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Analysis: Was Nigeria right in not signing the AfCFTA ?
On 22 March 2018 in Kigali, Rwanda, Heads of State of forty-four African countries, gathered to sign the African Continental Free Trade Agreement (“AfCFTA” or “the Agreement”), the landmark agreement which amongst others aims to liberalize trade across Africa.
The Nigerian President was among eleven Heads of States who did not sign the agreement, citing the need to consult widely before committing the country to an agreement with significant ramifications on its economy
It would be recalled that Nigeria also passed up the opportunity to sign the Economic Partnership Agreement (“EPA”) between the European Union (“EU”) and the Economic Community of West African States (“ECOWAS”), also citing the need to consult widely.
The growing pattern of avoiding free trade agreements (“FTAs”) on the basis that wider consultation is needed is worrying for a country that aims to increase the welfare of its people and diversify from an oil-centric economy.
If Nigeria’s reason for avoiding FTAs is the harm they would do if cheaper imports are allowed into its market, what about the harm such avoidance would do to consumers who earn the minimum wage and would be better off with cheaper imports or export manufacturers who need newer markets for survival or growth?
Based on examples from developed nations, FTAs are critical for economic growth and Nigeria should be seeking bilateral or multilateral FTAs that are strategic to its economic growth. Should Nigeria have signed the AfCFTA? Yes, if in the present form they are consistent with a clear and robust long-term trade strategy! But shouldn’t they already be if we were from the outset, party to negotiating the Agreement? What are the popular arguments against Nigeria’s participation in the AfCFTA (or FTAs) and what is my view on these arguments?
The uneven competition argument
Opponents of the AfCFTA have argued that gaping infrastructural deficits (i.e., perennial electricity shortage, high cost of capital, poor logistics landscape etc.) and uncertain business landscape, make it impracticable for Nigerian manufacturers to compete on even terms with their counterparts in other jurisdictions. They specifically argue that open borders would lead to the collapse or relocation of local manufacturers. Whilst this argument is valid, it may not tell the whole story
Open borders would lead to the availability of cheaper inputs for local manufacturers who would otherwise pay import duties and taxes on these inputs. Cheaper inputs mean cheaper production costs and cheaper production costs potentially allows local manufacturers compete better with their foreign counterparts.
Additionally, local comparative advantages in some sectors would allow some local manufacturers perform better than their foreign counterparts in a liberalized export market that would grow from the circa 186million population of Nigeria to the circa 1.2billion population of Africa. Improved exports allow local manufacturers generate more revenues to cover fixed production costs.
Opponents would argue that benefits from cheaper inputs and newer markets do not counteract the effect of the infrastructural deficit and uncertain business landscape. However, if this were true, the appropriate reaction should not be the avoidance of FTAs but a strategic response in line with a clear and robust trade strategy. For instance, how can Nigeria obtain the benefits of the FTAs whilst protecting its fragile or infant industries?
To begin with, AfCFTA does not intend to liberalize all commodities. Only 90% of recognized commodities would be liberalized under AfCFTA, meaning that Nigeria could decide what industries or products it considers fragile and ensures they are effectively protected. Secondly, Nigeria could ensure its manufacturers are properly enabled by resuscitating or ensuring implementation of strategic sectoral incentives.
The market access argument
Opponents of the AfCFTA have argued that the market access rules as currently drafted, would make Nigeria the prime candidate for dumping goods. Specifically, they argue that commodities originating from non-AfCFTA signatories would easily find their way, duty and quota-free into Nigeria (via simple processes like labelling, bottling, bagging etc.) if jurisdictions where they originate have free trade agreements with an AfCFTA signatory.
As a case in point, opponents have pointed to the ECOWAS Trade Liberalization Scheme (ETLS) (i.e., ECOWAS’ free trade agreement) where commodities from the nonECOWAS Member States allegedly flood the Nigerian market under the guise of products originating from the ECOWAS region. Whilst this argument is valid, it also does not tell the whole story.
The rules of origin (RoO) as currently drafted do not allow simple processes like labelling, bottling, baggingetc., to attain originating status unless the RoO is not properly evaluated or applied by the relevant authorities. The real issues here are monitoring, enforcement and technical competence; issues Nigeria must address vide shrewd negotiation and not the total abandonment of the AfCFTA.
Nigeria has arguably the largest economy in Africa and with a population of about 186 million people (projected to cross the 300 million mark in 2050, becoming the third most populous nation in the world), we must be proactive and begin to define the narrative in Africa.
Nigeria must, therefore, think long term and define a trading strategy. That is, identifying and leveraging where she has comparative advantages; what the industry value chains are; what she should import and in what form; what she should export and in what form; what industries she must protect; what industries she must develop etc. These are some of the considerations that must drive Nigeria’s approach to trade.
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Why SEC should support democratization of sale of foreign securities
In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position.
The directive of the Nigerian Securities and Exchange Commission (SEC), issued 8th of April 2021, has been met with consternation and a straightforward (but hopefully simplistic) interpretation that; “the government is out to stifle innovators, again.”
These perspectives aren’t unfounded, as innovators of all shades have taken a heavy beating lately due to a number of direct government policies or interpretations of these policies – irrespective of how well-intentioned these policies may be. On the contrary, micro-investment platforms deserve a fair shot within Nigeria’s capital market.
This is especially true considering that the recent regulatory fervour coincides with a period where the innovation ecosystem is recording new milestones and gaining traction, solving problems for users in all walks of life, democratizing wealth creation, and creating high-value jobs, all of which Nigeria desperately needs.
In the last six months alone, Nigerian startups have gained the confidence of some of the best investors locally and globally, leading to never-before-seen innovations, acquisitions, and investments into the economy. This promotes interest in the Nigerian innovation ecosystem from foreign market actors and increases its relevance as a high-value job creator. Some now wonder if our regulators want more or less of this positive momentum.
This latest notice from the SEC warned Capital Market Operators (CMOs) to desist from selling securities not quoted or registered, as only registered securities in Nigeria can be issued, sold, or offered for sale. Ostensibly, the directive requires CMOs registered with the SEC to offer only securities listed on any exchange in Nigeria to the public.
The challenge here is that High Net worth Nigerians (HNIs) have always had access to foreign securities offered or acquired through registered CMOs for the apparent benefit of the upside available in markets such as the United States. This should be democratized to allow Nigerians with smaller incomes to have access to valuable global stocks within fair rules, and this is what the likes of Trove, Chaka, Bamboo, and Risevest have done. In fact, this democratization should be applauded as one of the outputs of a thriving innovation ecosystem that provides practical
palliatives for the stifling inflation and erosion of value we have all experienced as Nigerians.
After all, what is suitable for Dangote should also be good for Musa, who earns NGN50,000.00, and thanks to any of the apps mentioned above, can today invest in shares of Dangote sugar while also adding a quarter of a Google stock to his portfolio every month. This “magic” of innovation is a poverty alleviator that should be encouraged and nurtured while ensuring that the public is protected from any harmful financial practices.
It is important to acknowledge at this point that the SEC has been a positively progressive regulator, generally engaging its public fairly. The issuance of the guidelines for crowdfunding and accommodation of FinTechs within the capital market was encompassing and engaged stakeholders of all hues. This should be commended. The SEC’s position classifying crypto as an asset class is also fair, refreshing, and proactive. We need more of this and not less.
At a time when we are exploring how the Nigerian capital markets can become a viable option for listing tech startups, this latest body language of the SEC, and the Nigerian government as a whole can be further misinterpreted.
In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position, as these innovations are widespread, publicly accepted, and valuable. Furthermore, these innovations support some of the registered and regulated CMOs by offering white-label solutions that are accelerating the ability of these legacy CMOs to better serve their HNI customer base, with local and foreign securities. The emergence of these innovative micro-investing platforms has triggered investments into local Nigerian securities in multiple folds. The volumes these innovative platforms channel into Nigerian stocks are arguably the most significant development in Nigeria’s capital market in a decade.
By virtue of the existence of these innovators, their combined strength has introduced over 150,000 new market participants who are primarily millennials: a majority of whom purchased their first set of stocks through these platforms. Before now, they had no active interaction with the capital market. These new entrants are now trading in excess of NGN10,000,000,000 (Ten Billion Naira) monthly through these apps. Note that a good chunk of the highlighted trade volume is routed through local CMOs to purchase Nigerian securities on the Nigerian Stock Exchange(NSE). Long term, these innovations would also serve as a channel to offer Nigerian guarantees to a global audience which would be a massive positive for the economy.
The quest for diversification of portfolios to include foreign securities can only be good overall. It underscores the global trend in cross-border trade in securities as disintermediated by technology and the need to enhance portfolios’ value globally.
Rather than curbing the practice of offering Nigerian and international stocks in a basket, this micro-investing trend should be allowed to flourish within reasonable regulatory frameworks. These platforms make investments attractive, easier, and affordable. Micro investing will curb the menace of pyramid and Ponzi schemes while introducing a new generation into Nigeria’s securities market in parallel with their appetite for global securities. Regardless of what we decide, the world has gotten smaller, and information that enables people to easily seek the best economic outcomes is readily available. While other nations gain from micro-investing, shouldn’t our people do too?
The ultimate beneficiary of increased wealth for Nigerians is the Nigerian economy. Rather than shutting Nigerians off from the rest of the world, we should be accelerating global access for our millions of people; hence this is the time for dialogue, not shutdowns.
Kola Aina is the Founding Partner at Ventures Platform and writes from Lagos, Nigeria.
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Buy what? Dangote vs BUA Cement
Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization, but does size win?
I want to review the performance of the largest quoted companies in Nigeria.
On the Nigerian Stock Exchange, they don’t come any bigger than Dangote Cement (Dangote) and BUA Cement (BUA). Only MTNN stands with both cement companies in terms of market capitalization. Dangote and BUA are both blue-chip companies, in the same sector and both enjoy federal import protection, they also both serve a local market with huge demand for cement.
Which is a better investment? Let us assume I have N100,000.00 (One Hundred Thousand Naira,) which should I buy? Let us review both stocks with FY 2020 results they posted. For consistency, I am going to use my trading view terminal numbers.
READ: Dangote Cement joins MTN in the trillion-naira club, as 2020 revenue surpassed N1 trillion
Market Capitalization
First, we talk about capitalization, (Market cap is the number of shares issued x market value of shares ). Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization. Does size win? Dangote is bigger? Not yet!
Market Price
With N100,000 I can buy about 465 shares of Dangote at N215 a share and 1,360 shares of BUA at N73.50 per share. Is BUA cheaper? do we have a winner? Not quite. Let us dig deeper.
Dangote Cement posted a Net Income figure of N276 billion, if we divide this earning by the number of issued shares which is 17 billion, we get an Earnings Per Share (EPS) of N16.14, so every share of Dangote Cement earns (not pays) the investors N16. Similarly, the Earning Per Share of BUA is N2.0
READ: BUA Cement loses N162 billion in market value in a week
Thus when I buy Dangote Cement N215 per share, I am buying 16 times the earnings of Dangote. We can simplify this by simply comparing the price I pay per share of Dangote to the EPS of Dangote (Price to Earnings Ratio), thus I invest my cash of N215 to buy 16 times the earnings of Dangote, thus the Price to Earnings Ratio of Dangote is 13.31 (P/E). Using the same calculation, the price for each earnings of BUA (the P.E.) is 35.38. This means even though I am paying more cash for each share of Dangote, I am paying less to buy the earnings of Dangote, thus Dangote is cheaper than BUA.
So our first milestone is reached, we have used the Net Income, Market Price, and Number of Issued shared to get the Earnings Per Share, we have then determined what amount of earnings we are buying to determine which stock is at a bargain.
READ: Oba Otudeko’s stakes in Firstbank and Honeywell are worth over N10 billion
What else?
Let us look at the earnings that will be paid in cash. Remember, Earnings, is just the Net Income of Dangote, we as equity holders have the opportunity to share in any portion of the Net Income.
Dangote in 2020 paid out from earnings N272.69 billion as dividends, this translates to about N16 per share or in terms of returns 7.44%. We get this Dividend Yield return by comparing the dividend paid to the market price per share (D/P). BUA also in 2020 paid out N59.26 billion as dividends from earnings, this translates to a dividend yield of 2.81%.
So, if I invested N100,000 in shares of Dangote Cement, I would earn a cash return of 7.44%, if I did the same with BUA I would earn a cash return of 2.81%.
READ: Jumia: In search of the elusive break-even sales
Let us go a bit deeper…
When you buy a stock, you are buying into the earnings and cash flow. Dangote Cement in 2020 earned N276 billion and paid N272 billion as dividends meaning they retained about N3 billion for that FY while generating over N248b in Free Cash Flow. Similarly, BUA earned a net N71.52 billion, paid out N59 billion in dividends, retained N19 billion but posted a negative Free Cash Flow of (N95.49 billion). Should BUA cement have simply used that cash to finance working capital rather than paying it as dividends? Perhaps. Let us speak more of Cash flow.
Cash retained is cash not paid to you the investor. You have to ask how well your company is utilizing that cash retained. Should it all be paid out as dividends? Or retained in the company to fund expansion and growth?
READ: Three things Nigerians can learn from Warren Buffet’s latest letter
Look at it this way, if Federal Government Bonds were offering a Yield of 15% and we see that Dangote is offering a yield of 7.44%, then as shareholders you should demand that Dangote pays more cash to you to allow you to invest in FGN bonds because you get a higher return (at lower risk). The point is any company retaining cash or paying cash at a lower yield than the market is hurting the investors, who are missing the opportunity of investing higher elsewhere.
Let us score both company managers by how well they have managed the revenues and capital of the companies
| Return on Assets % | Return on Equity % | Return on Invested Capital % | EBITA Margin % | Net Margin % | Debt to Assets | Long Term Debt to Assets | |
| Dangote Cement | 14.62 | 31.21 | 26.92 | 44.04 | 24.31 | 0.24 | 0.08 |
| BUA Cement | 11.15 | 19.12 | 15.35 | 41.87 | 32.03 | 0.36 | 0.23 |
FY 2020
Across the board, the management of Dangote Cement has done a better job when compared to BUA Cement in managing the assets of the company. Dangote Return on invested capital is higher with a much lower recourse to debt and of course a higher FCF number.
Overall, on Earning, Returns and Efficiency, it appears Dangote Cement posts better fundamentals…
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This is not investment advice, this is not a recommendation to buy or sell. Past performance is not a guarantee of future performance. Speak with your adviser before investing. Equity is risky.
