Economic Confidential, February, 2009

NEWS UPDATE

Nigeria’s Banks, Stocks in Crises?

... Government May Reacquire Shares

Dangerous signals are in the air in the Nigeria’s financial sector unless urgent actions are taking to save the entire economy which presently relies on the activities of the banking and stock market. Already there is a strong feeling that the government may reacquire some of the banks any moment.

This sentiment is coming after last year's claims by Government officials and the captains in the financial sector that Nigeria was immune to the global crisis. The Economic Confidential gathered that their pretentious views were intended to guard against public panic in the nation’s financial system.

The only sincere voice, who gave an early warning as at October 2008, was the former Minister of Finance and present Managing Director of the World Bank, Okonjo Iweala. From Washington DC, she disclosed that Nigeria and other developing nations would be adversely affected by 4F: Financial Crisis, Fuel Crisis, Fertilizer Crisis and Food Crisis. Her prediction is gradually coming to pass.

As at January 2009, the Economic Confidential gathered a lot of Nigeria’s brokers are stuck with loans and the banks are stuck with liquidity problems while certain chief executives of some banks have become richer than their banks.

The country’s Stock Market Value of equities has dipped by N2.2 trillion in January alone, heightening fears of an imminent crash. The crash scare is coming as stock analysts say the loss of 14 per cent of the market value in January was unprecedented and monumental.

The stock market lost over N3 trillion in 2008. It opened in January last year at N10.18 trillion market capitalisation and then peaked at N12.6 trillion on March 5 before the bears set in. The market closed for the year 2008 at N6.957 trillion. This is against the gain of over N6 trillion and a growth rate of 74.7 per cent in 2007. It has been confirmed that all Share Index declined from 31,450.78 points as at end December to 21,813.76 points as at January 30, 2009, a drop of 30.64 per cent. Trading value has shown high volatility but exhibiting a sharp declining trend when compared with January 2008.

The Nigeria‘s foreign reserves have also dropped by 11 per cent, from $57.2bn at end December 2008 to $50.9bn. This was attributed the drop to falling international crude oil prices as well as the strain on the nation‘s reserves in the face of the challenge of meeting increasing foreign exchange demands. Crude oil prices have also dropped below $35 a barrel after hitting a peak of $147 per barrel in July 2008. If international prices do not improve and oil exports drop to from the current 1.9million/barrel, which incessant crises in the Niger Delta Region, the country’s revenue may suffer heavily.

The sliding reserves influenced CBN to use part of the country‘s external reserves to defend the naira, which began a sharp decline against the dollar and other major currencies.

The recent pronouncements from official channels and the headlines are enough to make everybody scared on the fate of the financial sector. First to make categorical statement on the position of the sector is a top official of the Securities and Exchanges Commission (SEC) who advised the Federal Government to take over capital market from total collapse as the crisis in the sector deepens.

The SEC Executive Commissioner, Legal and Compliance, Mr. Charles Udorah, who made the statement at a Forum of Accountants-General in Abuja also confirmed that the capital market lost N2.08tn in January 2009 alone. He said the time was ripe for the Federal Government to take controlling interest in sick banks and companies quoted on the NSE in order to boost confidence in the market.

It was revealed at the meeting that stockbrokers owed banks a staggering N388bn, which prompted the capital market regulator to advocate the prosecution of the chief executive officers of identified sick banks and firms for contributing to the capital market crisis. Many of the consolidated banks, irrespective of the confidence of the Central Bank of Nigeria, may have been weighed down by their exposure to the capital market and the on-going global financial meltdown.

The SEC's Officer, however, said,”The downturn in our market is not based on the same factors that triggered off the crisis in the emerged markets. While our market is indeed undergoing a painful correction after honeymoon enjoyed by investors as a result of greed and speculative activities, the global financial market especially the emerged markets crisis resulted from unguarded and heavy reliance on credits and derivative instruments structures on fictitious and wasting assets. Indeed, this is the time for all stakeholders to join hands and deal with the greed of financial system operators. People must go to prison for illegal activities and disgorge ill-gotten wealth diverted from financial institutions into unproductive ventures and luxury.”

At the inauguration of National Economic Management Team (NEMT) the Minister of Finance, Mansur Muhtar confirmed that the nation’s economy is in deep crisis. He noted that while the country is able to weather the first-round effects of the global crisis, subsequent deterioration in the global economic and financial environment has exposed our country to considerable shocks. He pointedly said: “The Nigerian economy is at a critical juncture and our success in effectively responding to the current global economic crisis would be vital to laying the foundation for a more-diversified and resilient economy.

Muhtar reiterated the need for the diversification the economy against the global financial melt- down because the economic crisis has exposed Nigeria to shocks, including a sharp drop in market capitalisation, reduced revenue, falling external reserves, and Naira depreciation.

There are also calls for the establishment of an asset management company or the use of the Federal Ministry of Finance Incorporated, to acquire shares of identified critical companies. The proposed sovereign wealth fund when established could invest some of its funds in local stock market under certain criteria.

The greed of financial system operators is the major contributor to the saddening crisis in the financial sector of the Nigeria’s economy. Already people are calling on the imprisonment of those directly and indirectly involved for illegal activities and disgorge ill-gotten wealth diverted from financial institutions into unproductive ventures and luxury.

Some stockbrokers have continued to urge the government to allow pension fund administrators to invest up to 60 per cent of the cash in their custody in the capital market which will require an amendment of the Pension Reform Act of 2004, which allows for a maximum of 25 per cent of pension funds to be invested in the capital market. Pension funds are currently estimated at close to N1tn.

Trade Unions are against the moves of the stockbrokers saying investing a larger proportion of pension funds in the capital market was unacceptable especially to a deteriorating sector.

The share buy-back option should be the alternative means to rescue the market for now since the stock prices are very low and affordable.

With the crisis in the stock market that was largely triggered by the banking sector's short-term investments and in realization that without public funds most banks cannot survive, the government, Economic Confidential gathered, is working towards reacquisition of equity of about 30% in some of the banks as part-owners. This, according to a source, is to guard against complete distress in the delicate financial sector. The government is said to be uncomfortable with the financial standing of most of the banks and security reports on some of their chief executives.

In an information obtained by the Economic Confidential, a recent report from an anti-corruption agency confirmed that out of 24 banks, 16 are considered weak, six manageable and two strong enough for the economy. Most of the banks have been accused by the agency of neck-deep in money laundering, connivance with some state governments and through their offshore branches, high-rate of bad loans, insider abuse; declaration of false dividends, profit tripping and sheer fraud.

Some of the Chief Executive Officers are alleged to be engaged in spending spree on non-profitable investments like acquisition of private jets, mansions and yacht for recreation purposes. The smart ones personally invest shareholders’ funds in other sectors of the economy as back-up in case of any distress without the knowledge of depositors.

Are the suggestions from official quarters clear signals of looming danger in financial sector when one of the officials said: “the take-over of controlling shares in the sick banks and firms should be followed by the sack of their management and prosecution?”

Time, will indeed tell, unless immediate actions are taken.

A related story from our Archive: SEC Versus NSE

Source: Economic Confidential