Showing posts with label Steering Committee. Show all posts
Showing posts with label Steering Committee. Show all posts

Friday, February 6, 2009

The Workable Bailout Option for the Nigerian Capital Market

The Workable Bailout Option for the Nigerian Capital Market

By A.G. Olisaemeka

It goes without resentment that only physical injection of funds, which will shore up prices, can lift the capital market from its present very low depth. Responding to the financial meltdown afflicting every facet of business in Nigeria, the Presidential Steering Committee on the Global Economic Meltdown has proposed short, medium and long term palliative measures to address these concerns. The committee recently observed:

"What is being worked out is a package of incentives that will ginger production, increase the purchasing power of the ordinary man on the street, and help generate employment opportunities"
"In the medium and long term strategies, aside infrastructural development, the government is looking in the direction of agriculture, through commercial farming clusters and value chain, not only for food security, but for employment generation."

While specific actions were to be taken in the areas of power and oil, it also noted that:

"While the economic outcome does not look promising given the price of oil, the President remains optimistic that Nigeria can seize the moment to redirect our economy and begin on the road to prosperity."

It has warned that the palliative measures will not include a salary increase. The issue for determination at this juncture is whether these short, medium and long term palliative measures are sufficient to uplift the Nigerian capital market. One has no difficulty in coming to a conclusion of an emphatic "No!"
It is clearly understandable that the focal point of the committee is on the general economy encompassing power, oil and gas, agriculture, the money and capital markets and the emphasis is on increased production, employment generation, higher purchasing power, infrastructural development and food security.

It is one's repeated conviction that although these measures are noble and promising, they do not provide urgent answers to the question of the Nigerian capital market meltdown. The answers they provide are both indirect and tangential to the needs of the capital market.

Only a direct government intervention, characterized by physical funds injection can salvage the descent of the Nigerian capital market.

This can be achieved through any of the following ways:

1. Government Bailout of Banks, Stockbrokers and Investors

Investors in the Nigerian capital market as at end of January have lost more than N9 trillion. Much of these funds came from banks that lent heavily to investors and stock broking firms. This has increased banks non-performing assets on one hand and has foisted the hangman's noose on investors and stock broking firms who have now become "slaves" of banks. The Federal Government can intervene by acquiring these toxic assets at cost, paying off the banks. This will stem the tide of possible bank failures arising from their present capital market over-exposure. It will also relieve the investors and stock broking firms of high debt burden in which they are entrapped and made incapable of making further investments. The government can gradually dispose off these acquired shares in the distant future in a way that will not overheat the market.
This position will align with the statement credited to the Minister of State for Finance, Mr. Remi Babalola:

"…but if for instance, the regulator of the banking system came out to say this is the make up for each of the banks and this is the exposure they have, then we can agree. It is not only in the capital market, there is significant exposure in the downstream. There are so many areas that people might have recorded significant downside. What we need to do is to quantify all these and try to see how we can take it out and give them fresh air to continue their business."

(The Punch, February 5, 2009. Page 15)

Indeed this fresh air, this relief, for banks, stock broking firms and investors is all we need to revive the capital market.

2. Direct Purchase of Shares by the Government on the Nigerian Stock Exchange

The Federal Government may also wish to utilize a Special Purpose Vehicle (SPV) or use the Ministry of Finance Incorporated to commence buying of shares on the Nigerian Stock Exchange (NSE). When these shares are purchased, they will serve twin purposes – being investment for the government which it can hold, earn returns and later resell on one hand and increase the demand segment of the capital market leading to market recovery, on the other hand, it is estimated that the sum of N800 billion will suffice as the chain effect will trigger other purchase mandates as investors confidence heightens, following the upward movement of both the market capitalization and the ALL-Share-Index.

Finally, the market seems to be gaining some points in both the index and capitalization, following the government announcement of palliative measures highlighted above. It is one's opinion that this appearance of market recovery is only the natural reaction of investors to new information which cannot be sustained.

On 4th February, 2009, the All-Share-Index gained 2.2% to close at 22, 838.32 points and on the 5th February, 2009, it again gained 2.26% to close at 23, 356.03 points. The market capitalization also gained the same percentage movement to close at N5.108 trillion and N5.2 trillion respectively. This is a far cry of all-time high figures of about 66000 points for the Index and about N13.5 trillion for the capitalization less than a year ago.

The euphoria of this announcement of palliative measures that triggered the current bullish trend in the market is not expected to last for the next five working days unless physical capital injection of funds is articulated and implemented. The government should be in a hurry to do this if it wishes to save the capital market.

President Umaru Yar'Adua has directed the the CBN and Finance Ministry to liaise with other agencies and do more work on some short-term palliative measures being proposed so that they could be implemented soon.

Let physical injection of funds into the capital market be part of these measures if they must succeed in changing the direction of the capital market for good, otherwise the Nigerian Capital Market is still sitting on a keg of gunpowder.

By A.G. Olisaemeka

~ A.G. Olisaemeka is a chartered stock broker and consultant on financial matters on doing business in Nigeria. He is the Author/Editor of Scientists Discover Hell: As Astronauts Find Heaven distributed by Amazon.