CAPITAL MARKET REFORMS: THE NIGERIAN EXPERIENCE PRESENTATION BY: FAROOQ OREAGBA HEAD, STRATEGY & DERIVATIVE MARKETS THE NIGERIAN STOCK EXCHANGE AT THE ASEA CONFERENCE 17 TH – 20 TH SEPTEMBER 2006

REFORMS Anti Corruption Privatization Public Sector Political Financial Economic Service Delivery EFCC EITI ICPC Code of Conduct Bureau NEEDS NAPEP DMO BPE Monetization Policy Pension Economic & Financial Crime Commission Debt Management Office Bureau of Public Enterprises Independent Corrupt Practices Commission National Poverty Eradication Programme National Economic Empowerment & Dev. Strategy Extractive Industry Transparency Initiative

CAPITAL MARKET REFORMS The present administration has brought into play several reforms as shown from the previous slide, with varying degrees of success. For the purpose of this presentation, we will focus on those reforms which have had an impact on the Nigerian Capital Market in particular. These are namely: Anti-Corruption Economic Financial Political

REFORM: ANTI-CORRUPTION Anti-corruption Drive – focused on reducing the negative impact of corruption on the nations economy. Government set up Economic & Financial Crimes Commission (EFCC) to tackle financial and related crimes while Independent Corrupt Practices and other related offences Commission (ICPC) was set up to fight corruption in public office. Also, the due process office was set up to oversee and demand that standard processes be followed in the execution of government activities. EITI – Extractive Industry Transparency Initiative – This was set up to provide greater transparency on petroleum revenue data and public finances thereby assisting the policy makers in devising and implementing policies. ICPC – Independent Corrupt Practices Commission is the apex body saddles with responsibility to fight corruption and other related offences in Nigeria. It is mandated to prohibit and prescribe punishment for corrupt practices and other related offences.

REFORM: ECONOMIC National Economic Empowerment Development & Development Strategy (NEEDS) was designed to help in poverty eradication. National Economic Empowerment Development Strategy (NEEDS) was derived from the urgent requirement for value orientation. It is intended to provide Nigeria with a new set of values & principles which will facilitate the achievements of national goals of wealth creation, employment generation and poverty eradication based on a sound macroeconomic framework. Needs has fashioned reform agenda with emphasis on strengthening the macroeconomic environment and also the growth agents within the system. NEEDS Objectives Poverty reduction Employment generation Wealth creation

REFORM: ECONOMIC Contd National Poverty Eradication Programme (NAPEP) was established to monitor, coordinate and review all poverty eradication efforts. In addition to the NEEDS & NAPEP programes, there is the Small & Medium Enterprises Development Agency of Nigeria (SMEDAN). SMEDAN was created to: Establish a structure and efficient Micro Small & Medium Enterprises (MSME) that will encourage and enhance sustainable economic development of Nigeria. It also exists to facilitate and promote the access of MSMEs to resources required for their growth and development.

FINANCIAL REFORMS DEBT MANAGEMENT OFFICE(DMO) Set up to provide a one stop shop for clearing all Nigerian government debts. To transform Nigerias debt portfolio into an asset for growth and development To build a world class DMO of making Nigerias debt sustainable by 2006

BANK CONSOLODATION Prior to consolidation Nigeria had 89 banks, many with capital base <$10m. Due to this low capacity of local banks, the countrys reserves were deposited in foreign banks and there was also an over-reliance on public sector deposits. There were also regular problems of weak corporate governance, inaccurate reporting and non-compliance with regulatory requirements, irregular publication of annual accounts etc. On 6 th July 2004, Central Bank of Nigeria Governor announced the Banking Sector Reforms. First phase was designed to ensure a diversified, strong and reliable banking sector, ensure the safety of depositors money, play active developmental roles in the Nigerian economy and become competent and competitive players in both the African and global financial systems.

PENSION REFORMS Prior to the Pension Reform Act of 2004 and the setting up of the National Pension Commission, the situation was such that; There were significant outstanding pension liabilities. Most schemes in existence were under-funded Majority of workers in the private sector were not covered by any retirement benefit arrangements

OBJECTIVES OF THE PENSION REFORMS To facilitate the provision of retirement benefits to every worker To ensure that these benefits are received by the worker as and when due To establish uniform rules, regulations, guidelines and standards for administration of pension matters To establish a strong regulatory and supervisory framework To secure compliance and promote wider coverage.

IMPACT OF THE REFORM PROCESS IN NIGERIA FATF: As a result of the reform process in Nigeria and the progress being made, Nigeria has been removed from the list of non-compliant nations. Debt Relief/Country Ratings: In October 2005, Nigeria and Paris Club announced a final agreement for debt relief worth $18 billion and an overall reduction in Nigerias debt stock by $30 billion and this was completed on April 21 st Short-term financial windfall has resulted in savings from servicing debt being used to finance infrastructural projects, education, health and poverty reduction.

IMPACT OF THE REFORM PROCESS IN NIGERIA- contd Terms of the agreement embody sufficient safeguards to ensure that the poorest section of the population benefit. Standard & Poors & Fitch assigned the Federal Republic of Nigeria Long-term foreign and local currency Issuer Default Ratings of BB, both with stable outlook (on par with Brazil and Turkey). Nigeria Brady par bond maturing 2020 assigned BB Short-term rating B Country ceiling of BB Ratings underpinned by governments strong commitment to economic reform

IMPACT OF THE REFORM PROCESS IN NIGERIA- contd Implications It is estimated that government public debt burden will be just 17% of GDP by end of 2006 compared with 66% in 2004 Public external debt service ratio is expected to fall to just 17% of exports of goods and services in 2006 The existence of the ratings, though not investment grade, are important because they provide a benchmark to evaluate risk relative to other emerging markets, deepen domestic capital markets and promote public sector transparency The success of the Nigerian government reforms along with the recent ratings are some of the reasons for the increase in Foreign Direct Investment (FDI). Previously, the preponderance of economic & financial crimes had severe negative consequences on Nigeria and the level of FDI Restrictive policies and laws on enterprises were reviewed, thereby opening the economy to more foreign participation

IMPACT OF THE REFORM PROCESS IN NIGERIA- contd With regards to banking consolidation, key elements of the first phase were: Requirement that minimum capitalization for banks should be raised to a minimum of N25 billion ($250m) from N2 billion ($15m) with full compliance by end of December, The second phase is designed to encourage the emergence of regional and specialized banking. Consolidation reduces the problems of bank liquidation in Nigeria by putting the banks on a more robust footing and also to move the Nigerian economy forward by strengthening the banking system in order to facilitate development.

IMPACT OF THE REFORM PROCESS IN NIGERIA- contd MANAGEMENT OF EXTERNAL RESERVES Upon the completion of the initial consolidation process, the Central Bank of Nigeria (CBN) has now embarked on a framework for reserves management with a vision to leapfrog and create Nigerian mega banks that can compete on the world stage. With external reserves in the region of $33 billion, we are now seeing Nigerian banks partner with the likes of HSBC, Merrill Lynch, JP Morgan, Bank of India and Credit Suisse in order to meet the requirement to manage these reserves. The additional benefit of this exercise is the transfer of skills and the increased positive spotlight on the country.

IMPACT OF THE REFORM PROCESS IN NIGERIA- contd With respect to reforms in the Pension sector, the effect has been such that: licenses have so far been issued (13 PFAs, 1 CPFA, 4PFCs) 2. 5 existing schemes have been approved for continuation while another 6 Approvals-in-Principle have also been given. 3. Licensed operators have commenced operations and over 3500 Nigerians are employed in this area. 4. Approximately N69 billion ($530million) has been contributed in the public sector in 24 months. 5. Normal monthly accumulation is expected to be in the region of N6 billion 6. Guidelines on the investment of Pension Assets are designed to enhance the creation of new innovative securities such as REITs, ABS, infrastructural bonds etc.

CONCLUSION In concluding, it is fair to say that the ongoing reform process in Nigeria has had a significant impact on capital market activity in the country. We have recently seen the Federal Government come to the Capital market by issuing bonds in order to meet its obligations regarding pension arrears. It placed N75 billion ($576 million) worth of bonds with 5 local financial institutions in July Prior to banking consolidation, this would have been impossible. In addition, the Federal Government recently issued another N150 billion ($1.2 billion) to fund its contractual obligations. We have seen the development of a secondary bond market in Nigeria. In the year to May 2006, secondary market activity was nil, yet by August 2006, the secondary market activity was in excess of N30 billion ($230 million) per month. We expect this growth to continue.

CONCLUSION - contd The recently licensed pension fund administrators have emerged as a source of long term funds that can be used for infrastructural projects. We are now seeing the development of a ratings industry We are also seeing the creation of new products such as REITs, ABS, ETFs etc

Ladies and gentlemen, it is fair to say that the reform process in Nigeria has brought about exciting times in the Nigerian Capital Market and I thank you all for taking time to listen to our story. FAROOQ OREAGBA HEAD, STRATEGY & DERIVATIVE MARKETS THE NIGERIAN STOCK EXCHANGE -