VZCZCXRO0531
PP RUEHMA RUEHPA
DE RUEHOS #0551/01 2151201
ZNR UUUUU ZZH
P 031201Z AUG 07
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 9296
INFO RUEHUJA/AMEMBASSY ABUJA 9086
RUEHWR/AMEMBASSY WARSAW 0485
RUEHCD/AMCONSUL CIUDAD JUAREZ 0464
RUEHIT/AMCONSUL ISTANBUL 0463
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHDC
UNCLAS SECTION 01 OF 02 LAGOS 000551
SIPDIS
SIPDIS
SENSITIVE
DEPT PLEASE PASS TO USTR; OPIC FOR JAMES WILLIAMS; USTDA FOR PIERCE
DAVIS
E.O. 12958: N/A
TAGS: ECON PGOV EINV PREL NI
SUBJECT: KEY ECONOMIC OBSERVER CAUTIONS AGAINST "IRRATIONAL
EXUBERANCE"
REF: LAGOS 549
LAGOS 00000551 001.2 OF 002
1. Summary: In a July 17 meeting with Trina Rand, International
Economist, and Michael Ruffner, Director, Office of Technical
Assistance, U.S. Department of Treasury, Financial Derivatives Chief
Executive Officer (CEO) Bismarck Rewane described some of the risks
in the Nigerian economy. While Rewane was generally optimistic, he
felt the risks were not well-understood by even some key
stakeholders. These included an overvalued and highly leveraged
stock market and insufficient regulation to stem borrowing for
speculative purposes. End summary.
2. In a July 17 meeting with Trina Rand, International Economist,
and Michael Ruffner, Director, Office of Technical Assistance, U.S.
Department of Treasury, Financial Derivatives Chief Executive
Officer (CEO) Bismarck Rewane said the Nigerian economy faced a
number of risks that were poorly understood by even some key
stakeholders. Representatives of the banking sector and a private
equity fund, with whom Rand and Ruffner had earlier met (reftel),
expressed unbounded optimism about the economy. This was
illustrative of general attitudes in the financial sector, said
Rewane, and an understanding of risks was critical if Nigeria wanted
to avoid capital flight.
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Stock Market Is Overvalued; Interest Rates Are Too Low
--------------------------------------------- ---------
3. Rewane admitted that he represented a minority opinion,
describing what he termed the "irrational exuberance" of the stock
market, which he thought was "grossly overvalued" and manipulated by
the new oligarchy, such as Aliko Dangote. The Central Bank of
Nigeria had driven interest rates too low, which discouraged savings
and, instead, pushed investment toward the stock market. Rewane also
doubted the veracity of the Federal Government's inflation
statistics. The Bureau of Statistics claimed that year-on-year
inflation in May was 4.6 percent while the monthly moving average
was 6 percent. (Note: This resonates with comments Econoff has heard
from other economic observers, who believe inflation is actually in
the double digits. End note). Rewane said an overvalued naira was
inconsistent with the intention of moving away from oil dependence.
4. Asked whether these pressures were sustainable, Rewane said he
was skeptical of Nigeria's ability to absorb the excess liquidity in
the market. While there was great need for investment in
infrastructure, the resources available for this were inadequate.
Rewane suspected the federal government would borrow again soon for
this purpose.
--------------------------------------------- ----------
Economy Is Too Highly Leveraged; Regulation Insufficient
--------------------------------------------- ----------
5. According to Rewane, capital market regulators were
irresponsible. He warned, for instance, that insufficient regulation
enables banks to lend on the margins for speculative purposes. Stock
brokers are leveraging their debt several times over without
regulation from the Nigerian Stock Exchange (NSE). These excesses
could be addressed by tighter regulation by the Central Bank of
Nigeria (CBN), NSE, and pension fund commissioners. For instance,
the Securities and Exchange Commission should keep stock brokers
from leveraging numerous times; and the government should force
pension funds to comply with existing regulation. Rewane noted that
the country faces both political will and capacity shortages in
terms of more prudential capital markets regulation. He explained
that some regulators have a conflict of interest.
6. Of CBN Governor Charles Soludo, Rewane said his business
economics skills were limited, which prevented him from fully
assessing risk for lenders and borrowers. When it came to financial
economics, however, he was "very clever."
7. Remarking on the new political environment, Rewane believed the
administration would be under pressure to reorient the bureaucracy
toward the north, which would result in a more bloated and less
LAGOS 00000551 002.2 OF 002
efficient government bureaucracy. This, he argued, had been
characteristic administrations headed by a northerner. These
tendencies would eventually lead the administration to tap into the
excess crude account. Rewane also questioned the government's
priorities in deepening economic reform.
8. Rewane emphasized he was not pessimistic about the economy.
Rather, if the Nigerian economy was to achieve the growth rates the
Federal Government wanted, it would be critical to first understand
the potential risks looming on the horizon.
9. Trina Rand and Michael Ruffner cleared this cable.