its potential. Let me now give a summary of some of those major reform initiatives we have implemented and how they are impacting the market.
5. Strengthening the Bond Market: In spite of the immense potential of a domestic bond market, our market was largely an equities-dominated market unlike in other parts of the world where bond markets are typically larger than stock markets. For example in the United States of America (USA) the bond market is currently two times larger than the stock market. In the same vein a study by McKinsey & Co revealed that the global bond markets are three times the size of stock markets with the combined global bond markets worth $157 trillion out of the total $212 trillion of capital stock while stocks are worth $54 trillion. We took steps to build a domestic bond market getting support from a Resident Bond Advisor who was sponsored through the Efficient Securities Markets Institutional Development (ESMID) program, which is hosted by the International Finance Corporation (IFC).
We were able to review and streamline the entire bond issuance process including rules on book-building and shelf registration and also pushed for revision of the tax regime to eliminate tax discrimination against those investing in corporate and subnational bonds. As a result, there has been a growing interest in the domestic bond market with State governments raising N421.5 billion and corporate bonds totaling N148.5 billion were raised since 2010.
6. The strong interest in our bond market is not limited to domestic investors, because of the reforms we carried out the domesctic bond market is becoming increasingly more attractive to prestigious international issuers and investors. The IFC, a triple-A rated private sector arm of the World Bank, led the way by issuing its ‘Naija Bond’ of $50 million and subsequently filed for medium term notes (MTN) of US$1 billion. Another important triple-A rated multilateral institution, the African Development Bank (ADB), has followed suit by filing a US$1.5 billion MTN program. I am delighted to announce that these MTN programs will not be constrained by the previous two-year expiration of shelf programs as the Board of the SEC has approved its elimination allowing shelf programs an unlimited lifespan.
These positive developments in the bond market give investors more options apart from equities especially now that the FGN bonds have an extended yield curve of 20 years and have been included in JP Morgan’s and Barclay’s emerging markets indices.
7. Introduction of New Products: Apart from strengthening the bond market, the SEC has created an environment that engenders product innovation to provide even more investment options. Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs) and Sukuk have been introduced into our market. All three products can enhance financial inclusion helping increase the level of domestic participation in our market. REITs are particularly important to help Nigeria eliminate the massive housing deficit estimated at about 18 million units while Sukuk will not only attract capital from the Gulf region but will also encourage many Muslims who make up about half of Nigeria’s population to invest. Securitization is another product we have made efforts to promote considering the opportunities it offers for infrastructure finance, for the housing market and also for financing business operations and expansion.
8. Venture Capital (VC) and Private Equity (PE) form another important asset class due to the impact they can have on economic growth, innovation and job-creation. To encourage the growth of the PE/VC industry in Nigeria we introduced new rules on private equity while lending support to the Ministry of Industry, Trade and Investment who recently inaugurated an Industry Committee to make recommendations on the best ways to develop the PE and VC in Nigeria. We understand the important role capital markets play in spurring the developing of private equity by offering sufficient depth and liquidity to provide exit channels which is why we continue efforts to deepen and broaden our market.
9. New Listing Rules to Deepen the Equities Market: There are currently 196 listed equities on the mainboard of the Nigerian Stock exchange giving investors a very limited number of options in their portfolio composition especially because Banking and Construction sector companies dominate. The current composition of the listed equities does not reflect the Gross Domestic Product (GDP) of Nigeria since important sectors making up our GDP such as Agriculture, Oil & Gas and Telecommunication are not proportionally represented. Apart from advocating the listing of leading companies in these sectors to broaden investors’ options, we have been proactive in approving new listing rules that tackle the peculiar concerns of the companies to attract more listings especially from upstream oil & gas companies as well as the big telecommunications firms.
Small and Medium Enterprises (SMEs) who are in need of raising capital as well as companies with good feasibility studies can also access the market through the Alternative Securities Market (ASeM) which has special listing requirements tailored to the nature of such businesses. We believe this is an important platform to prepare SMEs to become bigger players on the mainboard in the future especially by strengthening their internal systems and the by subjecting them to higher standards of corporate governance.
10. Rules on Securities Lending and Short Selling and Introduction of Market Making: A key challenge facing our market is liquidity, illiquid markets are unable to perform the important price discovery and capital allocation functions of a market efficiently. To help boost liquidity and enhance confidence in the market, we introduced rules guiding securities lending and consequently permitted short selling to herald the introduction of market making which is already increasing liquidity in the market. Short selling is important not just for its impact on liquidity but also from a risk management perspective; it helps brokers and other investors to hedge their positions.
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