…Debt markets seen outperforming
…low private sector role to blunt impact
Nigerian equity investors may be in for another year of negative return as prospects of the Federal Government engaging in significant borrowing from the domestic market to finance its deficit and the attractive interest rates will dim appetite for stocks and make fixed income securities more appealing.
The Federal Government intends to finance an estimated N2.36 trillion fiscal deficit in 2017 with 98 percent of the budget shortfall expected to come from borrowings, of which N1.3 trillion will be from the domestic capital markets and N1 trillion from the international markets.
“The large budget deficit could affect stock prices this year and undermine confidence,” Mounir Gwarzo, director-general (DG) of the Nigerian Securities and Exchange Commission (SEC) said in Lagos.
Analysts at ARM Securities estimate that to finance the budget, the FGN would need to increase net domestic debt issuance by at least 15 percent year on year to N1.6 trillion, in 2017.
Nigerian Stocks are already down 5.2 percent this year, after the -6.1 percent returned by the All Share Index (ASI) in 2016.
Most domestic institutional investors are underweight stocks as effective fixed income yields on one-year bonds approached 22 percent at the last auction by the Central Bank of Nigeria (CBN).
Pension funds with total assets under management (AUM) of N5.9 trillion, had 58.1 percent of assets invested in FGN bonds, 11.47 percent in Treasury Bills, 2.31 percent in state government securities, 4.94 percent in corporate bonds and only 8.8 percent in domestic equities, latest data from PENCOM the regulator shows.
Pension fund exposure to domestic ordinary shares was equivalent to N524 billion, compared to a total equity market capitalisation of N8.7 trillion.
“The record 2017 budget is an indication of pending naira devaluation and investors will have preference for FGN bonds as against equities,” Afolabi Olowookere, Head, Economic Research and Policy Management at the Securities and Exchange Commission said.
“Foreigners will be careful with stocks that do not price in exchange rate risks.”
Total transactions by foreign investors decreased by 49.51 percent to N517.55 billion at the end of 2016 from N1.025 trillion recorded at the end of 2015, according to data from the bourse.
Meanwhile, the private sector’s low role in the budget is expected to blunt its impact.
“The private sector is being hemmed in and I cannot see the impact of the 2017 budget unless its structure changes,” said Johnson Chukwu, MD of Cowry Asset Management Limited.
“Government has to change its belief that the private sector will drive growth,” Chukwu said.
Government is involved in over 1,000 entities in Nigeria and needs to let go, as it is a waste of scarce natural resources, says Bayo Rotimi, CEO of Quest Advisory Services.
“The DG of the Bureau of Public Enterprises (BPE) is still operating in an acting capacity. There is no urgency by government to privatise. Nigeria needs to send a clear signal that it is open for business,” Rotimi said.
Analysts say that just like in 2016, when the FG was unable to follow through with its targeted evenly split debt mix, uncertainty over the external leg would again translate to higher than expected reliance on domestic sources.
The CBN is also expected to cap its financing of fiscal deficit to regulatory limit of 5 percent of the prior year’s revenue, meaning the apex bank’s deficit financing should contract 58 percent year on year, to N145.7 billion in 2017, leaving the government at the mercy of domestic debt markets.
“Government needs to stand on policy and be firm, as additional benefits will flow to the greater number of people from privatisation,” said Ore Sofekun, CEO of Investment One Funds Management Limited, which invests in start-ups in Nigeria.
Abiodun Adedipe, chief consultant of B. Adedipe Associates Limited, urged the government to realise that the capital market is a very important platform for capital formation and that for Nigeria to really develop, “our policy makers need to be more educated on the workings of the capital market and its implications on the economy.
“Domestic spending will help the market. Nigeria cannot develop without foreign capital inflow. The question is: why must we always target the external sector for critical development plans? The reason why we have a low capital investment is because we spend more on conspicuous consumptions. We need to domesticate most of our spending” he said.
PATRICK ATUANYA & IHEANYI NWACHUKWU
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