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Viewing cable 08LAGOS426, NIGERIA: PROBLEMS IN NIGERIAN CAPITAL MARKET OUTWEIGH

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Reference ID Created Released Classification Origin
08LAGOS426 2008-10-28 06:45 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Lagos
VZCZCXRO6234
RR RUEHMA RUEHPA
DE RUEHOS #0426/01 3020645
ZNR UUUUU ZZH
R 280645Z OCT 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0258
INFO RUEHUJA/AMEMBASSY ABUJA 9906
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
UNCLAS SECTION 01 OF 03 LAGOS 000426 
 
SENSITIVE 
SIPDIS 
 
STATE PASS OPIC FOR DERB, ZHAN, MSTUCKART, JEDWARDS 
STATE PASS TDA FOR LFITTS, PMARIN 
STATE PASS USAID FOR NFREEMAN, GBERTOLIN, GWEYNAND, SLAWAETZ 
STATE PASS EXIM FOR JRICHTER 
DOC FOR 3317/ITA/OA/KBURRESS 
DOC FOR 3310/USFC/OIO/ANESA/DHARRIS 
DOC FOR USPTO-PAUL SALMON 
TREASURY FOR DFIELDS, AIERONIMO, RHALL, DPETERS 
TRANSPORTATION FOR KSAMPLE 
 
E.O. 12958: N/A 
TAGS: EFIN EFIN EAID NI
 
SUBJECT: NIGERIA: PROBLEMS IN NIGERIAN CAPITAL MARKET OUTWEIGH 
CONCERNS FOR IMPACT OF GLOBAL FINANCIAL CRISIS 
 
Ref: A) Lagos 401 
B) Lagos 353 
C) Abuja 1735 
D) Lagos 290 
E) Lagos 266 
F) Lagos 97 
G) Lagos 95 
 
 
1. (SBU) Summary: Financial analysts disagree on the effect of the 
global financial crisis on Nigeria, basing their argument on the 
perceived degrees of linkage between the Nigerian market and the 
global market.  The Federal Government (FG) has mostly taken a 
laissez faire posture, contending that Nigeria is mostly immune from 
the global crisis.  The Local commercial banks are facing credit 
facilities recall and credit line reductions, and the Central Bank 
of Nigeria (CBN) has adopted a series of small measures to ensure 
liquidity in the market.  Falling oil prices, coupled with the 
global credit crunch, might hamper current operation and future 
investment in the oil and gas sector.  Analysts denounce policy 
proposals introduced by the Nigerian Stock Exchange (NSE) as 
ill-conceived maneuvers to restore confidence in the market while 
the FG has been silent on the impact.  Considering the multiple 
challenges the FG faces, the potential for steep economic downturn 
will severely challenge the abilities of the FG to react.  End 
Summary. 
 
Effect Depends on Degree of 
Linkage with Foreign Markets 
---------------------------- 
 
2. (SBU) The impact of the global financial crisis on the Nigerian 
market is still under heated debate.  The prevailing position is 
that Nigeria will not be as hard-hit as other emerging markets as a 
result of the low level of foreign funds in Nigeria's financial 
markets.  Reportedly hedge funds and international portfolio 
investments only account for about 8 to 10 percent of the liquidity 
in the market.  Moreover, Nigeria's foreign exchange reserves, 
estimated at USD 63 billion, are large enough to mitigate the impact 
of investment outflows through the sales of foreign exchange, some 
financial experts argued.  Dollar inflows from the sale of oil could 
also help in propping up the local currency.  The Central Bank of 
Nigeria (CBN) had introduced a series of measures to ensure 
liquidity in the capital market, including a reduction in the 
Monetary Policy Rates (MPR) from 10.25 to 9.75 percent, a reduction 
in the Cash Reserve Ratio (CRR) for banks from 4 to 2 percent, and a 
reduction in liquidity ratio from 40 to 30 percent.  The CBN 
predicts that these measures will inject about Naira 1 trillion (USD 
8.5 billion) into the market. 
 
3. (SBU) However, Bismarck Rewane, Managing Director of Financial 
Derivatives, argued on October 7 that Nigeria is much more 
integrated in the global financial market and, hence, vulnerable to 
the current financial turmoil.  According to Rewane, the Nigerian 
stock market is highly stratified and segmented with 35 percent of 
market capitalization tradable while the other 65 percent is tightly 
held.  Since foreign funds account for 10 of the 35 percent of 
tradable market capital, a drying up of capital in the international 
market would greatly reduce Nigeria's ability to raise capital. 
With respect to the CBN's measures Rewane said the liquidity 
injection could be inflationary. 
 
Federal Government Unconcerned 
------------------------------ 
 
4. (SBU) The FG has been fairly optimistic with respect to the 
potential economic impacts arising from the financial crisis, 
falling oil prices, and downturn in the Nigerian stock market.  CBN 
Governor Soludo, Minister of Finance Usman, and the President's 
Chief Economic Advisor (CEA) Yakubu have repeatedly told the media 
that Nigeria is unlikely to be affected.  At the October 21 Senate 
hearings on the potential impact of the global financial crisis on 
Nigeria's economy, Soludo argued that the CBN's adoption of various 
policy measures, including bank recapitalization and restriction on 
the foreign ownership of local banks, had made the Nigerian banking 
system strong and, therefore, shielded the economy from the global 
 
LAGOS 00000426  002 OF 003 
 
 
financial crisis.  He also insisted that no Nigerian bank will be 
allowed to fail, but emphasized that another round of 
recapitalization is needed to further strengthen the sector. At the 
same hearing Minister of Finance Usman said that while there is no 
crisis in Nigeria, the economy is not immune because the crisis is 
leading to less demand for petroleum which may have a serious impact 
on the budget.  He also asserted that the fundamentals of the 
economy are very strong.  CEA Yakubu told the Senate that it is 
possible that direct investment will evaporate in Nigeria. 
Financial Derivatives' Bismarck Rewane speculated that the FG's 
laissez faire attitude could be attributed to a vested interest 
among certain Northern elites to redress an imbalance in the 
distribution of economic wealth and power between the north and 
south by allowing the fall of the commercial power base in the 
south. (reftel D) (Comment: Some banking and financial interlocutors 
do share this particular viewpoint. The concentration of the NSE and 
bank head offices and branches in Lagos does reflect the imbalance 
and might lend some credence to this speculation. End Comment) 
 
Rising Interest Rates, Credit Facilities 
Recall and Reduction for Nigerian Banks 
---------------------------------------- 
 
5. (SBU) Abubakar Bello, General Manager of Guaranty Trust Bank, 
told EconOffs October 15 that local commercial banks are staggering 
under the burden of recall of their credit facilities and reduction 
of their credit lines.  Rewane also said banks are now funding trade 
lines from domestic credit mobilization, which is pushing interest 
rates even higher.  To make matters worse, Danladi Verheijen, 
Co-Founder of Verod Capital Ltd., told EconOff October 14 that 
commercial banks have grossly inflated, if not manipulated, their 
earnings on paper, and in reality banks have very little capital to 
lend out.  The convergence of rising interest rates and tightening 
liquidity in the domestic and international market will most likely 
lead to an economic slow down, he argued. 
 
Falling Oil Prices May Hamper Energy Investments 
--------------------------------------------- --- 
 
6. (SBU) Tightening credit markets and falling oil prices could 
hamper current oil and gas operations and threaten future investment 
in the sector.  While international oil companies are increasingly 
turning to local sources of funds to finance new projects, most 
funds still come from international banks or internal oil company 
cash flows.  As a result, a credit crunch could severely limit 
companies' ability to fund investment in long term projects. 
Falling oil prices also make these investments, always risky in 
Nigeria, less attractive.  Additionally, as noted by Adewale 
Shasanyan, Business and Policy Analyst of BP Nigeria on October 16, 
lower oil prices could negatively impact the oil and gas joint 
ventures that the state oil company has with international oil 
companies.  These joint ventures rely heavily on GON funding.  Even 
when oil prices were at record highs, the GON has been increasingly 
unwilling to fund its share of the costs, forcing the international 
oil companies to arrange loans to fund the shortfall.  Falling oil 
prices will further exacerbate the GON's reluctance at the same time 
oil company coffers are tightening, which could lead to deferred 
maintenance on aging oil fields.  Deep offshore oil fields, which 
are newer and do not rely on GON funding, are not as susceptible to 
this problem. 
 
One Year Out, a Real Estate Bust 
-------------------------------- 
 
7. (SBU) The financial crisis could lead to a bust in the real 
estate market in 2009, Rewane projected.  The recent downturn in the 
stock market had further fueled the real estate market bubble in 
Lagos and immediately surrounding areas because investors sold 
stocks and bought real estate (reftel A).  The economic slow down 
resulting from the financial crisis could lead to increasing 
delinquency on rent payments, increasing vacancy rates, and 
ultimately a bust in the real estate bubble, he predicted. 
 
NSE Proposes Banks as Market Makers in Bailout Plan 
--------------------------------------------- ------ 
 
 
LAGOS 00000426  003 OF 003 
 
 
8. (U) On October 7, the media reported that the Nigerian Stock 
Exchange had entered into an agreement with six local commercial 
banks to provide a Naira 600 billion (USD 5 billion) "bail-out" plan 
for the stock market.  Under this arrangement, the six banks would 
serve as market makers, each providing about Naira 100 billion (USD 
85 million) to buy up to 15 percent of its shares from the stock 
market. (Note: Market makers' primary function is to stabilize the 
market by ensuring continuous liquidity through the synchronization 
of buying and selling transactions. End Note) The Nigerian 
Securities and Exchange Commission (SEC), however, responded that it 
had not granted market making licenses to any banks or business 
entities. 
 
9. (SBU) Interlocutors decried the NSE's attempt to enlist banks as 
market makers as a hoax, or at best an ill-conceived plan, to 
restore confidence in the market.  Professor Doyin Salami of the 
Lagos Business School said if the banks agree to the proposal, the 
transactions would constitute share buy-backs and not market makings 
because bank shares account for 60 percent of the stock market 
capitalization.  Verheijen and Rewane said bank shareholders would 
not allow their banks to become market makers because banks would 
effectively purchase low or under-valued shares on the stock market 
thereby wiping out shareholder profits.  This is not the role of a 
commercial bank, the two analysts contended.  From Guaranty Trust 
Bank's perspective, Abubakar Bello said the government needs to 
"sweeten" the deal with incentives, for instance tax exemptions or 
guaranteed rates of return, in order for banks to consider it. 
Interlocutors contended that the premature announcement of this 
agreement was a maneuver on the part of the NSE to boost market 
confidence. 
 
NSE Leadership Questioned 
------------------------- 
 
10. (SBU) Industry experts are concerned with the FG's relative 
complacency towards the performance of Dr. Ndi Okereke-Onyiuke, 
Director General (DG) of the NSE.  There has been a growing and 
resounding call within the private sector for the resignation or 
removal of the NSE's DG given her alleged tinkering with and 
manipulation of the stock market (reftel B).  Verheijen emphasized 
that the NSE, through its actions, had demonstrated a willingness to 
protect issuers instead of investors and was, therefore, severely 
compromised.  According to interlocutors, the NSE's leadership needs 
to change; however, analysts noted it is unlikely the DG will resign 
because she has deep and strong ties to political and business 
elites who have thrived during her tenure of the stock market. 
 
11. (SBU) Comment: The Nigerian stock market and banking sector are 
under scrutiny by international investors and financial experts 
because of irregularities in their practice and because of 
questionable fundamentals (reftel B, C, D).  The stock market does 
not effectively operate on market principles, and some local banks 
have major holes on their balance sheets.  Given existing problems 
in the domestic market, it will be difficult for the FG to contain 
the impacts of the global financial crisis, which then will lead to 
a downturn in Nigeria's economy.  In the best case scenario, the 
global credit crisis might be a blessing in disguise as it exposes 
the problems facing the Nigerian financial market and regulatory 
structure.  In the worst case scenario, it will magnify the 
problems, and challenge the FG's interest or ability to react. End 
Comment. 
 
12. (U) This cable has been cleared with Embassy Abuja. 
 
BLAIR