Capital market key to easing Nigeria’s negative $85.21bn net foreign liabilities

By Ben Eguzozie in Port Harcourt & Charles Abuede in Lagos

• But government fails to tap market’s potential
• As market must grow 10 times in size to meet up
• Capital sink needed in-country
• Posts negative NIIP at -19.71%
• Financially unsustainable for more credit

With the economic downturn still pounding its economy, Nigeria’s foreign liabilities stood at $187.36 billion while its foreign assets amounted to $102.15 billion as of December 2020, leaving it with a staggering net figure of -$85.21 billion, according to International Monetary Fund (IMF) data.

But it would seem that to get off this bind, the government needs to begin to look at how to grow and deepen the capital market and see it as a partner for progress rather than just a bunch of private sector profiteers whom it is in competition with.

A robust and sturdy capital market is seen as holding the key to build and retain capital in-country and the Nigerian capital market, estimated at $50 billion in size, needs to grow to $500 billion to help Nigeria post surplus in its net foreign liabilities readings. Yet, the government continues to keep assets that can help expand and deepen the market, including its holdings in power distribution and generating companies, which years after privatisation it has failed to bring to the capital market as was planned. With dead capital scattered all over the place, the country, say analysts, continue to fail to smell the coffee in its quest for economic emancipation and development.

Since 2016, Nigeria’s foreign liabilities have recorded an upward climb of 42.41 percent from its initial $131.56 billion. At the same time, foreign assets rose by 13.67 percent from $89.87 billion.

Foreign liabilities are assets owned by foreign governments, corporations and individuals in Nigeria. On the other hand, foreign assets are the investment securities owned by the Nigerian government, companies, or Nigerians in foreign countries.

With foreign assets at $187.36 billion and Nigerian assets at $102.15 billion as of December 2020, this places Nigeria’s net international investment position (NIIP – foreign assets less liabilities) at -$85.21 billion, according to Economic Confidential, citing IMF figures.

Canada’s finance repository, Corporate Finance Institute (CFI), says a positive NIIP makes a country a net creditor, while a negative NIIP implies that the country involved is a net debtor. Drawing from the above analysis, Nigeria is a net borrower.

The Canadian finance institute further said that NIIP is also used to measure a country’s financial condition and its sustainability to take on more financial credit. The direct implication of this is that, with a negative NIIP, foreigners own more assets in Nigeria than the value of assets owned by the Nigerian federal government, its sub-nationals, private companies, and Nigerian individuals. The implication of this is that Nigeria presently appears not financially sustainable to take on more financial credit.

But the current Buhari administration’s proposed budget for fiscal 2022 has an inbuilt deficit of N5.62 trillion, for which Zainab Ahmed, the finance minister, says N4.89 trillion of that would be financed through borrowing from internal and external sources.

To understand Nigeria’s creditworthiness, the IMF measured the NIIP as a percentage of the country’s GDP of $432.30 billion (World Bank). Therefore, measured against the GDP of $432.3 billion, Nigeria’s NIIP stood at -19.71% as of December 2020.

The European Commission’s Directorate for Economic and Financial Affairs’ (ECDEFA) benchmarks for net international investment position (NIIP) states that the median value of NIIP norms, which accounts for balance of payments and consistent with a healthy financial position, is set at -17 percent of GDP.

Nigeria has -19.71 percent. This means the country’s current account deficits due to lower earnings from oil revenues in 2020 places it (Nigeria) clearly below the ECDEFA benchmark. However, when measuring a country’s immunity against the risk of external crises, which is measured by a separate metric called NIIP prudential, the median value is about -44 percent of GDP.

Some development economists say Nigeria’s foreign investment inflows since 2016 have been on a downward trend, though the country saw a 4% uptick to $2.4 billion FDI in 2020, according to the United Nations.

However, this was not enough to mitigate the country’s huge debt and boost revenue, forcing the current administration to go aborrowing. To date, the country’s total debt stock stands at $86.3 billion, with a thirst for more foreign borrowing that is already outlined for next year.

Economists proffer way out of negative NIIP

Development economists advise that for Nigeria to solve its challenge of current account deficits and low credit inflows, its capital market has to grow 10 times bigger than it is currently. Also, the capital that is in the economy must stay in the economy.

For Andrew Nevin, chief economist and partner at PwC Nigeria, the climate in Nigeria has to be attractive enough for foreigners to leave their money in the country.

“The US or UK economy retains foreign investors because they want to continue reaping returns on investment; rather than taking the money back. We need a capital sink in Nigeria,” Nevin said.

Experts’ solutions to growing the capital market

However, the significance of a well-developed capital market to foster economic growth is very imperative to develop economies, Nigeria inclusive. Also, the capital market provides long-term financing that is required to encourage economic growth. Other experts have also noted the huge role played by the capital market as an essential part of the Nigerian economy which encourages industries, trade and commerce to flourish without any resource or capital hindrance.

Miftahu Idris, an economist and capital market expert at Taraba State University, averred that despite the vital role of capital market in capital formation and nation-building, the Nigerian capital market is still underdeveloped and performs below its potentials compared to other capital markets in European economies.

“Market capitalisation of the Nigerian capital market is low due to the limited number of listed firms on the NGX and the limited participation of individuals (savers), either due to lack of capacity or lack of awareness as to the operational activities of the capital market. These could be the outcome of the high cost of operations, inflexible and rigorous listing requirements, and poor awareness on the market operations, inadequate stocks information dissemination and the relative uncertainty of returns. These hindering elements imply the need for further development and total overhaul of the Nigerian capital market,” Idris said.

Abiodun Keripe, managing director, Afrinvest Securities Limited, who expressed a similar view as Idris, said the growth of the Nigerian capital market by 10 times is really relative, noting that the market’s performance cannot be measured as standalone, but that the economy’s performance influences the overall performance of the market.

“We need to look into how we can correct some of the current challenges and then look at factors that can drive the market into delivering that sort of growth being talked about,” Keripe told Business A.M.

According to him, a broad look into the market shows that at approximately $50 billion, it is relatively small to the size of Nigeria’s GDP or economic size, adding that to bring up this size relative to other African peers such as the South African Exchange, among others, needs a lot of work to be done in several ways, such as a policy that can stimulate, attract investors, capital attentions to the market, Keripe stressed.

He stated that a lot has been going around from the background within the market with very laudable policy initiatives and environment from the SEC, government, ministry of trade, commerce and investments, monetary policies from the CBN, and other concerted efforts from regulators aimed at making issuers in the market feel comfortable, help investors learn and understand the market better, as well as deepen investor education.

He said the market needs more issuers (corporate issuers and government issuers) with policies engendering them to come in and raise capital in the market.

“On the other hand, how well the market can take these policies and implement them becomes another side to be measured while having the conversations of growing the capital market ten times than it is currently. A look into the market and how the Nigerian Stock Exchange (NSE), which is now the Nigerian Exchange Group (NGX), has developed can tell you how the market has evolved, opening the Nigerian capital market to the world. Currently, the NGX is putting in place policies, frameworks and as well leading the conversations about having a regional and integrated capital market around neighbouring African countries, which are very pivotal to achieving some of the laudable goals of the AfCFTA and implementation,” Keripe noted.

“For the SEC and in terms of policies to drive product development in the market, I think there are quite a whole lot which I supposed is part of the plan out of which new inventions such as cryptocurrency, have seen the body come out to create policies around the adoption, other policies are around crowdfunding, which is critical for fintech players and others. So, basically, if the regulators, capital market operators can put together strategies and policies that will drive investor education, it will help drive capital market growth in Nigeria,” he concluded.

A look into the core objective of the 10-year development master plan mapped out by SEC to grow and develop the capital market highlights the need to broaden investors’ understanding of capital market products; develop non-interest capital market products as well as commodities exchange ecosystem; encourage investment in pension funds; improve the savings culture to increase the availability of investment funds; recognition of favourable tax regime; exposing the real sector of the economy to funding from the capital markets; encouragement of retail investment; and enhancing the procedures of the capital market.