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Cablegate: Nigerian Stock Exchange Seeks Usaid Partnership

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 LAGOS 000123

SIPDIS


USAID FOR AA/AFR AFR/WA EGAT


E.O. 12958: N/A
TAGS: EFIN ECON EINV EAID NI
SUBJECT: NIGERIAN STOCK EXCHANGE SEEKS USAID PARTNERSHIP


REF: 02 Lagos 01933


1. (U) SUMMARY: The Nigerian Stock Exchange (NSE) seeks
USAID assistance to expand its services. The NSE plans to
attract more Nigerians and foreign investors to the equities
market through greater accessibility and new investment
vehicles in derivative markets. The NSE raised the issue of
working in partnership with USAID and in particular sought
assistance in the areas of hardware and software acquisition
and provision of technical assistance and training. USAID
is in the process of developing a new five-year strategy to
begin in January 2004, and will seek to identify ways of
working in partnership with NSE in the context of the new
strategy. USAID and NSE will develop terms of reference to
conduct an assessment in early 2003 to identify specific
areas of partnership. In addition, USTDA is considering a
2003 technical assistance grant to the NSE. END SUMMARY.


2. (U) On October 21, 2002, Econoff attended a meeting
between USAID Mission Director Dawn Liberi and Nicholas
Okoye of the Nigerian Stock Exchange. Okoye is Technical
Adviser to the Director General and CEO of the NSE, and is
Head of the newly created Strategy and Derivatives Markets
department. Okoye presented a proposal for partnership
opportunities between the NSE and USAID, as the NSE
continues to improve its IT infrastructure and plans to
expand investor services.


3. (U) Okoye reported that the NSE has achieved several
important international benchmarks for equities markets,
including clearing transactions in three days (T+3
clearance) and the development of a transparent review
system whereby reports of companies traded on the exchange
are available via the NSE Website. In addition, Okoye
reiterated the NSE's ranking by Standard and Poors and the
International Financial Corporation (IFC) as third for
return on investment among exchanges worldwide and first
among emerging markets. (REFTEL). The NSE now plans to
attract more investors by creating new investment vehicles
targeted toward individuals in Nigeria, institutions both
domestic and foreign, and Nigerians living or working
abroad. Okoye and the NSE Director General met with
representatives of the New York Stock Exchange (NYSE) and
the American Stock Exchange (ASE) in May to discuss ways in
which the NSE can leverage the expertise and global reach of
the US exchanges through technical assistance and training
programs. The NSE also hopes the US exchanges will
introduce the NSE to key international fund managers who
focus on emerging markets.


FOR NIGERIANS AT HOME: INVESTMENT SAVINGS ACCOUNTS


4. (U) Okoye noted that less than three percent of
Nigerians are invested in the NSE in any capacity, compared
to 75 percent of Americans and 63 percent of European Union
citizens who invest in equity markets directly or through
mutual funds and retirement plans. To attract more
individual investors in Nigeria and leverage the economies
of scales of the current nationwide banking system, the NSE
plans to partner with banks to develop a new savings entity,
the individual investment account. Since Nigerian banks
tend to have branches in even small towns throughout
Nigeria, the NSE sees a partnership with banks to be a more
efficient way to reach individual investors than encouraging
stockbrokers to expand their capacity and reach. Individual
investment accounts would allow bank depositors to place
savings into an account that would purchase shares of an
equities portfolio, allowing greater returns than
traditional savings accounts. According to Okoye, the 1999
Universal Banking Act permits licensed banks to participate
in every aspect of the financial industry, allowing for this
sort of partnership between banks and the exchange.


5. (U) To further encourage individual investors to use
the stock exchange and to enhance the reliability and
credibility of transactions, the NSE is developing an email
system to notify investors of transactions made on their
behalf. According to Okoye, in the US an automatically
generated confirmation letter notifies each investor when a
broker places a trade on his or her behalf. The Nigerian
postal system is considered too unreliable for such a
system, and thus, trades are currently made without
confirmation, known as "selling without a mandate." The NSE
is considering the creation of a free email account for each
investor in the exchange through which confirmations of
trades may be posted. Okoye notes that while few Nigerians
have access to computers and the Internet at home or work,
many individuals maintain free accounts that they access
from cyber cafes, which are quite common throughout the
country.


FOR INSTITUTIONAL INVESTORS AND NIGERIANS LIVING ABROAD: NEW
INVESTMENT VEHICLES IN THE DERIVATIVES MARKETS


6. (U) Okoye estimates that Nigerians living overseas
return over three billion dollars annually to Nigeria, often
in the form of real estate purchases and investments.
However, Okoye states that these individuals are frequently
victims of unscrupulous transactions or unreliable
construction cost estimates. The NSE believes Nigerians
abroad, as well as institutional investors in-country and
abroad, are looking for credible and transparent
opportunities to invest in Nigeria. As head of the NSE's
new derivatives markets department, Okoye highlighted
several investment products currently under development.
(REFTEL).


7. (U) Okoye states his team is developing an Exchange
Traded Fund (ETF). Like the NASDAQ "QQQ," or the American
Stock Exchange "SPDR," the ETF will consist of a "basket" of
the top 30 or so companies listed on the NSE which will be
traded as a single security. The Johannesburg Stock
Exchange (JSE) currently has a fund of this nature
available. The NSE is also preparing option contracts,
which are not currently traded on the NSE. Further, the NSE
is exploring whether foreign investors will be more
comfortable investing in NSE listed companies through the
NYSE and ASE in the form of depository receipts. To attract
the Nigerian expat investor, the NSE is developing a real
estate investment trust and note product, which will involve
the issuance of notes against real estate developments or
securities against ongoing rents. Similarly, the NSE is
developing oil and gas trust notes. The NSE points out that
indigenous energy companies are now positioned to take over
"marginal" or low-volume oil fields from major international
producers. Most of these are capped-wells, requiring
capital investment in flow stations and piping, which can
cost 15 to 30 million dollars, according to Okoye. Local
banks generally do not provide sufficient lending for such
projects, so the NSE believes it can offer investment trusts
of sufficient credibility and reliability to attract
investors and generate the funding needed to launch these
ventures.


AREAS FOR POSSIBLE USAID PARTNERSHIP


8. (U) NSE requested USAID assistance with the provision
of new hardware and software needed to develop and manage
each of the investment vehicles, as well as technical
assistance and training in both IT systems and trading
aspects of these products. Such IT systems development and
new services training will be necessary both for the NSE and
a set of Nigerian financial institutions that will become
custodial banks to facilitate the derivatives transactions.
Okoye states that the NSE would primarily use US made
products and consultants for these ventures, including the
NYSE and ASE. He notes that the NSE Board of Directors has
approved the concept of the exchange acting as a regional
clearinghouse for securities transactions involving other
African countries. Thomas Briggs of the US Department of
Treasury suggested such a concept during a recent tour of
Nigeria. Okoye states that the NSE is currently negotiating
with a company in Boston to establish and maintain a
database to record and call-up transactions for the last 12
years, a necessity if NSE is to become a regional
clearinghouse.


9. (U) USAID Mission Director indicated that USAID was
developing a new five-year strategy and that collaboration
with NSE could be explored within the context of the new
strategy. USAID would consult further with NSE and conduct
an assessment to identify potential areas of partnership and
collaboration. She estimated that such an assessment could
take place in early 2003. Additionally, the US Trade and
Development Agency is considering a technical assistance
grant to the NSE to upgrade its computer system and develop
a secondary trading floor in case of catastrophic failure.


HINSON-JONES

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