Cablegate: 2005 Nigerian Stock Market Negatively Affected By

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

211511Z Sep 05

UNCLAS SECTION 01 OF 02 LAGOS 001464

SIPDIS

SENSITIVE

DEPT PASS TO EX-IM KENNETH VRANICH AND BERT C. UBAMADU
DEPT OF TREASURY PASS TO C. ALEXANDER SEVERENS

E.O. 12958: N/A
TAGS: EFIN ECON EINV PGOV NI
SUBJECT: 2005 NIGERIAN STOCK MARKET NEGATIVELY AFFECTED BY
BANK REFORMS

1. (SBU) Summary. The bank recapitalization process
continues to weaken the Nigerian Stock Exchange (NSE) as many
investors prefer to channel their money toward bank Initial
Public Offerings (IPOs) rather than daily stock market
activities. The average returns on investment (ROI) for the
30 largest Nigerian companies are lower for 2005 than 2004,
although still higher than average returns for U.S. blue chip
stocks. Nevertheless, NSE representatives remain optimistic
that returns on investment will increase once the bank
recapitalization process is completed. End Summary.

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Background
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2. (U) The Nigerian Stock Exchange (NSE) has nine branches,
over 120 employees and lists 285 securities with a total
market capitalization of over naira 2.1 trillion (USD 16
billion). The listed securities include: 10 federal
government development stocks, 57 industrial
loans/bonds/preference stocks and 218 equities. Average
daily trade volume on the NSE is between naira 200 and 300
million (USD 1.5 to 2.2 million). The NSE estimates five
million Nigerians invest in the stock exchange.

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Secondary Markets Depressed
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3. (SBU) Technical Advisor to the Director General of the
NSE, Nicholas Okoye, told us the bank recapitalization
process has hurt his institution because more people are
investing in Initial Public Offerings (IPOs) by banks than
making daily trading on the NSE. Numerous banks have
resorted to IPOs to raise capital to meet the Central Bank of
Nigeria's naira 25 billion (USD 192 million) capital
requirement. Because Nigerian investors have shifted to the
primary market, the returns on the secondary market have
declined, the NSE representative said. Okoye told us
shareholders invested naira 225 billion (USD 2 billion) in
the primary market last year, but over naira 500 billion (USD
4 billion) so far this year. He expects investments in the
primary market to total naira 800 billion (USD 6 billion) by
December.

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10-15 Percent ROI on Nigerian Blue Chips
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4. (SBU) Okoye is correct. Capital shifts to the primary
market are partially to blame for the considerable lowering
of average returns on investment in the 30 largest Nigerian
companies. 2005 average ROI for the 30 largest Nigerian
companies were 10-15% compared to 40-50% returns in 2004.
Moreover, with inflation hovering near 15%, any real capital
gains on investment were minimal. Yet, NSE representatives
predict ROI on Nigerian blue chip companies will rise to 20%
in the immediate post-bank recapitalization period. The
CBN's bank consolidation process required mobilizing an
additional naira 600 billion (USD 4.5 billion) in domestic
capital for the banking sector. Once bank recapitalization
is complete, NSE representatives believe the volume of trade
will increase and predict the number of investors will grow
from its current 5 million to 7 million by 2006.

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Optimistic Future, But Capacity Lags
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5. (SBU) NSE representatives are bullish about stock market
expansion, and are working on plans to develop a derivatives
market to include: asset-backed securities, options, and
exchange-traded funds. They estimate 20 to 30 million
Nigerians have sufficient capital to invest in the stock
market (a figure we think is high), and that the Government's
Pension Reform Act will spur further investment into the
stock market. Despite optimistic growth projections,
however, NSE members stated the securities sector lacked the
regulatory capacity and infrastructure to keep pace with the
expansion. Okoye told us the lack of capacity hurt the
sector as a whole, and that more resources were needed in the
training, recruitment, and restructuring of the Security and
Exchange Commission (SEC), the industry's main regulatory
body.

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Comment
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6. (SBU) Comment. The phenomenal 40 to 50% average rate of
return enjoyed by Nigerian investors in 2004 is not in the
cards for 2005. However, financial experts generally agree
the stock market will recover and ROI will increase in 2006
as more capital returns to the secondary market. Experts
agree the CBN's bank recapitalization requirement in the
short-term has shifted investment from the stock market;
however, the long-term benefits of bank consolidation might
boost investment in the stock market. When and if larger
numbers of investors begin to move to the NSE, the SEC will
need to strengthen its currently weak regulatory capacity by
investing more in training and recruitment, and in creating
an adequate legal framework to handle the increased trading
volume. End Comment.
BROWNE

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