This article was motivated by this news. There were also calls for the government to pay more attention to the capital market. The general assumptions: there is money available for investments and the assets to be traded are also in place in the capital market. The simple solution was to herd people towards investing. Everything about these assumptions are wrong.
According to the graph below, this is the performance of the NSE over the past 5 years:
Now, let us layer the S&P 500 Index on the Nigerian Index over the past 5 years.
See the difference? The Nigerian Index is down by 16% while the S&P is up by almost 50%! If we adjust the NSE from Naira to USD, the difference will even be wider. This can be interpreted in two ways: either investors need to be educated to invest in the Nigerian stock market or that the stock market is not a good investment outlet. Now, I am going to prove that the latter is the case.
The Nigerian wealth
The average Nigerian does not have enough disposable income to deploy into savings and investment. The GDP per capita is just $1,968 as at the end of 2017 according to the World Bank. The minimum wage is $50 per month, or $1.67 per day, or $600 per annum. For a lot of Nigerians, people who earn the minimum wage are considered wealthy. This is a country where 91 million people are in extreme poverty according to World Poverty Clock. Whenever I tell my friends that Nigerians who earn over $1,000 a month are in the extreme minority, they think I am stretching the truth. However, there is evidence that only 2% of Nigerians have more than $1,400 in their bank accounts. This was in 2016 and just before Nigeria went into a recession that it is yet to fully recover from. I believe that the situation is way worse right now.
If less than 2% of Nigerians have $1,400 in their bank accounts and GDP per capita is $1,968, we don’t need much to prove the massive inequality in the country. So who exactly are we going to ask to save? Of what use is a National Savings Committee when most of your audience do not have the disposable income to save?
From this, we can see that the demand side of the market is virtually non-existent.
The risk premium on the Nigerian Stock Exchange is too low to support heavy investments at this point. With every passing year, investors are beginning to understand this. The Nigerian market is fraught with insider dealings, poor to non-existent corporate governance, nasty business environment (more about this later), lack of respect for contracts (cue the death of the cheque book), blatant fleecing of minority shareholders, ridiculous shareholder activism, etc. Many companies are choosing to delist from the stock market rather than stay.
Less than 10 stocks can accommodate more than $100,000 of investment in one day without going into a tailspin. This is a stock market where you have to beg and cajole well-run companies such as MTN list. If Nigerians even have the money to save, where exactly are they going to invest this money? Certainly not in stocks with low liquidity and in not in companies where they will be fleeced on top of it.
We can also conclude that the supply side of the market is also in shambles.
Take a look at the NSE chart again. Why would anyone be happy with such returns in an environment with double digit inflation, and where simply holding the US Dollar has maintained your purchasing power over the long term? Now, also consider government securities. The interest rates are so high that banks have stopped giving out loans. Which sane person will buy equities when the yield on the risk free rate is more than enough to compensate for inflation and even generate real positive returns?
The capital market is currently good for only one set of people — traders. Not investors. Not savers.
Nasty Business Environment
Sometime last year, I had a conversation a high net worth individual. He had a leasing firm. He complained bitterly about the stress of running a business in Nigeria. The profits were nothing to write home about. When he benchmarked his net profits against the returns on investment in treasury bills, he was visibly angry. He’s already winding down the business.
Nigeria is a place where you get taxed a minimum of $10.00 before you generate revenues of $1.00. You try and get licenses for your business and you are met with you-have-money-that-is-why-you-want-to-start-a-business-therefore-you-must-drop-money attitude. And when you refuse to drop the money (bribe), you are treated with disdain and everything becomes ten times more difficult. If you erect a signboard for your business, you start getting demand notices from agencies that you have never heard their names before. We operate in an environment where your account can be frozen by the tax authorities without notice. Your small shop can be demolished with only a 24-hour notice over a court dispute that you were not even aware of. There is no respect for human dignity.
These are the issues we need to solve if we want the capital market to thrive. You do not force people to buy things in a market if there is no respect for the rule of law and human dignity. You can be fleeced, and because the person who fleeced you is highly connected, there is nothing you will be able to do about it. We need to set our house in order first before asking people to invest their money in the Nigerian capital market.
Savings is not rocket science that needs a committee. It comes naturally when people have disposable incomes, when there is enough viable investment opportunities and when they know that there is a watchdog protecting their investments so that the rich and powerful do not take them for a ride.
Until we sort out these issues, a National Savings Committee is a waste of time and scarce resources.