Boniface Chizea
28 September 2008
opinion
Lagos — Recently, government had to intervene in an attempt to stem the bearish run at the Stock Exchange by setting up a committee with related mandate. This development as should be expected had elicited some reactions most of which amounted to the fact that this was an expected intervention which had been long in coming.
It was felt that this intervention could have been better if it had come much earlier as the run on the market had lasted for upwards of six months. But the fact remains that, to the best of our knowledge, there were not too many public reactions out there inviting government to intervene. We must accept the fact of our collective responsibility in growing and developing the Nigerian economy. Those in government are not super humans, all knowing, all knowledgeable. They could do with our collective advice and this is why those of us who have a culture of joining in public discussions must persevere as it is our patriotic duty so to do. The constitution of the Committee had an immediate impact as appreciation was reported in major indices of the Market but it would appear that the momentum that was anticipated had not quite materialized.
As far as I am concerned developments at the Stock Market hitherto were pleasantly surprising. At the outset of the Consolidation programme of the banking sector most of us were quite skeptical regarding the depth of the Market. No one imagined that the Market had the sort of depth it has now proven to have. I doubt also if there are many stakeholders out there who did not share this pessimism regarding the depth of the Market. But one issue after another was oversubscribed and in some instances massively so. In this connection one readily recalls the massive over subscription which the First Bank issue witnessed. Although there have been reported incidents of malpractice at the Market which cast a shadow of doubt on its robustness and integrity.
Playing the Stock Market suddenly became very popular and attractive and quite a number of players simply made a kill! In fact I know a number of young men who considerably improved their lot in life by playing smart at the Market. I recall confiding to my old time friend Tola Mobolorin, an acknowledged guru at the Market, that I have not quite gotten in on the act and he expressed surprise but encouraged me with the wise crack that it is never late. Of course I have some shares but I am in the buy and hold category and have not played the market with a view to making capital gains. But the gains in the market were quite giddy and considering the speed at which it all happened there was no way what has now happened with regard to the crash could not have been anticipated. I recall that when some reporters interviewed me and were wondering when the market would bounce back I observed that if we have termed what has happened market correction, then we can not correct and yet be expecting the Market indices to go back to where they were previously. But I have since spoken to a number of operators at the Market and they seem to be optimistic that there would be a bounce back.
The experience in most stock markets across the globe is that the market witnesses regular marginal ebbs and flows often in response to developments at the larger economy. The Nigerian Stock Market has proven so insensitive lately that even when companies released there financials it hardly mattered as far as the movement in the price of their stocks at the Exchange is concerned. But the genesis of the recent development regarding the bearish run at the Market might account for the fact of its recalcitrant nature. It would be recalled that there were three related developments that heralded the bearish run at the market. One was the required recapitalization imposed on the stock broking firms. The reasoning here is that since the stock brokers are major players in the market the distraction of having to recapitalize to continue in business undermined their market making moves which resulted in a lull that contributed in no small measure to the observable run at the market. But it would appear that this scare has been laid to rest as the new board at the Securities and Exchange Commission has suspended all that talk regarding recapitalization to be taken up after due consultations with stakeholders.
The second development was the requirement by the Central Bank regarding the imposition of Uniform Financial Year ends. This development resulted in unanticipated, irrational behavior on the part of the banks, as banks commenced to take positions long before the deadline to place themselves in relatively advantageous positions. Credit creation was halted and there were instances of loan recalls and rescheduling and this development impacted as should be expected on operators at the stock market and the last consideration was the purported halting of margin loans by the Central Bank; an accusation which the Bank had strenuously denied. Margin loans are regular fares for banks everywhere and therefore it is very unlikely for such an embargo to be imposed. This development so badly impacted activities at the Market and no doubt contributed in no small measure to the bearish run. It was reported that because of this development banks proceeded to recall all such loans including those extended to stock brokers the major market makers. It was also reported that the banks would usually require at least 150% cover on their exposures that it was unrealistic when it was recently reported that banks suffered losses from this development. In fact what we heard is that the banks because of the extent of cover they enjoyed on such loans were eager to off load such shares which were pledged as collaterals at knock down prices to recover their monies; a move which impacted the market negatively and contributed in no small measure to the bearish run.
The government Committee to stem the hemorrhage was told it should allow companies to buy back up to 20% of their shares in the market; an unusual permission as it is not common practice. This is often only allowed in the event of a company's rights issue and it has been one area through which quoted companies perpetrated mal practice. Companies, particularly banks, are known to fund their stock brokers to buy up their shares in an attempt to boost the price of their stocks at the market. And now that this practice has been conferred official recognition, the problem really is now how to ensure that companies keep to this permissible maximum! The Committee was also to allow differentials between the permissible daily movements in the price of shares upward and southwards and there is the requirement that a stabilization fund should be established and the Central Bank was required to inject liquidity into the Market. One would expect that it would be part of the deliverables expected from the Committee to work out how this stabilization fund is to be created. And one would also expect that the Central Bank might inject some liquidity into the market through its Open Market Operations mindful of the need to safeguard its core mandate which is the maintenance of price stability. The requirement that the cost of accessing the market should be drastically reduced has been on the cards for a long time now. This is one complaint regarding activities at the Stock market; that of usurious high charges. And therefore it is a recommendation which is long overdue and which is very much in the right direction.
When we teach Economics 101 and we discuss the perfect market, the stock exchange which should be characterized by free entry and exit without the prevalence of information asymmetry readily comes to mind. This is a reminder to all concerned regarding what should be allowed at the market and that most of the recent provisions which accompanied the constitution of the committee would appear to infringe on this characterization and therefore must be seen and treated as a palliative to be jettisoned as soon as some order returns to the market.
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