VZCZCXRO6552
RR RUEHMA RUEHPA
DE RUEHOS #0520/01 3650642
ZNR UUUUU ZZH
R 300642Z DEC 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0394
INFO RUEHUJA/AMEMBASSY ABUJA 0035
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC

UNCLAS SECTION 01 OF 03 LAGOS 000520 
 
SIPDIS 
 
STATE FOR AF/W 
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 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EAID PGOV NI
 
SUBJECT: Nigeria: Experts Say Nigerian Economy Faring Better Than 
Others in Global Crisis 
 
¶1. (U) Summary: On December 11, Economic Associates (EA), a firm of 
economists reviewed the Nigerian economy in 2008 at its annual 
economic outlook session in Lagos. EA analysts said commodity 
prices, particularly oil, are Nigeria's major link to the global 
economy, although a dearth of foreign capital inflows due to the 
credit crunch in the West contributed to the deflation of domestic 
stock prices. That being said, they see the slowdown in the Nigerian 
stock market as part of the a normal cycle in tune with global 
trends, although they believe Nigeria fared better than other 
emerging markets whose economies are more integrated with the West 
and that asset substitution, induced by higher interest rates of 
bonds and bank deposits had sustained the stock market slowdown. 
Household spending has been dropping as incomes have been eroded by 
the low minimum wage and inflation. End summary. 
 
Commodity Price Links Nigeria to Global Economy 
--------------------------------------------- -- 
 
¶2. (U) On December 11, Economic Associates (EA), a firm of 
economists that studies trends and develops models on the Nigerian 
economy, held it annual economic outlook session to forecast 
Nigeria's fortunes in 2009. EA analysts said commodity prices, 
particularly oil, link Nigeria more closely to the global economy 
than the Government of Nigeria (GON) wanted to believe. Tayo 
Fabusuyi, EA's principal economist, said global cyclical swings get 
transmitted to the domestic economy through commodity prices and 
their outturns are the leading foreign indicators of the Nigerian 
economy. He said global oil price predicts Nigeria's fiscal 
situation, external reserves and exchange rate. As an example, he 
pointed to the oil price slide to USD40.68 in December, lower than 
the USD45 oil price used as a benchmark for determining the GON's 
2009 budget. In the first week of December, the naira depreciated by 
10 naira to the USD (Reftel). 
 
Nigeria Economy Fares Better Than Its Peers 
------------------------------------------- 
 
¶3. Fabusuyi said Nigeria has so far fared better than most emerging 
markets whose economies are more integrated with the West.  Based on 
second quarter 2008 data, Nigeria's Gross Domestic Product (GDP) 
growth of 6.4 percent was higher than the 4.5 percent average growth 
for 26 emerging market economies (EME) including China, India and 
Russia. Consumer price inflation data for Nigeria (14.7 percent) in 
October was higher than the EME average of 9.8 percent. However, its 
external reserves of USD 58.4 billion fell below the USD 167.6 
billion EME average skewed upward by China's USD 1,905.6 billion 
reserves. Ayo Teriba, CEO of Economic Associates, said relative to 
other emerging markets, the Nigerian Stock Exchange (NSE) has been 
able to hold its own in the midst of the present global crisis. 
While the average contraction in EME stock markets was 46.2 percent, 
the NSE had only lost 17.6 percent of its capitalization as at 
November 2008 (Reftel). 
 
Foreign Capital Decline, Asset Substitution 
Trigger Stock Market Slide 
------------------------------------------- 
 
¶4. (U). According to Teriba, the downturn in the NSE is cyclical and 
in tune with global trends, although it came later and was milder 
than in other EMEs. He said the inflow of foreign capital had 
lowered interest rates, made fixed rate assets unattractive and 
boosted the NSE. The contraction of credits in the West caused such 
capital inflows to dry up, drive up bank rates and deflate the NSE. 
Teriba believed the recent hand-wringing over the stock market 
decline may have been exaggerated. The story within the local 
economy is one of asset substitution, he said, because an increase 
in bond and money market instruments rates makes them more 
attractive to investors than equities. A situation of zero-sum game 
may be at play; equity losses are gains for bond markets and bank 
deposits, and a reversal will occur when interest rates fall, Teriba 
said. 
 
Interest Rate Hike Sustained Market Downturn 
-------------------------------------------- 
 
¶5. (U) EA analysts observed that the volume of demand deposits have 
 
LAGOS 00000520  002 OF 003 
 
 
increased by more than two trillion naira (USD 15 billion) in the 
past 10 months since the NSE downturn began, coinciding with a 
period of interest rate rise in the money market. According to EA, 
when the NSE started growing, currency outside banks (COB) was high 
because inflation was higher than the interest rate and people 
preferred to hold cash or invest in the NSE. Bank deposits were low, 
until the NSE capitalization plunged in March 2008, when the growth 
of bank deposits accelerated doubling from naira 4 trillion (USD 30 
billion) in December 2007. 
 
¶6. (U) Teriba noted that although the slowdown at the NSE may have 
been triggered by policy statements from financial sector regulators 
(Reftel), the downturn was largely sustained by the continued rise 
in interest rates.  Although the Central Bank of Nigeria (CBN) had 
reduced its interest rate benchmark, the Monetary Policy Rate (MPR), 
in September in an attempt to stem stock prices deflation, the 
increase in GON debt instruments, particularly medium to long term 
bonds issued at 10-15 percent interest rate, gave NSE investors an 
alternative investment destination. He noted that rates on bonds of 
longer term maturities have been in double digits since the first 
quarter of 2008 as government was willing to pay higher interest 
rates in order to make bonds attractive. 
 
Bonds, CBN Withholding May Stall Stock Rebound 
--------------------------------------------- - 
 
¶7. (U) EA commended the GON for successfully deepening the long term 
end of its domestic debt through the issuance of 10-20 year bonds, 
but claimed the move may stall the timely recovery of the stock 
market. Teriba noted that while CBN's holdings of GON debt 
instruments have declined in recent years, commercial banks' 
holdings have surged. At the same time CBN's holding of government 
deposits has surged, while commercial banks are holding fewer 
government deposits. He said banks' loanable funds are being 
'depleted' on two fronts; they have funds tied down in bonds and 
have no access to public funds; as a result they may not be able to 
actively help the stock market rebound. Teriba suggested that public 
funds be made available to commercial banks, even on a temporary 
basis, at a fixed interest rate in the medium term to help make 
funds available to the stock market. He advised the CBN to help 
banks restructure the maturity of their deposits in the same way the 
Debt Management Office (DMO) is helping the GON restructure the 
maturity of its debt instruments. 
 
Households Spend Less; Business, Government More 
--------------------------------------------- --- 
 
¶8. (U) Teriba noted that whereas private consumption accounted for 
87.4 percent of GDP in 2003, it dropped to half that percentage in 
2007, largely because income of the average Nigerian household is 
heavily depressed by a national wage policy, based on a minimum wage 
of naira 7,500 (USD57), last reviewed in 2000 and highly eroded by 
inflation. The Nigerian is not able to afford much beyond food, 
clothing and essentials like utilities and transportation. In the 
face of stable net export growth, the over 44 percent decline in 
household spending has been offset by booming businesses whose 
capital spending rose by 42 percent in the last five years, and by a 
growing government sector, which spends about 25.8 percent of GDP. 
Teriba called this a delicate macroeconomic balancing act, in the 
face of peculiarities of the Nigerian economy, for two reasons: weak 
demand might initiate over-capacity as well as large inventory for 
firms, and empty consumer purses might incite social and political 
revolt against the government. Teriba advised government to pass on 
resources to households by reforming its wage policy and raising 
minimum wage. 
 
EA Criticizes USG Response to Global Crisis 
------------------------------------------- 
 
¶9. (U) EA analysts criticized the United States Government's 
response to the current global crisis, saying the response to the 
Asian crisis was swifter and more reassuring. They critiqued the USD 
700 billion bailout as arbitrary, saying that the existing stocks on 
the US market are highly leveraged and are likely to crumble. The 
analysts believe that the bailout was mainly to boost confidence and 
reassure investors and consumers that there is a level below which 
 
LAGOS 00000520  003 OF 003 
 
 
the USG will not allow the crisis to go, rather than to solve the 
problem. They opined that the panic in the last four months created 
the major problem and not the financial crisis which had been on for 
over a year. EA predicts that the US will come out of the economic 
crisis by second quarter 2009, faster than the Asian Tigers did, 
although the financial crisis might linger. 
 
¶10. (U) This cable has been cleared by Embassy Abuja. 
HUDSON