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You are here:Home>>Strategic Research & Analysis>>Gideon Nyan>>Foreign dominance in stock market worries stakeholders
Thursday, 03 January 2013 17:20

Foreign dominance in stock market worries stakeholders

Written by HELEN OJI AND KARLS TSOKAR - The Guardian
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• List ways for sustainable rebound
• Nigeria to adopt public sector accounting standard

 

TO avert another round of crisis in the nation’s capital market that could lead to the loss of investments, stakeholders have urged its regulators to attract local investors and break the hold of foreigners on the sector.

 

The stakeholders raised the alarm at the over- dependence on foreign investors for the sustenance of the market. They warned that this could cause another crisis in the near future.

 

The equities market, according to them, has remained the most attractive investment to foreign investors, accounting for 78 per cent of total capital investment in different sectors of the economy as at October 2012, with local investors occupying a miserly 30 percent of the market.

 

Data obtained from the Central Bank of Nigeria (CBN) Statistics Database posted on its website indicate that the total value of capital brought into Nigeria stood at $12.64 billion as at October 2012, out of which investments in equities accounted for $10.34 billion.

 

According to the stakeholders, to ensure a vibrant and sustainable capital market, there is the need for regulators to put a machinery in place that would help restore local investors’ confidence and attract them to the market.

 

In his review of the performance of the stock market in 2012, the General Secretary, Independent Shareholders Association of Nigeria, Mr. Adebayo Adeleke, explained that the regulators should focus more on measures that would make the market attractive for retail investors.

 

“Going forward, regulators should pursue measures to make the market attractive, not over-dependence on foreign investors and Foreign Direct Investment because when other foreign markets are troubled, it would have a ripple effect on our market and cripple activities. We should grow our own local market. Look for what to do for retail investors that lost their money.

 

“Retail investors have lost confidence in the market again. Nigerian Breweries delisted from the market on its own, Poly Products is on the verge of delisting, among others. That is to explain that things are not yet normal. The little recovery we are seeing is because the European economy is troubled and by the time it recovers, these foreign investors would exit our market and the market may crash again.

 

“What we have been experiencing are troubled and financially sick regulators which are not recognized under the law. No allocation was given to them in 2013 and the implication is that they would come back to manipulate the exchange by hiking transaction charges to make money. In fact, we have a lot of issues to address for a sustainable recovery of the market, ” he said.

 

Stockbrokers have noted that the Nigerian equities market’s year-to-date appreciation was by over 35 per cent.

 

But they noted that the recovery of the secondary market for equities was yet to translate into the reactivation of the primary market segment.

 

The Chief Executive Officer, Lambert Trust Securities Limited, Mr David Adonri admitted that while the primary market for bonds had been very active, the world class secondary market bonds platform of the NSE remained dormant.

 

He explained that there was the need to deepen the capital market with the reactivation of the NSE bond platform, listing of privatised state enterprises and expansion of the derivatives market in order to attract retail investors, adding that this would help to prevent a crisis in the equities market.

 

The Chief Executive Officer of Cowry Assets Management Limited, Mr. Johnson Chukwu, said the Nigerian capital market recorded an impressive performance in 2012, closing the year at 35.45 per cent appreciation in all-share index.

 

“Interestingly most of the appreciation occurred in the third and fourth quarters but most especially the fourth quarter of 2012. The market turned the corner in Q3 when government borrowing rates began to trend southwards.  During the early part of the year, the market performance was quite sluggish due to high Federal Government treasury bills and bond yields.

 

“Following from the trend noticed in 2012, it is obvious that for the Nigerian capital market to sustain the positive performance, the Federal Government should continue to moderate the rate it offers on its debt instruments - treasury bills and FGN bonds. If the government offers moderate yield on its debt instruments, portfolio investors will be compelled to look for alternative instruments with better returns. Such fund managers will also be encouraged to restructure their portfolios in favour of equities.”

 

Other factors that will ensure the sustenance of positive capital market performance next year, according to Chukwu include the maintenance of strong foreign exchange reserve and stable exchange rate in the country. This is particularly important for the foreign portfolio investors to retain their interest in the Nigerian capital market.

 

He noted that there was the need for quoted companies to continue to generate strong financial performance such that the appreciation in their market prices would be in tandem with their intrinsic valuation.

 

“Finally, the country must maintain political stability to encourage both local and foreign investors to continue to invest in Nigerian equities. Should the spate of bomb attacks in the North spread to the South, foreign portfolio investors and some of their local counterparts may be frightened out of Nigerian instruments particularly equity instruments,” he said.

 

And from this month, all three tiers of government in Nigeria are expected to implement the International Public Sector Accounting Standards (IPSAS) to entrench probity, transparency and accountability in order to promote purposeful governance and economic growth.

 

Particularly, it is to check corruption and inconsistency in management, while aiming to rekindle the people’s confidence. Nigeria’s quest to reposition her economy as one of the top 20 by 2020 has necessitated various reforms aimed at jump-starting speedy growth. One of such steps is the recent decision to commence the gradual compliance, by Ministries, Agencies and Departments (MDAs),  with the

 

provisions of the global accounting system.

 

Developed economies like the United States (US), United Kingdom, Germany and Japan operate openness in the daily administration and control of their expenditure. This system does not only promote checks and balances in governance but also provides the citizenry the opportunity to be part of the government. It equally provides a platform to measure economic growth, income and expenditure and budget implementation.

 

In the past few months, the office of the Accountant General of the Federation (OAGF) has held sensitization workshops in the six geo-political zones of the country with critical stakeholders on the project.

 

Government strongly believes that the eventual adoption of IPSAS in Nigeria would greatly assist in achieving the current transformation agenda of the Goodluck Jonathan administration.

 

IPSAS is a set of accounting standards for use by public sector entities around the world in the preparation of financial statements. They standards are based on International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). A sound government accounting standard such as IPSAS is a critical part of a nation’s institutional infrastructure. It has become a recognized benchmark for evaluating and improving government accounting in most developing countries.

 

According to Mr. Jonah Otunla, Accountant General of the Federation (AGF), the adoption of IPSAS by the three tiers of government would definitely lead to a better assessment of resource allocation, decisions made by government and improve transparency and accountability in the system.

 

According to the AGF, the desire of government is to incorporate the system as an integral element of reforms directed at promoting social and economic development.

 

In many states of the federation, balance sheet audits, when performed, still routinely reveal major discrepancies. This situation is largely blamed on the fact that the operation of government business and accounts has been within the general framework of the principles of fund accounting, with financial reporting structure being far from the principles in absolute terms.

 

Compliance with relevant standards in fact is said to at best being incidental.

 

While opening the first sensitization workshop for stakeholders comprising, commissioners of finance, states Accountants Generals, members of the State Houses of Assembly in the finance and appropriation committees and State Auditors General as well as other relevant stakeholders from the North- West zone in Kaduna, Mr. Otunla explained that considering the role which the new system would play in assisting the country achieve speedy economic growth, the

 

Federal Executive Council (FEC) had approved at its July 28, 2010 meeting that Nigeria adopt the provisions of the IFRS and IPSAS for the private and public sectors respectively.

 

This is the more reason why pundits insist too that limited financial reporting and disclosures made by most entities in the country could sadly be responsible for some perception that Nigeria is a risky environment for the flow of Foreign Direct Investments (FDI). In such instances, as research indicates, investors are not provided with sufficient economic information that will enable them to understand the risk profiles of entities in order to make informed judgments and decisions.

 

Besides being mandated to identify infrastructural needs and make recommendations to the government, a sub-committee is to ensure that officers involved in finance and accounts functions understand the core requirement of IPSAS, ensure adequate coverage of all stakeholders in the distribution of the document and tackling gaps noted in the financial statements of the three tiers in order to ensure that they are bridged.

 

It is also a key element within the United Nations System. Since 2006, UN system organizations have made headway in aligning themselves with IPSAS requirement.

 

There are over 50 countries that have and are in the process of adopting these standards. They include Algeria, Albania, Afghanistan, Argentina, Azerbaijan, Bangladesh, Barbados, Cambodia, Cayman Islands, China, Cyprus, East and Southern Africa, France, India, Jamaica, Morocco, Norway, Zambia, Pakistan and Uganda.

 

At the 42nd annual conference of the Institute of Chartered Accountants of Nigeria (ICAN), one of the cardinal recommendations was “that public sector financial management systems must provide reliable information to decision-makers for good governance and accountability. It is in this respect that participants welcomed the move by the government to adopt IPSAS as a basis for financial reporting in the Public Sector.”

 

It also noted: “Markets and economies function properly when participants have trust in the financial statements that drive activities and decisions in the capital markets. The Conference urged Chartered Accountants to continue to develop their professional capacity for generating credible and reliable financial reports that present a true and fair view of the results of the performance of reporting entities. Financial markets in which investors have confidence are the foundation for strong economies and accelerated development.”

 

ICAN’s president, Adedoyin Owolabi, said: “It is the quest for transparency in governance that has necessitated the call for the preparation of financial reports by all tiers of government with IPSAS. Expectedly, IPSAS would help check a major defect of the cash basis of financial reporting particularly as it relates to the smooth tracking of assets created with public funds.”

 

But there have been high hurdles in the effective implementation of this laudable accounting standard. The main obstacle is the legislative framework to guide accountants to abide strictly by the standards of IPSAS. The low development of Information and communication technology at the states level,

 

given that some of them do not have a computerised accounting system.

 

Equally important, as graft has become endemic, stakeholders have expressed fears that because corruption can easily be traced, fraudsters especially would not want the successful adopting of the new accounting standard.

 

“Fighting corruption is not easy and since IPSAS will ensure an accounting reporting system that will checkmate corruption and fraud, we should not expect the buy-in of all the stakeholders,” the secretary of the committee said.

 

The Federal Government has done much of the surface work for the project to succeed through the training of Principal Accounting Officers from the 36 states by a German-based global accounting firm, in some key features of the standard to ensure a clearer understanding of the adoption process. An acceptable uniform chart of accountants to all stakeholders is being developed to be released soon.

 

The implementation was initially set for December last year, but because of some other exigencies, it was shifted to January 2013.

 

The implementation of the cash basis of IPSA is to conform to international accounting standards that chart a way for transparency in disbursement of funds. Experts say what remains for Nigeria is to overcome the hurdles and embrace the needful to ensure financial discipline, transparency and accountability in government business.

Source: The Guardian

 

Last modified on Monday, 07 January 2013 01:29

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