Photo Courtesy: https://www.pngitem.com/middle/hbRbbxm_stock-market-crash-clipart-hd-png-download/
Impact of Covid-19 on Nigeria’s Stock Exchange
Stock markets provide a platform for investors and traders to buy and sell financial instruments. In the modern world, stock exchanges have been used to gauge the health and economic cycles of most developed countries. This is especially true for countries that have multiple, organized, and sophisticated exchanges. The United States of America (USA) for instance has thirteen major stock exchanges and hosts the world’s largest stock exchange by market capitalization, the New York Stock Exchange- as of 2019, it had over 3000 listed companies with a total market cap of $22.9 trillion. It was therefore no surprise that as the USA stock markets plummeted due to panic selling from a majority of investors, analysts and economists took it as an indicator of a slow-down in the economy, an indication that was confirmed by a report in the World Economic Outlook, projecting a contraction in the U.S economy by 5.9% (Gill, 2020).
However, apart from being one of the indicators of an economy’s health, stock markets mainly serve the purpose of providing long term capital for companies, through matching investors with excess funds to listed companies in need of these funds. A host of renowned successful companies have been able to scale their businesses as a result of accessing capital through stock exchanges. A great example is Facebook which was able to raise $16 billion on its 2012 Initial Public Offering (IPO) which enabled it to grow and invest in products that have enabled it to compete effectively with the likes of Google, Yahoo, Apple & Microsoft. Similar success stories are shared with African companies that have been able to access financing on their local stock exchanges. An example is Kenya’s leading Telecoms company, Safaricom, that raised Kes 236.6 billion (approximately $2.36 billion) on its 2008 IPO which propelled the company’s growth and is today the most profitable company in Kenya.
Africa hosts approximately twenty nine operating stock exchanges with the three largest stock exchanges by market capitalization being the Johannesburg Stock Exchange ($1.061 trillion in market capitalization with 411 listed companies), the Botswana Stock Exchange ($39.261 billion in market capitalization with 36 listed companies) and the Nigerian Stock Exchange ($33.757 billion in market capitalization with 167 listed companies) as of 2019.
The Nigerian Stock Exchange (NSE)
Nigeria is considered to be Africa’s most dynamic economy as it hosts a number of successful industries and has the largest population in Africa. Its economy has mainly thrived on oil export, it being the largest African member of the Organization of the Petroleum Exporting Countries (OPEC). In addition to the abundance of its oil output, Nigeria’s economy is well diversified in different successful sectors, including its growing tech industry and the flourishing film industry, “Nollywood”. These successes have thrust Nigeria’s economy to become continental leaders as highlighted by a Bloomberg report which asserts the country’s top spot as Africa’s largest economy as of 2019 with an outstanding GDP of $476 billion. (“Nigeria Tops South Africa as the Continent’s Biggest Economy,” 2020),
Leading African Economies, Source: Bloomberg
On top of having a rich economy, Nigeria thrives in having a formidable stock exchange market. In the continent, the Nigerian Stock Exchange is ranked the third largest in terms of market capitalization, but second by number of listed companies hosting 161 companies, second only to Johannesburg Stock Exchange, which has 411 listed companies. These listed Nigerian companies are spread across different sectors, including: the consumer services sector, the health care sector, consumer goods sector, financial sector (the largest), the technology sector, the oil and gas sector and the industrial/construction sector. Some of the great benefits enjoyed by these listed companies include having access to long term financing, higher public profile and visibility (which usually boosts a company’s credibility with the public) and greater corporate governance due to regulatory measures that help ensure a company’s longer term prospects and survival.
A large number of listed Nigerian companies have enjoyed handsome profits over the years and have gone on to become valuable leading businesses in the continent. In a survey done by the African Business magazine of Africa’s top 250 companies by region, successful Nigerian companies dominated the West African region, most of which were listed on the NSE. Some of the reasons attributable to these significant successes are: a surge in the use of technology in Nigeria that has made business operations in the country become more efficient, a booming economy that has consistently competed for top spot in the continent (this has continued to attract investments into the country) and the large population of skilled young men and women.
The Impact of COVID 19 on the Nigerian Stock Exchange
In the investment world, there’s a common phrase used to describe stock markets: stock markets take the stairs ‘up’ but the elevator ‘down.’ This phrase has become true with the impact of Covid-19 on global stock markets. As investors panicked when the Covid-19 virus started spreading like a bushfire, most of them took short positions on their stocks. The result of this were negative returns witnessed in investor portfolios and increased levels of volatility in stock prices only comparable to the 2007/2008 global financial crisis. Indexes, which portray the overall performance of the stock markets, had their prices and returns plummet sharply. On top of panic selling by investors, other two significant reasons attributable to the powerful effect of Covid-19 on stock markets would include the interconnectedness of the modern economy: as the modern world is largely unified in most operations including the expansive supply chains, restricted movements implied reduced operations and thus many companies faced possible business closures which most investors concluded to imply a bleak future and thus triggering massive selling. The second reason is the reduced flow of labor due to restricted movements which has meant that production of goods and services has declined, implying reduced sales and thus possible insolvency for businesses.
An example of significant volatility in the U.S. Stock Market, Source: KelloggInsight
The Nigeria Stock Exchange experienced a significant N1.71 trillion ($4.4 billion) loss in market capitalization between 28 February 2020 and 20 April 2020 as reported through a study done by economists from Nasarawa State University in Nigeria (Adenomon et al., 2020). This decline in market capitalization was heavily attributed to foreign investors exiting the Nigeria market due crashing of global oil prices (as Nigeria is a big exporter of oil and a contributor in OPEC) and the inherent currency risks (as a result of the reduced foreign exchange earnings, the Central Bank of Nigeria devalued the Naira from an official rate of N307 to N360 per dollar). Such losses in market capitalization gives an overall perspective of how the listed companies experienced contractions in their share prices which implied reduced valuations and possible reductions in access to equity capital since demand reduced as supply increased due to higher “sell-offs”.
Responses to the negative impact
In an effort to keep the market afloat, the Securities & Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) announced in April the extension of filing days for listed companies by 60 days. This initiative was implemented to ease the compliance pressure of listed companies, who are required to file quarterly and annual reports and make them available to the public. In addition, the NSE stated that remote trading via its electronic platforms would be used which encourages investors and traders to continue trading, even when at home. This initiative is particularly important as it helps the companies listed remain active in the market while also having access to funds from investors.
While these measures may not be completely sufficient, they are necessary to keep the Nigerian stock market alive. On top of these initiatives, I think that the Nigerian government can also improve on its fiscal and monetary policies to attract foreign investments and especially to shift the economy towards a completely free market economy. This is because, given that the country is largely an export economy, having a stronger currency that is influenced by forces of demand and supply will attract even more foreign exchange earnings. In addition, the SEC should also invest in measures targeting investor confidence building since most investors have shied away from putting their money in stocks given the significant losses. These coupled with stronger and efficient policies will help the Nigerian stock market recover in the near future.
Written by Frank Muhoho @naima_frank