NIGERIA: LAGOS ECONOMISTS SEE MARKET DOWNTURN AS CYCLICAL,

UNCLAS SECTION 01 OF 02 LAGOS 000189 SENSITIVE SIPDIS FOR GABORONE PASS PDROUIN FOR BAGHDAD PASS DMCCULLOUGH COMMERCE FOR KBURRESS TREASURY FOR DPETERS, RHALL, RABDULRAZAK STATE PASS USTR FOR LISER, AGAMA STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS STATE PASS TDA FOR EEBONG, DSHUSTER STATE PASS EXIM FOR JRICHTER STATE PASS USAID FOR NFREEMAN, GBERTOLIN USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS USDOC FOR USPTO - PAUL SALMON USDOJ FOR MARIE-FLORE KOUAME E.O. 12958: N/A TAGS: EFIN EINV ETRD PGOV NI SUBJECT: NIGERIA: LAGOS ECONOMISTS SEE MARKET DOWNTURN AS CYCLICAL, SIGNS OF MARKET HITTING ROCK BOTTOM Septel ¶1. (SBU) Summary: Ayo Teriba, Managing Director of Economic Associates, a premier economic research firm in Lagos, argues that Nigeria's economic down turn is cyclical and not structural. He also believes that the President's announcement of a deficit in the 2009 budget had set off panic among the public and private sector and aggravated the crisis. Bismarck Rewane, CEO of Financial Derivatives, argues that there have been signs of the market hitting rock bottom, indicating that reprieve might be forthcoming. End Summary. Contraction Cyclical, Not Structural -------------- ¶2. (U) Ayo Teriba, Managing Director of Economic Associates, argued in an economic forum on March 31 that Nigeria's ongoing market contraction represents a cyclical downturn following two years of growth. He emphasized that the contraction should not be seen as structural because the expansion in itself was not structural. Therefore government structural intervention is not the right remedy. The proper role for the GON is to reduce the level of uncertainty and opacity in the market, particularly in the banking sector. Bolstering the public and private sector confidence will help economic recovery, Teriba argued. 3% Budget Deficit Projection Aggravates Crisis -------------- - ¶3. (U) Teriba also contended that President Yar'Adua's presentation of the 2009 budget with a 3 percent budget deficit projection had set off panic among investors and consumers and aggravated the crisis. According to Teriba, the prevalent assumption among the general public was for the GON to draw down the Excess Crude Account (ECA) to cushion the Nigerian economy in hard times. The budget deficit projection by the President left the public with the impression that there was no money left in the ECA to cushion the economy, Teriba explained. (Note: The GON released USD 1.5 billion from the ECA in March to increase liquidity. There is a lack of consensus as to how much is currently in the ECA, with estimates ranging from USD 13 billion to USD 15 billion. Foreign reserves, which includes the ECA, is estimated at USD 48 billion. End note) The President's formal announcement of the deficit and his intention to borrow to finance the deficit added gravity to the situation, Teriba concluded. As a result, the odds are stacked against the CBN, and no monetary measures could take pressure off the depreciating exchange rate. (Comment: Post finds Teriba's analysis on the ECA incorrect. There has been able public news about how much there was in the ECA, and the pressure from the states to release at least one billion dollar to cover state revenue deficits. Market Might Have Hit Rock Bottom -------------- ¶4. (SBU) Bismarck Rewane, CEO of Financial Derivatives Company and member of the President Economic Steering Committee, argued in an economic outlook presentation on April 7, that there have been signs of the market hitting rock bottom. Rewane said some banks, including Intercontinental, Oceanic and Bank PHB, are currently managing a liquidity crisis, and CBN's new expansionary monetary polices might not help them (Septel). EconSpec observed in March customers queuing to withdraw cash from Intercontinental Bank's ATM machines that were not working purportedly due to system trouble. ¶5. (U) Bloomberg reported April 1 that the Nigerian Stock Exchange's All Share Index (ASI) has lost 36.82 percent in 2009, the steepest quarterly decline in more than a decade, making it the worst of 89 benchmark indexes tracked by the firm for 2009. The NSE has experienced cumulative loss of 82.26 percent in ASI since March LAGOS 00000189 002 OF 002 ¶2008. According to Rewane, the 19 banks quoted on the NSE have lost Naira 5.25 trillion (USD 35 billion) since March 2008. In addition, the Nigerian economy remains under intense pressure from not only low oil output, Rewane contended, but also from a sharp drop in electricity power supply, estimated by unconfirmed sources to have gone as low as 700 megawatts in March 2009. Persistent port congestion has resulted in high inventory levels, which translated into high unpaid credits. Rewane said with signs of the market hitting rock bottom, reprieve might be ahead, although Nigeria is still a long way from a sustained economic recovery. ¶6. (SBU) Comment: It is common practice to categorize Lagos-based financial analysts as being "pessimistic" or "rosy" in their assessment of the economic environment, government leadership, and policy viability. Teriba is widely reputed as an optimist while Rewane is a pessimist. In an environment where certain banks and financial institutions manipulate their balance sheets and accounting books, reliable data are hard to come by and analyses must be balanced against one another. Post argues that the economic impact has yet to be fully felt in all sectors and industries in Nigeria. While reprieve might be forthcoming for the NSE, other sectors might be a long way from hitting the bottom. End comment. ¶7. (U) This cable has been cleared by Embassy Abuja. Blair