NEW CENTRAL BANK GOVERNOR WILL FACE CHALLENGES

C O N F I D E N T I A L SECTION 01 OF 03 ABUJA 001009

SENSITIVE
SIPDIS

STATE PASS USAID FOR NFREEMAN, GBERTOLIN
STATE PASS USTR FOR LISER, AGAMA
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS
STATE PASS TDA FOR PMARIN, DSHUSTER
STATE PASS EXIM FOR JRICHTER
FOR GABORONE PASS PDROUIN
FOR BAGHDAD PASS DMCCULLOUGH
COMMERCE FOR KBURRESS AND DHARRIS
TREASURY FOR DPETERS AND AIERONIMO

E.O. 12958: DECL: 06/08/2024
TAGS: EFIN EINV ETRD ECON PGOV NI
SUBJECT: NEW CENTRAL BANK GOVERNOR WILL FACE CHALLENGES

Refs: A. ABUJA 921, B. ABUJA 938, C. LAGOS 186

ABUJA 00001009 001.2 OF 003


Classified by Ambassador Robin R. Sanders, for reasons 1.4 b and d.


1. (C) Summary: As presaged in ref A, President Yar'Adua nominated
Sanusi Lamido Sanusi to head the Central Bank of Nigeria (CBN).
Sanusi has been confirmed by the Senate and has taken charge at the
Central Bank. Sanusi has a reputation for risk assessment and
supervision, and his talents will be taxed in his new responsibility.
Recent steps under Governor Charles Soludo buoyed Nigeria's flagging
banking sector, but most industry insiders say the country's lender
of last resort has insufficient will to address underlying problems.
There are indications it may also lack necessary financial muscle to
avert a crisis should even a small bank begin to fail. Measures
introduced by the CBN since early 2009 have infused liquidity in the
sector, and also provided better oversight and surveillance to detect
signs of trouble. Nonetheless, there is universal consensus that the
true health of the commercial banks is unknown, and several analysts
and bank officials caution that the CBN has insufficient
institutional and financial capacity to intervene decisively to avert
a bank crisis. Most important will be whether Sanusi is able to
stand up to efforts to undermine stronger supervision, and how much
fallout there is at the CBN and in the banking sector from former
Governor Soludo's reported massive payouts to power brokers in order
to keep his job. End Summary.

New CBN Governor Takes Charge
--------------


2. (SBU) As presaged ref A, President Yar'Adua chose First Bank
Managing Director Sanusi Lamido Sanusi to head the CBN. The Senate
confirmed Sanusi on June 3 and he has taken charge. In his
confirmation hearing, Sanusi promised closer scrutiny of Nigeria's
commercial banks. He also stated that he planned a new Code of
Conduct for all regulators, promised transparent rules, and opposed
redenomination of the naira. He noted the importance of supporting
the expansion of electric power supply and improving other
infrastructure. He vowed support for the local currency and
expressed concern that interest rates and the rate of inflation were
too high. Though the CBN had important achievements under Sanusi's
predecessor, Charles Soludo, most of those were in the first half of
Soludo's term (ref B),and the new Governor has inherited weighty
challenges.


3. (C) On the political atmospherics surrounding Sanusi's
appointment, during the Ambassador's June 2 visit to Lagos to meet
with a number of banking, business, and political leaders there was a
fair amount of disquiet in the South about Sanusi's appointment. The
concern was not about his credentials as the CBN head, but rather the
fact that there was no one from the South that was represented in
President Yar'Adua's official (Cabinet) or unofficial circle on
financial or monetary policy. With the appointment of the very
conservative Sanusi, this was the last "nail in the coffin" for some
who fear that the South will be further excluded from having a voice
in macro economic decisions of the nation, particularly given that
Yar'Adua's Chief Economic Advisor Yakubu is from Katsina, and new
Finance Minister Muhtar is from Kano (also Sanusi's home state). Of
equal concern for the southern-dominated banking community is that
this all comes at a time when the global financial crisis is hitting
some Nigerian banks hard (we understand that 3-4 may have major
capitalization and liquidity challenges) on top of dwindling reserves
(estimated by some interlocutors at about USD 40 billion rather than
the published USD 45 billion, a drop of about 20 percent from the end
of 2008),and even more sharply diminishing excess crude account
funds (reportedly around USD 8 billion rather than the published USD
15 billion, down from a recent USD 17-18 billion) as the GON
continues to dip into the latter to meet budget shortfalls and pay
states their share of oil revenues.


4. (C) Meanwhile, the Mission should have adequate access to Sanusi
as he is a close contact of the Ambassador, less arrogant than his
predecessor, and although he has conservative political views, by all
other accounts is a pragmatic economist. As noted ref A, he was the

ABUJA 00001009 002.2 OF 003


only Northerner that was a Group Managing Director of any Nigerian
commercial bank prior to his appointment as CBN Governor.

What's Ahead for Sanusi
--------------


5. (SBU) For the new CBN Governor there are a number of challenges
ahead that he will have to address. Of note, they range from
instituting a common-year accounting system for the banks, increasing
oversight of the sector, and the prevalence of margin lending.
Sanusi will not only need to grapple with all of these issues but
also have to determine just how healthy or unhealthy Nigeria's
banking sector is. The CBN has said the sector's exposure to margin
loans is now 784 billion Naira (USD 5.3 billion),down from a peak of
1 trillion Naira (USD 6.8 billion),respectively. Most private
sector contacts, however, doubt these figures. Lagos Business School
professor and member of the President's Economic Management Team
Doyin Salami on May 5 told Lagos EconOff he continued to have doubts
about the banking sector and the extent of its losses, and suggested
that several banks had attempted to hide losses in various
subsidiaries. Afrinvest's Chioke noted the proliferation of
short-term funding instruments designed to finance equity trading,
other than traditional margin loans, accounted for as much as 20
percent of assets in some banks. Chioke noted that such vehicles
were largely unregulated and falsely perceived to be safe. Access
Bank's Chief Compliance Officer Pattison Boleigha added that the
evaporation of confidence in margin lending was one of the triggers
of the collapse of the Nigerian stock market beginning in March 2008.
Indicating the possible size of these risks, private research
company Renaissance Capital recently estimated that nonperforming
loans would double in eight of the 11 banks it monitors.

Limited Arsenal To Avert Crisis
--------------


6. (SBU) Although none of our contacts are forecasting the imminent
collapse of a bank, several financial watchers warn that the CBN
almost certainly lacks the institutional and financial muscle to
address a crisis should one occur. We will have to see if Sanusi can
turn this around. According to Boleigha and Teriba, the tremendous
growth of the financial sector in recent years had outpaced the CBN's
regulatory capacity. Talented central bank staffers were quickly
poached by top banks and the drive for profits superseded internal
controls and proper risk management. In addition there were also
reports that the CBN under Soludo was complicit with some banks in
attempts to mask balance sheet shortcomings. Financial experts have
called for the CBN to be stripped of its bank regulatory function,
suggesting that role go to an independent agency akin to the British
Financial Services Authority, leaving the CBN with the sole role of
conducting monetary policy.


7. (SBU) Of particular concern to some of our contacts is the CBN's
limited financial resources available to prop up a failing bank
should a run begin. One bank insider said the CBN has already
disbursed the equivalent of USD 2 billion to FCMB, Finbank, and
Access Bank via the expanded discount window (ref C) and speculated
that the government's issuance of the 200 billion Naira (USD 1.4
billion) agricultural bond was an attempt to bail out UBA and First
Bank, which have received 75 billion Naira (USD 510 million) and 25
billion Naira (USD 170 million),respectively. Boleigha meanwhile
agreed that the CBN's capacity to raise local funds was limited by
recently imposed interest rate caps, persistent inflation, and the
government's large fiscal deficit.


8. (SBU) There are others who are arguing that the CBN would have
sufficient recourses to handle a banking crisis, provided the stock
market rebounds. Teriba noted that falling interest rates on
Nigerian government securities would eventually lead investors to
return to equity markets that would become more attractive as
interest rates fall. (Note: The future course of interest rates, the
key to this rosy scenario, is very much in doubt especially as the
government will almost certainly have to increase borrowing to
finance a budget deficit that the IMF expects to equal 8.5 percent of

ABUJA 00001009 003.2 OF 003


GDP this year. End Note). We understand that the CBN has 4.5
trillion Naira (USD 30 billion) in government deposits that it could
lend to troubled banks, but at the same time the impact of such a
move is potentially inflationary.


9. (C) Comment: The vulnerability of Nigeria's banks to toxic
equity-backed assets is unclear and even the most informed contacts
we talk to will likely not be able to provide much of an early
warning should a bank run begin. What is clear, however, is that the
tremendous growth in bank assets over the last several years was in
part a mirage generated by easy credit, loose accounting standards,
and possible outright collusion among banks to manipulate the equity
market. This bubble grew while regulators watched and sometimes
encouraged. Now that the bubble is deflating and at risk of rupture,
it is equally unclear if the CBN, under Sanusi, is ready politically
and able financially to intervene should a crisis start. While there
may be cause for some optimism for a relatively quick rebound of the
global economy, we are concerned that several of our contacts, who
also sit on government economic management committees, are failing to
account for the risks inherent to the system and the recovery.
Sitting back and counting on a rebound in the equity market to
re-inflate bank balance sheets is a band aid. The swift removal of
these toxic assets from the bank books and the institution of
stronger regulation to prevent a return of such troublesome lending
are the only long-term solutions.


10. (C) Comment continued: New CBN Governor Sanusi has his work cut
out for him. While he has a reputation for favoring careful risk
assessment and stronger supervision, it remains to be seen whether
players in the commercial banking sector and at senior levels of the
GON will thwart his presumed intentions to strengthen the sector. It
also remains to be seen how much damage his predecessor may have done
to the sector and the CBN in his unsuccessful campaign to remain in
charge. As noted above, some Southerners are clearly upset with the
appointment. One independent businessman went so far as to allege to
Abuja Econ Counselor on June 7 that senior leadership within the
Presidential Villa had installed Sanusi as MD at First Bank as a
prelude to his CBN appointment. This was done with an eye to having
the new Governor funnel funds from the CBN and possibly the banking
sector more broadly to support the PDP's candidates in the 2011
elections. Possibly the biggest question is whether Sanusi has both
the intentions and the wherewithal to keep others from interfering
with the important work facing the CBN as outlined above. End
comment.


11. (U) This cable has been cleared by Embassy Abuja.

Sanders