No Cause for Worry
By Demola Abimboye and Chris Onyam
Monday, September 22, 2008
Nigeria’s economic managers map out strategies to contain any adverse effect that could spill over from the lingering financial crisis in the United States of America
The lingering financial crisis in the United States of America and the resultant ripples across the globe have sent jitters down the spines of Nigeria’s economic managers. Last week, top officials of the Central Bank of Nigeria, CBN, and members of the Bankers Committee met to map out strategies to contain any adverse effect on the country. The Monetary Policy Committee of the CBN also met to address the persistent downturn in the capital market, the festering Niger Delta crisis which has resulted in the daily loss of about 500,000 barrels of oil daily and the global crash of stocks. After the meeting on September 18, Chukwuma Soludo, CBN governor and Shamsudeen Usman, finance minister announced some measures including reduction of the monetary policy rate, MPR, from 10.25 percent to 9.75 percent and cash requirement Ratio of banks from 4 percent to 2 percent. These will ultimately reduce lendng rates and boost liquidity in the economy.
Experts who spoke to Newswatch last week said that it was high time financial sector operators learnt from the American experience. Esther Adegbite, professor of banking and finance at the University of Lagos, UNILAG, said that Nigeria’s so-called strong banks need to enforce strict checks and balances. She said that if Lehman Brothers with its 158 years of investment banking expertise could crash while Merrill Lynch was swallowed by the Bank of America, it should be a big lesson for Nigeria. "It brings up the role of management and the importance of maintaining a strong management," she said.
Yusuf Ismaila, another lecturer at UNILAG, warned that the US problem may have adverse effect on Nigeria’s capital market. "The crash of the two institutions could scare people and discourage investors in the capital market which suffered setbacks some months ago," he said.
Ismaila argued that investors could withdraw from the stock market and turn to the banks where they can get as much as 16 percent interest on fixed deposits. "Those who have invested heavily in stocks and are expecting big returns may have heart attack," he said. The banking and finance lecturer, however, said that Nigeria’s foreign reserve held in J.P Morgan is safe.
But a senior official of Wema Bank Plc who spoke on condition of anonymity, told Newswatch that since all Nigerian reserves are held in the US, whatever happened to the American economy would affect Nigeria. "The issue, however, is how the current crisis affects prices of gold and bonds, two instruments Nigeria has invested her reserves in," he said.
The Wema Bank official added that since the CBN manages the reserves through some select banks and J.P Morgan, if any of them had invested in the crashed banks, then it would affect Nigeria negatively. "For instance, some of them invested in mortgages and people couldn't pay back as credit facility has been over-stretched," he said.
He, however, said that it might not be long before the crisis is resolved, especially if the Democrats win the next elections. The party has promised to explore foreign markets. "Between now and November, things will take shape," he said.
Abioye Eluwole, boss of Bytofel Securities, told Newswatch that Nigerians should not panic at all. He contended that a few jittery foreign investors might withdraw from the country like they did recently and which resulted in the bearish trend in the stock market in the past few months. "There would not be a direct effect as such. If it were an energy crisis, then Nigeria, with her mono product economy, could be badly affected," he said.
Even so, he said that the current price of oil is a positive one for the country. "If any financial institution is having problem in the US, I don’t see why Nigerians should be worried."
After a meeting with the Bankers Committee last week, the CBN allayed fears over the global financial turbulence. Ignatius Imala, CBN’s director of banking supervision, said that "The collapse of the global banks will not affect Nigerian banks because they have no trading relationship." He attributed the fall of the two US financial giants to regulatory failure. He said that Nigerian financial regulators had put in place checks to prevent a meltdown.
Lehman Brothers, according to him, collapsed because it took a huge loss into its books following deteriorated quality of assets and the regulators did not examine its activities. "Here in Nigeria, we make sure all our institutions comply with prudential regulations by classifying their assets properly," he said, adding "You can’t find such a situation here because we are on top of the situation," Imala explained.
Aigboje Aig-Imoukhuede, managing director, Access Bank, who spoke on behalf of his colleagues in the Bankers’ Committee, said that Nigeria’s foreign reserves which currently stood at $60 billion would not be affected by the crisis. "The steps taken by the Nigerian government in the management of foreign reserves were discussed at the meeting. The steps are ultra conservative. The reserves have not been affected in any way," he said, adding "the financial institutions affected had little or no business links with Nigeria and Africa in general."
Chris Newson, boss of Stanbic IBTC Bank, spoke in the same vein. He said that economies with direct relationship with the US, such as Europe’s, would be affected by the slowdown. Nigeria, he reasoned, has a robust economy and thus would be affected indirectly. "This may affect oil revenues but the price for oil is healthy and demand is strong," he said.
As investors continued to analyse the fall of two of Wall Street’s biggest firms last week, some of them said that the immediate future would be difficult. Henry M. Paulson Jr, treasury secretary and the Federal Reserve, examined how the few strong survivors could lead an industry turnaround, while the weaker ones fail or are taken over by larger rivals. "We’ve gone from a golden era of banking and financial services, It’s going to be tougher," said, Keneth D. Lewis, chief executive of Bank of America adding "There are going to be fewer companies, and we are going to be better at what we do."
Worldwide, financial companies have reported more than $500 billion in charges and losses stemming from the credit crisis. Experts said that this could eventually exceed $1 trillion. During the Depression in the 1930s, Congress separated commercial banks, which take deposits and make loans from investment banks which underwrite and trade securities. The investment banks were allowed to do business with little supervision but commercial banks operated under a tighter regime. Congress repealed those Depression-era laws in 1999, thereby giving commercial banks greater latitude to operate on Wall Street.
Already, Wall Street firms were reducing their debt levels as regulators worked out new rules about leverage, liquidity and capital levels. Strict rules could force Goldman and Morgan Stanley to merge with a bank that has customer deposits, a steady source of capital, and thus is buffered from collapse.
The authorities on Wednesday, September 17, announced an $85 billion rescue package for the American International Group, AIG, the country’s biggest insurance firm. This was expected to avert the threat of a global meltdown. Federal Reserve made its decision about AIG "with the full support of the Treasury Department," it said in a statement, adding that the package included conditions designed to protect "the interest of the US government and taxpayers."
The company had earlier approached regulators, saying it was concerned that if a deal could not be put together to save Lehman, AIG’s future would be in doubt. AIG, through its financial products unit in London, has exposure to the same mortgage-linked debt securities that led to Lehman’s fall.
Trading in New York was low last week. On Monday, the Dow closed at 10,917.51 down by 4.4 percent. The Standard & Poor 500 index of the biggest United States public companies fared even worse, falling 59.00 points, or 4.7 percent, to 1,192.69, its lowest close since October 2005.
The crisis on Wall Street caused by the bursting of the real-estate bubble has lasted 13 months and has caused far more damage than analysts initially forecast. Three of the five biggest American investment banks have failed or been bought since March. Fannie Mae and Freddie Mac, the giant mortgage companies, were nationalised early September.
Plunging housing prices also squeezed consumer spending and slowed overall economy. About 700,000 employees have lost their jobs this year. Every major sector of the S& P 500 fell Monday, with banks and insurers down by 10 percent, energy companies, seven and technology stocks, four percent. Health care and consumer staples companies, which are generally viewed as less tied to the overall health of the economy, fell by less than two percent.
With agency reports