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RR RUEHMA RUEHPA
DE RUEHOS #0353/01 2520627
ZNR UUUUU ZZH
R 080627Z SEP 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0151
INFO RUEHUJA/AMEMBASSY ABUJA 9815
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHDC
RUEWMFD/HQ USAFRICOM STUTTGART GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK

UNCLAS SECTION 01 OF 02 LAGOS 000353 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR AGAMA 
STATE PASS USAID FOR NFREEMAN, GBERTOLIN 
STATE PASS EXIM FOR JRICHTER 
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS 
STATE PASS TDA FOR LFITTS, PMARIN 
DOC FOR 3317/ITA/OA/KBURRESS 
DOC FOR 3310/USFC/OIO/ANESA/DHARRIS 
DOC FOR USPTO-PAUL SALMON 
DOJ FOR MARIE-FLORE KOUAME 
TREASURY FOR RHALL, DPETERS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD PGOV NI
SUBJECT: NIGERIA: GOVERNMENT INTERVENTION TO HALT STOCK MARKET'S 
DECLINE ALARMS INVESTORS 
 
Ref: A. Lagos 290 
¶B. Lagos 266 
¶C. Lagos 97 
¶D. Lagos 95 
 
¶1. (SBU) Summary: The Government of Nigeria adopted a series of 
measures and commissioned a Presidential Advisory Team to halt the 
decline in the Nigerian stock market.  Since March, the market 
recorded a 30 percent loss in market capitalization.  Industry 
interlocutors feared that the policy measures, in addition to being 
unsustainable and inefficient, would scare off foreign investors. 
The measures will not ultimately stop the market's decline and 
accusations of market manipulation point to deeper problems in the 
Nigerian public equity market.  End Summary. 
 
Government Intervenes to Arrest Market Downturn 
--------------------------------------------- -- 
 
¶2. (U) The total market capitalization on shares listed on the NSE 
rose from N2 trillion in 2004 ($17 billion) to approximately N12.6 
trillion ($108 billion) in March 2008, at which point the market 
began to decline, slumping to N8.8 trillion ($75 billion) in late 
August.  The All-Share Index (ASI) declined by 31 percent from 
66,116.56 to 43,119.47. 
 
¶3. (U) On August 26, the Government of Nigeria (GON) adopted a 
series of measures to arrest the market downturn.  Key to the 
recovery plan are provisions permitting quoted companies on the 
Nigerian Stock Exchange (NSE) to buy back 20 percent of their 
shares, and pegging downward price movement on any stock to a 
maximum of 1 percent daily while retaining the 5 percent ceiling for 
upward price movement.  Other measures included a reduction of 
market operators' fees, including a 50 percent reduction for NSE's 
fees; limiting the number of new listings on the market; 
introduction of a capital market stabilization fund; and a review of 
trading rules and regulations.  Banks were also encouraged to extend 
margin loan repayment periods and inject new funds into the market. 
The GON also commissioned a 16 member Presidential Advisory Team, 
headed by the Minister of Finance and comprised of, among others, 
the Attorney General, Minister of Planning, Governor of the Central 
Bank of Nigeria (CBN), industrialist Aliko Dangote, and the heads of 
three Nigerian commercial banks.  The commission was charged with 
developing strategies to curtail the continued drop in share prices, 
while proffering medium to long term measures that would boost 
investors' confidence. 
 
¶4. (U) Two days after the intervention, market capitalization 
recorded a 7.2 percent gain.  The ASI closed at 46,312.27.  The 
market recorded a comparatively higher volume of stocks traded and 
price appreciation for 84 stocks. 
 
Allegations of Market Manipulation 
---------------------------------- 
 
¶5. (SBU) Financial industry contacts told EconOff on August 29 that 
recent upward movement in stock prices is not sustainable.  Bismarck 
Rewane, Managing Director of Financial Derivatives, said that 
because the intervention could not last indefinitely, investors 
would leave the market once the intervention stops.  He blamed 
previous interventions for the stock market's current state. 
Notably, he accused the NSE of being behind a strange, week-long 
period in early June, when stock prices only ticked up after a two 
month bear market.  Malcolm Gilroy, Vice President of United Bank 
for Africa Global Markets, said that intervention was the inflection 
point at which the stock market began a sharp decline.  According to 
Gilroy, a few sophisticated investors, alarmed by the NSE's 
meddling, sold all their equity holdings.  (Note: Gilroy wouldn't 
say who those investors were, but implied they were foreigners.  End 
Note) 
 
¶6. (SBU) In the local press, NSE officials denied any intervention, 
 
LAGOS 00000353  002 OF 002 
 
 
alternately blaming the strange occurrence on a computer glitch or a 
change in trading rules that permitted only the sale of large blocks 
of stock.  However, in a conversation on Sept 3, the NSE's General 
Manager for Compliance, Henry Onyekuru, all but admitted to Lagos 
Econoffs that the NSE had a hand in the June irregularity.  When 
asked what happened in June, Oneykuru noted that the market had been 
bearish and said that the NSE had decided on its own to "adjust the 
market's valves" to arrest the decline.  He did not elaborate, but 
indicated he thought manipulating the exchange to stop bear markets 
was a natural function of the NSE. 
 
One Percent Floor to Drive 
Out International Investors 
--------------------------- 
 
¶7. (SBU) According to Malcolm Gilroy, the one percent floor on 
downward price movements will only serve to hurt liquidity in the 
equity markets, limiting the ability of large institutional 
investors to rebalance portfolios as necessary.  Gilroy said this 
measure, out of the whole package, was a "heavy-handed and crass way 
of intervention" and would effectively discourage sophisticated 
international investors from entering the Nigerian market. 
 
¶8. (SBU) Gilroy said stockbrokers persuaded the Central Bank of 
Nigeria (CBN) not to force banks to call margin loans.  Gilroy 
accused the banks of having been negligent in their lending 
policies, which allowed some brokers to obtain huge loans to 
leverage the bullish market.  Nigerian banks, with a cadre of 
inexperienced managing directors, are now bereft of ideas on how to 
cover the margin losses that resulted from a market downturn. 
 
16 "Wise men": Unqualified, Compromised 
--------------------------------------- 
 
¶9. (SBU) Contacts questioned the qualifications of the 16 so-called 
"wise men" on the Presidential Advisory Team, saying that none of 
them had any international experience in managing a stock market 
crisis.  Gilroy believes equity market experts from countries that 
had undergone similar crises and experienced stockbrokers needed to 
be on the commission.  The inclusion of local businessmen and bank 
managing directors, once again, signified the confluence of 
interests between the regulators and the market players, he opined. 
 
¶10. (SBU) Comment:  These measures won't stop the decline in the 
Nigerian stock market, or at least they shouldn't if the market 
operated in a transparent and open fashion.  The stabilization fund 
could, in theory, prop up share prices for some time by injecting 
fresh capital into the market.  Predictably, how the fund will be 
capitalized, who will control it and how investment decisions will 
be made have not been articulated.  The allegation that the NSE 
manipulated the exchange to permit only upward price movements is 
serious.  If true, it calls into question the legitimacy the 
Nigerian public equity market.  Certainly the NSE Compliance Manager 
has an unusual view of the role of a stock exchange.  End Comment. 
 
 
BLAIR