ADDRESSING EMERGING RISKS IN THE NIGERIAN CAPITAL MARKET

ADDRESSING EMERGING RISKS IN THE NIGERIAN CAPITAL MARKET Mr. Mounir Gwarzo, Director General Securities & Exchange Commission Sunday, 8 th May, 2016

Outline 1 Overview 2 Emerging Risks Across AMERC 3 Nigeria’s Emerging Risks 4 Addressing the Emerging Risks 5 Conclusion 2

2016 so far defined by high volatility ۞ Volatility is a natural part of the market cycle over the short term ۞ 2016 has been defined by very high volatility across the global financial markets ۞ The major identified factors behind this high global volatility include: Liquidity US Fed Policy ۞ Volatility of the global oil and commodities markets ۞ Slower growth from China and other major emerging economies China ۞ US Federal Reserve interest rate policy (time-frame for rate hike still unknown) ۞ Liquidity concerns as global Central Banks consider reducing monetary accommodation Oil ۞ The volatility has led to massive selloffs with most of the major market indices across developed, emerging and frontier markets in negative territory 3

Emerging Risks in the AMERC Markets Falling Oil/Commodities Prices Slower Growth Global Headwinds US Fed Policy Low Liquidity ۞ ۞ Our markets continue to face unique challenges both as frontier and emerging markets ۞ Similarly, slowdown from China and major emerging economies is adding to the narrative about the state of the global economy ۞ ۞ Growth has slowed significantly in our domestic economies The number one driving force behind this year’s challenges has been the volatility of global oil prices Liquidity is a big concern, policies of central banks around the world towards tightening already impacting liquidity 4

The macroeconomic environment in Nigeria’s economy is facing very challenging times §Following over a decade of impressive above 7% growth rate, the economy has significantly slowed to only 2. 82% in 2015 , roughly equaling population growth rate §The current economic environment is characterized by factors including: q. Decline in prices of crude oil in global markets q. Exchange rate instability q. Inflationary pressures q. Energy shortages (power and fuel) q. Exit of foreign investors q. External headwinds, including slower global growth q. Security challenges Sources: NBS, World Bank Macroeconomic Indicators Real GDP growth (est. Q 1, 2016) 3. 3% Real GDP per capita growth 0. 3% CPI inflation 11. 4% Fiscal deficit as % GDP (2015) -3. 7 Key interest rate (MPR) 12% Naira exchange rate/USD 199 Sources: CBN, NBS, IMF ۞ The general sense of uncertainty in the economy is a major concern for government and a major risk for the Nigerian capital market ۞ The fiscal focus of the current administration is massive investment in infrastructure and pursuing diversification of the economy 5

How emerging risks are impacting the Nigerian capital market‘s performance While maintaining its sound fundamentals, the Nigerian capital market is currently reflecting the sentiment in the broader economy The NSE ASI since 2014 The FMDQ 2014/2015 Turnover ۞ Within the context of the current economic environment, both the fixed income and equities segments of the capital market have witnessed dips in activity ۞ In the last 3 months of 2015 alone, transaction volumes on the FMDQ OTC platform (which reflects the state of the fixed income market) declined by about 50% from N 14. 54 trillion in October 2015 to N 7. 43 trillion by the end of that year. This drop in liquidity has continued into the early parts of 2016 ۞ The stock market has also endured similar declines. Major NSE indices lost 17% in 2015 while transaction volumes fell by over 40% within the year. 2016 ytd performance is currently at -10%, an improvement from the steep declines in the early parts of the year Sources: NSE, FMDQ and Bloomberg Major Factors Impacting Performance ۞ ۞ The oil price shock ۞ Exit of foreign portfolio investors, etc The declining foreign reserves Foreign exchange volatility The delisting of FGN bonds from major emerging market indices by JP Morgan and Barclay’s 6

Addressing the emerging risks through diversification, greater liquidity and enhanced capacity Greater sophistication, improved liquidity, enhanced capacity and diversification will be critical to addressing identified emerging risks Diversification of Trading Platforms ۞ We have ensured reduced systemic importance of any single trading platform by licensing alternative trading platforms. Nigeria now has multiple platforms: The Nigerian Stock Exchange (NSE) for trading listed securities The NASD Platform for trading in unlisted securities of public companies FMDQ is the OTC platform for trading fixed income securities In addition to these platforms we have two commodities exchanges (NCX and AFEX) while a capital trading point will soon be licensed ۞ ۞ Diversification of Products Diversification of Liquidity Sources Product diversification is very critical for frontier markets like ours. In addition to conventional products like equities and bonds we are have reviewed our regulations to allow product innovation for new products like: ۞ As foreign investors have exited frontier markets, efforts must be aimed at developing a domestic investor base capable of filling in the gap ۞ Pension Funds: We are actively engaging the National Pensions Commission (Pen. Com) whose expected guidelines will see greater participation of pension funds ۞ Unified Licensing: This innovative scheme will grant access to central bank’s discount window to broker/dealers and market makers Securitization: Infrastructure funds/bonds Sukuk Note: We are supporting Nigeria’s Federal Government to finance budget deficits by issuing infrastructure bonds The Government is also working on issuing a sovereign sukuk to serve as benchmark for other issuers 7

Implementing the Nigerian Capital Market Master Plan as Longterm Strategy for addressing emerging risks Major Master Plan Initiatives we have implemented Strengthening the SEC’s Capacity 1 Corporate Governance Scorecard 8 2 National Investor Protection Fund ۞ 3 Dematerialization Our implementation approach is to identify initiatives within the Master Plan at the beginning of the year and to focus on faithfully implementing them ۞ 4 E-Dividend In 2015, being the first implementation year, we selected low-hanging fruits which we are delighted to have fully implemented ۞ A lot of these initiatives had been identified for decades without any meaningful progress in their implementation ۞ Thanks to the Master Plan, there is a renewed focus on ensuring such initiatives are prioritized and religiously implemented 5 Direct Cash Settlement 6 Recapitalization 7 Robust Public Enlightenment 8

The Master Plan Implementation so far… Second Year (2016) Major Master Plan Initiatives for 2016 1 Attracting More Listings 2 Establishing a National Savings Strategy 3 4 Similarly, in 2016 we shall focus on key areas of the Master Plan , especially prioritizing initiatives that will deepen the market while boosting its attractiveness and competitiveness ۞ We will focus on getting major companies in strategic sectors of the economy to get listed on any of the SEC-licensed platforms ۞ A National savings strategy document will be developed to improve our savings culture and accelerate the development of a domestic investor base ۞ The technology infrastructure across the market will be given prime attention to increase market efficiency ۞ Our cost structure will be reviewed to make the market more competitive ۞ Product innovation will be prioritized, especially derivatives that can help economic agents manage their risk Deepening the Non-Interest Products Segment Building Industry-wide ICT Infrastructure 5 Capital Market Literacy 6 Reduction of Transaction Costs 7 ۞ A Framework for Derivatives 9

Conclusion ۞ The risks our markets face present their own unique opportunities to refocus our market development objectives ۞ We must seize the opportunity to further deepen financial literacy in our markets, take measures that enhance depth, breadth and liquidity as well as firm regulation ۞ Our competitive edge should be continual adherence to best regulatory practice 10

Thank you! Mr. Mounir Gwarzo, Director General Securities & Exchange Commission Tuesday, 12 th April, 2016 11