Deep Impact

Capital Markets

As Nigeria endures the effects of declining oil revenues, new pressures are being put on the capital markets to support government spending while curbing ongoing inflation.

The declining contribution of oil revenues puts an added pressure to fund state spending by borrowing on behalf of the government. Dr. Abraham Nwankwo, Director General of Nigeria’s Debt Management Office (DMO), assured that the recent removal of Nigeria from the JP Morgan Bond Index was not a completely telling proxy of the new administration’s ongoing capacity to raise capital by borrowing from the bond market. Nwankwo noted that the development of the market which led to its original listing by JP Morgan was largely facilitated by domestic investors whose role remains relatively unchanged by external assessments.
The World Economic Forum (WEF) ranked Nigeria’s credit rating in the middle of the pack at number 77 in the world. The country has received such additional external valuations as a B+/Stable rating from S&P, BB-/Negative from Fitch, and Ba3/Stable from Moody’s. Although Nigeria has conventionally funded its deficit spending through the debt market, the country’s government debt to GDP ratio of 10.5% put it in 7th place in the world according to the 2015-2016 Global Competitiveness Report (GCR). The same report listed Nigeria’s -2.3% government budget balance at number 57 in the world, indicating the robust faculty of the country to launch large-scale public deficit expenditure programs with minimal detriment to the state’s long-term solvency.

The GCR ranked Nigeria’s purchasing power at international parity 21st in the world, at approximately $1.05 trillion. One effect of its massive market size is that the Nigeria’s economic growth has been a result primarily of leveraging the sheer volume of available resources rather than developing efficient markets, leaving the country susceptible to macroeconomic volatility in the trade of commodities that still forms the core of its system of wealth generation. Progress has been made, and the World Economic Forum listed Nigeria as transitioning from Stage 1 (factor-driven) to Stage 2 (efficiency-driven). The fact remains, however, that the drying inflows of US dollars from the sale of oil on the global market is having a substantial impact throughout all segments of the economy, not least among them in the capital markets. The Central Bank of Nigeria (CBN) issued a report in 4Q2015 indicating that foreign reserves were reduced to $30.04 billion, $719.32 million of which was blocked, while the remaining $29.33 billion was liquid. A survey by the WEF found that foreign currency regulation was the 6th most commonly cited obstacle to doing business in Nigeria, and the $7 million decline in foreign reserves from the month preceding the CBN’s report was largely a result of the mounting pressure that increasing domestic demand for US dollars has put on the country’s foreign exchange market.


Nigeria came in at 81st in the GCR’s ranking of countries’ aggregate macroeconomic environment and 91st in the measure of gross national savings, at 17.4% of GDP. The chief role of the public sector as the engine for economic growth has required unbridled access to capital markets. Respondents to the WEF survey indicated that access to financing was the 3rd greatest impediment to doing business in Nigeria, and due to the consistently high interest rates charged by commercial banks, financing through the equities market is a common course of action for both the public and private sector. The Nigerian Stock Exchange (NSE), regulated by Nigeria’s Securities Exchange Commission, is the convergent market for mobilizing capital. To maximize the productivity of all available capital, the equities market is composed of both the main exchange for large-cap enterprises, as well as the less stringent Second-Tier Security Market (SSM) for SMEs. Both the primary and secondary capital markets have grown substantially since the founding of the NSE in 1961 with just 19 traded securities. Following the delisting of IHS Nigeria Plc, the total number of listed equities at end-2Q2015 stood at 193, while the total exchange had expanded to 279 securities consisting of government bonds, unit trusts, equities, industrial loans, and debenture securities.

There was optimistic growth during 2Q2015 in the capitalization of federal government of Nigeria (FGN) bonds, sub-national bonds, equities, exchange traded funds (ETFs), and corporate bonds, at 0.28%, 0.64%, 6.56%, 7.77%, and 16.99% respectively. These figures were all dwarfed by the 107.92% appreciation of the market capitalization of Nigerian supranational bonds, which now stands at two such listed securities following the NSE’s listing of the $65.2 million African Development Bank bond in April 2015. In addition to the $65.2 million supranational bond, the NSE registered in 2Q2015 one new listing of a federal government bond worth $25.1 million, as well as one new corporate bond worth $226.2 million. Supplementary listings on the NSE during 2Q2015 increased by 20.55 billion units from 15 companies, compared to just four companies listing 7.99 billion units in 1Q2015.

The NSE’s two primary indicators, the market capitalization and the NSE All Share Index, dropped 20.98% and 17.96% during the first 11 months of 2015 to 27,385.69 points and $47.4 billion respectively. Industry analysts largely attributed the contraction to a lack of transparent government policy to orient market coordination. Within the challenging and highly concentrated Nigerian capital markets, the top twenty companies listed by market capitalization remained unchanged during 1H2015 and accounted for $48.1 billion. As of end-1H2015, the five leading equities in the NSE represented 55.43% of the total market capitalization, with Dangote Cement Plc alone controlling 26.48%, followed by Nigerian Breweries Plc at 10.40%. During 2Q2015, Union Homes Savings and Loans Plc led the 53 listed companies whose share price increased with a dramatic 1,056% increase in its trading price per share. Guinness Nigeria Plc’s $0.15 share price increase was the highest absolute price gain during 2Q2015.


Nigeria’s financial market development was ranked a modest 79th in the GCR, despite coming in at just 86th and 122nd in terms of the availability and affordability of financial services respectively. The same report also gave approving marks to the strength of accountability in the private sector. Although Nigeria ranked 43rd in terms of financing through the local equity market, it came in at 135th and 128th position for the ease of access to loans and the availability of venture capital respectively. Policy transparency, institutional efficacy, and public spending inefficiencies stand out as some of the major inhibiting factors to the further development of Nigeria’s capital markets. To tackle these constraints, both the Central Bank and the Securities and Exchange Commission are making concerted efforts to focus on improving the standards for market transparency and adherence to corporate governance regulations. The SEC collected more than $11,000 from fees and penalties during 2Q2015 alone.

Concerns remain regarding the limited success of the Central Bank’s DMO in containing the effects of high interest rates on domestic price inflation and the trajectory of Nigeria’s continually depreciating naira. Headline inflation was 9.20% in 2Q2015, and an 8.1% annual inflation rate put the country in 125th position according to the GCR, leaving no surprise why respondents to the survey listed inflation as the 8th largest obstacle to doing business in Nigeria. At a meeting of the Monetary Policy Committee held by the Central Bank in 1Q2015, the group voted unanimously to maintain the monetary policy rate (MPR) at 13%, the liquidity ratio at 30%, and the cash reserve ratio (CRR) on private and public sector deposits at 20% and 75% respectively. The 11 members of the Central Bank’s Monetary Policy Committee determined that in order for the corrective measures outlined by previous monetary policy decisions to take effect throughout the economy, leaders would need to allow for more time and maintain the current strategic course.

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