Zainab Ahmed, Nigeria's Finance Minister


Anxiety is on the rise again over the continued weakening of the Nigerian economy given the escalating volatility in the price of crude and the wobbly capital market. From a notional benchmark of $60, the oil price fell to about $54 before resurging to hover between $57 and $58 on Friday August 16, 2019. Brent has climbed to $60.2, but remain ever volatile.

Evidently then, the crude price volatility raises doubts about the sustainability of the 2019 budget and the country’s ability to achieve significant mileage in bridging both its huge infrastructure gap and addressing some more also of its gargantuan human capital deficit.

Last week, Nigeria’s Finance Minister, Zainab Ahmed sounded alarm that the country needed to increase its revenue generation  or it is headed for crisis. But that’s could be a tall order given the present realities.

In the last few months, three highly valued stocks (by price) on the trading chart of the Nigerian Stock Exchange (NSE) have shed a huge chunk of their nominal value.

These stocks include Seplat Petroleum Development Company Plc and Total Nigeria Plc, with each losing an average of 28 per cent year to date. This scenario appears to further compound and complicate the Nigerian situation as to what to expect in the short to long term in the economy.

The Federal Government had projected its budget based on the production of 2.3million barrels of crude per day and an expected revenues of about N6.97 trillion for the 2019 fiscal year.

From the oil sector, the federal government is expecting a revenue of about N3.73 trillion, while N710 billion will come from the proceeds of government equity in Joint Ventures. But for the better part of the year this far, oil production volumes still stood at 1.9 million barrels per day, while oil volatility is growing; given the spate of tension in the world, and especially the ongoing trade war between the US and Iran.

Not even the banking sector which is the most liquid of the equities market is spared as stocks in that sector have also, most uncharacteristically, shed huge amounts of weight.

Indeed, a deeper research by Business Hallmark reveals that three quarter of listed stocks on the NSE chart have lost almost a quarter of their value this far. While some have lost almost half of their value since January 2019, some others like Zenith Bank Plc, Stanbic IBTC and G T Bank have shed over 30 per cent of their nominal value within the same period under consideration.

The plunge is in fact, not restricted to the leading stocks on the Nigerian Stock Exchange price chart. BH research also reveals that the Year To Date market Index eased by 14 per cent as the All share index fell from the opening 30,771.32 basis points score that was recorded on January 3, 2019 to 26,925.29 basis points on Friday August 16, 2019.

The development has not only become worrisome to stakeholders, confidence in the equities market as an investment option is also eroding once again. On a stock-by-stock basis, the values of individual stocks, especially blue-chips have been battered, with an accompanying major erosion of capital values.

Looking at specific stocks, Zenith Bank lost 28.6 per cent from N22.63 in January 3, 2019 to N16.20 on Wednesday August 14, 2019 while Dangote Cement’s share price eased by 11.2 per cent from N186.00 to N165.00 in the same period under review. Also, while Seplat Petroleum Development Company slid by 23.4 per cent from N640.00 to 490.00 per share, Okomu Oil Palm’s share price also plunged by a notable 26 per cent from N76.20 to N52.00 per share.

On their part, shareholders of Guinness Nigeria lost 42.5 per cent of the value of their holdings as the stock’s price fell from N72.00 to N41.40 per share even as investors in Julius Berger Plc, Nigerian Breweries Plc and Unilever Nigeria Plc lost 11 per cent, 36.4 per cent and 13.5 per cent respectively.

At the close of business on Wednesday August 14, 2019, BH investigations also revealed that GTBank Plc shares also retreated by 21.2 per cent while Stanbic IBTC slid 17 per cent year to date. CAP Plc’s share price dropped by 27.20 per cent from N34.00 per share to N24.75 per share, Cement Company of Northern Nigeria fell by 28.18 per cent, 11Plc eased by 14.50 per cent, Conoil Plc also plunged 24.08 per cent while Forte Oil Plc retreated by 44.6 per cent.

Similarly, MRS Oil’s share price slid by 18.8 per cent, Total lost 47.8 per cent while investors in Nestle Nigeria also lost 13.8 per cent year to date.

Market Analysts have expressed deep concern over the dismal performance of the equities market as reflected in the fall in the value of several Blue-chip companies. Large Cap stocks have over the years remained a major source of strength and confidence for the local bourse, but this is being brazenly questioned by the massive drop in corporate market values. However, a few market reviewers have insisted that the performance of stocks cannot be divorced from the situation in the broader economy which has also experienced severe challenges.

A number of economists have expressed the view that any stock market would find it difficult to do well in a volatile macro-economic environment.

Nigeria is yet to recover fully from a recent recession and this has not favoured investors. In fact, there have been stories of anguish and disappointment as many businesses saw profits cave in. The dismal performance of investments has been blamed on an unstable and disoriented macro-economic environment. The effects of the recession between 2016 and 2017 are still lingering in the neighbourhood as no concerted effort has really been directed at improving the economy in a concerted and sustainable manner. Many people confess that the past year was indeed very challenging because of chiefly, the lack of a good policy direction to drive the economy.

Almost every sector of the economy has shown weaker indices as the macro economy continues to hobble along with low growth and high cost of domestic operations and consumer retail prices. Few Nigerians have welcomed the year 2019 with any degree of enthusiasm despite the federal government’s landmark fiscal expenditure plan of N8.83 trillion (which doubles as one of the highest in the nation’s history) and the increased allocation of resources to various sectors.

Indeed, there is still a major sense of uncertainty in the polity as regards the government’s broad economic direction as policies are widely considered by economy watchers as being made without comprehensively thinking through them. A recent example is the President’s announcement directing that the CBN place a ban on the extension of foreign exchange to food importers which has however been greeted with wide criticism not because many do not want the nation to grow its local food production stock but that they are not persuaded that all has been done to ensure sound policy implementation that would not engender negative effects on already over-burdened Nigerians.

Opinions have also been varied in the debate on the prospects for the broader economy going forward. Industry commentators believe that the year 2019 has not been favourable to businesses in Nigeria. Inflation has hovered between 11.4 per cent and 12 per cent having retraced its steps from the 18 per cent it attained in 2016. The economy has remained weak at 2.01 per cent; lending rate hovers between 28 and 32 per cent depending on the financial institution; deteriorating security has become a scare point to even domestic investors let alone foreign investors who have remained on the fringes to watch the drama inherent in a political environment that is largely fraught with deceit.

Equally troubling are factors like the poor implementation of the budget where over 70 per cent is deployed for recurrent expenditure with very little left for capital projects; the shrinking economy that has left consumers with very little disposable income to invest; and the Central Bank of Nigeria maintaining its hold on the monetary policy rate, leaving the MPR at 13.50 per cent, and the CRR and liquidity ratio at 22.5 per cent and 30 per cent respectively. These, analysts say, have also not augured well for banks in terms of creating risk assets at competitive rates.
Mr. Johnson Chukwu, Managing Director, Asset Management Company told Business Hallmark that the equity market mirrors the performance of the economy.

‘’We have seen a first quarter GDP growth of 2.01 per cent down from 2.38 per cent in the last quarter of December 2018. The deals of return will at best respond to the incentives or absence of incentives in the economy.

We have seen in the past few years that there is no concerted effort to drive economic growth and that is impacting negatively on the equity market. Apart from some outliers among the quoted companies, you will realize that most of the quoted companies are at best operating on the same level they did in the previous year.’’

According to him, if you invest in an economy that is growing by 2.1 per cent that is the kind of returns you should expect. When the economy is sluggish in performance, it will not be the first point of call for investors.

The Chief Executive Officer of the Nigerian Stock Exchange (NSE), Mr Oscar Onyema, had reckoned during his recap and outlook for the market for 2018/2019 that the Nigerian capital market started the year on a high note, with the Nigerian Stock Exchange’s All Share Index (NSE ASI or All Share Index) reaching a ten-year peak of 45,092.83 in January.

This was largely driven by the positive performance of the NSE ASI in 2017, which emerged the best performer in Africa and the 3rd best globally, according to CNN. As we approached the second quarter, political risks, oil price volatility and rising global yields resulted in bearish sentiments that saw the All Share Index and equity market capitalization fall by 17.81% and 13.87%, closing at 31,430.50 and N11.73Tn, respectively.

‘’Capital markets tend to act as barometers of any economy, and in Nigeria’s case, the prolonged economic downturn directly impacted an array of products and asset classes on the Nigerian Stock Exchange (NSE or The Exchange) ,’ the NSE CEO had said. Going by Onyema’s observation the market has remained weak mirroring the weak economy so far.

Further indications of the equity market’s link to economic dynamics is reflected in the drop in the NSE Oil/Gas Index which declined 27.6 %, NSE Banking Index dropped 22.01%, NSE Insurance fell 14%, NSE Consumer Goods Index plunged 30.3 %, NSE Lotus Islamic Index declined 22.4% while the NSE industrial Index crashed by 9.58%, mimicking the decline in real GDP growth.

The CBN’s target to achieve a single digit inflation has not materialized even though it has dropped from about 18 per cent in 2016 to 11.08 in August 2019. One of the causative factors is the spike in food prices which is in turn being driven by rising prices of imports and structural deficiencies in power, transportation, and production.
Equally, there are still security concerns as the Boko Haram group has continued to launch murderous attacks on both civilians and the military, with criminal elements now scattered across literally every part of Nigeria, causing fear in the communities. Add to these, the nefarious activities of alleged killer herdsmen and rising unemployment and you would see the major challenge that the authorities have in their hands in nudging the economy back to life and sustainably too.

And the development will continue to rub-off on the capital market.
Most worrisome also is the observation by the analysts at HUFFPOST who have said that investors are worried that the trade war between the U.S. and China may drag on through 2020 and cause more economic damage for the United States of America and off course the world.

They noted that the yield on the 10-year Treasury briefly dropped below the two-year Treasury’s yield Wednesday morning for the first time since 2007. The so-called inversion has correctly predicted many past recessions and is the loudest warning bell yet about a possible recession ahead.
Within this scenario, Nigeria continues to face the security and infrastructure challenges that have held back its economy, but private enterprise is plugging some of the gaps, The Financial Times of London has also noted. But for how much longer given particularly the losses being suffered at the stock market?

Commenting on the issue, Dr. Afolabi Olowokere, believes the reality on ground today is that there is not much prospect for the equity market to perform very creditably to the extent of delivering unusual returns this year. He explained that whereas there will continue to be activity in the market, this will however continue to fluctuate from time to time and not grow significantly before the end of year 2019.

Olowokere however added for good measure that the fixed income market which has seen a surge until recently still possesses the potential to perform better than equities given that there is no tendency to reduce interest rates in the short term. The fixed income will be doing better than the equity market in the next one or two years, he asserts.

With the All Shares Index sliding from 66,551.84 basis points at the beginning of March 2008 to 26,223.54 last week, investors have begun to write off the market as a safe haven for savings in the rest of the year.