How would you judge President Buhari’s performance in the last two years? By looking at the state of the economy or progress in kicking out corruption; or would you consider his impact on the world stage? Midway through his tenure, there is one yardstick for the impact of our septuagenarian president: financial markets.
Admittedly, many will disagree. Nigeria’s financial markets are still too shallow and exclusive to meaningfully affect the average person. Taken together, capitalisation of the equity and fixed income markets equate to 30% of national GDP whereas the U.S. stock market alone is bigger than the world’s largest economy. Despite this, we can learn a lot about an economy and policy by looking at financial market responses. For example, the stock market is a leading indicator of economic activity. Financial markets also attract greater international interest than other parts of the economy, so activities there give insight to changing perceptions further from home. Most importantly, financial markets are a vehicle for wealth preservation and investment for individuals, institutions, and the government. How they fare has a huge bearing on our ability to create wealth in the future.
Interestingly, Nigeria’s financial markets have been a microcosm of the country’s economic and political state in the past decade. In each case, high oil prices hid the fractured fundamentals from view for many years. But by the time President Buhari assumed office, the bubble had burst, and he was forced to juggle a precarious economic situation with his long-term vision. Charting this course and looking at how his efforts have shaped the markets, we get a surprisingly consistent picture of his performance. And moving forward, developments in the financial markets can provide a perspective on the impact of President Buhari's policies in the coming years.
The Pre-Buhari Oil Bubble and a False Dawn
2008 was a bad year to be in the stock market. As the global recession hit hard, the Nigerian Stock Exchange (NSE) lost 45% in a single year, precipitating a fallow period until the oil price boom in the latter part of the decade and strong domestic economic growth attracted foreign investors into the market. A bull market followed shortly between 2011 and 2014 when the market hit a recent peak. Unfortunately, with the crash in global oil prices, investors fled the Nigerian market as they revised their outlook on the economy in a world with low oil prices. By the time the elections came round in March 2015, the NSE had lost 30% from its 2014-high.
The story is similar in the fixed income market as the Central Bank of Nigeria (CBN) increased interest rates to tackle the oil price shock, and this created a bear market as interest rates shot up in the economy even before Buhari's election triumph.
But when he won, the markets reacted emphatically. Again, this reflects the general national mood at the time. Between March and May alone the NSE gained 13%. For a short while, investors shrugged off concerns about oil prices and the exchange rate, staking their expectations on the promise that President Buhari held. As we know, that promise first delayed and then arguably, was denied. The markets were quicker to act than most as evident signs of indecision quickly turned sentiment sour. Three months into his tenure, the stock market regressed to previous levels.
Kicking out half the stock market
Beyond the initial euphoria, the NSE has performed poorly during President Buhari’s reign. In 2015, the market lost 17%; in 2016, it lost 6%. Furthermore, trading volumes declined substantially mainly because of the sharp reduction in the number of foreign participants in the market. A portion of the blame for this lies at the feet of Buhari’s economic management team. Yes, the oil price crash prompted capital flight from Nigeria, but this was aggravated by the CBN’s infamous handling of the exchange rate. Put simply, as the gap between the official exchange rate and the black market rate increased and liquidity in the foreign exchange market dried up, foreigners were unwilling to put their money in Nigerian investments. Historically though, foreign flows constituted the larger share of trading on the NSE, so a slump here emaciated the entire market.
But President Buhari’s influence extended beyond the exchange rate. Careless management of the Niger Delta situation and an inability to speedily pass the 2016 Budget severely damaged the economy. Coupled with foreign exchange scarcity, many large businesses were affected and this weakness fed through to their share performance.
There were some outliers. The CBN’s directive to restrict foreign exchange access for oil palm and other agriculture imports – as part of the 41-item list – buoyed some firms in the market. Notably, Okomu Oil Palm Company PLC and Presco PLC were primary beneficiaries as both prices and demand for locally produced palm oil soared after 2015. Meanwhile, the partial deregulation of petroleum pump prices boosted the margins of several petroleum downstream companies, though this was tempered by numerous issues in the oil & gas sector.
Rising rates in the fixed income market
Despite the few bright spots, domestic investors became more risk averse in the recessionary environment, choosing instead to put their eggs in the fixed income market.
They have done this because yields – interest rates on fixed income instruments like treasury bills and bonds – have risen significantly, increasing the return from investing in this market. While this is positive for those looking to enter the market, it has caused a headache for long-term participants as rising yields imply lower prices. Furthermore, higher yields mean it is harder for bond issuers such as governments and corporates to raise capital since the interest paid out is greater. So from a macroeconomic perspective, this rise in yields is an adverse development.
President Buhari’s economic management has played a key role in this bearish turn in the fixed income market. The first way is through the exchange rate, once again. In particular, the currency shenanigans in 2015 prompted JP Morgan to delist Nigeria from its popular emerging markets bond index which included several of the Federal Governments (FG) bonds. The delisting was pivotal as significant foreign flows track the index, meaning that Nigeria’s expulsion triggered another round of capital flight. Consequently, lower demand for Nigeria’s bonds increased their yields (or reduced their prices).
Secondly, though the FG has been lauded for its bold attempts at increasing capital expenditure as part of its annual budget, funding efforts have had a knock-on effect on the domestic bond market. At this point, it is worth remembering that the FG initially stated its intention to source a decent chunk of planned 2016 borrowing from international markets. However, at the pace this administration has become known for, progress on this front was only made in early 2017 with the $1.5 billion Eurobond sale. Instead, the FG borrowed extensively from the domestic bond market in 2016. As this borrowing warranted an increase in government bond supply, yields rose even further.
It is hard to pin the last driver of the fixed income market on President Buhari. As this article shows, inflation in Nigeria would have risen with or without devaluation, and the CBN’s fixing of the naira may actually have capped the increase in inflation. And as inflation rose, the CBN had no choice but to increase interest rates, notwithstanding the inevitable consequence of even higher fixed income yields.
Was this inevitable?
Overall, the equity market has had a torrid time in the Buhari era – until the last month or so. High yields in the fixed income market have contributed to this, but even that market has suffered in the last two years. Some will argue that these two results were inevitable, after all, the NSE has been known to unerringly track the movement in oil prices. But while we cannot dispute the fact that foreign investors – important in both markets – were exiting even before the elections, it is difficult to ignore the disregard shown to this group by the present administration. Volatile foreign inflows have long since been the object of many Nigerians' scorn, but the fact is that they played a crucial role in recuperating the financial markets after the crisis and few investors had any qualms about riding the subsequent bull run they triggered.
Ultimately, the issue is still too niche to command much attention, but the evolution of the financial markets can give us a reading on the efficacy of President Buhari’s policies in the coming two years. Whether we sustain the recent stock market rally may hinge on policy choices yet to be made, especially in the foreign exchange market. Meanwhile, activity in the fixed income market will likely be driven by FG borrowing and whether they are able to borrow externally as planned. In short, financial market outcomes will reflect economic policy outcomes. For this reason alone, Nigerians – and Buhari himself – would do well to watch the market.