Wednesday, October 15, 2008

Nigeria's financial markets: Grave and present danger

AS humankind gets into a financial and economic crisis being unanimously described as a meltdown and the plausible beginning of a world economic recession, it is apt to reassess the Nigeria financial authorities' engagement with the matter at hand, and where our embryonic money and capital markets would find insulation from the collateral shocks already holding sway. All over the world, comparisons are being made of the current events with the recession years of the 1920s and 1930s.

What was derisively regarded, a year or so ago, as small town America sub-prime loans problem has today metamorphosed to multibillion-dollar bank crashes, nationalisation of legendary businesses and interventions by several Governments to bail out banks. Without doubt, the landscape of the world economy is being redrawn by the colossal loss of fortune by both banks and non-bank financial institutions and the wipe-out of the middle class borrower. The magnitude of the credit collapse and its multiplier effects is estimated to be in excess of US$ trillions (not computing emotions and damaged lives) in the OECD countries, that is, the world's net surplus and donor countries.

In the immediate past year, the Nigerian Stock market had recorded phenomenal growth, month after month was a record performance and the world was said to be toasting to its very impressive returns to investors, albeit, its new and impatient investors. Every trading session was a self-fulfilling prophecy of growth. In the money market, the banks have been leveraging on the post consolidation boom to post unprecedented profits and dividends though the commitment of bank credit to the real sector of the economy has become a vexing challenge to its touted profit figures.

For most part of this year, commentaries on the Nigerian Stock market and the Money market have been strident that the apparent intensity of trades and turnover being witnessed there is being driven not by so much growth in the fundamental indices of the Nigerian economy, but by a mix of bankers, domestic speculators and a new breed of overseas money managers testing their feet in the exotic African market. In the past fortnight, it has all turned from sour to outright panic.

Stock price index having declined nearly 40 per cent from its January 2008 point is about to move into a freefall and there are genuine fears the trend may not be staunched until a so-called correction of Nigerian stock market exuberance has fully taken place.

In the wake of widespread monetary and capital markets dislocation across the world, Nigerian financial markets show that they are hardly immunised against these externalities. Some consequences had tip-toed in the past months namely: International hedge funds managers have taken flight with their estimated US$10b Nigerian markets portfolio; Credit lines to Nigerian banks for Letters of Credit have been constricted if not cancelled altogether; fund-raising for the nascent Nigeria Infrastructure fund is massively jeopardised.

To the extent that no one, now, disputes the global village profile, where money comes only to its safest haven, the current crisis calls for a robust domestic response and then also, the need to erect whatever brick wall as a supplement to what the world benchmark institutions have also put up against the global meltdown.

The response of the lead Nigerian monetary authority, the Ministry of Finance has been laughable: it constituted a Presidential Advisory panel made up of the same operatives whose actions and prejudices required independent review in the first place. It also publicly hinted that it would send N50 billion into the stock market.

The Securities and Exchange Commission, on its part, constituted two expert panels to deal with market issues in Governance and Operations and submit their reports at the end of 2008; a measure, laudable in itself as medium term response but doubtful as an appropriate response to raging market indiscretions especially alleged insider trading and the prop up of banking and insurance sectors' stocks.

The Nigerian Stock Exchange authorities went in search of emergency market makers to hold the basket as the floodgate to dumped shares opened without concurrence with its supervisory agency or the federal legislative watchdogs.

On its part, Central Bank of Nigeria held an emergency Monetary Policy Committee meeting and announced an adjustment of the monetary policy instruments-Monetary Policy Rate, liquidity and cash reserve ratios to increase liquidity in the system. It became unusually taciturn thereafter. An action that the industry suggests is a direct fallout of the recent undermining of the CBN leadership.

One attribute of all these reactions stand out: they were uncoordinated and tentative. More importantly too, there was no market or indeed, political leadership to take ownership of the initiatives. Another is that, in beating back a financial market trend, speed plus robustness are imperatives because a major cause in the market is the calculus of fear and uncertainty. It is important to convey the determination, vigour, competence and resolve of the authorities to hold a trade position. In the enlightened economies, the highest professional and political leadership took over the pronouncements to the markets, assuaging the people and ensuring accountability to the legislatures.

All the measures by Nigeria's four disparate money and capital markets authorities appear half thought - through on their announcement dates and as days ran further, it became apparent to the financial markets that the implementation frameworks were uncharted. Fear and uncertainty legitimately increased.

The notion that this trend can be sufficiently contained by short-cuts solutions has been stealthily debunked in the past four months by events in those same markets. We are amazed, for instance, at the slapdash gestures choreographed by the Central Bank of Nigeria: it was reluctant to admit its discomfort with margin trading and this was eventually poorly communicated in a market where information is the cornerstone; it pulled its punch on implementing the uniform end of year for the banks - a policy initiative announced long ago and well agreed that this is a panacea to clean up all the banks' books once and for all; as well as its recent instruction to banks to have their lending and deposit rates published on the internet - a directive operating since the 1990s, the publication in all banking halls. How many infractions of these rates have the CBN banking examiners who are to monitor actual transaction costs in the about 5,000 bank business offices in Nigeria sanctioned?

Unlike in many other countries where the stock market perfectly mirrors the economy and state of the nation, it could be argued that the Nigerian money and capital markets only mirror in part the formal economy. This opinion may even be sustained by the abrasive claim that about 40 per cent of currency in circulation is still outside the banking system. That is not sufficient to accept the authorities' cavalier approach to a major market crisis. A large number of Nigerian middle class joined the financial markets and encouraged by the lending policy of the banks, rode what has become a tiger. Greed and fear have now come full cycle.

While many have burnt their shirts, it need be said that Nigerians must not be allowed the delusion that there is fool-proof reward without risk, there are bound to be winners and losers in both the money and capital markets. Hopefully, the CBN-inspired elongation of loans tenure may turn the corner for these victims of the meltdown.

But the Nigerian financial markets have grown dramatically in the past five years to rank as a medium term power-house and currently mirror the promise of a nation that would someday, not too distant, meet the challenges of the 21st century world in terms of opportunities for domestic credit, wealth creation and infrastructure financing.

The state of affairs in the world markets is unprecedented. With globalisation, and it can be averred that despite it, the situation in Nigeria's financial market today is grave. Let the current crisis be availed for cleanup of both regulators and the market operators to inaugurate a fresh, though battered, beginning.

This danger presents a demand for leadership in all respects to stabilise the Nigerian markets and prescribe a detailed indigenous road map. We call on all the affected authorities to emulate the rest of their counterparts in the world and sit up to the emergent reality.