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. 
 
--------------------------------------------- --------- 
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.