NIGERIA: STATE OF THE ECONOMY FOR JUNE/JULY

UNCLAS SECTION 01 OF 02 LAGOS 001100

SIPDIS

STATE PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: ECON EFIN EPET ETRD ECPS NI
SUBJECT: NIGERIA: STATE OF THE ECONOMY FOR JUNE/JULY
2005, OUTLOOK FOR FALL



1. Summary: Nigerian economists indicate that the
country can expect continued inflationary pressure,
increased interest rates, and modest naira
depreciation. This economic environment will cause
Nigerian investors to continue to look outward for
investment opportunities, as evidenced by a 30%
increase in foreign exchange investments in June. The
Nigerian stock market, however, is still attracting
investors, and new capital requirements for banks set
for December 2005 have resulted in increased trading
levels. Current trading suggests that more banks than
previously thought will survive the need to
recapitalize. End summary.

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RISING INFLATION RATES
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2. A recently released communiqu of the Central Bank
of Nigeria's (CBN) monetary policy committee (MPC)
estimated the monthly inflation rate for April 2005 at
16.3%. This is significantly higher than the 10.0%
achieved in December 2004 and is way off the single
digit inflation target set for 2005. In addition, first
quarter money supply increased by 17.5%, for an
annualized growth rate of 42%, more than double CBN's
2005 target of 15%. Executives at Financial Derivatives
Company (FDC) Limited, a Lagos-based economic think
tank, attribute the money supply saturation to the
monthly release of statutory allocations to all tiers
of government. They predict increased pricing pressure.
For example, prices of staple foods like wheat bread
have risen by about 50%.

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RISING INTEREST RATES
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3. Money market interest rates had been on a downward
trend in early June because of excess liquidity in the
system. However, the money market took a sharp upward
turn in June to reach 14.7% by month's end, likely due
to CBN's gradual withdrawal of public funds from banks.
In June, the CBN withdrew approximately 30 billion
naira from Nigerian National Petroleum Corporation
(NNPC) and plans to withdraw another 30 billion naira
in July. The CBN is concluding plans to become sole
banker to seven major Nigerian parastatals, including
NNPC. This move by the CBN is yet another way in which
they are trying to decrease commercial banks'
dependence on the government. They have already ordered
state governments to reduce ownership of private banks
from sometimes over 50% to a maximum of 10%, and they
are closely monitoring stock market trading in bank
shares to ensure that states do not overpurchase bank
shares. In the past, overdependence on public funds has
resulted in private banks' maintaining unsustainable
debt.

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NAIRA DEPRECIATION IN JUNE REVERSES EARLIER TREND
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4. At the end of first half of 2005, the Naira
remained stable at N132.87/$1 in the official markets,
despite a marginal depreciation early June, while the
value of the naira in the parallel market fell during
the same period to N143/$1 from N139/$1. Many look at
this difference as a result of summer travel plans,
which increases demand for U.S. dollars in the parallel
market without greatly affecting the official rate.
Experts predict people will hold on to their U.S.
dollars because of both the dollar's stability relative
to the Naira and the dearth of investment outlets in
the Nigerian money market. Furthermore, yields on money
market instruments have become unattractive, with the
MRR (Marginal Rediscount Rate) pegged at 13%, and the
inflation rate projected to be 12.2% at best. Also,
Nigerian government securities are currently
unattractive, with Treasury bills yielding all-time low
returns of 4.5%, compared to 14.5% just a year ago.


5. According to FDC, the current environment is an
inducement for capital flight, since investors will
prefer to hold dollar-denominated assets outside of the
country. "Even the most patriotic investor will think
twice about investing in these money market
instruments," FDC executives said. June's 30 percent
increase in foreign exchange demand in the Inter-Bank
Foreign Exchange Market (IFEM) to N1.07 billion
(USD8.05 million) lends credibility to this assertion.

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NIGERIAN STOCK: STILL ATTRACTIVE TO INVESTORS
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6. The Nigerian Stock Exchange (NSE) remained a haven
for investors, as overall price gains seemed to
outweigh price losses in the first half of 2005. The
NSE All-share index rose by 1.7%, while market
capitalization rose by 6% from N1,860 billion in May to
N1,909 billion in June.


7. Initial Public Offerings (IPO) for banks continued
to be introduced on the floor, as smaller banks
struggle to meet the December 2005 deadline to
recapitalize to N25 billion. As the deadline draws
closer, experts believe that, based on these IPOs,
between 30 and 35 banks are likely to meet the Naira 25
billion mark, a much larger number than the 15-20
previously estimated. (Comment: The CBN nevertheless
continues to investigate the origins of funds invested
in these IPOs and has disqualified some. A firm
estimate of surviving banks might therefore be
premature at this point.) FDC executives noted a
decline on returns on investment (ROI) and earnings per
share (EPS) of banks that had raised capital from the
NSE, despite an increase in their total earnings.

HOWE