Opportunities in the Nigerian Capital Market for Business Owners
Opportunities in the Nigerian Capital Market for Business Owners In recent conversations, the lack of awareness about the Nigerian capital market and the opportunities available to investors, highlighted a critical gap in financial literacy among Nigerians. This conversation made me realize that businesses, especially small and medium enterprises, lack the financial literacy to tap into opportunities offered by the capital market. While a lot of investment literacy targets individuals and HNI investors, this article has been specifically crafted to highlight three opportunities the capital market offers to businesses. Investment Opportunities A foundational concept in finance and project evaluation is the computation of return. Organizations calculate the expected return from a project or investment and compare it against their hurdle or expected rate, making the critical decision of how to deploy capital based on this analysis. I am curious to know what return expectations local organizations, especially SMEs set for their businesses? In the current economic climate and high-interest rate environment, the hurdle rates for expected return might be the Monetary Policy Rate (MPR) which is currently at 27.5% for projects with less than 1-year tenors or the return on the 10-year FGN bond which is currently over 18%. You might wonder why a business would invest money instead of putting that money towards its own operations? Using the project evaluation criteria, if the return on the business isn’t higher than the hurdle, in this case, the current return on Money Market instruments in Nigeria, the capital is better utilized when invested in the fixed income product that offers the higher return. Applying this strictly would be to the detriment of the economy as businesses play such a critical part in economic development by providing employment, contributing to productivity and innovation. However, an understanding of this finance concept and adoption of project evaluation can enhance the operations and returns of SMEs. For instance, ideal funds can be invested in Money Market Instruments to enhance the overall return to the business. For instance, firms with good inventory management systems can negotiate payment terms with suppliers to manage cashflow efficiently. Firms with 90 to 180 days to pay for products can invest the funds allocated for the inventory in short-term investment products and match the maturities to their payment timelines to optimize their use of funds. For short-term investments – Treasury bills (T-bills) offered by the Federal Government of Nigeria (FGN) and Commercial papers offered by Corporates offer returns that outperform what is obtainable from traditional banking services. Medium term offers include the Federal Government Savings Bonds which are offered for 2 and 3-year tenors. Long term offers include Federal Government Bonds and Corporate Bonds. Businesses can also invest in the shares of listed companies as long-term investment assets and a means to diversify their capital structure and revenue streams as fundamentally sound equities offer returns in terms of periodic income from dividend payments and long-term capital appreciation. 2. Capital Raising Opportunities Products offered by Issuers in the capital market – whether structured as debt instruments (Bonds, Commercial Papers), equity (Shares) or a Hybrid (ETFs, Funds, REITS) etc.- are investment opportunities for the investing public but capital-raising initiatives for the Issuers. It is important that local businesses understand how investment products are created in the capital market to envisage the opportunity for them to also become issuers of capital market securities in the long term. The requirements to raise capital from the capital market might seem daunting to SMEs however the rules, requirements and guidelines are conceived as minimum operating standards for world-class organizations, so such requirements should be seen as aspirational rather than deterrents. Typical requirements in simplified terms include registration as a Public Company (Plc), regulatory compliance, audited financials, solvency, profitability & sustainability assessments, governance structures and operating standards. However, it is good to note ongoing measures to simplify, streamline and reduce the cost of coming to the market. The issuing of Commercial papers to meet short-term working capital needs is one route we have seen a lot of listed and unlisted Nigerian companies raise capital. SMEs with long-term visions to scale can benefit from studying the capital market requirements and working with registered financial advisors to start building and structuring their business and operations to succeed in coming to market in the long-term. It is important to state that raising capital in local currency is more sustainable than raising foreign currency capital due to exchange rate risk. Also, raising capital by issuing equity is considered obtaining patient capital therefore growing the local capital market by deepening participation and product offerings will translate into positive long-term benefit to the economy and the Nigerian people. 3. Learning Opportunities Due to public interest and investor protection requirements by the regulators of the financial markets – The Central Bank of Nigeria (CBN) for the Money Market and the Securities & Exchange Commission (SEC) for the capital market – the financial markets are information driven. The Issuers of securities must be public entities and meet ongoing disclosure requirements. This provides a gold mine of publicly available information that startups, small businesses, researchers and institutions can mine. For listed companies in particular, ongoing disclosure requirements include the publication of annual and quarterly financial statements and publication of all material updates on their business and operations. There are also a lot of financial institutions, intelligence platforms and analysts watching and commenting on the performance of listed companies. SMEs especially can tap into this pool of information to develop business strategies, benchmark performance and evaluate projects. It is important to note that certain concepts in finance and economics when applied to the Nigerian economy do not provide the expected results as conceived in the theories – this is due to systemic, regulatory and operational differences between Nigeria and the economies of the countries where most of these concepts are developed or tested. Typically, these countries are the developed economies of the United States, UK and Europe. Engaging licensed professionals to understand how you or your business
Nigerian Economy Sustains Strong Growth Momentum in Q4 2024
Nigerian Economy Sustains Strong Growth Momentum in Q4 2024 The Nigerian economy sustained its growth momentum in the fourth quarter of 2024, expanding by 3.84%. This marks an improvement from the 3.46% growth recorded in Q3 2024 and Q4 2023. As a result, Nigeria’s GDP growth for 2024 stands at 3.4%, a notable rise from 2.74% in 2023. This continued positive trajectory signals the Nigerian economy’s resilience and ability to sustain growth amidst external and internal challenges. The growth in Q4 2024 was primarily driven by a surge in aggregate demand, which typically spikes during the festive period. Furthermore, agricultural output benefitted from the harvest season, contributing significantly to economic growth. The agricultural sector grew by 1.76% in Q4 2024, compared to 1.14% in Q3 2024, primarily driven by improved performance in crop production. The reduction in Premium Motor Spirit (PMS) prices also played a significant role in driving economic growth. A decline in Brent crude prices and the commencement of operations at the Dangote refinery, along with other refineries like Old PH and Warri, helped lower transportation and operational costs for both consumers and businesses. 25 activities expanded, 15 slowed and 6 contracted The fourth quarter of 2024 also saw continued progress in Nigeria’s major sectors. Notably, 25 activities expanded, 15 slowed, and 6 contracted, indicating positive economic developments. This marks an improvement compared to the third quarter of 2024, when more sectors contracted (22 Expanded, 14 Slowed and 10 Contracted). The Central Bank’s efforts to stabilize the Naira appear to be paying off, particularly in the real sector, with evidence suggesting that the Nigerian economy is more sensitive to exchange rates than interest rates. Moreover, the decline in PMS prices is having a noticeable effect on the transportation sector, which grew by 18.61%, a significant jump from the 12.15% growth seen in Q3 2024. Below is a breakdown of key sectors/activities that expanded, slowed or contracted: Expanding sectors/Activities Q3’24 Q4’24 Comments Agriculture 1.14 1.76 Supported by a robust harvest and a relative decline in logistics costs Manufacturing 0.921 1.79 Largely supported by Naira appreciation and improved oil refining activities at the Dangote refinery as well as the commencement of operation at the old PH and Warri refineries Trade 0.65 1.19 Supported by Naira appreciation and a gradual boost in disposable income as some states have implemented the new minimum wage Construction 2.91 2.95 Improved construction activities, evidenced by the growth in cement manufacturing Real estate 0.68 0.86 Increased real estate construction activities Transport and Storage 12.15 18.61 Partly due to the gradual decline in PMS prices due to lower global oil prices Slowing & Contracting Sectors/Activities Q3’24 Q4’24 Comments Crude petroleum and natural gas 5.171 1.48 Decline in crude oil production Financial and Insurance 30.83 27.78 Though the sector slowed, the growth rate is still high as the high interest rates support interest income. Meanwhile, the relative stability in the exchange rate means that FX gains could begin to thin out. Electricity supply 3.23 -5.04 This was partly due to ongoing issues with the national grid, including consistent grid collapses. Coal mining -63.56 -121.33 Partly due to security, operational and infrastructural challenges. Also, inadequate funding and challenges are other key challenges. GDP Outlook Looking ahead, Nigeria’s GDP growth outlook appears cautiously optimistic, with several factors that could foster a favorable economic environment. As inflation continues to moderate, there is a strong possibility that the Central Bank of Nigeria (CBN) may opt for a shift towards monetary easing in the second half of the year. This would likely result in lower interest rates, which in turn would reduce financing costs for businesses, encouraging expansion and investment. A more favorable monetary policy environment would make credit more accessible and affordable, which could fuel growth in both the corporate and SME sectors. Additionally, the implementation of a new minimum wage policy is expected to positively impact consumer purchasing power. As wages rise, the disposable income of workers will increase, which is expected to stimulate domestic demand. This, in turn, will likely have a positive effect on retail consumption, as well as boost business revenues across various sectors. With the ongoing disinflation process, the combination of higher wages and more stable prices will help to restore confidence in the economy and foster a more vibrant consumer market. However, while these developments paint an optimistic picture, there are still potential risks that could derail the economic outlook. One significant risk is the ongoing global trade uncertainties, particularly the potential for tariffs and restrictive trade policies from major global economies. For example, any shifts in the trade policies of the United States, under President Donald Trump or subsequent administrations, could have significant ripple effects on Nigeria’s economy. Tariffs and import restrictions could hinder the growth of Nigeria’s export sectors, such as oil and agricultural products, while also increasing the cost of imported goods. Furthermore, the potential tightening of immigration policies in key economies could impact the remittance flows to Nigeria. Remittances from Nigerians working abroad are a critical source of foreign exchange and a key contributor to household income for many families in Nigeria. Any restrictions on immigration or changes to work visa policies in countries like the United States could reduce the number of Nigerians able to send money back home, negatively affecting domestic consumption and economic stability.
Nigeria’s Headline Inflation Decelerates to 23.18% in February
Nigeria’s Headline Inflation Decelerates to 23.18% in February The Consumer Price Index (CPI) and inflation data for February, released yesterday, revealed a notable moderation in headline inflation, which decreased to 23.18%, down from 24.48% in January. This deceleration was primarily driven by a significant reduction in food inflation. According to the National Bureau of Statistics (NBS), food inflation fell by 2.57%, dropping to 23.51% in February from 26.08% in January. This decline was largely anticipated, given the seasonal effects of the harvest period and a reduction in logistics costs, which benefited from the pass-through impact of lower energy prices during the month. Additionally, the relative stability of the exchange rate in February helped ease inflationary pressures on imported food items, even as consumption demand remained subdued due to broader economic challenges. In contrast, core inflation, which excludes volatile food and energy components, showed a slight increase, rising to 23.01% from 22.60% in January. The uptick in core inflation highlights that underlying inflationary pressures persist, indicating that inflation risks remain embedded in the economy. This suggests that while the decline in food inflation provides some temporary relief, inflationary expectations continue to be driven by structural factors, including supply chain constraints and persistent cost pressures in non-food sectors. Policymakers will continue to monitor these trends closely, as they weigh the implications for monetary policy and broader economic stability. Is the Downward Trend in Inflation Sustainable in the Coming Months? The inflationary trajectory in the coming months will be influenced by multiple factors. The anticipated increase in demand due to the Ramadan and Easter festivities is likely to temporarily boost consumer spending, particularly in the food and transportation sectors. Furthermore, the recent suspension of the Naira-for-crude arrangement between Dangote Refinery and the NNPCL, if not reinstated, may lead to significant currency pressures as the refinery would need to source foreign exchange to procure crude oil. Additionally, the onset of the planting season in the second quarter is expected to reduce the supply of certain commodities, potentially pushing prices higher. We expect the monetary authorities to closely monitor these developments and the evolving inflation data, as they will play a crucial role in shaping policy decisions at the next meeting in May.
Fixed Income Quarterly – Q3
Fixed Income Quarterly – Q3 2023 Macro-Economic Overview Nigeria’s inflation continued to climb, reaching 25.80% in August, over 300bps increase from figures as at the end of Q2 2023. On the back of the persistent rise in inflation, the MPC decided to increase the MPR by 25bps to 18.50%, narrow the asymmetric corridor to +100/-300 basis points around the MPR, while retaining the CRR and Liquidity ratio at 32.50% and 30% respectively at the July 2023 MPC meeting. The September meeting was postponed to further notice A new CBN governor, Dr. Olayemi formally assumed duty in an acting capacity last week Friday, September 22, 2023, after which the Senate approved his nomination. New Deputy Governors of the Central Bank of Nigeria were also confirmed by the Senate. Oil prices averaged $83.80/$ in Q3, peaking at $96.55/$ on 27Sep on the back of the tight global supplies, following the deal to reduce production by major producers – Saudi Arabia and Russia. Brent crude oil closed the quarter at $96.10/b. Nigeria’s Gross Domestic Product (GDP) grew by 2.51% (year-on-year) in real terms in the second quarter of 2023. This growth rate, lower than the 3.54% recorded in Q2’2022, can be attributed to the challenging economic conditions in the nation. The Nigerian FX reserve dropped to $33.25bn as at 26th September, amid FX supply challenges. Interbank liquidity averaged c.N312bn through the quarter, closing around c.N35bn after hitting a high of c.N896bn early July and a low of repo c.N396bn mid September. Total FAAC disbursement for the quarter was c.N2.042trn with c.N1.15trn for Jul and c.N891.93bn for May respectively. Sources: FMDQ, CBN, NBS, Bloomberg Market Performance in Q3-2023 Bond market The Nigerian local bond market traded on a mixed note during Q3 2023, with yields generally trending upwards. The bears dominated the market in July and August, following the MPC’s decision to increase the monetary policy rate by 25bps to 18.75%. However, the market turned mildly bullish in towards the end of September, with demand skewed to the shorter-term maturities. Yields on benchmark bonds rose by 150 bps on average during the quarter. The market climate, however, took a turn as September drew to a close, with a mild bullish wave encompassing the market. Notably, there was an increase in demand for shorter-term maturities. The fluctuating trends culminated in a net increase of the benchmark bond yields by an average of 150 basis points by the end of the quarter. Several factors came into play to drive these trends in Q3 2023: Hawkish CBN stance: The Central Bank of Nigeria (CBN)’s hawkish stance to curb inflation was a key driver of the upward trend in bond yields in Q3 2023. The CBN raised the monetary policy rate by a cumulative 100 bps over the quarter, to 18.75%. This increase in interest rates made it more expensive for borrowers to borrow money, which in turn led to a rise in bond yields. Inflation concerns: Inflation remains a major concern in Nigeria, with the headline inflation rate rising to a 17-year high of 20.52% in August 2023. High inflation erodes the purchasing power of investors, making them less willing to invest in long-term bonds with fixed interest rates. System liquidity: System liquidity tightened in Q3 2023, due to a number of factors including the CBN’s open market operations (OMOs) and the loan-to-deposit ratio (LDR) policy. This tightening in liquidity made it more expensive for banks to lend money, which in turn led to a rise in bond yields. Treasury bill market The treasury bills market recorded mixed sentiments amid cautious trading in Q3.The quarter started off with bullish bias as participants sourced for attractive on the back of the relatively liquid system. Mid quarter, offers improved across board following the significant hike in the stop rates at the auctions, and tight system liquidity, as players looked to fund their obligations. Also, the CBN floated the first OMO auction of the year which saw participants looking to exit their positions in anticipation for higher yields. Throughout the quarter, we recorded an uptrend in stop rates at the auction, save for the last auction which saw a decline of 151bps, 45bps and 161bps on the standard tenors respectively. All in all, stop rates improved by 213bps, 305bpsand 543bps to close the quarter at 4.99%, 3.05% and 11.37% respectively. Eurobond Market The SSA Eurobond market experienced a volatile Q3 2023, with yields fluctuating on global economic factors, domestic economic developments, and central bank decisions. The quarter began with bearish sentiment, as the US Federal Reserve signaled more rate hikes due to persistent core inflation. However, sentiment turned bullish in mid-July following favorable US CPI data (down from 4.10% to 3.00%) and strong consumer sentiment. This bullish trend continued through late July, as the US economy beat expectations and inflation remained controlled. However, the market turned bearish in early August, following a US credit rating downgrade, to AA+ from AAA, citing fiscal deterioration and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills. The market remained mixed for the remainder of August, as investors weighed global economic risks and domestic economic developments. In September, the market saw bearish sentiment again, as US inflation surged from 3.20% to 3.70%, and the Fed maintained a hawkish stance. Overall, the SSA Eurobond market experienced a volatile Q3 2023, with yields fluctuating on a range of factors. There was a shift in investor focus towards shorter-maturity Eurobonds. This suggests that investors are seeking to reduce their exposure to long-term risk. Country Event Nigeria Nigeria’s Eurobond market experienced mixed performance in Q3 2023. Yields were up in the early part of the quarter, but turned bullish in mid-July following favorable US CPI data and strong consumer sentiment. However, yields rose again in early August following a US credit rating downgrade. The market remained mixed for the remainder of the quarter, as investors weighed global economic risks and domestic economic developments. In terms of domestic economic developments, Nigeria’s inflation rate hit a
Fixed Income Quarterly – Q1 2024
Fixed Income Quarterly – Q1 2024 Macro-Economic Overview Nigeria’s inflation hit an all-time high, reaching 31.70% in February, with food inflation at 37.92% and core inflation at 25.13%. To contain the fast-rising consumer prices, the MPC continued its hawkish stance, as the MPR was increased by 400bps to 22.75% in February, following a further jump to 24.75% in March. The asymmetric corridor changed to +100/-700 in February before it was returned to the previous range (+100/-300 around the MPR) in March. The CRR was also increased to 45% from 32.50%, while the liquidity ratio was retained at 30%. Oil prices averaged $81.66/b in Q1, peaking at $87.70/b on the 19th of Mar, on the back of the disruption to the Russian refining activities following attacks from Ukraine. Nigeria’s Gross Domestic Product (GDP) grew by 3.46% y-o-y (year-on-year) in real terms in the fourth quarter of 2023, coming from a 3.52%y-o-y recorded in Q4’2022. The growth recorded was largely driven by the service sector, which recorded a growth of 3.98% y-o-y. The Nigerian FX reserve has recorded some improvement this quarter, as it currently stands at $34.3bn coming from $32.9bn in Q4 2023. This can be attributed to improved diaspora remittances, foreign portfolio investment and crude oil earnings amidst settlement of outstanding forward contracts. Interbank liquidity averaged repo c.N236bn through the quarter, with a high of c.N863bn early January and a low of repo c.N2.29trn mid-March. The Total FAAC disbursement for the quarter stood at c.N3.40trn with February recording the highest at c.N1.15trn. Sources: FMDQ, CBN, NBS, Bloomberg Market Performance in Q1-2024 Bond market The bond market opened the year with participants trading cautiously while awaiting the Q1 bond auction calendar. The Jan-24 bond auction release saw the removal of 53s which led to a bit of rally especially on the 2053 paper. The first auction of the year saw stop rates close higher leading to yields adjusting across the curve in the secondary market amid sparce bids as players focused on the shorter end of the curve. The bearish bias continued mid quarter with offers across the curve as bids remained limited. The Feb-24 bond circular saw new 7-year and 10-year bond issuance which further fueled the bearish bias. Following the outcome of the auction with papers closing significantly higher, the bond curve adjusted yet again in the secondary market. Towards the end of Q1, activity waned in the bond market as most players remained on the sidelines. The bond circular for Mar saw the re-opening of the 7-year and 10-year papers and the introduction of a new 3-year issuance. Following the auction, bearish sentiments amid cautious approach was sustained as there was also a private sale of N2.35tn worth of bonds (new 26s, new 27s, new 28s) by DMO. Closing the quarter, average yield rose by c.126bps across the curve. Treasury bill market The Treasury bills market opened the year with bullish bias on the back of the system liquidity. The continued demand drove yields lower leading to a resistance in the market towards the end of the month. This led to a reversal in yields coupled with the lower system liquidity witnessed amid the high stop rate in the persistent OMO auctions by the CBN. Mid quarter, bearish sentiments were dominant as market players sold off their positions in a bid to prepare for the high yield environment. This bearish momentum was further fueled by the NTB auction calendar with an over c.N1tn offer and anticipated increase in MPR. Most activity remained on the newly issues papers. Towards the end of the quarter, the treasury bills market recorded mixed sentiments albeit with a bearish bias on the back of the low system liquidity. A bit of cherry picking was seen especially on the long end. Offers were seen across board especially on the longer end of the curve as players sold off their positions to meet their obligations. The quarter ended with the Feb-25 and Mar-25 maturities trading around 18.85% and 18.95% respectively. Eurobond Market The SSA Eurobond market started the year with cautious optimism. The market in Q1 2024 has been influenced by a variety of factors, including global economic trends, geopolitical developments, central bank policies, and domestic economic conditions. Some nations reported improved economic growth and improved fiscal positions, supporting investor confidence in their sovereign bonds, while others grappled with challenges such as high inflation, fiscal deficits, and debt sustainability concerns. SSA sovereigns faced pressures at the start of 2024 due to fiscal concerns and a stronger dollar from a high interest rate driven by global central bank inflation-fighting policies via rate hikes. African countries are, however, now returning to the international debt capital market to access funds amidst sluggish economic expectations in 2024, as expectations of a possible global rate cut in 2024 continue to support investors’ interest. Global Economic Factors Economic data from the United States, including 3.4% GDP growth in Q4 2024 (vs. 4.9% in Q3 2023) and mixed signals in the labour market (highest unemployment rate since January 2022 at 3.90% vs. 275,000 added jobs in February, up from 229,000 in January), drove moderate uncertainty in the pace of anticipated rate cuts later in the year. Also, escalating geopolitical tensions, including the Russia-Ukraine and Israel-Palestine wars and their impact on energy prices (brent crude briefly crossed $87 per barrel), contributed to market volatility. Concerns over inflationary pressures and supply chain disruptions from attacks by rebels in the Red Sea also influenced market sentiment. The central banks of developed economies, including the US Federal Reserve, maintained a cautious approach to monetary policy. The Fed signalled a holding pattern on interest rates, recently leaving rates unchanged in March. However, the Fed’s stance leans towards three cuts by the end of 2024, contingent on inflation continuing to decline towards their target of 2%. Investors in the SSA Eurobond market generally interpreted the US Fed stance with cautious optimism. Country Event Nigeria Nigeria’s Eurobond market saw mixed performance in Q1 2024. During the quarter, factors
