Thursday 24 September 2015

Buhari, The Economy And Capital Market

by Arize Nwobu

As the economy continues to face challenges which demand innovative and radical policies, the stakes are high on President Muhammadu Buhari. He is expected to provide inspiring leadership and deliver on key mandates, ensuring security of lives and property, galvanise state resources to engender prosperity, keep a watchful eye and maintain rigorous stewardship over federal treasury, tax collection, public service recruitment and development and deliver services that are responsive to citizens’ need, be accountable and ensure public trust in government. 

Nigeria is expected to be among the top 20 economies in the world with a minimum GDP of N144tn (US$900bn) and a GDP per capita income of no less than N640,000 (US$4,000) per annum by 2020 and the priority areas to achieve this target include physical infrastructure, real sector development, human capital development and governance. The current stock of core infrastructure in Nigeria is estimated to be about 30-40 per cent of the GDP, which is said to be far below the international bench mark of 70 per cent of the GDP even as experts believe Vision 20:2020 target may not be realisable outside the mechanism of the capital market which is one of the most important factors of funding infrastructure with strong socio-economic impact. Forward looking nations explore the mechanism of the capital market to drive economic growth and development.

The United States with the largest bond market in the world, and other advanced economies utilise optimally the mechanism of the capital market to finance capital intensive and innovative projects. In India, the expansion of the capital market has been noted as a major factor for its consistent economic growth. The Indian market is characterised by its vibrant equity and debt markets. As a strategy to develop infrastructure and deepen the bond market, the Indian government had raised Foreign Institutional Investors’ investment limit in corporate bonds from US$20bn to US$40bn, with a prescription that the additional limit of US$20bn will be available to FIIs only for investments in corporate bonds issued by companies in the infrastructure sector. The capital market in terms of the GDP rose from 75 per cent in 1995 to 130 per cent of GDP in 2005, while the Indian economy grew at 8.6 per cent in 2010-2011 as a result of increased activity in the capital market on the back of strong investor confidence. Net capital inflows increased to US$123.2bn in April 2011 as against US492.1bn in April 2010, dominated by Foreign Institutional Investors (FIIs), Investment and Trade Credit and Foreign Direct Investments. In 2010-11, 40 new companies listed on the two exchanges, National Stock Exchange and Bombay Stock Exchange. The Gross Domestic Savings rate in India is 33.7 per cent with investment rate at 36 per cent, while the rate of savings in financial assets grew to 11.8 per cent in 2009-10, from 10.8 per cent in 2008-09.

Malaysia, which shares similar characteristics with Nigeria, was reportedly transformed sequel to the successful launch and implementation of the first and second Capital Market Master Plans (CMP1 and CMP2), and has since moved ahead of Nigeria in all metrics. The market capitalisation as a share of the GDP for Nigeria in 2013, was 27 per cent, compared with 247 per cent for Malaysia, 207 per cent for South Africa and 112 per cent for Brazil. The average trading volume for Nigeria is about US426m and the turnover rate is 10.1 per cent compared to US$647m and 107.6 per cent for Malaysia. Also, the Value of Assets Under Management for Nigeria is US$910m compared to US4114bn for Malaysia. Some of the measures introduced in Malaysia to achieve the impressive objectives include broad fiscal incentives, measures to enhance market liquidity in the bond market, deregulation in investment management industry, institutional and regulatory reforms including demutualised securities exchange and corporate governance. It is also instructive that equity financing through the mechanism of the capital market has remained an important source of funding for SMEs in Malaysia.

On the contrary, banks dominate business financing in Nigeria as most businesses are averse to equity financing through the stock exchange, a major reason SMEs have not made the desired impact on the economy. Cumulative bank loans to the private sector stood at N6.5tn in 2013, while bond market capitalisation (excluding FGN bonds), stood at N2.05tn for the same period. The dominance of bank-based financing has severe shortcomings and is a major reason the growth pattern of the economy is anomalous. Banks are conservative in their disposition and strategies which often hinder entrepreneurial and industrial risk-taking necessary for innovation and development of SMEs, crucial to economic growth. They are averse to lending to the real sector and tend to extract more from the future profit of firms. The Nigerian economy is conducive for a vibrant and dominant capital market-based financing system in order to fast- track and restructure the growth pattern and engender inclusive growth.

Market-based financing system has several advantages over the bank-based based: One, it is superior in processing information in new and uncertain situations involving innovative products. Two, it optimally allocates capital and enhances economic performance. Three, it catalyses industrial growth faster than the bank-based and helps economies to achieve inclusive growth through greater employment opportunities. Four, it helps companies to meet international best practices which in turn, attracts foreign direct investments. Five, it engenders macroeconomic stability as money market interest rates are more sensitive than long-term rates in the capital market. Six, it provides tailor made risk management tools as the economy matures and the method to raise capital increases. Seven, it offers in-depth insights into the direction of the overall economy based on the movement of the stock market. Eight, it provides a window for the growth of small and medium scale enterprises, the engines of growth, through venture capitalism.

For the Nigerian economy to achieve a double digit, and inclusive growth with greater job opportunities, the Federal Government should follow in the footsteps of Malaysia and collaborate with market operators and other stakeholders in the capital market to launch a transformation campaign of the capital market as one of its developmental programmes; which among other things, will encompass capacity building on concepts and operations of the capital market for government functionaries, continued privatisation and introduction of policies to incentivise more listings of local firms on the stock exchange and stimulate appetite for investment in securities.

- Arize Nwobu is Assistant Director/Head, Research and Technical, Chartered Institute of Stockbrokers

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