Business Analysis
Crystal-Gazing the Nigerian Stock Market in 2022
By Uche Uwaleke
Going by the relatively low year-to-date return of circa 6 percent in 2021, the performance of the Nigerian stock market, represented by the equities segment of the Nigerian Exchange, appears a far cry compared to mouth-watering market return of 2020.
One continues to recall with nostalgia that despite the ravaging impact of COVID-19 on the Nigerian economy, the stock market surprised on the upside, outperforming global stock markets in 2020, according to Bloomberg, and posting over 50 percent year-to-date return.
Has the low outturn in 2021 come as a surprise? Not exactly. In my article ahead of 2021 titled ‘Crystal-gazing the Nigerian Stock Market in 2021’, I had made the following prediction: ‘’the stock market will most likely pull back by the second half of 2021 having attained an unprecedented peak in 2020.
The low yield environment in 2020 acted like a tide that lifted all boats and under such circumstances, there is the tendency that a number of stocks may have been mispriced or priced above their intrinsic values.
If history is any guide, market correction is bound to happen especially in the last two quarters of 2021 regardless of any positive growth rate in GDP attained in 2021’’.
With the benefit of hindsight, this prediction actually hit the bull’s eye in view of the fact that the highest stock return in 2021 was in the month of January at 5.3% and that returns for the last quarter printed at 4.52% (October), 2.88% (November) and -1.12% (November) compared to 13.79%, 14.72% and 15% respectively during corresponding periods in 2020. It goes without saying that the performance of the Nigerian stock market in 2021 cannot be divorced from the fragile economic performance.
The country recorded some improvements in real GDP growth compared to the economic downturn of the previous year which was largely on account of COVID’19 pandemic. For example, GDP growth rate in the second and third quarters came in at 5.01% and 4.03% respectively powered mostly by the non-oil sector.
Also worthy of mention is the fact that headline inflation began a downward trajectory in April 2021. Regrettably, these positive macroeconomic developments did not make any significant impact on the stock market not least because the quarterly GDP growth rates had a lot to do with what is statistically known as the base effect in the computation of GDP given the deep economic recession experienced during the corresponding periods.
Furthermore, although disinflation was sustained for 8 consecutive months in 2021, the double-digit inflation rate remained high to support any meaningful growth in the stock market. As a matter of fact, the 6.07% return in 2021 translates to negative real return when adjusted for inflation which came in at 15.40% in November 2021.
Other factors which presented challenges to real traction of the stock market in 2021 include the high exchange rates as well as rising yields in the fixed income market due in part to increase in government’s borrowing.
It will be recalled that the remarkable performance of the stock market in 2020, despite the pandemic, was largely on account of the low yield environment made possible by the accommodative monetary policy stance of the Central Bank of Nigeria.As the 2021 curtain falls, what looks clear from my crystal ball is that the performance of the market in 2022 will be shaped by the following factors: CBNs Monetary Policy.
In order to support economic recovery, the CBN has maintained what can be described as accommodative monetary policy stance since September 2020 when the MPR was reduced by 100 basis points to 11.5%.
This stance will likely change in 2022 as policy becomes more hawkish induced by both endogenous and exogenous factors (i will come to these later).
Tightening monetary policy through, for example, raising the MPR could lead to rising yields in the fixed income market and portfolio rebalancing away from equities to fixed income securities. For many businesses including listed companies, access to credit will continue to pose a challenge in a rising interest rate environment.
Persistent Forex challengeFor many businesses that depend on imported raw materials, difficulty in accessing forex is most likely to linger in view of the arrears of unmet forex demand which the CBN still grapples with. Against this backdrop, capacity utilization will likely be negatively impacted which in turn affects bottom lines and ability of listed companies to pay dividends.
Implementation of the FGs 2022 BudgetOne of the endogenous factors I referred to earlier has to do with the growing fiscal imbalance. I can bet that the over N6 trillion deficit in the 2022 budget (which now has an aggregate expenditure of over N17 trillion) and government borrowing plans to finance the deficit will impact the stock market in a number of ways.
It stands to reason that the more the government borrows to finance budget deficit; the more interest rates are driven up and as yields in the fixed income space go up, investors will naturally migrate from equities to government securities. More so, when government securities have the additional advantage of being risk-free.
I foresee the yield environment in 2022 returning to the pre-COVID level and having a huge toll on the equities market. As a corollary, the implementation of certain aspects of the 2021 Finance Act could impact liquidity of companies such as the reduction in the period for the payment of the Tertiary Education Tax from 60 days to 30 days.
Faced with liquidity constraint, many public companies may not be in a position to maintain dividend payments at current levels or even pay at all.
Removal of fuel SubsidyAnother endogenous factor I could pick from my crystal ball is the planned removal of fuel subsidy following implementation of the PIA by mid-2022.
The inevitable consequence will be higher headline inflation in the near term lingering till end of 2022. The tight monetary policy that will follow to rein in inflation will result in higher fixed income yields and make equities investment less attractive.
There’s equally the risk of rising cost of production arising from removal of fuel subsidy and increase in electricity tariffs. The situation will be made worse if fuel subsidy removal triggers social unrest which is inimical to both foreign and domestic investments. Already, if recent reports are anything to go by, organized Labour has announced a Nation-wide protest on January 27 against the plan.
Heightened Political ActivitiesFor some reasons, penultimate election years in Nigeria are characterized by feverish preparations for general elections which tend to relegate the economy to the back seat.
This will have adverse consequences for the economy and the stock market from the uncertainties and tensions often generated by activities of some desperate Politicians. Inflationary pressure and exchange rate challenge will likely manifest more in the 2nd half of 2022 as politics takes centre stage.Intensity and Spread of Omicron Virus.
On the global scene, the intensity/spread of the omicron COVID’19 variant represents an exogenous factor. So, how the federal government of Nigeria responds to it will equally influence stock market performance in 2022. Resort to Lockdowns and movement restrictions will prove counterproductive.Interest Rate Normalization in Developed economies.
The planned interest rate normalization in developed economies is another exogenous variable likely to impact the Nigerian economy including the stock market in 2022. First, bond yields will rise leading to capital flow reversals in frontier and emerging markets. So, Nigeria should expect further capital outflows as a consequence which will hurt the stock market.
Also, it goes without saying that exit of foreign investors usually puts pressure on the forex market.
Therefore, another likely implication is depletion of foreign reserves and a higher exchange rate of the naira providing further justification for the CBN to tighten monetary policy. As earlier noted, doing so will increase cost of borrowing and reduce access to credit by businesses. When this happens, banks are likely to reprise their assets which may worsen Non performing loans position in the Banking sector.
At another level, the rise in US interest rates and bond yields will make it more expensive for the government to service the huge public debt now in excess of N38 trillion especially the foreign debt with significant Eurobonds component.
This development will worsen the fiscal imbalance, jeopardize the 2022 budget as well as crowd out development funds.Having gone through this experience before, both the fiscal and monetary authorities should anticipate the fallout of interest rate normalization in developed economies and put in place measures to cushion the adverse impact on the Nigerian economy.International crude oil priceOn the flip side, International crude oil price is likely to stay above the 2022 budget reference price of $62 per barrel on the average.
Crude oil output is also likely to shore up following implementation of the Petroleum Industry Act. The combined effect of these is that the oil sector performance is likely to improve in 2022 which should rub-off positively on oil companies listed on the Nigerian Exchange.
Overall, the seemingly intractable challenge of insecurity will continue to dampen sentiments in the nation’s stock market in the new year. In order to mitigate the risks in the horizon, as well as ensure effective response to these possible threats to the nation’s economy, there should be proper coordination between fiscal and monetary authorities.
The government should begin in earnest to discuss compensation measures with organized Labour aimed at ameliorating the impact of fuel subsidy removal.
All said, to overcome the headwinds, investors in the Nigerian stock market will be well advised to follow the time-honoured cautious investment path of asset allocation, risk management and portfolio diversification.
Happy New Year!
*Uche Uwaleke is Professor of Capital Market at the Nasarawa State University and President of the Association of Capital Market Academics of Nigeria
By Uche Uwaleke
Overall, the 2024 budget proposals hold a lot of promise for the economy if well implemented.
A major snag, however, stems from the likely distortionary impact of the new Forex regime.
A naira float in the face of weak supply and strong demand with its attendant forex market volatility introduces uncertainty in budget implementation.
This is why I consider the N750 to the dollar rate used for the 2024 budget as a tall order.
It’s most likely the exchange rate will be the major cause of wide budget variances in the 2024 budget on account of NAFEM operations.
This is particularly so in respect of the dollar-denominated component of the budget much of which can be found in the over N3 trillion proposed defence spending as well as in recurrent debt expenditure.
A volatile and high exchange rate will increase the cost of servicing external debt and further widen the budget deficit.
In my view, a well implemented and corrupt-free dual (not multiple) exchange rate regime (one official including for debt service and another tier for other transactions) helps to bring certainty in government procurements and short term planning in general.
A related issue has to do with the mode of financing the over N9 trillion deficit and its likely impact on cost of capital for firms and the stock market.
Unlike in previous budgets where the amount voted for new borrowings were split fairly equally between domestic and foreign sources, this time around domestic borrowing is taking up a huge chunk at about 78% (N6.1 trillion out N7.8 trillion provisioned for new borrowings)
This can have the effect of crowding out the private sector, hiking interest rates, increasing cost of funds and depressing the equities market as investors migrate to fixed income securities. The outcome will be a further weakening of the productive sector.
In this regard, the government is advised to explore more opportunities for concessional project-tied loans from multilateral and bilateral sources. This will help to boost forex reserves and stabilize the exchange rate.
With respect to borrowing domestically, it’s important that emphasis should be placed on the use of the right instruments such as infrastructure bonds as opposed to FGN bonds that are inflationary prone.
Uwaleke is Nigeria’s first Capital Market Professor
By Ademola Oyetunji
The atmosphere in the Nigeria’s financial sector is in a state of frenzy. Stakeholders are befuddled on why the apex bank’s monetary policy committee have not met. This is because the CBN had twice postponed the meeting under the leadership of its new Governor.
The first postponement scheduled to hold shortly after the appointment of Mr.
Cardoso and his four deputy governors, was obviously put on hold to enable them settle down. The reason could also be that the new management team needs time to study and digest President Tinubu’s 8-point agenda and current trends in the financial system to align them with his vision.Mr. Cardoso at the NASS screening had promised to ensure the independence of CBN. He also pledged to ensure that the CBN under his watch will play its role as a catalyst for growth, and adviser to the government. He said “his-CBN” will shy away from interloping responsibilities.
It is also a common knowledge that President Tinubu had ordered a clean house of the Bank believed to have veered of its mandate under the immediate past governor.
It is also a public knowledge and concern that the Naira has been under attack by speculators and rent seekers, a chronic headache for the Bank’s new helmsmen. Forex illiquidity has also become malignant. Thus, convening the MPC meetings amidst these challenges may not be an immediate priority, rather they have been unobtrusively addressing and stabilizing the financial sector. The gains of these efforts are visible, though the parallel market is still chaotic.
The postponement of what was supposed to be its last meeting for the year further heightens the palpable fear and uncertainties of the consequences of the MPC not meeting. Stakeholders’ fear cannot be dismissed as Nigerians battle economic hardship, rising food inflation and unbridled Naira depreciation.
However, the CBN Act 2007 section 12 saddles the Committee to ensure price stability and support economic policy of the federal government. The Committee consists of the Governor as the chairman, the four deputy governors, two members of Board of Directors, two members appointed by the Governor, and two members appointed by the President to formulate monetary and credit policy.
It is the highest policy making organ of the Bank responsible for reviewing economic and financial conditions in the economy. It also determines the appropriateness of policy applications in short to medium term, and regularly reviews Bank’s monetary policy framework, and adopt changes when necessary.
The Act mandates the Committee to communicate monetary and financial policy decisions effectively to the public and must ensure the credibility of the model of transmission mechanism of monetary policy. It is to meet bi-monthly, except otherwise (as it is the case presently) or on emergency.
Until the appointment of the present CBN Governor, the Committee had met four times under the last dispensation. It is also a public knowledge that boards of federal parastatals and agencies were dissolved by the President with many yet to be reconstituted. The CBN board is one of those dissolved and yet to be reconstituted, neither is it a public knowledge that the President has nominated his two candidates.
Hence, the Bank presently does not have the required number to form a quorum, nor the Governor and his deputies have the constitutional mandate to overtly make certain monetary policy decisions without the approval of the Board.
The concern by the public is normal, particularly the way economic saboteurs have been attacking the Naira and manipulating the parallel forex exchange market. The concern is also noted considering the latest inflationary figure, 27.33%, released by the National Bureau of Statistics (NBS).
But to allay the fears of the public, the Bank’s spokesman, Dr. Isa Abdulmumin had on the eve of the scheduled September MPC meeting issued a press statement to announce its postponement. He regretted any inconvenience the change in date may have caused the Bank’s publics.
The hullabaloo over non-holding of the meetings may have been misplaced but expected. And with Nigeria’s current economic reality, it behooves the economic managers to be strategic in meeting economic saboteurs at their wits ends.
Notable economists and financial technocrats have entertained worries over continuous postponement of the organ’s meeting. They believed it may further heighten economic uncertainties. Mr. Boluwafemi Agboladun, a chartered accountant, expressed fears that the silence from the Bank amidst economic turbulence is unsettling as no concrete reason was given for not holding the meetings.
He was however quick to add that the strategy adopted so far by the new management of the Bank is yielding positive dividend. There is stability in the forex market, and Naira exchange rate is no longer volatile. The strategic management adopted by the CBN so far, he noted, is commendable, making currency peddler unsure of what next is coming out from the Bank.
Agboladun also felt that the new CBN Governor may have decided to start the new year with his own monetary policy calendar after he would have gotten a clear heads-on of the fiscal direction to align it with his monetary policy philosophy. He stressed that, it is better for the CBN and the government to have a clear distinction in roles, unlike the muddled and overlapped responsibilities witnessed in the last administration.
Feranmi Deepak, a public commentator, was not surprised that the meeting, though statutory, has suffered two postponements. He was only worried that the outcome of the meetings would have avail the public of the monetary policy direction of Mr. Cardoso, as it would have road mapped investment decisions by local and foreign investors.
The CBN, he observed, may also be taking its time coming out with its agenda. This, he noted, may be due to the ongoing economic diplomacy drive of the President who has been unrelenting in his travels, marketing Nigeria. Therefore, the CBN, he said, “may be collating all he has been saying to the investing community to develop its monetary policy roadmap as government banker and advisor”.
He was optimistic that the MPC meeting would assume its normal mode next year, when probably the President in his wisdom would have reconstituted the bank’s board to allow for normalcy in its calendar and restore stability in the financial sector.
*Ademola Oyetunji writes fro
By Chisom Adindu
The ongoing effort by National Assembly to tinker with the Central Bank of Nigeria’s Act, 2007, has been generating heated debate within the polity. The concern has been the rationality of the exercise. This effort is spearheaded by two distinguished Senators, Senators Steve Karimi and Darlington Nwokocha.
The bills are – ‘A Bill to Amend the Central Bank of Nigeria Act 2007, and Matters Connected Therein’, and An Act to Amend the Central Bank (establishment) Act 2007 to Make the Central Bank More Transparent and Accountable in its Operations and to Ensure Enhancement of its functions and for Connected Matters’.
The crux of the two amendments already consolidated by the Senate is the ban on the CBN governor and his deputies from partisan politics, reconstitution of the CBN Board; subjection of CBN staff renumeration to the Salaries and Wages Commission; and ceding the position of the Board Chairman to a person outside the CBN. Also proposed prohibition of use of foreign currency in local transactions. Until this proposal, the Governor doubles as the Board Chairman.
The preoccupation of the sponsors of the bills is to enhance transparency and efficiency of the Central Bank of Nigeria, and to strip its governor of certain powers. The Senate Committee on Banking and Finance is saddled with the responsibility of reviewing and working on these bills for the Senate to take a position.
Whatever is the expectation of the sponsors, it is important that the National Assembly does not in a spasm of emotion erode the independence of the Bank. CBN Act 2007 had settled this.
It was a common knowledge that the immediate past CBN governor’s hiatus and unprofessional conduct by engaging in partisan politics may have warranted this quest. His action was an infraction, and antithetical to his oath of office. It was also against the norms of central banking ethics. Anger against a rare singular infraction should not be used as an excuse to cripple a vital organ of government as the CBN. It amounts to throwing the baby away with the bath water.
An International Monetary Fund (IMF) working paper titled: The Role of Board Oversight in Central Bank Governance: The Legal Design Issues describe the Central Banks as a public law institution established to fulfill essentially sovereign functions delegated to them by the State. It admitted that certain central bank laws explicitly prohibit certain operations.
Continuing, the paper said, for a central bank to be effective, it must enjoy a high level of autonomy vis-à-vis both political institutions and private economic interest. This autonomy it enumerated as: institutional, functional, personal, and financial. Institutionally it said the central bank should not be influenced by the State or private third parties in its decision-making in the context of the performance of its functions, e.g., through ministerial instructions.
Functional points to its capability to implement its functions without direct governmental interference, and Personal ensures that key decisions makers of the central bank (Governor and members of the Executive Board, Monetary Policy Committee and Oversight Boards) are autonomous from political and private economic interest.
The Financial entails the capability of the bank to pursue its mandate by way of the financial means required to do so (the emphasis is mine).
Banning the CBN governor and his deputies from partisan politics is a good proposal, and well approved. But to appoint/impose an outsider as the chairman of the board other that its governor is incongruous with global central banking practice.
Typical of our clime, as being proposed, will not augur well for a critical institution as the CBN. The infraction of its former governor – highly condemned, is not an excuse to deal a fatal blow on the Bank. It amounts to killing a fly with a sledgehammer.
Subjecting its staff salaries to an external body violates the financial independence of the Bank. Infractions committed by its former governor has nothing to do with staff welfare. There are other organs of government earning far higher than the CBN staff, yet the legislators turned the blind eye.
Why are all eyes on the CBN? Are the Nigeria National Petroleum Plc staff salaries a subject of scrutiny by the National Salaries and Wages Commission? The Debt Management Office (DMO), Nigeria Deposit Insurance Corporation (NDIC), and many others. It is public knowledge that the staff of some of these agencies earn fantastically higher, (excluding other perks) than the CBN staff.
The Central Bank of Nigeria like its peers is the heart of the monetary system of the country. Nigeria’s economy is influenced heavily by the actions it takes, thus, any spasm of irrational decisions to alter or whittle what international investors and global partners would see as an erosion of the Bank’s independence, will further hurt the already fragile economy.
It was the Central Bank of Nigeria during the COVID-19 pandemic that ensured the stability of the economy while other organs of government were at a loss on what to do. The CBN should not be politicized. What happened under Godwin Emefiele was a rash decision that should be treated in isolation.
Amending the Act is not investor friendly, and it should be jettisoned. It will also encumber the effectiveness of monetary policy, and once the institution is seen as an appendage of the political class, there will be loss of faith, and confidence, in the economy. Ultimately, the economy will suffer for it.
Mr. Uche Tochukwu, a financial expert, said tweaking the CBN Act now, just because of what happened under Godwin Emefiele will hurt the economy and the integrity of the CBN. He welcomed the decision of the lawmakers to ban the Governor and his deputies from partisan politics but frowned at appointing an outsider as the Bank’s Board Chairman. He said it is an aberration.
Tochukwu called the attempt to subject the CBN staff salary to Salaries and Wages Commission as meddlesomeness. What about their own opaquely fatty allowances the public has decried? Doing that, they advised, will kill the morale of the staff. Are we even sure the staff are earning fantastically, he asked?
The legislators should get serious with other national pressing issues in the economy rather than tampering with the CBN Act. Dr. Babatunde Adisa, an economist expressed this. He said, globally, independence of central banks is high advocacy, why is our own legislators thinking of reversing the CBN gear of progress. He said those advocating for the weakening of the CBN governor’s power or administration of the institution are not in tune with reality.
Thus, the National Assembly should be guided as posterity will not forgive them if they are resolute on this unprofitable voyage.
Chisom Adindu writes from Umuahia, Abia State.
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