Any cheer for capital market in 2016 budget?

April 6, 2016

The National Assembly recently passed the 2016 Appropriation bill after making a minor cut of N17bn to the budget size from the initial N6.077tn proposed by the Executive arm of government. At N6.06tn, it is the largest budget in Nigeria’s history and so is expected to have “’something for everyone” and facilitate inclusive growth.

Considering that the world over, the capital market is a major channel of economic growth and development, is the 2016 budget capable of meeting the wish-list of the capital market? Are there sufficient pro-investor measures in the budget to re-invigorate a market that has been devastated by foreign investment outflows? In 2015, for example, the equities market lost over 17 per cent of its value largely on account of the exit of foreign portfolio investors. The economic headwinds of last year in the wake of the slump in oil price did not spare companies quoted on the Nigerian Stock Exchange. Of the 19 companies that have released their 2015 financial results and announced dividends to shareholders as of March 23 2016, only Lafarge Africa Plc, a cement and building solutions provider, is giving a bonus of one for 10 in addition to a dividend of 300 kobo per share in spite of reduced earnings. The rest made no capitalisation issue provision but are only paying various amounts of dividends with a majority recording low dividend yield- the ratio of dividend to share price.

In particular, the banking sector which makes up about 28 per cent of total equities capitalisation on the NSE, grappled with huge non-performing loans in 2015. According to a recent report by the Central Bank of Nigeria, “the amount of bad loans in the banking industry rose sharply by 78.8 per cent to N649.63bn in 2015, indicating severe deterioration in the quality of the loan portfolio of the banks.”

The first impression from a bird’s eye view of the 2016 budget is that capital expenditure is set to rebound from many-year lows. In contrast to budgets of previous years, the federal lawmakers approved a sizeable chunk of N1.587tn for capital expenditure with recurrent expenditure at N2.646.3tn. The capital component will impact the market more than the recurrent as the latter comprises largely salaries and overheads. In line with expectations of many, the lion’s share of over N422bn is allocated to the Ministry of Works, Power and Housing. Another large beneficiary category is the Ministry of Transportation which has been allocated over N188bn. Obviously, the huge investment in infrastructure is crucial to reducing the cost of doing business and improving the attractiveness of Nigeria as an investment destination. The government spending on housing and infrastructure is expected to have a direct impact on a company like Julius Berger Nig Plc listed under the infrastructure/heavy construction category and companies in the building materials sub-sector such as Dangote Cement Plc and Lafarge Africa Plc where current valuations are still considered attractive. In recognition of the fact that security is necessary for encouraging investment, accelerating economic growth and creating jobs, the government has set aside over N130bn for the Ministry of Defence. All said, whether these provisions will gain traction for the capital market in 2016 will largely depend on how the funds are utilised.

It is noteworthy that the National Assembly did not tinker with the oil benchmark of $38 per barrel proposed by the Executive. So also are crude oil production targets of 2.2 million barrels per day and an exchange rate of N197 to one dollar. A deficit of N2.2tn is projected, representing 2.14 per cent of Gross Domestic Product. The huge deficit will be largely financed by borrowing with N1.48tn devoted to debt service. By implication, government borrowing is expected to surge in the 2016 fiscal year. In the external sector, plans are afoot by the Debt Management Office and the Securities and Exchange Commission to issue the Nigerian sovereign Islamic bonds as part of strategies for funding the budget deficit. According to the DMO, “issuing a sovereign Sukuk will attract significant amounts of affordable capital from the Gulf countries and other established Islamic markets around the world into Nigeria.”

Government borrowing programme will also be felt in the domestic bond market that has recorded an impressive growth narrative. A recent report by the Nigerian Stock Exchange revealed that ‘’while the equities market dipped by 17.4 per cent and the primary equity market was flat in 2015, the bond market‘s capitalisation grew by 32.7 per cent to N7.14tn in 2015’’ largely on account of the activities of federal and state governments that raised N76.5bn and N35.8bn respectively in debt capital last year. This was made possible by a captive domestic market made up of banks and non-banking institutions eager to buy government bonds. So, the 2016 budget has the potential to strengthen the bond market and perhaps put Nigeria in the league of countries where bond markets are larger than equities markets. For example, in the United States of America, the bond market is about twice the size of the equities market. This evidence is consistent with a study by McKinsey & Co in 2012 which indicated that global bond markets are three times the size of equities markets. Any salutary effect of the 2016 budget on the bond market will increase the frontier of options available to investors and with greater clarity on policy direction of the government following the passage of the 2016 budget, investors who have remained on the sidelines due to economic uncertainties are expected to return.

The return of liquidity to the capital market will also be a function of whether the market views government’s policies as supportive. It is disturbing to note that the 2016 budget is silent on any specific government fiscal policy aimed at deepening the capital market. There is no mention of the capital market in the Medium Term Expenditure Framework / Fiscal Strategy Paper 2016–2018 of the Federal Government of Nigeria which will provide the basis for budget preparation in the next three years. This glaring omission creates the impression that the National Planning/Budget office has yet to appreciate the critical roles that the capital market can play in economic development of Nigeria.

In many emerging markets such as Malaysia, Indonesia, and India, the government spells out in the budget document measures to boost the capital market given its importance in the economy. For example, Malaysia 2016 budget included “invigorating capital market” under the government’s first priority of “strengthening economic resilience”. It sets out several initiatives for the attainment of this objective such as “tax deduction on issuance costs of Sustainable and Responsible Investments”, among others. Is it any wonder therefore, that these economies have moved on from a frontier classification where Nigeria still is to a higher “emerging” status?

There are 190 listed equities on the main board of the NSE compared to about 350 on the Johannesburg Securities Exchange of South Africa. This gives investors a very limited number of options in their portfolio composition not least because companies in the Industrial Goods and Banking sectors dominate the market. Dangote Cement Plc alone constitutes about 30 per cent of total market capitalisation of equities.