#1Nigerian Capital Market Update August 2023 pwc www.pwc.com/ng#2About the report The Nigerian capital market update report is an annual research report providing useful insights on the performance of the domestic capital market as well as some major activities domestically, across other African markets and globally. This version of the report covers events from the last date of the previous publication (August 2022) till June 2023. The Nigerian Capital Market Update PwC August 2023 2#3Summary of Some Major Events Key events that occurred in the Nigerian capital market in the period under review include: Launch of the Nigerian Capital Market Masterplan (CMMP) Unification of exchange rates boosts government revenue Launch of IFRS S1 and S2 Sustainability Disclosure Standards in Nigeria by FRC, ISSB, and NGX Regulation Limited Unlocking capital market liquidity with FMDQ derivatives ■ The SEC in 2014-launched 10-Year Master Plan to drive the vision and growth of the Nigerian capital market ■ The need to align the aims, objectives, metrics and targets to current realities, factor in the market's dynamism and advancements in financial technology have necessitated an update to the CMMP The Revised Capital Market Master Plan, is anticipated to serve as the capital market's strategy for the years to come Nigeria's exchange rate unification has really increased the federal government's revenue from the previous exchange rate. This revenue was shared among the Executive, Legislative and Judiciary levels of government. ■ The two ISSB Standards, IFRS S1 & S2, were introduced by the Financial Reporting Council (FRC) of Nigeria, International Sustainability Standards Board (ISSB), and Nigeria Exchange Group Regulation Limited (NGX Reg). ■ The introduction is crucial for the development of the capital market because it enables Nigerian businesses to participate in a worldwide standard for reporting sustainability. FMDQ Group subsidiaries FMDQ Securities Exchange Limited and FMDQ Clear Limited created the FMDQ Exchange-Traded Derivatives (ETD) market. ■ The market has two products, FGN Bond Futures & USD-naira non- deliverable FX futures. PwC The Nigerian Capital Market Update August 2023 3#4Macroeconomic Overview (1/3) The Nigerian economy grew by 2.31% Y-o-Y in real terms while inflation rose to its highest level in the last five years at 22.79% as at Q2 2023 Gross Domestic Product The non-oil sector contributed 93.79% to Q1 2023 GDP growth rate, lower than its 95.66% contribution in Q4 2022. Services, Agriculture, and Industries sector contributed 57.29%, 21.66% and 21.05% to Real GDP respectively. The Nigerian Capital Market Update PwC 2.31% Q 1 2023 (YoY) 3.52% Inflation rate; Q2 2023 22.7% Monetary policy rate (MPR) June 2023 18.5% ◉ Inflation reached an all-time high of 22.79%, up by 4.1% from the 18.6% recorded in June 2022, with potential impact on the real return on investments The CBN further increased the MPR to 18.5% in May 2023 to enhance price stability. However, this may impede on Bank's ability to service the real sector of the economy A new administration was sworn in on May 29th, 2023. Policies implemented by the new administration include; Removal of fuel subsidy. Unification of exchange rates Signing of electricity and student loan bill Suspension of some taxes Q4 2022 (YoY) Economic Downside Top 5 Contributors to Real GDP in Q1 2023 (%) Crop Production 19.48 1. Cash crunch. Trade 15.97 3.11% 2. Fuel subsidy removal 3. Rising exchange rates ICT 14.13 Oil & Gas Real Estate 6.21 5.31 Q1 2022 (YoY) August 2023 4#5Macroeconomic Overview (2/3) As of Q1 2023, total capital importation declined by 28% to $1.1m relative to $1.5m as of Q1 2022 Distribution of total capital importation in 2022 (In $'millions) 2419, 45% - Foreign portfolio investment trend, 2018 – March 2023 $16 $14 13.4 $12 $10 468,9% $ Billions 8.5 $8 3.4 27.9% T 2.45 $6 4.2 42 ... $4 2.4 2.6 1.9 0.22 $2 0.98 1.41 1 Foreign Portfolio Investments 1 0.8 2442, 46% 0.6 0.2 0.2 0.06 0.3 0.13 ☐ Foreign Direct Investment $0 ■ Other Investments 2018 2019 2020 2021 2022 Q1 2023 The Nigerian Capital Market Update PwC Source: National Bureau of Statistics Equity Bond ■Money market August 2023 5#6Macroeconomic Overview (3/3) 1000 800 Before unification 600 400 200 о 03-Jan-23 The Nigerian Capital Market Update PwC In June 2023, the announcement of the unification of exchange rates as well as the removal of fuel subsidy caused a huge spike in exchange rates and fuel prices Exchange rates Year-to-date Average fuel pump price Year-to-date 03-Feb-23 03-Mar-23 03-Apr-23 03-May-23 03-Jun-23 After unification 03-Jul-23 03-Aug-23 Average price per litre 700 617 590 600 538 500 400 306 300 245 213 208 214 200 100 0 ill March January February April May June July August Source: Central Bank of Nigeria Opportunities Amidst Disruptions Amidst the economic disruptions arising from sudden macro-economic reforms in the short run, it is expected that these reforms would yield positive benefits for the economy and the capital market in the long run The liberalisation of the foreign exchange market could potentially attract foreign investments and positive capital flows ■ In addition, the removal of fuel subsidy will provide more fiscal space for the Federal Government and allow for channeling of the funds saved from payment of subsidy into more developmental projects such as infrastructure development. However, policy implementation and accountability in fiscal offices is key to reap the benefits of the subsidy removal ■ Source: National Bureau of Statistics, Trading Economics, PwC research Other macro-economic initiatives of the Federal Government aimed to improve its fiscal position and increase revenue including setting up the Presidential Committee on Fiscal Policy and Tax Reforms to enhance revenue collection efficiency, ensure transparent reporting, and promote the effective utilisation of tax etc. and the planned sale of about 20 state-run companies to raise funds and improve governance in these entities also presents opportunities for the capital market. The Sale of the state-owned entities through the capital market would deepen and grow the market. Furthermore, tax incentives to attract more companies to utilise the capital markets as well as investors to participate in investing in the capital markets could be introduced through the tax reform process August 2023 6#7Domestic Stock Market The domestic equities market has been on an upward trajectory since the pronouncement of key policy changes by the new administration NGX ASI vs global indices, 2018 - June 2023 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% www די LII ■ FTSE 100 18.96% ■ Hang Seng ■ NGX ASI ■ FTSE JSE ■ Nairobi ASI ■ EGX 30 ■■ S&P 500 18.93% -30.00% 2018 2019 2020 2021 2022 H1 2023 The domestic equities market outperformed most of its peers in the West African market. ■ Investors had a positive reaction to the bold key policy changes by the government such as the removal of subsidy, floating of the naira and the unification of the exchange rate windows which caused the market to rally positively ■ The global equities market experienced major improvements, with a few exceptions from the past year as investors see positive returns on investments Investor concerns over the Russian-Ukraine war, high inflation and other tensions have been gradually abated as several governments set up measures to combat the fallout. ■ The FTSE 100 (1.07%), EGX 30 (21.01%), FTSE JSE (4.08%), S&P 500 (16.89%) all recorded positive returns while the Nairobi ASI (-16.06%) and Hang Seng (- 4.37%) recorded positive returns Market Capitalisation: The market (NGX) recorded an 18.93% increase as at H1 2023 (N33.19 trillion) relative to December 2022 (N27.92 trillion). Returns: The NGX also recorded an all-time high index since 2008 at 60,968 points in June 2023 - an increase of 18.96% relative to December 2022. PwC The Nigerian Capital Market Update August 2023 7#8Domestic Debt Market About 104 commercial papers worth NGN 798.30 billion, and N95billion in corporate bonds were issued in the first half of 2023 Commercial papers Corporate Bond Activity (2018 - June 2023) 1% 41% ■ Agricultural ■ Consumer foods 28% ■ Financial servies ■ Healthcare 1% Manufacturing ■ Pharmaceutical 2% ■ Real estate 16% ■ Telecommunications 10% NGN'Billions 20 800 16 17 16 16 600 15 400 10 4 200 5 182 177 368 312 688 95 0 0 2018 2019 2020 2021 2022 YTD Corporate bond volume Corporate bond value (N'bn) FGN Yield Curve as of June 2023 No. of transactions NGN 798.3 BN 60% 41% 104 Dangote Cement Plc 1% Total Value of commercial papers issued in Nigeria as at H1 2023 The relative increase in the value of commercial papers issued in H1'23 to H1'22 The manufacturing sector accounted for 41% of total issuances for H1 2023, while the financial services accounted for 28%. Total number of commercial papers issued in Nigeria The highest issuer of commercial paper in H1'23 with a value of NGN 138BN % Yield 25 23.35 15 2050 16.76 15.14 12.41 13.41 10.06 10.63 10 14.69 2Y 3Y 5Y 7Y 10Y Time to maturity 15Y 20Y 27Y There was an 86% decline in corporate bond issuances in H1 2023 relative to 2022 which can be attributed to the soaring interest rates and uncertainties in the macroeconomic environment. The 10-year FGN bond yield experienced an increase of 21.5% as at June 2023 relative to June 2022. In H1 2023, the FGN issued bonds worth N3.6trn and savings bond worth N6bn. Source: FMDQ DQL The Nigerian Capital Market Update PwC Source: FMDQ, PwC Research August 2023 8#9Across Africa In West Africa, Ghana experienced its first default on sovereign debts, while AELP kicks off Phase 2 to boost cross-border securities trade. Ghana Defaults on Sovereign Bonds The Ghanaian Finance Ministry in December 2022 announced the suspension of payments on selected sovereign external debt including its Eurobonds, commercial loans and most bilateral loans, calling the decision an "interim emergency measure". The Ministry further disclosed this interim measure, pending agreements with all relevant creditors, was necessary to prevent a further deterioration of Ghana's fiscal situation and preserve its limited international reserves. Consequently, Fitch downgraded Ghana's credit rating from "C" to Restricted Default (RD). The Ghanaian government has completed the first phase of meeting the conditions for a $3bn extended credit facility from the IMF aimed at restoring fiscal stability and investor's confidence. This includes the completion of the Domestic Debt Exchange Programme (DDEP) with 85% participation rate recorded. African Exchange Linkage Project (AELP) Phase 2 The African Exchange Linkage Project (AELP), a flagship project between African Securities Exchanges Association (ASEA) and the African Development Bank Group to link African capital markets launched the AELP Trading link in December 2022. This e- platform would allow investors in the listed countries to trade shares on other African exchanges through a single and centralised platform. This milestone would foster cross- border trading and free movement of investments in the continent. Additionally, the ASEA and the Bank Group kicked of the Phase 2 of African Exchanges Linkage Project (AELP) through signing an agreement for a $600,000 grant to expand the number of linked African exchanges from 7 to 15. The AELP is a flagship project of ASEA and the Bank Group to link African capital markets, thereby promoting cross-border securities trading, increasing liquidity and diversifying investment opportunities for investors. Listing rules for Nigeria Technology Board The Securities and Exchange Commission (SEC) approved the rules for listing on Nigerian Exchange Group (NGX) Technology Board in December 2022. This specialised platform aims at wooing tech-based companies to list and raise capital on The Exchange given the stringent requirements for listing on the Main Board. This represents a game changer for African tech companies to expand their funding sources beyond private equity investments. Fundraising for Ethiopian Exchange Ethiopia took a giant step in establishing its first stock exchange by initiating the fund raising for the Ethiopia Securities Exchange (ESX). Ethiopia has begun selling shares of ESX stock exchange to finance its establishment in 2024. The aim is to raise 75% of the funds needed from private investors, while 25% would be held by Ethiopian Investment Holdings. This initiative aims to open up the economy to private-led investments including foreign players. PwC The Nigerian Capital Market Update August 2023 9#10Global Markets (1/2) Globally, IPOs and mergers and acquisitions fell in the first half; sales of green bonds outpaced those of fossil fuel bonds; and mainland China reopens (1/2) Global IPOs decline by 50% In H1 2023, global IPOs raised a total of $63 billion. This represents a 50% decrease in the $96 billion in proceeds from global IPOs in H1 2022. The Asia Pacific area made up the majority of the funds raised via IPOs in H1 2023, but it also saw a 30% decrease in proceeds of issue compared to H1 2022. $300 billion raised in Green bond issuances in H1 2023 According to Bloomberg, a total of $347.6 billion was raised through the sale of green bonds in H1'23, representing a 15.8% rise over the $300.1 billion in value of green bonds issuances in 2022. This is the first time that more money was raised overall from the sale of green bonds than from fossil fuel bonds. 100 80 88 Value of IPOS ($'billions) 60 37 40 20 20 400 347.6 300 36.6 200 56.1 100 26 0 H1'2023 H1 2022 Q1 Q2 Source Global IPO Watch, 2022 and 2023, PwC UK The Nigerian Capital Market Update PwC 0 Source: Bloomberg 316.5 300.1 233.2 H1'23 FY'23 ■Green bonds ■ Fossil fuel bonds August 2023 10#11Global Markets (2/2) Globally, IPOs and mergers and acquisitions fell in the first half; sales of green bonds outpaced those of fossil fuel bonds; and mainland China reopens (2/2) Decline in mergers and acquisitions deals in the H1' 2023 In H1 2023, there were over 27,000 deals worth over $1.2 billion, which is a decrease from H1 2022, when there were over 29,000 deals worth over $1.9 billion. Macroeconomic instability, erratic capital markets, sharply rising interest rates, and the effects of inflation are all contributing factors to the decline in worldwide merger and acquisition deals. 2 Value of M&A ($'billions) 1.2 1.9 0 H1 2023 H1 2022 Number of M & A 27,000 29,000 H1 2023 ■H1 2022 Mainland China reopens Toward the end of 2022, Mainland China lifted its COVID restrictions. The Chinese economy is experiencing a solid recovery, as evidenced by the 4.5% increase in Q1 of this year and is expected to grow an average of 5.2% in 2023. Decline in global inflation towards the end of first half of the year Inflation in advanced economies has maintained its lower trend shows the benefits of the central bank's monetary tightening policies. The inflation rate in the US decreased to 3% in June from 4% in May 2023, getting closer to the 2% goal range. The Eurozone also saw a slowdown in inflation, which dropped to 5.50% in June from 6.1% in May 2023. The decline in prices in the energy, transportation, and food industries can be linked to the cause of downward trend in inflation. Silicon Valley Bank fails In March of this year, the United States saw the second-largest bank failure since the financial crisis of 2007-2008. After investing the majority of their deposits in long-term assets paying close to zero interest rates, Silicon Valley Bank (SVB) experienced liquidity problems. Additionally, interest rates have recently increased significantly as a result of rising inflation. As a result, bond prices fell, an SVB's loss position led to a rating downgrade, and investors started to flee in large numbers. Source: Global M&A Industry Trends: 2023 Mid-Year Update - PwC UK The Nigerian Capital Market Update PwC August 2023 11#12Conclusion What's next on the horizon? Contacts The global economy is slowly recovering from the effects of the ongoing Russian- Ukraine war which has caused disruptions to supply chains and energy supply as well as high inflation across several countries and continents. However, with Inflation gradually subsiding due to hawkish stances being applied by central banks to combat inflationary pressures, global outlook seems weak amid slow economic growth and concerns of recession. Reports by the world bank project a decelerated growth to 2.1% in 2023. In the domestic market, key policy changes of the new administrations to address macroeconomic imbalances was met with positive sentiment. The removal of subsidy and the unification of foreign exchange rates is expected to improve the efficiency of the FX market, unlock private investment, increase the inflows of foreign direct investments as well as improve the fiscal space and restore macroeconomic stability. However, while the policy changes are being implemented, inflationary pressures would still be high in the short-term. The completion of the Dangote refinery could also alleviate pressure and act as a catalyst for growth and opportunities. Omobolanle Adekoya Partner, PwC [email protected] Elizabeth Ekpo Senior Manager, PwC [email protected] Click here for the link to our capital markets publications and other insights PwC The Nigerian Capital Market Update August 2023 12#13Acknowledgement We would like to thank Elizabeth Ekpo, Nosakhare Agbonlahor, Lorretta Nnajim, Olumide Abikoye, Opeyemi Femi-Francis and Tumininu Tubi for their important contributions to this publication. pwc O 2023 PwC. All rights reserved. At PwC, our purpose is to build trust in society and solve important problems. We're a network of firms in 152 countries with nearly 328,000 people who are committed to delivering quality in assurance, advisory and tax services. 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