…Its first investments should be in the Nigerian stock market
The recent debate on the Sovereign Wealth Fund (SWF) by the governors’ forum after the law establishing it has been passed, reminds me of what a diplomat at the American Embassy once discussed with me several years ago.
He was always amused about the nonchalant attitude of Nigerians to bad laws. Many Nigerians, even the so called elite, sit by, while bad laws are being made. They will not lift a finger to challenge it or even raise awareness to the problems the new law will create. They only wait after the law has been made to find a way around it.
He contrasted the position with Americans who will fight on both sides, for and against the new law to ensure that the law, when passed is fair and in the interest of the majority. Though they do not always succeed on this count, once a law was made, all Americans will obey it until it is repealed. The governors, obviously in self serving campaign to have the law repealed, is another validation of the observation my friend made. Where were these governors when the bill was proposed and passed into law last year? I have no problem with their challenge. If it is a good law, it will stand the test of this challenge. My advice to the government is for it to immediately start executing the law as it is now, direct that all monies currently in excess of the budget benchmark be credited to the SWF.
Anyone who does not like it should go to court. The fact is while the law exists, it has already started accumulating money for its take off, and not to do what the existing law says is failing to execute. There is also an opportunity that the stock market has created for the SWF to establish itself quickly and become relevant to Nigeria and its numerous stock market investors.
The SWF represents the best intervention instrument that can turn the market around and avoid the moral hazard of direct government intervention in the stock market. The SWF on the other hand, as a huge institutional investor, can invest within a market setting that is both necessary to do and the right action.
There is also the urgency for the Fund to take off with the aim to stabilise the stock market. This is important for many reasons, as I said in this column two Thursdays ago that despite the various reforms going on in the capital market and the stock market in particular, unless there is a massive infusion of liquidity to buy up the excess supply of securities now been dumped on the market, the recovery of the market may take a long time to come.
Doing this will not be outlandish, as not doing anything will put our stock market in danger, just like what happened to the Japanese stock market that is yet to fully recover 20 years after. The SWF buying large positions in the Nigerian stock market will be the right set of assets to start with, and the easiest to create.
This will do for the market what the 2004 banking industry consolidation did in opening up our stock market to the average investor and creating several millionaires when it lasted. It was a pity we were unable to manage the success that followed. Buying up Nigerian companies’ equities will be a good way to start off the Fund. The Fund can buy these equities and hold forever, if it so chooses, this can become a major source of future dividend income and new resources it will need to help transform the nation.
First, it will be buying up this position at some of the best prices it can ever hope to. It will also help to halt the present trend where in the last few months foreign investors have become the major buyer of Nigerian equities. The Nigerian equities represent valuable investment right now. The SWF has the resources and the required time to take a long-term perspective.
It can wait to fully make the gains of the opportunity presented by the stock market. Frankly speaking, there is no better return for its investments anywhere else in the world right now. This will be a bet on Nigeria and some of it best companies. This required intervention will immediately put a stop to the declining prices and stabilise the market. This in my opinion is the best way to intervene in the market right now. A compelling market case can be made for the intervention as investing in the Nigerian stock market will revive the entire economy.
A rising stock market has a way of carrying the rest of the economy with it. The SWF also has another very good reason to do this. They will be helping to stabilise the stock market that will provide the additional capital to help it carry out its development mandate. A working stock market will provide an exit for those outside investors who will be partnering the SWF in large projects. In rail development for instance, they will at some point want to divest. Foreign investors are interested in a working stock market because it assures them they can get a fair valuation for their investments and provide them with an excellent exit when the time comes.
Why support creation of SWF for Nigeria
Despite the huge oil receipts received all these years, there is no development to show for it. Instead, we are drifting towards anarchy with the growing poverty and security problems, daily compounded by the near 70 percent unemployment that is worsening by the day.
The problem of lack of diversification of the economy, corruption and wasteful government expenditure pattern will not go away, and we need to do something new.
We can not keep doing the same thing and expect different results, we need to take a fresh approach and the SWF is one of such fresh approach.
Let us create this Fund, and let it shield part of the oil revenues, to make sure we put it beyond the reach of those who want to waste it and mortgage the future of our child. We need to spend the money saved in the SWF to diversify our economy, especially looking at the theoretical benefits of a multiplier effect of such large spending on the economy.
We need to take into consideration the significant problems we have with capacity to execute, together with the corrupt environment and weak infrastructure, compounded by an ineffective and corrupt civil service. A well run SWF will help create the investments that will provide a soft landing for the economy when we finally run out of oil, because oil is a wasting asset that will run out someday. We need to make haste in developing the economy and this will mean having to overcome our capacity and infrastructural problems quickly by borrowing capacity elsewhere.
At least, it will be a new strategy. We need to do something new. Many of the emerging Gulf states have successfully used Sovereign Wealth Funds to uplift their development. The proposed Nigerian SWF will go a long way in achieving the twin objectives of providing for the raining day in the form of long-term investment as well as act to smoothening out the problems associated with the boom and burst of oil prices, which has necessitated the creation of the Excess Crude Account (ECA) to where the government credits the difference between the oil price budgeted and the actual receipts.
We have come to view this, essentially as a current account that the government draws from at will. The current near empty ECA reserve balance is a testimony to this. From a balance of about $20 billion only three years ago to almost nothing today, it is testimony that this has not worked. A Sovereign Wealth Fund properly funded and managed well will not only smoothen out the price fluctuations in our oil receipts, it will also provide us with solid investments with growth potential for the future, thereby guaranteeing that we will be leaving some this God-given gift to future generations.
It will also provide us with a transparent and accountable management for at least a portion of our oil wealth that only a few benefit from now. As minister of finance has explained, part of the fund will be dedicated strictly to infrastructure development. The benefit of this is that you will have an infrastructure fund that attracts foreign capital that will have no fear that their investment will one day be appropriated (I am not sure if the recent nationalisation has not changed this assumption). The leverage from this ability to attract foreign capital will also mean that the Fund has the ability to attract a better credit rating than even the country Nigeria. It will also have the ability to access long-term funds that can sometimes be up to 40 years, before repayment, because they will be invested in viable long-term projects that can have the kind of cash flows that can easily repay such loans over the long haul, without recourse to the government.
The minister has said that given the huge infrastructural challenges we face, we cannot have enough to do it from our budgets. I agree with her. And this idea is fresh and workable. We need to try it and the governors need to give it a chance.