Sunday, 25 March 2012

One Scandal too many for the Nigerian capital market

As the Director-General of Nigeria’s Securities and Exchange Commission (SEC) sat down that early Tuesday morning in the (un?)hallowed chambers of Nigeria’s National House of Assembly, little did she know that she was in for the biggest embarrassment of her life.
Director-General of Nigeria's Securities and Exchange Commission (SEC)

As she was preparing for the hearing on Monday, putting together her papers to present to the committee on the capital market that Tuesday morning, some rebels in her office were also busy leaking what should have been confidential internal memos to the committee. While she was thinking that this was going to be an inquest into how the Nigerian capital market lost its verve in the last three years, little did she know that this was also going to be payback time for those that have lost out in her bid to restore some credibility to a market bruised to the point of death.

So when the attacks came flying, she was hardly prepared. A N30 million bill on an eight month binge in a luxurious hotel, a N850, 000 bill and an unholy alliance to a bank she should be keeping at an arm’s length were the arrows of accusations that came flying in her direction. The hallowed chambers of the house of assembly must have suddenly looked like a magistrate’s court. Suddenly, from a prosecution witness, which she thought she was going to be at the trial of the capital market miscreants, she was the one in the dock. She had little time to respond to the change of situation before the curtain fell.

Recall, about a year ago, it was the turn of Ndi Okereke-Onyuike. She was the  Director General of the Nigerian Stock Exchange (NSE). She was the woman who you offend at your own peril. But the gods were about removing the veil of invincibility from her face in a very horrible way. The hammer the gods were about to use achieve their devious mission was called Arumah Oteh, a woman of impeccable character and education, a Harvard graduate with distinguished career in Africa’s most prestigious financial institution.
Ndi Okereke-Onyuike Former DG NSE 

Among the accusation against Onyuike-Okereke was the mismanagement and stealing of billions of naira from the NSE, the alleged falsification of her credentials and other sins. Despite her protestation of innocence, she was removed promptly and a new DG of the NSE appointed. With her removal, it was expected that the storm of scandals that has enveloped the market is over. Now the market was ready to fly on a pedestal of transparency and credibility until the latest bombshell.

Oteh’s fight back was a classic case of a woman scorned. On the Thursday, when the house returned to sit for the second session of the probe, the committee chairman thought he had it made. He has stamped his authority on the probe in the last session and made the woman of integrity look like an ordinary crook worse than the crooks she sent out of the capital market.

However, he was in for a shock. Only if he knew what awaited him from the SEC DGs microphone, he would have gladly postponed the day’s sitting. When the accusations started flying from the SEC DG, the palpable discomfort of the committee members and its chairman were obvious. They had asked for N39 million for this sitting and have also asked for N5 million in cash. Interestingly, the chairman had once collected money from SEC for a foreign trip which he never attended. 

As the counter accusations started flying, the committee members realized that they had interesting games on their expensive smart phones. They all suddenly fell in love with the games and started playing with it. The chairman of the committee also suddenly realized he had a long tongue and dry lips as his tongue kept flying over his dry lips.

The damage had however been done. A picture of a capital market enveloped in a dark cloud of corruption was complete. The Nigerian capital market has been painted like a vultures party with everyone feeding on the carcass of investors. A good reason why the market is yet to recover from a loss that has seen mostly retail investors lose more than IUS$ 60 billion in three years. This is more than a quarter of Nigeria’s GDP.

Efforts to revive the capital have been largely futile. There are many reasons why the market remains comatose. Some of the blame rest on the doors of regulators why other reason have to do with the peculiar circumstances of Nigeria as a country.

First, let us look at Nigeria as a country. How many investors will be comfortable investing in a country when bombs are exploding by the minute? Two, with unending threats of break-up of Nigeria, most investors are getting sceptical investing long term considering that capital market investments are long term. Three, with the way three banks were nationalized, with little say from shareholders, how many investors will be willing to invest in shares again not knowing if they will wake up and see their investments nationalized. Most investors still find it difficult to understand why their investment in Bank PHB or Spring Bank or Afribank is no longer worth the paper it is written on again while investments in other banks are now worth one tenth their values. For such investors, the capital market has become a no go zone for generations.

For long, the current regulators in the Nigerian capital market, encouraged by the Central Bank of Nigeria (CBN), have adopted the attitude that retail investors got what they deserved in the massive loss that the market suffered. Yet, as regulators, they stood by and watched the infractions and market manipulations that eventually killed the market. None of the auditors which approved fraudulent annual reports have been charged today for their actions and these auditors still audit the same banks that they audited to death in previous years. Yet, regulators expect investors to trust these same auditors again that once audited the banks to death.

 Nigerian regulators are also yet to show that they have better control of the market? There is no doubt that there has been significant improvement in enforcement of the rules and regulation of the exchange in the last one year. Companies are releasing their results more regularly and the forecasts are also done more consistently. Also capital market operators are also being forced to adhere more closely to the rules of both the Exchange and the SEC.

However, there is much to be done. The quarterly reports of most companies remain unreliably. It is very difficult to understand why a company will issue a third quarter result showing that it has made profit, issue a forecast that it is going to make profit at the end of the year, and a few days to when it is going to release its final results, it hits you with a profit warning and eventually announces a significant loss in its final results. No investor will ever have faith in such a market or company again.

Company quarterly results are still basic. Most companies release very few details in their quarterly results that hardly help investors to make an informed decision about the company. Forecasts are always not backed with assumptions. Investor relations departments are missing from most quoted companies and most of them do not have reliable websites. Getting the published annual report of most quoted companies in Nigeria is like a camel going through the eye of a needle.  Very few companies (mainly banks) bother with analysts presentations and conference calls on their results. 

Finally, regulators seem to think that foreign investors can be relied on to revive the Nigerian capital market. It is usual for them to tout the amount of foreign investors investing in the Nigeria Capital market. However, the truth is that foreign investors are usually short term. It is only local investors that give the market the liquidity it needs to be a viable market.

The depth local investors can bring to the market was shown in the 2006 to 2008 market boom. Retail investors were mainly the drivers of the boom. It can happen again. But local retail investors must first of  be given the respect they deserve once more. It is talking down on them and making them look stupid for putting money in the Nigerian capital market that has partly gotten us to where we are today.

And that reminds me, this was the reason the House Committee on Capital market was supposed to be calling for a public hearing on the Nigerian capital market. To find out why the market is in a bad state. Unfortunately, it became a probe into how SEC is run. Not that how SEC is run is not an issue, it is key, but it should not have been the main purpose of the probe. Putting it first, buried the more important issue of why the market collapsed and has remained in coma.

The capital market committee should have concentrated on the bigger issue of why the market collapsed and let how SEC is managed come in as part of their probe not as the main focus of their probe.  I hope the adhoc committee on the capital market will take a cue.  The Nigerian capital market must be made buoyant again. 

Monday, 12 March 2012

Crude oil, Gold and violence lifts and divides West Africa

It is gold rush all over in West Africa again. However, it is not just a gold rush, the coast line of West Africa is flowing also with the next best thing to gold, crude oil.
Alassane Ouattara, ECOWAS Chairman

Several West African countries are fast joining Nigeria as crude oil producers. Ghana currently produces 80,000 barrels of crude oil per day (bpd) with a good chance of it rising to 120,000 barrels per day by the end 2012. Cameroon produces 59,000 bpd, Ivory Coast 40,000 bpd while more established producers in the region like Equatorial Guinea produces 200,000 bpd and Gabon 230,000 bpd.

Ghana’s production is expected to increase to about 350,000 bpd within the next three years. Sierra Leone and Liberia are also set to join the train of oil producers in West Africa.

 African Petroleum Corp, an Australian listed firm in late February announced that it had made a significant oil discovery from one of its oil wells in Liberia.

"Narina-1 has identified a potentially large accumulation of light good quality oil at the Turonian level as well as excellent quality oil in the Albian," chief executive Karl Thompson said in a statement.

The company also announced the commencement of an “extensive exploration and appraisal programme in Liberia in 2012” which may lead to more crude oil discovery in Liberia.

Chevron Corp, the second-largest U.S. oil company is also planning to start the exploration of the first of two oil wells planned for this year by the end of the first half of 2012 in Liberia.

 Anadarko said in January it struck "significant" light oil off Ghana in its Deepwater Tano Block, the latest in a string of discoveries in the area.

In Gabon, which is already an oil producer, French oil major Total revived its exploration efforts by buying stakes in three onshore licences. Total SA is also investing $200 million in 2012 in drilling an oil block in a Joint Development Zone (JDZ) between Sao Tome and Nigeria.

Also exploration activities are currently on going by  Tullow Oil and Anadarko  in offshore  Ghana, Sierra Leone and Liberia while UK based  Bowleven, Kosmos Energy and Victoria Oil and Gas are also carrying out oil prospecting in Cameroon. These are efforts are likely to define the energy potential of the West Africa coastal line.

 Solid Minerals

The vast amount of solid mineral lying untapped in Africa is also attracting high level investment into West Africa. Top bauxite exporter Guinea and major gold producer Ghana, have attracted billions of dollars of investment from resource firms eager to dig up its vast unexploited iron ore reserves.

It is estimated that West Africa currently has the potential to produce nearly 10 percent of the world's iron ore in future. This is driving investments into West Africa from top miners  like BHP Billiton, Rio Tinto, Vale and Chinalco which are expected to make as much as $10 billion in new investments within the next few years in mining activities in West Africa.

Liberia has already started iron ore shipments, while Sierra Leone expects mines to start production soon. Also Cameroon's large Mbalam deposit and Guinea's Simandou project could start shipping as early as 2014 according to a Reuters report.

Guinea is also in advanced talks with state-owned China Power Investment to develop a bauxite mine and build an alumina refinery, deep water port and a power plant.

The downside

But while investors have renewed their love for West Africa, so has the tendency for the region to fall apart increased. From Nigeria to the Sahel deserts of Mali, renewed violence is putting pressure on the peace that is required to ensure that these new massive investments in the region make an impact on the livelihoods of West Africans.

In Nigeria, suspected Al-Queda linked militants are tearing the Northern region apart with daily bombing raids that gives the impression that the country’s security agencies have no idea how to handle the crisis. In the South South region of Nigeria, there also seem to be a resurgence of militant activities that almost crippled the country’s oil production in 2008. Crude oil theft and piracy has also increased sharply in the South South spreading to coast line of West Africa.

Also West African countries are fast becoming the main transit route for hard drugs. . The United Nations estimates that $1 billion worth of cocaine, destined for Europe from Latin America, passed through West Africa in 2008. Guinea Bissau has become West Africa’s cocaine transit point due to its weak government.  The situation in Guinea Bissau has been made worse by the death of the country’s President Malam Bacia Sanha early this year raising the possibility of the military taking over the country.

In Mali,  Tuareg-led MNLA fighters  have revived their quest for independence with attacks against the Malian security forces. There are speculations that MNLA fighters are receiving support from rebels from Chad, Algeria and Nigeria. They are also said to be well armed with weapons from Tuaregs returning from Libya. This has ensured that they are not only well armed, but they are battle ready and have been able to inflict significant casualties on Malian Security forces.

In Senegal there is a resurgence in an  on-off low-level rebellion in the Casamance region, now entering its fourth decade, which  has been made worse by the quest by the country’s 84 year President Wade to seek another term in office. Several people have already been killed or displaced since the violence in the Casamance region picked up again this year.  There is fear that the rebel activities in the region may have been fuelled by arms and ammunition smuggled by fighters from Libya.

Ivory Coast just emerged from a long drawn violent conflict that almost tore the country apart while there is an uneasy calm in Bukina Faso and Togo where the leaders have managed to strong arm themselves into keeping the position quiet. However, most analysts say the peace in these countries may not be sustainable. Even Countries like Ghana, which is considered to have the best democracy in the region, are not considered save if the violence in the other countries in the region is not checked.

Gradually, the emerging trend is a West African region on the verge of breaking long years of poverty and under development however that prospect is being undermined by internal divisions that may ensure development continue to elude the region.  

Tuesday, 6 March 2012

A tale of 2 City Bankers, an investor and Nigeria

Last week, two bankers who work in the London financial centre (referred to as City) had an interesting e-mail conversation on why Nigerian bonds, despite their high yields, are not being snapped up by foreign investors with an appetite for high yield bonds. Below is an edited version of the conversation that provides an interesting insight into how foreign investors view the Nigerian economy and even its apex regulator.
Sanusi Lamido Sanusi-Central Bank of Nigeria Governor. 

This is the e-mail from Mr R that set up the conversation trail. 

Over to you guys! I have not known Nigeria to default on its debt obligations in the last 10 years. If the Fed Government is offering such lucrative interest rates on Bonds, which is in essence a safe asset, why are we not selling them to the European public, who can only get 1% on their saving in the retail banking sector? Educate and enlighten us please?

Mr H, a banker in City responds.

There is more to bond yields than the objective factors you have mentioned. First of all, on a currency level, the Nigerian Naira is not a “tradable” currency and as such, bonds cannot be issued in Naira for international sales. Most outstanding Nigerian bonds are issued in USD which carries a currency risk (cross-currency factor).

Nigeria is still regarded as a very unstable country so there is the default risk in case of change of government or change of country structure (think about what happened during the break-up of the soviet union and the Balkans), the cost of Nigeria Credit Default Swap (insurance against default) is very high, this has to be priced in and remember, this is not in Naira as well.

Also, Nigeria is mono-product economy with the economy almost dependent on oil, the value of Naira is very dependent on the price of oil and this affects the value of Nigerian bonds (daily bond valuation – Mark-to-market value). Then, there is the independence of the guys that take decisions with regards to fiscal and monetary policies in the country, these guys are not independent. Soludo tried but his ideas were too advanced for the country and the country wasn’t ready for it, Sanusi is just your ordinary Joe who is not independent but suits the environment.

Finally, bond prices, amongst other things depend on the interest rate in the country, theoretically, for money to have value, the cost of borrowing should be less or equal to inflation, inflation is linked to the purchasing power and purchasing power parity and hence value of money and bond prices/yields. Current inflation rate in Nigeria is about 23%, also, the Nigerian Central Bank Base Interest Rate (Risk Free Rate) is about 12%, if you adjust that with other interest rate factors like default, pre-payment, repayment, liquidity and sovereign risk, you can see that the bond rate of 16-17% is not bad.

Mr T, another banker in City also contributes to the conversation.  

I was just getting some information together so I could attach them and send you an email. Almost my sentiments exactly. Things like the independence of the governor, I wouldn’t have known about, but only a suspicion. Also, your inflation rate, I didn’t know the current figure.  But I was going to say exactly what you have mentioned about stability. See attached Bloomberg screen shot; I was very shocked to see how high Nigeria’s Yield is and how low the price is. With Nigeria’s resources, you can mainly put it down to stability and the other factors you have mentioned like independence, which also comes into stability.

Look at Ghana’s yield (December 11) and see how low that is. I thought they will be not that far off Nigeria, but I was really surprised to see what I just saw. I have also attached Greece, Germany (GR) and the UK which were all printed in December to give anyone an idea of where the advanced nations are, and how bad Greece is at the moment, and where we in Ghana and Nigeria fit, to have a judgement on whether we can do better or we are doing Ok, or to judge if one wants to invest.

I still think 16 to 17% is a very healthy return, but if – on a weekly basis – we hear of bombings and unrest and the perception that the government is being overrun, it’s difficult for people to invest in government bonds. However, people will take the risk of doing business that will bring short term and quick bucks. So that’s my opinion.

Mr H responds again.

You had the patience I didn’t have for I couldn’t walk down and print these out. Yes, the yield on German Government bonds is low but I think it should almost be negative like that of the Swiss. This is because Germany is very healthy economically and should be the only AAA country in the world.

As for UK, the low yield is mainly due to them not being members of the Eurozone; the economy is a bit fragile with high debt to GDP ratio. As for Greece, well, International Swaps and Derivatives Association (ISDA) defines default as when either a country cannot pay its debt back on its own or when there is a debt swap (swapping current debt to longer maturities) with that in mind and with the current situation in Greece, I will say that Greece have defaulted and their debts should be worthless.

As for Nigeria vs Ghana, the difference in yield doesn’t tell the whole storey, the notional value of outstanding debt (which Nigeria has more) also plays a role in bond yields.

Also real inflation in Nigeria is actually more than 30% if one gets really academic in calculating it, there is a lot of money in circulation, the central bank has no control on the amount in circulation, there is free money (stolen, drug, bribery, 419, different foreign currencies) everywhere and as such the central bank cannot control money supply, this is a very effective way of controlling inflation and once the central bank loses this, then it is all gone.

 On a final note, Nigeria has no derivative market, there is almost no financial and biometric risk management within the financial (bank and insurance sector), when idiosyncratic risks cannot be managed, then, they are pushed or passed on to the end user hence high inflation, money supply, low purchasing power of money and this ultimately affects  bond yields.

The most dangerous of all especially with Nigeria is that of instability, most Nigerians don’t even know what the map of Nigeria might look like in the next 20 years, well, if you look at that fact and that things like mortgages are price with 30-year bond rates, then you can understand the reason for high yield and low price of Nigerian bonds, the uncertainty risk.

Mr R who sent the initial mail that set up the conversation responds

Thanks for a very interesting insight,  real inflation, control of money supply, outstanding debt levels, mono-cultural economy, Ghana's yield... Though as T concluded, I still would rather invest in Nigerian Bonds than Greece's, considering that nominal outstanding debt to revenue ratio is almost 200%. So, if I was sitting on a million €, where would you advice I invest in, annuities or similar investment? Just planning for when I win the lottery!!! Just Joking!

Mr T responds  
If you want a cautious and decent growth, then invest in Gold. It has gone through the roof and took a hit this week, so not a bad time to get in.

If you want quick aggressive buck,(with the danger of losing a lot) then you can look no further than African mining firms (this includes foreign companies already mining in and those doing exploration in places like Mali, Guinea, central Africa, Burkina etc). Or look at the ZAR (South African Rand). It is an absolute volatile currency which has dropped 13.5% against the $ in a month. It can move back up that quickly again.

Hurry up and win the lottery. In the past month, two people from Nottinghamshire have won over £40m each. Maybe, you better move there and buy your ticket.


This is a real conversation. It is not made up, just slightly edited. 

Watch this video by CNBC Africa on Nigerian bond yields done as far back as November 2010. 

Friday, 2 March 2012

Nigeria to sell stakes in Nigeria Unity Line-BPE

Nigeria's  National Council on Privatisation (NCP),  the apex body for approving the country's privatisation exercise, has approved that the country sell its shares in Nigeria Unity Line (NUL) to strategic investor sales.
Namadi Sambo, Chairman NCP and Nigeria's Vice President 

The NUL was initially sold on December 2, 2005 to Seaforce Shipping Company Limited which had agreed to pay a bid price of $20, 000, 000.00 (Twenty million dollars);

However the transaction failed because the Nigeria National Petroleum Corporation (NNPC)  ignored a term in the sales agreement that compelled it to allow the investor lift 40% of crude sold by it. Surprisingly, the government also did not move to enforce the agreement. 

The Bureau of Public Enterprises (BPE) statement however  notes that " the passage of the Nigerian Maritime Administration and Safety Agency (NIMASA) Act 2007(here) and Local Content Act 2011 (here) are current positive indicators in the maritime industry that have added value to NUL and have provided the necessary institutional framework to enforce compliance with extant laws. 

The Statement also says that "some prospective investors have shown interest in NUL"

The BPE also states that  it had consistently ensured that NUL’s license is renewed in order to maintain its local and international relevance. 

 NUL has no liability and is not encumbered in any way affirms the BPE statement. 

NUL is a public limited liability company wholly owned by the Nigerian government through NIMASA. 

It was incorporated on 23rd January, 1995 and commenced operations in July 1996.

Thursday, 1 March 2012

Nigeria’s second National carrier (NITEL) up for liquidation

Nigeria’s legacy telecom firm, Nigeria Telecommunications Limited (NITEL) will be liquidated.

The National Council on Privatisation (NCP) has approved ‘guided liquidation’ as the strategy for the privatisation of Nigerian Telecommunications Ltd (NITEL) and its mobile arm, M-TEL, in view of the huge liabilities of both companies according to a statement from the Bureau of Public Enterprises (BPE), the body charged with Nigeria’s privatisation exercise.

The NCP has also ordered an investigation into the management of the company. The investigation is in respect of revenues received by the corporate but which remain on accounted for.

The NCP Nitel/Mtel management had made a presentation to the NCP admitting the receipt of some revenues from SAT-3 but were not able to fully account for the revenues. Besides, they continue to draw their salaries and wages from the Federal Government of Nigeria.

The NCP also noted that NITEL’s account has not been audited for several years.

The Nigerian government has made several attempts to sell NITEL to private investors before now without any success. Nigeria’s House of Assembly recently disclosed that the firms liabilities may be as high as N250 billion (USD 1.57billion).


Watch this VOA brief on Nigeria's telecom industry