NIGERIA: GOVERNMENT INTERVENTION TO HALT STOCK MARKET'S

UNCLAS SECTION 01 OF 02 LAGOS 000353

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E.O. 12958: N/A
TAGS: EFIN ECON EINV ETRD PGOV NI
SUBJECT: NIGERIA: GOVERNMENT INTERVENTION TO HALT STOCK MARKET'S
DECLINE ALARMS INVESTORS

Ref: A. Lagos 290

B. Lagos 266

C. Lagos 97

D. Lagos 95


1. (SBU) Summary: The Government of Nigeria adopted a series of
measures and commissioned a Presidential Advisory Team to halt the
decline in the Nigerian stock market. Since March, the market
recorded a 30 percent loss in market capitalization. Industry
interlocutors feared that the policy measures, in addition to being
unsustainable and inefficient, would scare off foreign investors.
The measures will not ultimately stop the market's decline and
accusations of market manipulation point to deeper problems in the
Nigerian public equity market. End Summary.

Government Intervenes to Arrest Market Downturn
-------------- --


2. (U) The total market capitalization on shares listed on the NSE
rose from N2 trillion in 2004 ($17 billion) to approximately N12.6
trillion ($108 billion) in March 2008, at which point the market
began to decline, slumping to N8.8 trillion ($75 billion) in late
August. The All-Share Index (ASI) declined by 31 percent from
66,116.56 to 43,119.47.


3. (U) On August 26, the Government of Nigeria (GON) adopted a
series of measures to arrest the market downturn. Key to the
recovery plan are provisions permitting quoted companies on the
Nigerian Stock Exchange (NSE) to buy back 20 percent of their
shares, and pegging downward price movement on any stock to a
maximum of 1 percent daily while retaining the 5 percent ceiling for
upward price movement. Other measures included a reduction of
market operators' fees, including a 50 percent reduction for NSE's
fees; limiting the number of new listings on the market;
introduction of a capital market stabilization fund; and a review of
trading rules and regulations. Banks were also encouraged to extend
margin loan repayment periods and inject new funds into the market.
The GON also commissioned a 16 member Presidential Advisory Team,
headed by the Minister of Finance and comprised of, among others,
the Attorney General, Minister of Planning, Governor of the Central
Bank of Nigeria (CBN),industrialist Aliko Dangote, and the heads of
three Nigerian commercial banks. The commission was charged with
developing strategies to curtail the continued drop in share prices,
while proffering medium to long term measures that would boost
investors' confidence.


4. (U) Two days after the intervention, market capitalization
recorded a 7.2 percent gain. The ASI closed at 46,312.27. The
market recorded a comparatively higher volume of stocks traded and
price appreciation for 84 stocks.

Allegations of Market Manipulation
--------------


5. (SBU) Financial industry contacts told EconOff on August 29 that
recent upward movement in stock prices is not sustainable. Bismarck
Rewane, Managing Director of Financial Derivatives, said that
because the intervention could not last indefinitely, investors
would leave the market once the intervention stops. He blamed
previous interventions for the stock market's current state.
Notably, he accused the NSE of being behind a strange, week-long
period in early June, when stock prices only ticked up after a two
month bear market. Malcolm Gilroy, Vice President of United Bank
for Africa Global Markets, said that intervention was the inflection
point at which the stock market began a sharp decline. According to
Gilroy, a few sophisticated investors, alarmed by the NSE's
meddling, sold all their equity holdings. (Note: Gilroy wouldn't
say who those investors were, but implied they were foreigners. End
Note)


6. (SBU) In the local press, NSE officials denied any intervention,

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alternately blaming the strange occurrence on a computer glitch or a
change in trading rules that permitted only the sale of large blocks
of stock. However, in a conversation on Sept 3, the NSE's General
Manager for Compliance, Henry Onyekuru, all but admitted to Lagos
Econoffs that the NSE had a hand in the June irregularity. When
asked what happened in June, Oneykuru noted that the market had been
bearish and said that the NSE had decided on its own to "adjust the
market's valves" to arrest the decline. He did not elaborate, but
indicated he thought manipulating the exchange to stop bear markets
was a natural function of the NSE.

One Percent Floor to Drive
Out International Investors
--------------


7. (SBU) According to Malcolm Gilroy, the one percent floor on
downward price movements will only serve to hurt liquidity in the
equity markets, limiting the ability of large institutional
investors to rebalance portfolios as necessary. Gilroy said this
measure, out of the whole package, was a "heavy-handed and crass way
of intervention" and would effectively discourage sophisticated
international investors from entering the Nigerian market.


8. (SBU) Gilroy said stockbrokers persuaded the Central Bank of
Nigeria (CBN) not to force banks to call margin loans. Gilroy
accused the banks of having been negligent in their lending
policies, which allowed some brokers to obtain huge loans to
leverage the bullish market. Nigerian banks, with a cadre of
inexperienced managing directors, are now bereft of ideas on how to
cover the margin losses that resulted from a market downturn.

16 "Wise men": Unqualified, Compromised
--------------


9. (SBU) Contacts questioned the qualifications of the 16 so-called
"wise men" on the Presidential Advisory Team, saying that none of
them had any international experience in managing a stock market
crisis. Gilroy believes equity market experts from countries that
had undergone similar crises and experienced stockbrokers needed to
be on the commission. The inclusion of local businessmen and bank
managing directors, once again, signified the confluence of
interests between the regulators and the market players, he opined.


10. (SBU) Comment: These measures won't stop the decline in the
Nigerian stock market, or at least they shouldn't if the market
operated in a transparent and open fashion. The stabilization fund
could, in theory, prop up share prices for some time by injecting
fresh capital into the market. Predictably, how the fund will be
capitalized, who will control it and how investment decisions will
be made have not been articulated. The allegation that the NSE
manipulated the exchange to permit only upward price movements is
serious. If true, it calls into question the legitimacy the
Nigerian public equity market. Certainly the NSE Compliance Manager
has an unusual view of the role of a stock exchange. End Comment.


BLAIR