NIGERIA: FINANCIAL SECTOR SLOWDOWN POSES A SECURITY RISK

UNCLAS LAGOS 000092 SENSITIVE SIPDIS FOR GABORONE PASS PDROUIN 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: FINANCIAL SECTOR SLOWDOWN POSES A SECURITY RISK Ref: A) 08 Lagos 266 B) 08 Lagos 97 C) Abuja 263 ¶1. (SBU) Summary: During discussions on February 4, Professor Doyin Salami, Dean of the Lagos Business School told Econoffs he sees the downturn in the Nigerian stock market as a national security risk, especially as the government is preoccupied with dwindling revenues resulting from low oil prices. Although the Central Bank of Nigeria remains defensive about the existence or amount of toxic assets banks currently carry on their books, Professor Salami openly doubted the health of Zenith, Oceanic, Intercontinental banks as well and the United Bank for Africa (UBA),although he had no (or was unwilling or unable to share) official data to support this unease. Finance Minister told Ambassador on February 5 that he saw lots of 'red flags' in the banking sector, which he is discussing with the CBN and watching carefully. Playing "spot the bad bank" is the latest Lagos parlor game. It could be Nigeria's emerging middle class that loses that game. End Summary. True State of Financial Sector Unknown -------------- ¶2. (SBU) The true state of Nigeria's financial sector, particularly the banks and the stock market is shrouded in mystery. Professor Doyin Salami, Dean of the Lagos Business School told Econoffs on February 4 that the Central Bank of Nigeria (CBN) continues to claim that Nigerian banks are healthy because it has inaccurate data. He said CBN examiners posted to various banks are "compromised" and though they likely see problems in the banks, they do not report the true state of the banks to the CBN. He said the CBN claims there are no problems with banks' margin loans is worrisome and many experts believe these assets are now non-performing (Ref A). Finance Minister, Mansur Muhktar told Ambassador on February 5 that there were a number of 'red flags' on the banking sector that he was concerned about. He has developed a special working group within the ministry to follow, including putting pressure on the CBN on �00A;oversight (REF C). ¶3. (SBU) In separate discussions that same day, Bismarck Rewane, CEO of Financial Derivatives Company, said the regulatory response to the financial crisis is hampered by the lack of information about the size and nature of non-performing assets the banks currently carry on their books. For this reason, the Technical Working Group of the National Economic Management Team (NEMT) planned to convene hearings on February 6 to gather information from those elements of the public to which the group would not ordinarily have access. (Note: Salami is a member of the NEMT, while Rewane is on the Presidential Steering Committee on the Global Economic Crisis. NEMT is providing expert advice to the Steering Committee which then advises the President. End note.) Despite the formation of the new committees, Dr. Ayo Teriba, CEO Economic Associates, said the Nigerian government is more preoccupied with bailing itself out of the financial crisis brought about by falling oil prices, than on the impact of the global crisis on Nigeria. Health of Some 'Big' Banks Uncertain -------------- ¶4. (SBU) When asked which Nigerian banks he believed to be "too big to fail", Salami said First Bank and Union Bank, two of Nigeria's oldest banks, fell into that category, but he saw them as safer and more stable the other banks. He said he fears for the health of other big banks like United Bank for Africa (UBA),Zenith Bank, and Intercontinental Bank. Not based on any empirical data, Salami said his fears are borne out of informal information gathered from sources within the sector. Stock Market Decline Is a Security Risk -------------- ¶5. (SBU) Rewane told Econoffs that he saw shrinking income and a lack of confidence resulting from the stock market downturn as a "risk to Nigeria's national security." He opined that Nigeria's small, but growing middle class, which had been using Nigeria's once booming equities market as a store of value for a rainy day, is faced with a double blow of falling stock prices and contractions in various sectors of the economy due to lower oil prices. With few options to fall back on, Rewane saw this economic pressure on Nigeria's emerging middle class as a security risk. (Note: In January 2009 alone, the Nigerian Stock Exchange lost nearly one third of its market capitalization to close at naira 4.9 trillion (USD32.7 billion). End note.) According to Rewane, income inequality will rise in 2009 as the top 20 percent of Nigeria's population will get 50 percent of the country's income in the year. ¶6. (U) Salami said lack of confidence in stock market regulators and their competence is of more concern than the equities price declines. He opined that the inherent weakness in the banking sector was merely transferred to the stock market when margin loans were pulled and a harmonised banking year-end policy was proposed (Ref B). ¶7. (SBU) Comment: Trying to guess which Nigerian bank is in the worst financial position has become something of a sport among Lagos business executives, financial analysts and other industry watchers. Opinions vary widely as to which bank is in the most trouble; Salami's views seem no more, or less, valid than others we have heard. If a big name bank goes under, it could be Nigeria's middle class that takes the hit; the elite presumably have financial reserves offshore, while Nigeria's teeming poor are largely outside of the financial system. End Comment. ¶8. (U) This cable has been cleared by Embassy Abuja. Blair