CAPITAL MARKET REFORMS:
THE NIGERIAN EXPERIENCE
PRESENTATION BY:
FAROOQ OREAGBA
HEAD, STRATEGY & DERIVATIVE MARKETS
THE NIGERIAN STOCK EXCHANGE
AT THE ASEA CONFERENCE
17TH – 20TH SEPTEMBER 2006
Anti Corruption
Economic
EFCC
EITI
ICPC
Code of Conduct
Bureau
NEEDS
NAPEP
Financial
DMO
Privatization
BPE
Economic & Financial Crime Commission
Extractive Industry Transparency Initiative
Independent Corrupt Practices Commission
National Economic Empowerment & Dev. Strategy
National Poverty Eradication Programme
Debt Management Office
REFORMS
Political
Public Sector
Service Delivery
Monetization Policy
Pension
Bureau of Public Enterprises
CAPITAL MARKET REFORMS
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The present administration has brought into play several
reforms as shown from the previous slide, with varying
degrees of success.
For the purpose of this presentation, we will focus on
those reforms which have had an impact on the Nigerian
Capital Market in particular.
These are namely:
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Anti-Corruption
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Economic
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Financial
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Political
REFORM: ANTI-CORRUPTION
Anti-corruption Drive – focused on reducing the negative impact of
corruption on the nations economy.
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Government set up Economic & Financial Crimes Commission (EFCC) to
tackle financial and related crimes while Independent Corrupt Practices
and other related offences Commission (ICPC) was set up to fight
corruption in public office. Also, the due process office was set up to
oversee and demand that standard processes be followed in the
execution of government activities.
EITI – Extractive Industry Transparency Initiative – This was set up to
provide greater transparency on petroleum revenue data and public
finances thereby assisting the policy makers in devising and
implementing policies.
ICPC – Independent Corrupt Practices Commission is the apex body
saddles with responsibility to fight corruption and other related
offences in Nigeria. It is mandated to prohibit and prescribe
punishment for corrupt practices and other related offences.
REFORM: ECONOMIC
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National Economic Empowerment Development & Development Strategy
(NEEDS) was designed to help in poverty eradication.
National Economic Empowerment Development Strategy (NEEDS) was
derived from the urgent requirement for value orientation. It is intended to
provide Nigeria with a new set of values & principles which will facilitate the
achievements of national goals of wealth creation, employment generation
and poverty eradication based on a sound macroeconomic framework.
Needs has fashioned reform agenda with emphasis on strengthening the
macroeconomic environment and also the growth agents within the system.
NEEDS Objectives
Poverty reduction
Employment generation
Wealth creation
REFORM: ECONOMIC
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Contd
National Poverty Eradication Programme (NAPEP) was established to
monitor, coordinate and review all poverty eradication efforts.
In addition to the NEEDS & NAPEP programes, there is the Small & Medium
Enterprises Development Agency of Nigeria (SMEDAN). SMEDAN was
created to:
Establish a structure and efficient Micro Small & Medium Enterprises
(MSME) that will encourage and enhance sustainable economic
development of Nigeria.
It also exists to facilitate and promote the access of MSMEs to resources
required for their growth and development.
FINANCIAL REFORMS
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DEBT MANAGEMENT OFFICE(DMO) Set up to provide a one stop shop
for clearing all Nigerian government debts.
To transform Nigeria’s debt portfolio into an asset for growth and
development
To build a world class DMO of making Nigeria’s debt sustainable by 2006
BANK CONSOLODATION
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Prior to consolidation Nigeria had 89 banks, many with capital base <$10m.
Due to this low capacity of local banks, the country’s reserves were
deposited in foreign banks and there was also an over-reliance on public
sector deposits.
There were also regular problems of weak corporate governance, inaccurate
reporting and non-compliance with regulatory requirements, irregular
publication of annual accounts etc.
On 6th July 2004, Central Bank of Nigeria Governor announced the Banking
Sector Reforms.
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First phase was designed to ensure a diversified, strong and reliable
banking sector, ensure the safety of depositors money, play active
developmental roles in the Nigerian economy and become competent and
competitive players in both the African and global financial systems.
PENSION REFORMS
Prior to the Pension Reform Act of 2004 and the setting up of the
National Pension Commission, the situation was such that;
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There were significant outstanding pension liabilities.
Most schemes in existence were under-funded
Majority of workers in the private sector were not covered by any
retirement benefit arrangements
OBJECTIVES OF THE PENSION REFORMS
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To facilitate the provision of retirement benefits to every worker
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To ensure that these benefits are received by the worker as and when
due
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To establish uniform rules, regulations, guidelines and standards for
administration of pension matters
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To establish a strong regulatory and supervisory framework
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To secure compliance and promote wider coverage.
IMPACT OF THE REFORM PROCESS IN NIGERIA
FATF: As a result of the reform process in Nigeria and the
progress being made, Nigeria has been removed from the list of
non-compliant nations.
Debt Relief/Country Ratings:
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In October 2005, Nigeria and Paris Club announced a final
agreement for debt relief worth $18 billion and an overall
reduction in Nigeria’s debt stock by $30 billion and this was
completed on April 21st 2006.
Short-term financial windfall has resulted in savings from
servicing debt being used to finance infrastructural projects,
education, health and poverty reduction.
IMPACT OF THE REFORM PROCESS IN NIGERIAcontd
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Terms of the agreement embody sufficient safeguards to ensure that
the poorest section of the population benefit.
Standard & Poors & Fitch assigned the Federal Republic of Nigeria
Long-term foreign and local currency Issuer Default Ratings of BB, both
with stable outlook (on par with Brazil and Turkey).
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Nigeria “Brady” par bond maturing 2020 assigned BB
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Short-term rating B
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Country ceiling of BB
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Ratings underpinned by government’s strong commitment to economic
reform
IMPACT OF THE REFORM PROCESS IN NIGERIAcontd
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Implications
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It is estimated that government public debt burden will be just 17% of GDP
by end of 2006 compared with 66% in 2004
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Public external debt service ratio is expected to fall to just 17% of exports
of goods and services in 2006
The existence of the ratings, though not investment grade, are important
because they provide a benchmark to evaluate risk relative to other
emerging markets, deepen domestic capital markets and promote public
sector transparency
The success of the Nigerian government reforms along with the recent
ratings are some of the reasons for the increase in Foreign Direct
Investment (FDI). Previously, the preponderance of economic & financial
crimes had severe negative consequences on Nigeria and the level of FDI
Restrictive policies and laws on enterprises were reviewed, thereby opening
the economy to more foreign participation
IMPACT OF THE REFORM PROCESS IN NIGERIAcontd
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With regards to banking consolidation, key elements of
the first phase were:
Requirement that minimum capitalization for banks should be
raised to a minimum of N25 billion ($250m) from N2 billion
($15m) with full compliance by end of December, 2005.
The second phase is designed to encourage the emergence of
regional and specialized banking.
Consolidation reduces the problems of bank liquidation in
Nigeria by putting the banks on a more robust footing and also
to move the Nigerian economy forward by strengthening the
banking system in order to facilitate development.
IMPACT OF THE REFORM PROCESS IN NIGERIAcontd
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MANAGEMENT OF EXTERNAL RESERVES
Upon the completion of the initial consolidation process, the Central Bank of
Nigeria (CBN) has now embarked on a framework for reserves management
with a vision to leapfrog and create Nigerian mega banks that can compete
on the world stage.
With external reserves in the region of $33 billion, we are now seeing
Nigerian banks partner with the likes of HSBC, Merrill Lynch, JP Morgan,
Bank of India and Credit Suisse in order to meet the requirement to
manage these reserves.
The additional benefit of this exercise is the transfer of skills and the
increased positive spotlight on the country.
IMPACT OF THE REFORM PROCESS IN NIGERIAcontd
With respect to reforms in the Pension sector, the effect has been such that:
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18 licenses have so far been issued (13 PFAs, 1 CPFA, 4PFCs)
5 existing schemes have been approved for continuation while another
6 Approvals-in-Principle have also been given.
Licensed operators have commenced operations and over 3500
Nigerians are employed in this area.
Approximately N69 billion ($530million) has been contributed in the
public sector in 24 months.
Normal monthly accumulation is expected to be in the region of N6
billion
Guidelines on the investment of Pension Assets are designed to
enhance the creation of new innovative securities such as REITs, ABS,
infrastructural bonds etc.
CONCLUSION
In concluding, it is fair to say that the ongoing reform process in Nigeria
has had a significant impact on capital market activity in the country.
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We have recently seen the Federal Government come to the Capital
market by issuing bonds in order to meet its obligations regarding
pension arrears. It placed N75 billion ($576 million) worth of bonds with
5 local financial institutions in July 2006. Prior to banking consolidation,
this would have been impossible.
In addition, the Federal Government recently issued another N150 billion
($1.2 billion) to fund its contractual obligations.
We have seen the development of a secondary bond market in Nigeria.
In the year to May 2006, secondary market activity was nil , yet by
August 2006, the secondary market activity was in excess of N30 billion
($230 million) per month. We expect this growth to continue.
CONCLUSION - contd
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The recently licensed pension fund administrators have emerged as a
source of long term funds that can be used for infrastructural projects.
We are now seeing the development of a ratings industry
We are also seeing the creation of new products such as REITs, ABS,
ETFs etc
Ladies and gentlemen, it is fair to say that the reform process in
Nigeria has brought about exciting times in the Nigerian Capital
Market and I thank you all for taking time to listen to our story.
FAROOQ OREAGBA
HEAD, STRATEGY & DERIVATIVE MARKETS
THE NIGERIAN STOCK EXCHANGE
Email- foreagba@nseconsult.com