Nigerian Stock Exchange
In this ambitious programme to transform the governance structures of Nigeria’s bourse, including the introduction of market makers and new technology, the players are willing but the framework is still weak.
The directors of the Nigerian Stock Exchange (NSE) have announced a revamp intended to make it a serious contender for the continent’s largest bourse, and to bring it up to par with global platforms. The stock exchange plans to ease price-swing restrictions, adopt a Nasdaq trading platform and introduce new instruments to boost liquidity.
Ade Bajomo, executive director of NSE market operations and technology, said the exchange should be the driving force for Nigeria’s capital markets to develop along similar lines to those of Singapore.
“The most important thing is that the stock exchange reflects the Nigerian economy. Where we are today, the foundation is being laid for [that],” says Arunma Oteh, who will oversee the shake-up as director general of Nigeria’s Securities and Exchange Commission (SEC).
Daily trading on the exchange currently hovers at around $3bn to $4bn. “Nigeria could easily get to the point of [trading] N1trn [$6.2bn] per day, far exceeding South Africa, and becoming a world-class exchange,” Oteh says.
The plan is ambitious. Currently Aliko Dangote’s empire represents almost a quarter of the exchange, whose market capitalisation totals $7.2trn. Multinationals and banks primarily make up the rest.
Recent times have been turbulent for Africa’s second-biggest exchange. By the end of 2011, shares had dipped 16.3%, scaring investors who were still recovering from a 2008 banking crisis that wiped out almost half the value of equities.
The 2008 disaster ushered in the stock-exchange overhaul. And few doubt that Oteh, a Harvard Business School graduate and former African Development Bank vice president, has the necessary vision and will to oversee the Herculean task. She has made it clear she is prepared to take unpopular decisions.
One of her first moves was to require companies that present late results – an all-too-common occurrence – to be sanctioned. “Both the Stock Exchange and we at the SEC are very, very tough with what we require from companies today. You have to have these minimums if we are going to show Nigerian companies can adhere to the highest international corporate governance standards.”
A further boost could come amid plans to upgrade Nigeria’s GDP base year before end-2012 – the first recalculation since 1990. That would see the economy shoot up to $375bn from $270bn this year, the International Monetary Fund estimates. South Africa is expected to hover around $390bn at year-end 2012. Starting in May, Nigeria’s trading hours will be extended to 4pm to overlap with US hours.
New listings necessary
The NSE directorship is in discussions for upstream petroleum companies and the Nigerian National Petroleum Company to list. The 2 million barrel per day industry makes up some 90% of foreign exchange earnings and and 80% of government revenue.
“Meanwhile, gas is a sector we have yet to truly focus on in Nigeria. It’s going to be very big,” Oteh predicts. Brokerages say indigenous oil companies have shown an interest in listing both at home and internationally.
The new roll-out will give the 200 listed companies a 10% swing margin, compared with the current 5%. Newly introduced market makers who could borrow stocks for shorting would further boost liquidity, Bajomo told The Africa Report.
The move is seen as a cautious step in a long and potentially fraught process. In 2008, an attempt to introduce five market makers floundered. None of them was able to meet a minimum N10bn flotation requirement and N2bn capital.
Oteh said that experience – which occurred before she was appointed in 2010 – provided a valuable lesson. “The regulations were very stringent this time around. Only half of the 20 companies that applied received certification. We have also approved short-selling, and we are working on reducing the transaction costs,” she added.
International partners
The bourse is also looking at deals that could be similar to a 5% stock swap in 2008 between Brazil’s BM&F Bovespa and Chicago’s CME group, which owns the Dow stock and financial indexes, Oteh said: “We’re preparing guidelines for mutualisation. People are very excited, but we need to make sure we have the right framework in place.”
While many think the proposals will encourage new listings that would provide greater depth, brokers say it remains to be seen how big an impact the reforms will have in terms of liquidity. Another crucial dampening factor remains: Nigerian banks, still reeling from the 2008 crash, have been reluctant to extend credit lines amid a tough business climate.
“Internet-savvy investors will still be looking to see more liquidity – that’s still the major problem for frontier markets,” said Lagos-based Thaddeus Investment Advisors & Research principal analyst Jude Fejokwu. “At the end of the day, if brokerages aren’t in tune with best business practices, the value of reforms like automation will be far from what it should be.”
Other problems remain. Current SEC regulations allow companies to present all but full-year results unaudited. This allows, one auditor pointed out, “free rein to cook the books”. Against Nigeria’s already tough business climate, that could be a red light to all but the most risk-inclined?
