Experts have renewed calls for the Federal Government (FG) to adopt a policy that would help reduce persistent volatility in the nation’s Foreign exchange (Forex) market and stimulate capital market investment.
Besides, they noted that there is a need to consider a downward review of the Monetary Policy Rate (MPR) to enable listed firms to enhance profitability and increase investors’ access to the stock market.
The stakeholders argued that one of the major reasons the stock market is currently witnessing an unprecedented lull due to investors’ apathy and exit of foreign investors is due to high interest rate and shortage of forex that would deter investment growth and profitability.
According to them, if the interest rate is reasonably low, listed firms can borrow long-term loans, improve profitability and make more investment in the stock market.
It would attract investment into the country and spur activities in the primary market segment of the exchange.
Average Foreign Portfolio Investment (FPI) per month rose to N85 billion in 2017, as against N43 billion recorded in 2016. The value of Foreign Portfolio participation in equity trading in the NSE hit N851 billion as of October 2017, representing a 60.8 per cent higher than N517.55 billion recorded for the full year ended December 2016.
The improved performance witnessed in the domestic bourse within the period was attributed to the introduction of the Importers and Exporters’ window in mid-April 2017, which helped stabilise volatility and liquidity in the Forex market as well as attract foreign investors into the market.
Already, the U.S. dollar shortage is biting hard in Nigeria with its pangs being felt across all sectors of the economy. Local investors in the capital market had recently expressed fear of likely takeover of listed multinationals by foreign investors, should the Central Bank of Nigeria (CBN) fail to grant Foreign Exchange (forex) cover to repatriate their unclaimed dividend.
According to them, if the FG fails to make forex available to foreign investors to repatriate their dividends, it would not only push local investors away from multinationals operating in Nigeria, it would also, increase the quantum of unclaimed dividends in the capital market.
The stakeholders insisted that the scarcity of forex prevents productive diversification and discourages investment inflow into the country, while a stabilised and liquid forex market would woo foreign investors who have been waiting on the sideline or exited the country.
An economist, Johnson Chukwu, said the key issues that can attract more patronage in the market include the downward review of the Monetary Policy Rate (MPR) policy that would stabilise the foreign exchange market.
He said: “What is pulling the market is the high-interest rate. Last year when the interest rate was low, there was a heavy inflow from fixed income to the equities market and most investors shifted to equities. Today, interest has risen by 9.75 for 364 days. There is no dividend yield that will give up to 10 per cent.
“Again, foreign portfolio investors are not active in the equities market because of the forex issue. The economy has been struggling. The underlying earnings of listed firms are not doing well and future cash flow is not strong.
Therefore, he suggested that government must create enabling environment to promote investment inflow and new businesses in Nigeria.
The President, Standard Shareholders Association of Nigeria, Godwin Anono said bemoaned the current interest rate saying that it is a disincentive to investment for both foreign and indigenous investors, particularly, when compared to the current inflation rate.
According to him, if the interest rate is reasonably low, listed firms can borrow a long-term loan, improve profitability and make more investment in the stock market.
“If the interest rate is high, it would not be lucrative to investors to invest in the capital market when compared to the money market but if it is reasonably low, listed firms can go to the banks, borrow money and inject into the businesses and make a profit.
“Then businesses would flourish and make more money to pay dividends because the interest rate repayment is not too much. This would encourage more investment in the stock market but if it high, companies cannot borrow because if they do, they cannot repay.”
A stockbroker, Sola Oni had stated that the relationship between interest rate and the stock market is such that implies that when the interest rate is low, speculators move their funds from the money market instruments to the stock market to make a kill.
As a corollary, the same speculators move from the stock market to other asset classes, especially, fixed-income securities when the interest rate is high.
By this logic, he added that it is assumed that the current interest rate would boost investment in the fixed-income securities while it may depress investors’ appetite for equity investment.