The continuous fall in the value of the naira in the 2016 financial year further aggravated the woes of the Nigerian equities market and its investors, STANLEY OPARA writes
The 54.8 per cent depreciation of the naira at the interbank foreign exchange market in 2016 resulted in a N330.99bn drop in the value of the Nigerian equities market.
The equities market posted a N604bn nominal loss in 2016 as the market closed at N9.246tn capitalisation from the N9.850tn recorded a year earlier.
The Central Bank of Nigeria data showed that the interbank exchange rate of the naira to the United States dollar as of the end of last year was N305; while for 2015, it stood at N197. Therefore, a 54.8 per cent year-on-year depreciation of the naira against the greenback led to a market loss of N330.99bn in currency terms.
Thus, in real/aggregate terms, the market posted N934.99bn loss in 2016, with the fall in the value of the naira playing a major role.
The gap between the interbank and parallel market rates of the naira against the dollar also widened significantly during the year, following the immense pressure on the currency, as the parallel market rate exchanged reached a high of N490/dollar at year-end.
In an attempt to bridge the gap between the rates and ease the pressure on the naira, the apex bank introduced the flexible exchange rate system, as well as an over-the-counter foreign exchange futures market on June 15, 2016.
In order to manage the pressure on the naira, the apex bank continued to manage the liquidity level through Open Market Operations and other interventions, hence, the system’s liquidity stood relatively low throughout the year, when compared to the prior year.
The President, Funds Managers Association of Nigeria, Dr. Ore Sofekun, said the country’s equities market had suffered a serious downturn over the last 36 months, driven by the combined effects of political risk (from the uncertain outcome of the 2015 elections), drop in oil prices, and the inadequate policy response to reduced dollar liquidity.
She said the prevailing market circumstances had not spared even large and blue chip companies, as all players in the market were taking a beating in their share prices at the moment.
According to her, companies seeking to raise fresh or additional capital in the Nigerian capital market are finding it increasingly difficult to attract the attention of stock market investors at the moment.
“If a company lists during a downturn like this, investors may price the shares much lower than the value the company’s management expects,” Sofekun added.
Analysing the economy in 2016, the Nigerian Stock Exchange recently said the bottoming out of crude oil prices and a drastic decline in domestic oil output affected crude oil export, which accounts for roughly 90 per cent and 70 per cent of the country’s forex earnings and government revenue, respectively.
This, it noted, resulted in foreign exchange liquidity challenges during the year, as the supply side of the forex to the CBN dropped by over 70 per cent despite heavy domestic demand.
Accordingly, the oil price shocks and the attendant prolonged forex dilemma, coupled with challenges to policy implementation, drove the Nigerian economy into its first recession in over 20 years by the second quarter of the year, the Exchange noted.
To this end, the Chief Executive Officer, NSE, Oscar Onyema, said 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 Exchange.
After peaking at 31,071.25 in June 2016, an increase of 8.48 per cent over the 2015 closing value, the NSE All-Share Index began to retreat to negative territory as total foreign inflow dropped by 45 per cent between June (N42.46bn) and July (N23.43bn).
Onyema said the development was a function of the loss of confidence in the implementation of an announced free floating forex regime; weak corporate performance; and second consecutive quarter of negative economic growth in the period, resulting in the economy entering into a recession.
He explained, “Accordingly, we witnessed the lowest levels of foreign portfolio and domestic trading activities post the global financial crisis, with a year-on-year decline of 69.79 per cent and 56.79 per cent, respectively.
“This trend is consistent with the inverse correlation observed between the value traded on the NSE’s equity market and the spread between the parallel and interbank forex market rates, suggesting that both domestic and foreign investors seek stability in the monetary policy.
“In addition to sluggish performance in secondary markets, primary market activity was non-existent as there were no Initial Public Offers for the year, although there was one new company listed by introduction in the period.”
Amid these challenges, the Exchange said it had resolved to do a better job at promoting its unique value proposition to both global and domestic investors.
According to the bourse, good coordination between fiscal and monetary policies should result in the resolution of the identified structural deficiencies and drive economic growth, going forward.
It stressed, “We expect investors to continue to keep a close watch on the divergence between the interbank forex rate and other exchange rates in the country.
“Accordingly, a convergence of forex rates in the country and the performance of listed corporates will determine the level of market activity in the short term.”
The Director, Institutional Sales, Vetiva Capital Management Limited, Pabina Yinkere, said the current bearish state of the equities market aggravated by naira volatility would only make companies get weaker valuations than they would prefer for quoted firms and those warming up for listing.
The President, Constance Shareholders Association of Nigeria, Shehu Mikail, maintained that the country’s stock market was seriously troubled as the internal inflation was vehemently being strengthened by the forex crisis.
He said the outcome of the last year could repeat itself in 2017 if the government did not intensify its efforts to better the situation, as the stock market would continue to be a reflection of the country’s economic standpoint.
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