NSE: further stability expected-Expert
Hoisting investadvocate website, a unique face in online Financial Market journalism, the firm sought to find out more about the Nation’s Stock Market and other related issues.
In this interview with PETER OBIORA of investadvocate.com, Victor Ogiemwonyi, Chairman Technical Committee, Governing Council, Chartered Institute of Stockbrokers/ Managing Director Partnership Investment Company Limited, (Member of the Nigerian Stock Exchange) reviews Quarter one (Q1) in year 2010 of the Nigerian Capital market (NCM), the introduction of an Asset Management Corporation of Nigeria (AMCON) to help carter for the Toxic Assets that has bedevilled the Market, effects of the ongoing Banking reform on the Nation’s Stock Market and regional integration of our Exchange.
Others issues discussed include, assessment of the Arunma Oteh, new Director General (DG) of the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE’s) leadership tussle, current trend of companies seeking fresh funds via Rights Issuing and world economic recovery . Excerpts:
NB: This interview was held in March 2010 and we are just publishing it for the first time.
Review of Q1 in year 2010 in the Nigerian Capital Market (NCM)
What has happened in the first Quarter (Q1) of year 2010 in the Nation’s Stock Market has been a surprise; following the meltdown it experienced in the last 18 months prior to 2010.
There were major issues in the Market such as debt overhang issues, liquidity problems, excess securities created from treasury stocks that Banks bought for themselves; which caused some problems in the Market and has resulted to what I will term as dumping effect. In this case, if any stock appreciates slightly, the next occurrence is the dumping of such stock; this happened in the early part of Q1 of year 2010.
However, the moment the Central Bank of Nigeria (CBN) came up with the Asset Management Company (AMCOM), to care of the Toxic Assets created by Banks. This resulted to Banks not lending out money because their funds were trapped and due to the debt hanging over the entire economy and the Capital Market Meltdown, many people could not service their loans; which further slowed down the economy. Banks are usually very reluctant to lend money to a slow economy; which connotes that the likelihood of the debts becoming bad is higher. All these have culminated to the lack of confidence in the Market. And confidence is the reason for liquidity in any Market. However, the proposal by the CBN on the establishment of an Asset Management Company to take care of these debts has helped in stabilising the Market a bit.
The NCM in the last two to three months has grown over 15 percent (15%) which is quite huge considering what the Market has been through in the past period. Also there is no doubt that further stability would be coming to the Market going forward. This has been the scenario in Q1 of year 2010 in the NCM.
Establishment of an Asset Management Corporation of Nigeria (AMCON)
As I speak now, the last public hearing on AMCON Bill would soon come up. The idea is that when it gets this far, it is almost certain that the Bill will be passed. However, there were some debates on the onset as to the reason behind the Bill. There were some aspects of it that the Stockbroking Community felt was not quite taken up properly. One was the issue of taking Long Term Assets, by any definition of Long Term Assets, Capital Market Assets are classified as Long Term Assets and must be at least five (5) years, the whole of these crises is less than two (2) years and now if we are to take the underlining Assets as the CBN has proposed and leave the Debtors; particularly the Stockbrokers in this case with the debts, it would be unfair; because we are dealing on Long Term Assets and they are still with the Banks. As earlier affirmed, the recovery we are seeing in the NCM in the past two to three months shows there are potentials for these debts to be wiped out.
Thus, if you are going to take the assets underneath and discount same from the Banks; then you have to take the debts with it; otherwise let the individual Banks settle with their customers and restructure the loans. What we are seeing is that the issue has not been properly taken care of in the sense that if you take the underlining assets without taking the debts, you have not done anything; because the debt overhang issue would continue to be there and then of course there are likely to be challenges to that effect which would not be a good thing to everybody.
More importantly, powers are not being given to AMC; which prior to this time, the Banks did not have. I can affirm that most of the Banks did not understand what the Margin product was all about. The Margin is a self funding and liquidating facility; it is left in the hands of the Banks to manage; which is the reason from day one, the Banks were given the free hand to manage; because the stocks are with them.
For instance if you approach two (2) Banks and lend about N100 million from these two Banks and you give them maybe a First Bank of Nigeria Plc (FBN) shares when it was about N33.00. Bank A for instance when the shares came down to N27.00 panicked and sold the whole shares and paid off your debts; whereas Bank B decides to keep the shares and now FBN is selling for about N14.00, how do you remedy this scenario? These were some of the explanation we needed to give to them. In the case of Bank B, it was a business decision to hold on to the shares hoping that things would get better and you can’t blame that on the debtor or investor as the case maybe. Margin Accounts by their nature are self limiting in the risk that they have been exposed to. These were the issues; which I think they have taken time to put in proper perspective and hopefully all these will be part of the things that will be put together for the good of all stakeholders. The idea of the AMC is a good one; we are not the only people that have done this, it has happened in other places.
EDITOR’S PICKS:
As at the time of filling in this interview, Nigeria’s House of Representative on Tuesday March 23 2010 passed the Asset Management Bill in Abuja Nigeria. This is to soak up the bad bank loans.
The Central Bank of Nigeria (CBN) has proposed to set up an Asset Management Corporation of Nigeria (AMCON) to buy up bad bank loans in exchange for Government Bonds in order to free up banks’ balance sheets and get them lending again after a N620 billion bailout last year.
However, the House of Senate is expected to vote on the bill in the next few weeks.
Current Banking reforms and its effect on the NCM
To be fair, nobody will quarrel with the fact that what Lamido Sanusi, the Governor of the CBN is doing is not proper. Some of the Banks went against the normal Banking ethics, a Bank using its depositors funds to buy its own stock, which is not a good practice. However, there have been issues as to the way Sanusi handled the situation. Banking is a conservative institution and when you talk about it, you have to do so with the confidence in mind; maybe a few people felt that these could have been handled better.
There is another argument that given the Nigerian situation, you have to do things in a little bit different way in order to make an impact; I believe that was the way Sanusi chose. Again, there was no doubt that we needed a reform; which is now having a positive reflection in the Market. We may not have witnessed the kind of Market infractions we have in the past period, some of us saw it; but we were not sure that it will be as deep as it was. From this point, Market Operators and Stakeholders really need to look at how they can help make the reforms work. I can affirm there are measures of stability and confidence coming to the Market and we are hoping that when the AMC is finally in place and takes out the toxic assets and debts, we are going to see a definite confidence returning, which will ensure liquidity in the NCM. This will bring about an orderly growth of our Capital Market.
Contribution of Market Stakeholders to the CBN’s reform
One of the things that were clear when the reforms unveiled a lot of things was that every Capital Market stakeholder was guilty in one way or the other. Regulators were not proactive, Operators got involved in some Market infractions, in a nutshell, and there were irresponsible Stockbrokers, inexperienced Regulators and greedy investors.
These were issues that all of us had learnt from, we did the test before taking the lesson. If all of us can moderate the excesses of the immediate past, I think we would be helping the reforms by that way.
On Arunma Oteh new Director General of the Securities and Exchange Commission
Definitely, when mistakes are made and you have somebody who has come from the outside; which was one of the major arguments for Arunma Oteh. We needed an outsider to make a change and that has already been reflected; bringing different perspective to how things work. There is also the issue that should be more focused on knowing what the problems on ground are.
In the immediate past, the SEC set up a review committee which I was a member to look at the entire Capital Market. We did this for a period of about six (6) months and found out that some of the areas where there were loopholes, we made proper recommendations; but in some, we had the proper laws; but they were not being enforced. I don’t have any doubt in my mind that Oteh would focus on ensuring that our recommendations were all fully implemented; because that is where she would begin.
During the days of Musa Al-Faki, the Market grew so fast, activities in year 2007 and 2008 was like what was done in the previous five (5) years and Regulators were caught unawares. It is one thing to blame them and also look at that fact that the Market grew so rapidly and could have caught anybody unawares. The global meltdown did not give our Regulators ample opportunity to learn and even those whom they were supposed to learn from had issues in the hands during the review period.
Oteh, I believe seems like somebody who would be able to focus on what the problems are and decide on them. It is important to have a transparent Market, have enforceable and sensible laws. It is also important that when the rules are broken, there should be no fear or favour in making sure the culprits are brought to book and penalised. My advice to her is in two (2) folds. One is to implement the Capital Market Review Committee recommendations to the fullest. The second is to make sure that she clears out the current Market infractions that have eroded confidence in the Nation’s Stock Market; not necessarily the punishment to the culprit that is important. But to be dynamic by making sure that when new laws are required, news rules should be made to make sure that such unhealthy practices does not occur again.
We are already seeing some of the things that needs to be changed, for instance if you look at the issue of having relationship between Issuers and their Advisers. For example FBN being advised by First Trustees or FBN Registrars. This kind of practice will make us have an environment that brings problems. We have seen some of these in the recent infractions in the Market. These we need to correct urgently and rules put in place to ensure that such are sensibly done.
Another infraction that is very clear and has come to the knowledge of all is the fact that the rate at which the Banks were approaching the Capital Market to raise funds was too frequent; therefore, made nonsense of the objective.
We had rules that ensure an orderly way which an Issuer comes to the Market to raise funds. In the recent past, some of them came to the Market to raise funds every other year. For instance, an organisation comes to the Market to raise about N50 billion and that company has not finished utilising and accounting for the funds, they come back and raise an additional N100 billion. This is one of the reasons we had problems in the Market.
NSE leadership tussle
The current DG has announced her retirement; though the Council of the NSE has not addressed us formerly as members of the Exchange. This is a problem we are having; we don’t know those representing us at the Council; somebody just tells us who and who are there and we don’t know how they got there. These are some of the issues that needs to be addressed, there shouldn’t be in a professional institution like the Stock Exchange the issue of leadership tussle of any kind. However, the recent summon of the NSE by SEC is to find a solution to the lingering problem. I think that all these issues are part of the growth in the Market and would be resolved in due time. There has been a lot that has happened in the Market and with time things will take its rightful shape. I am very confident that if they throw it open, we would eventually get somebody within the Exchange or outside it that will run the NSE very well.
The court and nullification of Alhaji Aliko Dangote’s NSE Presidency
It is very difficult to make comments on this, but in a short while, the issues will be clearer and we would know exactly what has caused it, Alhaji Dangote has been President of the Exchange for some months now and we don’t seem to relate why all of a sudden this is happening.
Companies and current trend of funding raising through Rights Issue
It is actually a keen interpretation, one of the things that Issuing Houses do when is to help companies raise money or advice them on the Market situation on such issues. However, the Market situation right now does not permit for fresh issues; due to the lack of interest by investors as a result of the past meltdown.
Those that sought to approach the Market for fresh funds last year at the thick of the meltdown have found out that their shares were completely destroyed in value or that nobody trading on same. Issuers now decided to raise fresh funds through existing shareholders; which was the reason for the spate of the Rights Issue, if the existing shareholders does not vote yes, you cannot expect outsiders to do so; this is basically what has informed this, it is an alternative way to the Capital Market and for the fact that some of these issues have succeeded means that tentatively people are gradually getting interested in the Market. The current Market trend in terms of investors’ confidence is why Issuers are going for a safer means of fund raising.
Regional integration of our Stock Exchange
This has been in the works for awhile, there has been a committee working on this. The issue is that most regional Exchanges are converging. And convergence is where liquidity and a bigger Market are made available. The idea is that instead of having a small Market in Ghana or Cote d’ Ivoire; there should be an an integration for a larger and more vibrant Market. Nigeria seems to be the only large Market in the region. But if you integrate them, somebody can be in Accra and trade in Lagos. As I affirmed earlier, if we integrate the Exchanges, we will have a more liquid Exchange with more Securities and a wider perspective.
FACTS CHECK:
Committee for the Integration of West African Securities Markets Convenes in Lagos, Nigeria
Ghana, Nigeria and Côte d’Ivoire Move to Establish a Larger Market for Issuers, Brokers, Buyers and Sellers of Securities Lagos, Nigeria; Accra, Ghana; Abidjan, Côte d’Ivoire – March 10, 2010
News Facts
· As part of their on-going commitment to expand the capital markets reach in the West African sub-region, The Nigerian Stock Exchange (NSE), Ghana Stock Exchange (GSE) and Bourse Régionale des Valeurs Mobilières (BRVM) held a meeting of the CEOs and Regulators of the capital markets for the Integration of West African Securities Markets, on Thursday, March 4th, 2010, in Lagos Nigeria.
·The highlight of the meeting was the decision to form an Executive Committee constituting stakeholders of the West African Securities Markets.
·The Executive Committee will comprise the CEOs of all three Exchanges, one representative for each Regulator of the three markets, a representative from each Central Securities Depository (CSD), and a Broker/Dealer representative from each of the Exchanges. Four organizations were granted Observer status, namely ECOWAS, the West African Monetary Institute (WAMI), Union Economique et Monétaire Ouest-Africaine (UEMOA) and the Sierra Leone Stock Exchange.
·The Executive Committee is tasked with overseeing the pre-integration and implementation phases of the initiative. Their major function is that of a policy-setting and decision-making body. They are given the responsibility of approving all issues concerning the integration of the West African securities markets, and coordinating with the relevant government and regional bodies to ensure the success of the project.
·The Executive Committee will be instituted in April 2010, when they will hold their first formal meeting.
·In 2007, a Technical Committee was formed to perform due diligence on the three regional exchanges and their markets, and to make recommendations on how the integration can be effected. Several reports on legislation, exchange operations, listing requirements, broker/dealer requirements, reporting requirements, settlement and more have been delivered by the Technical Committee for review and action by the Executive Committee. They will be expected to deliberate on these reports during the meeting next month.
·In December 2009, at the 13th Annual African Securities Exchanges Association (ASEA) Conference in Abuja, Nigeria, the sub-regional stock exchanges signed a Memorandum of Understanding (MOU) to seal their commitment to the project that has been undergoing feasibility studies since 2007.
(Source: West African Stock Exchanges Press Release dated March 10 2010 and signed by Ekow Afedzie, Deputy Managing Director Ghana Stock Exchange)
Recent view by Economist at US Investment Bank Morgan Stanley on current world economic recovery
The Economist are affirming that due to the fact that we see the world economy making a gradual recovery does not mean that the risk is over. For instance, if something hits bottom, the next thing is to start going up. When it gets to a point, people would start asking questions and this has already started in the advanced economies; when the meltdown continued, most of these countries hit their economy with lots of money and lowered their interests’ rates.
Now, what comes with that is the political side of it, people are beginning to lament that so much funds have been put out; the current debate in the United Kingdom (UK) and the United States (US) is that government has put so much money out. Morgan Stanley is actually saying if these funds have been put out there by the Government, how are they going to get same back. In the US, they have been issues of Government getting back the funds injected into failed Banks; especially when they seem to be making profit. I agree with the view of the Morgan Stanley Economist. One thing is clear whether we like it or not, it will take about two (2) to three (3) years before we can actually see a complete correction of the global meltdown effect. The Banks are the first to be hit and they are still the ones who first and foremost started the process of self recovery.
Another thing is that the advanced economies actually have far more problems; because a recession heats them up due to the maturity of their economy. But here in an emerging economy, there are lots of opportunities; even when the economy is going down, there are new opportunities; but in the advanced economies, everything is narrowed down and therefore not many opportunities available there. For instance if you don’t have people who have jobs, the retail sector and taxes will suffer. In the developing world, we still have a lot of problems to solve; there are always fresh areas and this is the reason we are not feeling it so much.
EDITOR’S PICKS:
In a recent publication published by Finfacts Team Mar 15, 2010 – 8:42:03 AM “The global economic recovery remains strong in 2010 but the risks are mounting for 2011â€ÂÂ, according to economists at US investment bank Morgan Stanley.
The economists, Joachim Fels, Manoj Pradhan and Spyros Andreopoulos, all based in London, say there is no need to worry about 2010 growth: They continue to forecast solid, above – -consensus global GDP growth of 4.4% this year
But downside risks for 2011: At the same time, the MS economists believe that downside risks for the global economy in 2011 are mounting, for three reasons.
First, many central banks in EM are about to start tightening monetary policy, and they expect the Fed to nudge official rates higher from Q3 2010 and thus earlier than markets currently expect. Monetary policy works with a lag, so most of this will only impact 2011 growth. Second, the MS macro team is looking for significantly higher bond yields this year and for a sell-off in developed equity markets. If so, it would dampen growth prospects for next year further. Third, the economists expect sovereign debt concerns to spread throughout the advanced economies as fiscal policy in most developed countries is on an unsustainable path. If (a big if, as discussed below) governments tighten fiscal policy significantly starting next year (this year, most countries are still easing fiscal policy), this would hurt growth. But if they don’t tighten, bond yields would likely rise even more and consumers would likely become even more cautious, again hurting growth. Taken together, the economists currently look for a moderate slowing of global GDP growth to 4% next year. However, they say that the risks to next year’s growth outlook are skewed heavily to the downside.
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