Deepening The Nigerian Capital Market Amidst Global Turmoil; Pension Funds As A Vital Home-Grown Recipe

This article was first published in the maiden edition of the Capital Market Solicitors’ Association (CMSA) Newsletter (Issue No. 1), May 23, 2016.

For the Nigerian capital market, whilst there is light at the end of the proverbial tunnel, it is clear that painstaking, domestic policies and strategies coupled with disciplined implementation are central to the market’s revamp. In this article, we seek to provide some insight into the workability of stimulating capital market activities with the home-grown pension fund assets, a pool of investment funds which undoubtedly, is most appropriate for the long-term capital required in any viable capital market; more so in an emerging economy such as Nigeria.

BACKGROUND

Data from the Nigerian Stock Exchange (“NSE”) indicates that a return to those market indices achieved in the period prior to the 2008 global economic crisis, may take a little longer than expected. The NSE Market Capitalisation and ASI respectively reached an all-time high of N12.6 trillion and 66,371.20 points in March 2008 and began a free fall thereafter except for a brief rebound in 2013. In the trading week that ended February 12, 2016; Market Capitalization and ASI still stood at N8.49 trillion and 24,689.69 points respectively (see “Weekly Financial Markets Review & Outlook”, Cowry Asset Management, 12 February, 2016). There are clear reasons for this.

First, the global stock market declines have continued to impact foreign portfolio investments (“FPIs”) in Nigeria, affecting liquidity and therefore, the volume of deals closed on the floor of the NSE (see “Stockmarket woes worsen”, The Economist, January 23rd 2016). This, especially since 2013, has been responsible for the exodus of most of the FPIs that used to catalyze activities on the NSE. Consequently, the stock market has been propelled almost perennially in a bearish direction.

Second, the country’s seeming, monolithic dependence on oil for foreign exchange earnings (about 90% of Nigeria’s income is derived from crude oil sales) at a time that international oil prices are plummeting, is consistently hurting the economy. “In the past 18 months the price has fallen by 75%, from $110 a barrel to below $27” (see “Who’s afraid of cheap oil?”, The Economist, January 23rd 2016). Erosion of investors’ confidence, added to the widespread credit-crunch amidst other negative fundamentals, further aggravate market-apathy among retail and institutional investors alike.

WHAT TO DO

Nigeria needs to look inward at this stage and harness its domestic potentials for growth. One strategic solution for catalyzing activities with the aim of ensuring that the capital market begins to fulfil its role in the Nigerian economy lies in making use of the somewhat “idle” pension funds accumulated since the pension reform was first introduced in 2004; to enlarge the breadth as well as increase the depth of the market.