Africa Update

Financial meltdown and Africa

Vol. XV1. Issue 1.  (Winter 2009)

Table of contents

• Editorial:  Dr. Gloria Emeagwali
  
  
• Dr. Mobolaji E. Aluko -   The Global Financial Meltdown: Impact on Nigeria's Capital Market and Foreign Reserves

  
  

• Alhassan Attah-Quayson -  The World Financial Crisis: How will Sub-Saharan Africa Fare?

• Film Review - Nollywood's Presidential Ambitions : Owen Rogers, CCSU

The Global Financial Meltdown: Impact on Nigeria's Capital market and Foreign Reserves
By Dr. Mobolaji E. Aluko
Howard University, Department of Chemical Engineering

Introduction – The US and Global Financial Situation

On Tuesday, October 9, 2007, the Dow Jones Industrial Average (DJIA), a major United States stock market index, attained its highest value ever at 14,164.53. Since opening at 40.94 on May 26, 1896, the DJIA has increased steadily, despite several periods of decline. However, by Wednesday, October 22, 2008, just over a year after DJIA's high, it had close at 8,519.21, representing a 39.85% decline in the index. In fact, a cyclical bear market is recognized to have commenced on July 2, 2008 when the Dow closed at 11,215.51, more than 20% below its record high, accelerating by mid-September with a series of panics related to financial instability caused in part by the failure and/or sub-prime mortgage lending difficulties of the investment banking industry in the United States, specifically Lehman Brothers, Merrill Lynch, Morgan Stanley and JP Morgan-Chase, as well as government-backed mortgage giants Fannie Mae and Freddie Mac.. For example, the largest daily point loss (777+; closing DJIA 10,365.45) was on September 29, 2008; the largest daily point gain (936+; closing DJIA 9,387.61) was on October 13, 200; and the largest intraday point swing (1,018+; closing DJIA 8,451.19) was on October 10, 2008. Furthermore, along the largest percentage gain since 1933 was 11%, achieved on October 13, 2008 (closing DJIA 9,387.61), while the largest percentage loss since 1987 (7.87%) was attained on October 15, 2008 (closing DJIA 8,577.91). The last day that the DJIA closed above the psychological 10,000 level was October 3 (at 10,325.38).

This wild financial period was broad and not confined to the United States. According to a TIME magazine essay (October 20, 2008), through October 8, the year-to-date losses of the Standard & Poor 500 of the US was 33%; of the DAX index of Germany was 38%; of Brazil's BM&F Bovespa was 40%, of Shanghai's SE Composite was 60% and of Russia's RTS Index was 67%. In fact, the TIME essay also states that on October 6 and 7, 2008 alone, the global stock market lost a whopping $6.5 trillion as measured by Standard & Poor's BMI Global, an index of major markets worldwide. We will review briefly below the response of various governments around the world, but we first ask: what has the financial situation in Nigeria been?

The Nigerian Capital Market Situation

Nigeria's own stock market index is the Nigerian Stock Exchange's All-Share Index (NSE-ASI, or simply ASI), and currently provides a composite picture of the financial health of 233 listed equities. Starting with an index value of 100 in 1984, with increased listings and financial activity, the index value saw changes from 12,137; 20,129; 23,845; 24,086; to 33,358 at the end of each of the years 2002-2006 respectively; with respective end-of-year market capitalizations of N0.748 trillion, N1.32 trillion, N1.93 trillion, N2.90 trillion and N5.12 trillion. The ASI attained a value of 57,990 (and N10.180 trillion capitalization) at the end of year 2007, started the year 2008 at 58,580 (with a market capitalization of N10.284 trillion), and then went on to achieve its highest value ever of 66,371 on March 5, 2008,with a market capitalization of about N12.640 trillion. [See Tables 4 and 1]

However, ever since that high, the ASI has inexorably declined, exhibiting a secular bear posture since July 17 when, at ASI=52,910, the index fell below 20% of its all-time high, and has continued to fall, closing on October 22 at 42,207 (a 36.4% loss from the high within just seven months, and a year-to-date decline of 27.9%), and appears headed to below 40,000 if matters do not improve. In terms of capital decline, the Nigerian capital market has since the March 5 lost to date about N3.38 trillion, or about 26.7%. [See Table 1 and Figures 2 and 7]

Possible Impacts

So what, if any, has been the impact of the global financial crisis on the Nigerian capital market, since from the dates given above, there seems to be an overlap of distress periods? Bearing in mind that there is virtually no cross-ownership of banks (investment or otherwise) between Nigeria and foreign countries, and there is hardly any domestic mortgage market for there to be a sub-prime problem as found particularly in the UK and the USA, it is difficult to pronounce any direct impact. Nevertheless, four factors on which the global situation may have direct or indirect impact are as follows:

1. Foreign portfolio investments withdrawals and withholding (in order to service financial problems at home), as well as prospects of reduced foreign direct investment, are bound to affect investor confidence in and the economic health of Nigeria. This is particularly in an era where public-private partnership of big ticket items like power plants, rail and roads are being encouraged.

2. A general credit crunch from lending institutions for businesses requiring short- and long-term borrowing, including banks lending to each other. Reference Interbank offer rates (e.g. LIBOR for London, NIBOR for Nigeria, etc.) increase; yields on short-term (safer) Treasury bills reduce, and yields of (less safe) bonds (particularly junk bonds) increase. See LIBOR graph in Figure 8, showing an increase from just below 3.0% in mid-September to almost 5% in early-October, before settling back to 3.5. [As on October 23, Nigeria's 90-day NIBOR was 16.000%, after bouncing around for over the past two months between 14.7% and 17.1% see Table 1]. In economies where mortgages, credit card purchases, etc. are rife, this credit crunch become reflected in higher mortgage and credit card rates – and outright denials of credit for risky credit seekers.

3. Parallel to the concept of sub-prime mortgage problem abroad is the phenomenon of marginal borrowing/lending in Nigeria, whereby investors borrow money from banks to invest in other financial instruments (particular IPOs of banks) with the hope of making profit all around. This may have been Nigeria's version of the “sub-prime" problem.

4. Nigeria being an oil monoculture, the see-sawing price of crude oil and prospects for economic recession in the developed world with its attendant reduced energy needs, coupled with interests in innovative energy resources, are bound to give a pause to confidence in Nigeria's economy. For example, during the period of this financial crisis, Nigeria's Bonny Light Crude Oil Spot Price FOB went from a January 2008 start price of $95.16 per barrel to as high as $146.15 in the first week of July before closing on October 17 at $76.24 per barrel, less than 50% of the high price. [See Table 1.] In fact, on Tuesday, October 21, 2008 the NYMEX West Texas Intermediate Crude Oil for November delivery closed down $3.36 at $70.89 per barrel. [See Figure 3] In this respect, it would look as if Nigeria's capital market bear cycle actually began with the decline of oil prices in July, and accelerated with its further decline in September and October.

Foreign Reserves – Are They Safe?

We now turn our attention to our foreign reserves, and inquire what the impact of the global crisis might be, noting that:

1. At a quantum level of about $62 billion as of October 1, 2008, our foreign reserves compares with those of many countries in the world.

2. At the end of 2006, 87.3% of the naira value of N5.617 trillion ($42.3 billion) was denominated in US Dollars, 8.7% in Euro currency, 1.78% in British Pound Sterling, 0.95% in Japanese yen and the rest (1.27%) in other currencies. At the end of 2007, these percentages stood at 86.2%, 5.92%, 2.19%, 5.57% and 0.12% respectively, reflecting a significant increase in Yen holdings out of the increased N6.549 trillion ($51.33 billion) for last year. There is some indication that there has since been a re-denomination such that 67% of the foreign reserves are in US dollars, 24% in Euros, 3.7% in British Sterling, 3.6% in Japanese Yen, 0.1% in Swiss Franc, and the rest (1.6%) in a basket of other currencies, but this has not been confirmed. In any case, with the global crisis, there is hardly any currency or country that is not in distress, as can be seen in Table 5, where the emerging markets such as Singapore, Malaysia, India, South Korea, Brazil and South Africa have taken some hits in the past three months. For example, from October 1 to October 26, 2008, while the Yen has appreciated against the dollar by 11.65%, the Euro has declined by 11.15%, the Pound Sterling by 11.54% and the Swiss Franc by 4.98%. [Since August 1, these figures are +15.01%, -18.60, -19.70% and -9.72% respectively.] In short, there is almost nowhere to hide, and it would appear that it would have been better if Nigeria had NOT re-denominated (as rumored) because of the currency hits recently taken by both the Euro and Pound Sterling.

3. On October 3, 2006, some $7 billion (representing some 18.40% of total external reserves at the time) were apportioned to 14 Nigerian banks (out of the 24 consolidated banks as confirmed July 2004) and their 14 global asset management partners. The 14 global asset managers and their local counterparts were Black Rock (UK) and Union Bank of Nigeria Plc; J.P. Morgan Chase (USA) and Zenith Bank Plc; H.S.B.C (UK) and; First Bank of Nigeria Plc; BNP Paribas (France) and Intercontinental Bank Plc; UBS (Switzerland) and United Bank for Africa Plc; Credit Suisse (Switzerland) and IBTC Chartered Bank Plc; Morgan Stanley (USA) and Guaranty Trust Bank Plc; Fortis (Benelux) and Bank PHB Plc; Investec (UK, South Africa) and Fidelity Bank Plc; ABN Amro (Netherlands) and Access Bank Plc; Cominvest (Germany) and Oceanic Bank Plc; ING (Netherlands) and Ecobank Plc; Bank of New York (USA) and Stanbic Bank Plc and; Crown Agents (UK) and Diamond Bank Plc. [See Table 2] It is believed that CBN gave each asset manager, $500m of the external reserves to manage, with the global custodian being JP Morgan. The idea was to ensure that our own local financial institutions benefit both financially and in terms of international knowledge and skills transfer – in CBN's words "to allow for professional management, diversification of investment and to leverage on the expertise of the foreign banks to transform Nigerian banks into global financial institutions. The CBN has traditionally kept the external reserves as deposits with foreign banks. This is the first time that it is appointing foreign assets managers to manage part of its reserves, in line with global best practice."

An interesting tangled case in point is that of Fortis, ABN Amro, and BNP Paribas, three asset managers of Nigeria's foreign reserve. In October 2007, one year after it became an asset manager, Fortis, along with Banco Santander of Spain and Royal Bank of Scotland, acquired ABN Amro in a deal for more than 70 billion Euros. Santander picked up ABN Amro's Italian and Brazilian units, while RBS acquired ABN's wholesale and investment banking businesses. But the deal left Fortis apparently overstretched so much that on September 28, 2008, Fortis, a huge Benelux banking and finance company was partially nationalized, with Belgium, the Netherlands and Luxembourg investing a total of 11.2 billion Euros (16.3 billion U.S. dollars) in the bank. Belgium agreed to purchase 49% of Fortis's Belgian division, with the Netherlands doing the same for the Dutch division. Luxembourg agreed to a loan convertible into a 49% share of Fortis's Luxembourg division. However to complicate matters, before the opening of the business day, October 6, BNP Paribas, the French bank, assumed control of the remaining assets of Fortis following Dutch nationalization of the operations of the bank in The Netherlands. Finally, on Monday October 20, France announced a €10.5 billion rescue plan for six of its largest banks, including Cr�dit Agricole, Soci�t� G�n�rale – and BNP!

Thus we can see that three Nigerian banks – Intercontinental, Bank PHB and Access – are tied up in this Fortis/ABN Amro/BNP Paribas tangle. From above, it may actually be that the Royal Bank of Scotland is effectively Access Bank's partner. On Wednesday, October 8, the government of Britain announced that it would make �25 billion available as "Tier 1 capital" to the following financial institutions: Abbey, Barclays, HBOS, HSBC Bank Plc, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland, and Standard Chartered as part of a bank rescue package. An additional �25 billion was scheduled to be made available to other financial institutions, including British subsidiaries of foreign banks." The plan can be characterized as partial nationalization. On October 13, 2008 the UK government actually started the nationalization process by injecting �37 billion in the nation's three largest banks, and ended up owning a majority share in the Royal Bank of Scotland (RBS) and over a 40% share in Lloyds and HBOS. In return for the bailout, the banks agreed to cancel dividend payments until the loans are repaid, have board members appointed by the Treasury, and limit executive pay.

To round things out, on Tuesday October 14, the United States announced a plan to take an equity interest of $250 billion in US banks with 25 billion going to each of the four largest banks. The 9 largest banks in the US: Goldman Sachs, Morgan Stanley, J.P. Morgan, Bank of America, Merrill Lynch, Citigroup, Wells Fargo, Bank of New York Mellon and State Street were called in to a meeting; all eventually agreed. Finally, on October 16, a rescue plan was announced for the Swiss banks UBS and Credit Suisse. Recapitalization involved Swiss government funds, private investors, and the sovereign wealth fund of Qatar. A Swiss agency was set up to purchase and workout toxic funds. UBS had suffered substantial withdrawals by domestic Swiss depositors but still reported profits; Credit Suisse has reported losses.

What the above information shows is that the overwhelming majority of our counterpart asset managers themselves have been having significant trouble managing themselves, and one wonders what kind of "toxic exposures" they have inflicted on our foreign reserves, how safe our piled-up monies are in all of these foreign banks. One hopes that they have not been "eaten" up by the proverbial termites where we thought that they were safe, rather than use them strategically in developing our country as many long-suffering Nigerian citizens have called for. This is more so when we note that out of the 14 asset managers listed above, 10 of them have either gone bankrupt, been taken over, or have been partially or fully nationalized by their countries within the past one month, with only Cominvest, Crown Agents, Investec and Black Rock seemingly above the fray.

It is of course only the Central Bank of Nigeria that can answer the question of our foreign reserves' safety. One therefore first turns to public information that the CBN provides on its website to attempt to ferret the true situation out.

If one looks at its website www.cenbank.org – Foreign Reserve Movement page – starting from January 2, 2008, one sees that our gross foreign reserves steadily increased from $51.2 billion to a high of $63.5 billion on September 10, 2008, before declining to a value of $61.99 billion on October 1, 2008 – the last recorded entry. That is a decline of $1.5 billion within a two-week period, following which, after three weeks (today is October 23, 2008), there are NO MORE ENTRIES in the table. One wonders why this lack of further entries is so – is this site updated daily, weekly or monthly, for example? One thinks that the CBN owes the nation further precise explanation to assure us that it is not hiding anything and that our foreign reserves have been lodged safely and insured against losses.

In this regard, the recent assurances by Central Bank Governor Soludo and his bank colleagues Messrs Odoko and Imala about the foreign reserves' safety are welcome, but not sufficiently informative of their precise structuring to allay all fears. For example, it would be necessary to outline precisely not only how they have been diversified in terms of foreign currencies, but their allocations in terms of foreign government bonds and treasury bills, foreign government guaranteed securities, special drawing rights (SDRs), fixed term deposits, call accounts and current accounts are precisely the added value the foreign asset managers have provided since their engagement.

How Have Our Banks Fared at the Stock Exchange in 2008?

Of the 24 consolidated customer deposit banks that we have in Nigeria, 21 are listed among a total of 233 securities traded on the Nigerian Stock Exchange, with Citibank, Equatorial Trust Bank and Standard Chartered Bank being unlisted. In terms of capitalization ranking, 8 of these banks rate currently among the Top Ten, 13 among the Top Twenty, 16 among the Top Thirty and all of them are in the Top Forty-One. The banks' total capitalization makes up about 42% of total listed companies, and grew by an astonishing 200% in 2007, after a growth of 77% the previous year (2006). Share of Banks in the 20 Most Capitalized Stocks in the NSE (in %) has more than doubled from 30% in 2002 to 65% in 2007.

More pertinent information in terms of stock movement and Price to Earnings Ratios are shown in Table 3 below. It shows that virtually all of the banks have experienced significant erosion in their stock prices, both within the month of October 2008 and since the beginning of the year, with many experiencing near-50% decline since January 2008. It is likely that the erosion would have even been more without the -1%/+5% daily movement cap recently imposed on stock movements by the NSE on August 27, 2008, rather than the previous -5/+5 caps. For example, on the high stock-price end, Oceanic Bank has seen its price plunge from N39.05 in January 2008 to N17.13 on October 23, 2008 (a 56% drop), while at the low end, Access Bank [Figure and Unity Bank [See Figure 4-6] have witnessed 56.65% and 55.34% drops respectively in their January 2008 start stock prices of N23 and N8.8 respectively.

It should be noted that these negative movements do not necessarily mean that the banks' PRESENT financial positions are NOT sound – they do not affect that current asset status, which may be more than adequate – but they reflect investor confidence in the banks themselves, as well as their prospects for future growth based on new capital injection. Nevertheless, allegations persist that some banks engage in stock or capitalization "gaming" within the system, and have their working capitals locked down thereby, and stand to lose heavily when all the chips are down. Obviously, as months go by, the men will be separated from the boys in the banking industry.

Conclusion

From all of the above, one is led to the conclusion that Nigeria faces an uncertain economic situation both in the near and far future as a result of the ongoing global and domestic financial crisis. Our capital market is in tatters at the moment; our banks are struggling; our monoculture of oil continues to bedevil us, resulting in a reported need to adjust government expenditure and upcoming budget accordingly; and our foreign reserves situation remains an enigma wrapped in a mystery for now.

One hopes that the government in Abuja - both Executive and the National Legislature - the Nigerian Stock Exchange (NSE), the Securities and Exchange Commission (SEC) and the Central Bank (CBN) will all coordinate their activities and rise to the occasion as has been attempted by various governments around the world, lest our nation gets consigned to another long period of economic wilderness. The admonition in the West is even more apt in the developing countries, that in this new order of globalization, high technology and 24/7 operations. The only option is the infusion of innovative ideas (including new technology), new regulations, and in particular highly-competent professionals at the NSE, SEC and CBN conversant with the management of 21st-Century financial markets.

Holding on to the old order of doing business, and mouthing platitudes of complacency, are no options.