Abubakar K. Mommoh
16 November 2008
interview
Bello Mohammed Maccido, MD, Legacy Pension Managers recently spoke with Sunday Trust on the current global financial crisis and its impact on Nigerian economy and pension industry, the volatile equity and activities of his company. Excerpts
In the last few months, world attention has been on the financial crises in the United States and other parts of the world. What are the implications of the crises on the Nigerian economy, particularly pension industry?
To be able to analyse the implications of the global financial crisis on Nigeria and for the pension industry, we need to dimension the international financial crisis so that we can understand it properly.
It started as a local situation in the United States and has now enveloped many countries in just a few months. After the significant down turn in the stock market in the United States, a number of countries in Europe responded immediately showing similar signs of weakness and as the crisis spread to other parts of the world, we saw several countries declaring they were insolvent. The most recent examples are Pakistan and Ice land which both declared their inability to meet international commitments.
Secondly, the crisis in the US started with the meltdown in the subprime mortgage market where mortgagees were extended under easy terms to borrowers that did not meet the requirements. Because the mortgage market has not been under close watch of the regulatory authorities in the US, practitioners in that market over extended mortgages and when the US economy started showing early signs of recession, those mortgagors were unable to meet their commitments on the mortgages. It also brought the mortgages that were on the books of many big investment banking institutions of the US to be exposed to risk of non realisability of value.
Automatically, with the early signs of recession in the US, the mortgage industry literally collapsed overnight. Initially Bear, Stearns with its huge portfolio of mortgage on its books had to seek government bail. Lehman brothers also filed for chapter 11 bankruptcies and then Merrill Lynch which was taken over by Bank of America. So is the large insurance, AIG, which had to be to be prevent from collapse. The crisis has more or less cascaded down to many parts of the financial system with the result that only commercial banks that have more capital to support their asset base have not collapsed in the crisis.
Worst of the entire crisis has affected the availability of credit in the US. If you understand the role of credit in the US system you will know that it is not crisis of small dimension. Credit is the engine that drives the demand for goods and services across that country. The moment you withdraw credit, you take away the ability to buy goods and services and definitely production level will go down. And when production level goes down, level of employment goes down with the effect that overall economic output is significantly diminished. The crisis has permeated the financial system to the point that it has even touched the nerve of commerce in the sense that access to credit has nearly dried up.
For us in Nigeria, given that we are in an integrated world, the question is how does what is happening in the advanced market affect us?
First, you have to remember that we are an oil exporting country and in just few months, the price of oil has gone down significantly from well over $140 a barrel to around $60. Because we depend mainy on oil for our foreign exchange earnings, it'll affect the availability of funds for government to support projects. What we have seen in the equity market globally, we have seen it in the Nigerian Stock Exchange because in a period of less than six months, the market has lost over N4 trillion. It peaked at about N12.7 trillion but presently, it is about N8.5 trillion.
Part of what drove down the price of stocks in the country is the exit of the foreign fund managers. Though they do not control the largest percentage of the market, they have significant percentage in the Nigeria equity market. Once they began to experience global meltdown and fear that equity markets globally were on consistent down ward trend, the fund managers quickly moved to exit their investment, probably to look for safer investments that are debt fixed income instruments that are less physical than equity.
Alongside what is happening internationally, the Nigerian equity market is going the same direction. Significant components of Nigeria equity market come from savings, retail investors across the country, of course, the margin facilities that banks have extended to borrowers to buy stocks in the equity market and the activities of the foreign fund managers. But now we have seen fund managers probably exit and we have seen the banks withdrawing their margin facilities. Definitely, the Nigerian Stocks Exchange has been constrained of liquidity and this has continued to derive down prices because once you have market that is less liquid the likelihood is that people are more willing to sell and than to buy.
But in terms of how this whole event is affecting the pension industry, we are lucky that when the National Pension Commission was putting together the investment guidelines for Pension Fund Administrators, the National Pension Commission was conservative in ensuring that most of the money did not go into equity investments that are more exposed to risk than other type of investments. Rather investments mostly went into Federal Government bonds, treasury bills, and money market instruments. Even though equity market has gone down, the fact that the proportion of the portfolio is more in debt instruments which have not suffered this free fall similar to what happened in the equity market has actually mitigated the portfolio of pensioners from severe losses.
Secondly, pension funds are long term investors. Under the pension law, if for instance, somebody begins work at the age of 25 under the Pension Reform Act, he cannot access his retirement benefits until the age of 50 years, even when he retires. If you are a 25-year-old graduate just getting into working system, the day you enter and open a retirement savings account, it means your funds have to be kept for you for another 25 years before you can access them.
Clearly, you can see that what we are managing, as pension fund administrators are long term funds and because they are long term funds even the 25 per cent proportion that we have taken to the equity market cannot be considered as loss because losses are for those who are there for a short term. Because of our long holding period we are less likely to be exposed to price fluctuations like those who are there for a short time because long term share prices tend to appreciate.
Some people have in the past said the stocks in Nigeria market were overvalued through activities of the speculators.
The Nigerian financial system has really developed from what it was in the early 1980's. Significant progress has been made not just in bringing financial system to world standard but innovations have been made in the Nigerian Stock Exchange. Years ago, biddings were done verbally through call over system on the floor of Exchange while the entire world had become an automated system. But over time, we also moved over to that stage.
Now, automation trading is much easier and the settlement system has been improved. In the past, when you wanted to sell your shares, you had to physically present your shares to the broker. The broker had to take them to the Registrar for signature verification before a sale could be consummated; it used to take many weeks. Now they are in electronic form within Central Security Clearing System.
Before the advent of democracy in 1999, the total market capitalization of the Nigerian Stock Exchange, that is total value of all shares put together was about N300billion but middle of this year, when the market started its down turn, the market capitalization had gone to over N12trillion. New companies had been listed on the market through Initial Public Offers and others have also done subsequent offers that have increased the number of shares in the market and that has been partly responsible for the growth.
The growth of Nigerian stock market is not from just price appreciation, new companies have been listed on the Exchange that came through initial public offers and even existing companies have also gone to the market particularly the banks during consolidation. They have gone back to the market to seek capital to meet the N25billion mark. Share prices have also gone up because of demand over time; people have become more aware of the fact that purchase of share is a way of creating wealth. Again, margin trading has facilitated speculative demand which has impacted the market.
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