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Meltdown opens the way for a sounder exchange in Nigeria - FT



By Simon Mundy / November 22, 2011 / FT Special on Africa 2011

Nearly three years after the Nigerian stock market lost two-thirds of its value in the space of 12 months, many in the country’s finance industry believe the collapse came with an important silver lining.

The heady rise that preceded it – the market capitalisation of the Nigerian Stock Exchange doubled in the year before its peak in March 2008 – was spurred in part by irresponsible bank lending and inadequate risk management by brokerages. Yet the traumatic end of that bull run has given the authorities a mandate to reform the market, targeting bad practice and working towards more stable, sustainable growth.

Oscar Onyema, appointed as chief executive of the stock exchange in January, admits that it will not be easy to restore faith among bruised investors. “This market is not used to downturns,” he says.

After a tentative rally in 2010, the NSE All-Share Index lost about 15 per cent of its value in the first nine months of this year. Foreign asset managers, who account for the bulk of daily trading, contributed to the decline by selling Nigerian stocks to cover deteriorating positions in the US and Europe.

Nonetheless, Mr Onyema maintains, the NSE will “come out of it stronger and better”.

His predecessor, Ndi Okereke-Onyiuke, was removed after claims that she had failed to sanction market participants properly for rule violations.

Banks had pumped up their valuations by lending brokers the money to buy their shares in large quantities, while many quoted companies flouted the requirement for timely filing of annual results.

Such practices will no longer be tolerated, says Mr Onyema. The “crackdown” on bad practice will go alongside steps to encourage innovation: short selling will be permitted by the end of this year; the NSE is working with Absa, the South African bank, to introduce its first exchange-traded fund and expects to host trading of options and futures in the next four years.

The nascent corporate bond market is also tipped for growth. To date, only nine companies have issued bonds and most corporations are accustomed to relying on banks for long-term credit.

However, the market has been boosted by regulators’ decision to raise the limit for pension funds’ investment in corporate bonds, and to provide tax breaks for issuers.

Mr Onyema wants the value of all securities traded on the NSE to increase from $60bn to $1,000bn by 2015, driven by new company listings, expanding markets for bonds and derivatives and consistent growth in the economy.

Senior industry figures are quietly sceptical of the target. But they have been cheered by the fresh approach taken by Mr Onyema and two other central figures in the reform drive: Lamido Sanusi, governor of the central bank, and Arunma Oteh, director-general of the Securities and Exchange Commission.

“What the NSE is doing is a very sound thing,” says Femi Awoyemi, managing director of Proshare, the market information service. “They’re going back to the basics – recognising that the very structure upon which we built the market is faulty.”

Yet it will take profound changes, he adds, to redress the “abysmal” imbalance between the capital market and the economy. Not only is the stock market relatively small, but crucial sectors such as agriculture and telecoms are barely represented.

Tax holidays should be considered, Mr Awoyemi says, to bring to the market companies such as MTN, the South African mobile phone group, which has its biggest operation in Nigeria.

The NSE is introducing a “sales force” to drive new listings, and is in talks with about 400 companies, Mr Onyema says. It is also lobbying the government to list state-owned entities, arguing that this will drive improvements in transparency and governance.

Those benefits will also accrue to the NSE itself when it completes a planned demutualisation – a step expected to bring stricter oversight of the broker-dealers who own it.

Mr Onyema faces pressure from those in the investment community who argue that the reforms should be deeper and faster. “They’re moving in the right direction, but it’s been slow,” says Niyi Falade, chief executive of Crusader Sterling Pensions.

Mr Falade calls for rules on profit warnings, “which are totally absent from the market”, the introduction of half-year financial reports and tighter supervision to address the “disconnect between audited results and unaudited results”.

Yet even sweeping regulatory change may not reignite the interest of investors such as Mr Falade, whose funds have cut their exposure to equities by more than half since 2008.

With interest rates set to remain high as the central bank fends off downward pressure on the currency, Mr Falade says there is little incentive to invest in shares when short-term government paper offers double-digit yields.

Nonetheless, the stock market offers “significant opportunities” for long-term investors, says Tofarati Agusto, managing director of WSTC Financial Services, a boutique investment bank.

“There is turbulence, volatility – but it is one of the best times to be in the market because of the reforms,” Mr Agusto says. “And we’d never be talking about this kind of reform if we hadn’t had the meltdown.”

Source: FT /

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