Nigeria’s Foreign Reserves In Danger

Nigeria’s own stock market index is the Nigerian Stock Exchange’s All-Share Index (NSE-ASI, or simply ASI), and currently provides a composite picture of the financial health of 233 listed equities. Starting with an index value of 100 in 1984, with increased listings and financial activity, it attained a value of 57,990 at the end of year 2007. It started the year 2008 at 58,580 (with a market capitalisation of N10.284 trillion), and went on to achieve its highest value ever of 66,371 on 5 March 2008, with a market capitalisation of about N12.640 trillion.

However, ever since that high, the ASI has inexorably declined, exhibiting a secular bear posture since 17 July when, at ASI=52,910, the index fell below 20 per cent of its all-time high, and has continued to fall, closing on 22 October at 42,207 (a 36.4 per cent loss from the high within just seven months, and a year-to-date decline of 27.9 per cent). In terms of capital decline, the Nigerian capital market has since 5 March lost to date about N3.38 trillion, or about 26.7 per cent.

Possible Impacts

So what, if any, has been the impact of the global financial crisis on the Nigerian capital market, since from the dates given above, there seems to be an overlap of distress periods? Bearing in mind that there is virtually no cross-ownership of banks (investment or otherwise) between Nigeria and foreign countries, and there is hardly any domestic mortgage market for there to be a sub-prime problem as found particularly in the UK and the USA, it is difficult to pronounce any direct impact. Nevertheless, three factors on which the global situation may direct or indirectly impact are as follows:

1.Foreign portfolio investments withdrawals and withholding (in order to service financial problems at home), as well as prospects of reduced foreign direct investment, are bound to affect investor confidence in, and the economic health of Nigeria. This is particularly in an era where public-private partnership of big ticket items like power plants, rail and roads is being encouraged.

2.Parallel to the concept of sub-prime mortgage problem abroad is the rife phenomenon of marginal borrowing/lending in Nigeria, whereby investors borrow money from banks to invest in other financial instruments (particular IPOs of banks) with the hope of making profit all around.This may have been Nigeria’s own “sub-prime” problem version.

3. Nigeria being an oil mono-culture, the see-sawing price of crude oil and prospects for economic recession in the developed world with its attendant reduced energy needs, coupled with interests in innovative energy resources, are bound to give a pause to confidence in Nigeria’s economy. For example, during the period of this financial crisis, Nigeria’s Bonny Light Crude Oil Spot Price, FOB, went from a January 2008 start price of $95.16 per barrel to as high as $146.15 in the first week of July before closing on 17 October at $76.24 per barrel, less than 50 per cent of the high price. In fact, on Tuesday 21 October 2008, the NYMEX West Texas Intermediate Crude Oil for November delivery closed down $3.36 at $70.89 per barrel. In this respect, it would look as if Nigeria’s capital market bear cycle actually began with the decline of oil prices in July and accelerated with its further decline in September and October.

Foreign Reserves

We now turn our attention to our foreign reserves, and inquire what the impact of the global crisis might be, noting that:

1. At a quantum of about $62 billion as of 1 October 2008, 67 per cent of the foreign reserves is denominated in US Dollars, 24 per cent in Euros, 3.7 per cent in British Sterling, 3.6 per cent in Japanese Yen, 0.1 per cent in Swiss Franc, and the rest (1.6 per cent) in a basket of other currencies. It was not too long ago that the US Dollar exposure was 90 per cent (at least one hopes that that is the correct information) but with the global crisis, there is hardly any currency or country that is not in distress. In short, there is nowhere to hide.

2. On 3 October 2006, some $7 billion (representing some 18.40 per cent of total external reserves at the time) were apportioned to 14 Nigerian banks (out of the 24 consolidated banks as confirmed July 2004) and their 14 global asset management partners. The 14 global asset managers and their local counterparts were Black Rock (UK) and Union Bank of Nigeria Plc; J.P. Morgan Chase (USA) and Zenith Bank Plc; H.S.B.C (UK) and First Bank of Nigeria Plc; BNP Paribas (France) and Intercontinental Bank Plc; UBS (Switzerland) and United Bank for Africa Plc; Credit Suisse (Switzerland) and IBTC Chartered Bank Plc; Morgan Stanley (USA) and Guaranty Trust Bank Plc; Fortis (Benelux) and Bank PHB Plc; Investec (UK, South Africa) and Fidelity Bank Plc; ABN Amro (Netherlands) and Access Bank Plc; Cominvest (Germany) and Oceanic Bank Plc; ING (Netherlands) and Ecobank Plc; Bank of New York (USA); and Stanbic Bank Plc and Crown Agents (UK) and Diamond Bank Plc. CBN gave each asset manager, $500m of the external reserves to manage, with the global custodian being JP Morgan. The idea was to ensure that our own local financial institutions benefit both financially and in terms of international knowledge and skills transfer – in CBN’s words “to allow for professional management, diversification of investment and to leverage on the expertise of the foreign banks to transform Nigerian banks into global financial institutions. The CBN has traditionally kept the external reserves as deposits with foreign banks. This is the first time that it is appointing foreign assets managers to manage part of its reserves, in line with global best practice.”

With the global crisis in the financial and banking industry, therefore, one cannot but wonder how safe our piled-up foreign reserves are in all of these foreign banks, and hope that they have not been “eaten” up by the proverbial cockcroaches where we thought that they were safe, rather than use them strategically in developing our country as many long-suffering Nigerian citizens have called for. This is moreso when we note that out of the 14 asset managers listed above, 10 of them have either gone bankrupt, been taken over or have been partially or fully nationalised by their countries within the past one month, with only Cominvest, Crown Agents, Investec and Black Rock seemingly above the fray.

An interesting tangled case in point is that of Fortis, ABN Amro, and BNP Paribas, three asset managers of Nigeria’s foreign reserves. In October 2007, one year after it became an asset manager, Fortis, along with Banco Santander of Spain and Royal Bank of Scotland, acquired ABN Amro in a deal for more than 70 billion euros. Santander picked up ABN Amro’s Italian and Brazilian units, while RBS acquired ABN’s wholesale and investment banking businesses. But the deal left Fortis apparently overstretched, so much that on 28 September 2008, Fortis, a huge Benelux banking and finance company was partially nationalised, with Belgium, the Netherlands and Luxembourg investing a total of 11.2 billion euros (16.3 billion U.S. dollars) in the bank.

Belgium agreed to purchase 49 per cent of Fortis’s Belgian division, with the Netherlands doing the same for the Dutch division. Luxembourg agreed to a loan convertible into a 49 per cent share of Fortis’s Luxembourg division. However, to complicate matters, before the opening of the business day, 6 October, BNP Paribas, the French bank, assumed control of the remaining assets of Fortis following Dutch nationalisation of the operations of the bank in The Netherlands. Finally, on Monday 20 October, France announced a €10.5 billion rescue plan for six of its largest banks, including Crédit Agricole, Société Générale – and BNP! Thus we can see that three Nigerian banks – Intercontinental, Bank PHB and Access – are tied up in this Fortis/ABN Amro/BNP Paribas tangle.

From the above, it may actually be that the Royal Bank of Scotland is effectively Access Bank’s partner. On Wednesday 8 October, the government of Britain announced that it would make £25 billion available as “Tier 1 capital” to the following financial institutions: Abbey, Barclays, HBOS, HSBC Bank Plc, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered as part of a bank rescue package. An additional £25 billion was scheduled to be made available to other financial institutions, including British subsidiaries of foreign banks. “The plan can be characterised as partial nationalisation. On 13 October 2008, the UK government actually started the nationalisation process by injecting £37 billion in the nation’s three largest banks and ended up owning a majority share in the Royal Bank of Scotland (RBS) and over a 40 per cent share in Lloyds and HBOS. In return for the bail-out, the banks agreed to cancel dividend payments until the loans are repaid, have board members appointed by the Treasury and limit executive pay.

To round things out, on Tuesday 14 October, the United States announced a plan to take an equity interest of $250 billion in US banks with $25 billion going to each of the four largest banks. The nine largest banks in the US: Goldman Sachs, Morgan Stanley, J.P. Morgan, Bank of America, Merrill Lynch, Citigroup, Wells Fargo, Bank of New York Mellon and State Street were called in to a meeting; all eventually agreed. Finally, on 16 October, a rescue plan was announced for the Swiss banks UBS and Credit Suisse. Recapitalisation involved Swiss government funds, private investors and the sovereign wealth fund of Qatar. A Swiss agency was set up to purchase and work out toxic funds. UBS had suffered substantial withdrawals by domestic Swiss depositors but still reported profits; Credit Suisse has reported losses.

What the aforegoing shows is that the overwhelming majority of Nigeria’s asset managers themselves have been having significant trouble managing themselves, and one wonders what kind of “toxic exposures” they have inflicted on our foreign reserves.

It is, of course, only the Central Bank of Nigeria that can answer that question. One, therefore, turns to public information that it provides on its website to attempt to ferret the true situation out. If one looks at its website – Foreign Reserve Movement page – starting from 2 January 2008, one sees that our gross foreign reserves steadily increased from $51.2 billion to a high of $63.5 billion on 10 September 2008, before declining to a value of $61.99 billion on 1 October 2008 – the last recorded entry. That is a decline of $1.5 billion within a two-week period, following which, after three weeks (by 23 October 2008), there are NO MORE ENTRIES in the table. One wonders why, and one thinks that the CBN owes the nation an explanation to assure us that it is not hiding anything.

Conclusion

One is led to the conclusion that Nigeria faces an uncertain economic situation both in the near and far future as a result of the on-going global and domestic financial crisis. Our capital market is in tatters at the moment; our mono-culture of oil continues to bedevil us, resulting in a reported need to adjust government expenditure and upcoming budget accordingly; and our foreign reserves situation remains an enigma wrapped in a mystery for now.

One hopes that the government in Abuja - both Executive and the National Legislature - the Nigerian Stock Exchange, the Securities and Exchange Commission and the Central Bank will all co-ordinate their activities and rise to the occasion as has been attempted by various governments around the world, lest the nation get consigned to another long period of economic wilderness. Burying our heads in the sand and mouthing platitudes of complacency is not an option.