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Cablegate: Nigeria: Problems in Nigerian Capital Market Outweigh

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

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