VZCZCXRO7704
PP RUEHMA RUEHPA
DE RUEHUJA #0079/01 0151511
ZNR UUUUU ZZH
P 151511Z JAN 09
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC 4990
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHOS/AMCONSUL LAGOS 0648
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 03 ABUJA 000079 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EEB/IFD/OMA 
STATE FOR EEB/EPPD 
DEPARTMENT PASS TO USTR AGAMA 
TREASURY FOR PETERS, IERONIMO, HALL 
USDA/FAS/OTP FOR MCKENZIE 
SECSTATE PASS TO USAID/AFR FOR ATWOOD 
DOC FOR 3317/ITA/OA/KBURRESS AND 3130/USFC/OIO/ANESA/DHARRIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV EPET ENRG EPET PGOV NI
SUBJECT: GLOBAL FINANCIAL CRISIS IMPACTING NIGERIA 
 
REF:  A. STATE 134459 
       ¶B. ABUJA 2437 
  ¶C. LAGOS 520 
  ¶D. ABUJA 2386 
  ¶E. ABUJA 2387 
  ¶F. ABUJA 2365 
  ¶G. ABUJA 2180 
      ¶H. LAGOS 426 
 
¶1.  (SBU) Summary.  This cable responds to ref A tasking.  Despite 
the Nigerian government's (GON) public statements, the global 
financial crisis (GFC) has impacted Nigeria in its most vulnerable 
area - revenue from crude oil sales.  Crude oil accounts for over 
80% of government revenue and over 90% of export earnings for 
Nigeria and the drop in demand for oil and the resulting fall in oil 
prices is hurting Nigeria.  According to the GON, the slowdown in 
economic growth, the rise of inflation and naira depreciation are 
just cyclical trends that would have taken place without the GFC. 
GON officials have expressed confidence in public that this slowdown 
will not last a long time.  The key effects on the Nigerian economy 
are: less income from crude oil sales have led to less revenue for 
the FY 2009 budget; a reduction in the flow of funds to Nigeria from 
foreign investors; the drop in the oil price has decreased consumer 
spending; and the Nigerian stock market has lost nearly half its 
value since February 2008, which dampens lending.  As a result of 
the fiscal impact, in FY 2009 the GON will operate with a projected 
budget deficit of 1.1 trillion naira ($7.4 billion), which 
constrains fiscal spending.  Considering the large sums needed to 
improve electricity supply and infrastructure, difficult decisions 
will have to be made on spending priorities.  Decreases in 
government spending will affect the implementation of the Millennium 
Development Goals (MDG), which was already falling short of the 
country targets.  Millennium Development Budget (MDB) may see a 
reduction in funds from the GON and donor community.  The GON needs 
to demonstrate political will to ensure proper allocation of 
resources, not only for MDG but the whole economy.  In response to 
this widening impact, on January 13, 2009 the GON created a 
Presidential Steering Committee chaired by President Yar'Adua to 
assess among other things, the impact of the GFC on Nigeria and 
appropriate responses (septel).  End Summary. 
 
Don't Believe the Hype 
----------------------- 
 
¶2. (SBU) The global financial crisis including the fall in oil 
prices have a major impact on the amount of resources that Nigeria 
has available for investment in infrastructure and building the 
capacity of institutions at the federal, state and local government 
levels.  Even with decreasing resources, GON officials are cautious 
when discussing the GFC and reiterate comments that the GFC has not 
had and will not have a major impact on the Nigerian economy.  In 
their view the economy is experiencing "light turbulence."  In 
December 2008 Merrill Lynch reported in a review of the Nigerian 
economy in 2008 that Nigeria has fared better than most emerging 
markets whose economies are more globally integrated.  This report 
was widely cited in local newspapers and in government broadcasts. 
Based on Nigeria's second quarter 2008 data, the report noted that 
Nigeria's Gross Domestic Product (GDP) growth of 6.4% was higher 
than the 4.5% average growth for 26 emerging market economies (EME) 
including China, India and Russia (reftel C). 
 
Reduction in Oil Production 
--------------------------- 
 
¶3. (SBU) Falling oil prices coupled with tighter credit markets will 
likely lead to a further erosion of oil production in Nigeria and 
continued deterioration of existing petroleum infrastructure.   At 
least two large international oil companies have reduced or flat 
lined their operating budgets for 2009 and we expect all oil 
companies are taking a close look at the operating profiles in 
Nigeria.  Companies are likely to defer maintenance projects and 
forgo new exploration and production ventures.  Wells that are shut 
in due to sabotage may not be reopened as quickly, if ever.  While 
last year, companies such as Shell and Chevron extended credit to 
the GON to finance its share of oil production costs, similar 
financing in 2009 may be tougher to arrange.  In addition, Nigeria 
had planned to restructure its oil production joint ventures, 
forcing them to seek outside financing instead of government and oil 
company financing.  That plan will be even harder to implement in 
the current credit market.  The impact of all these factors could 
 
ABUJA 00000079  002 OF 003 
 
 
mean that oil production remains far below its potential for several 
years, even if oil prices recover.  On the natural gas side, we can 
expect new natural gas projects, such as the Brass and OK Liquefied 
Natural Gas Projects, to be delayed or even cancelled.  Similarly, 
movement towards eliminating natural gas flaring in Nigeria is 
likely to slow. 
 
Naira Sliding 
------------- 
 
¶4. (SBU) The naira had recorded relative stability since 2005, but 
has now greatly depreciated against the dollar; between November 
2008 and January 13, 2009, it has moved from 117 naira per dollar to 
153 naira per dollar.  Due to the GFC, foreign banks are calling in 
credit lines that were earlier approved for Nigerian banks (reftel 
E).  As reported to the press by the Director General of the West 
African Institute for Economic and Financial Management, Nigeria has 
lost over $4 billion to "panic divestments" by foreign investors. 
Falling foreign exchange holdings have increased oversight by the 
Central Bank of Nigeria (CBN) of Nigerian banks and the CBN has 
issued new guidelines that reduce bank foreign exchange net holdings 
from 20% to 10% and require further documentation during forex 
purchases to hamper banks hoarding dollars for speculative gains. 
The CBN expects that these actions will stabilize the foreign 
exchange market and renew confidence in the naira (reftel B). 
 
Budget Shortfall 
---------------- 
 
¶5. (SBU) The crisis has led to substantial reduction of the FY 2009 
budget given the expected fall in revenue earnings from oil.  In 
December 2008, President Yar'Adua presented the 2.87 trillion naira 
($24.53 billion) budget for FY 2009.  The proposed budget sets crude 
oil production at 2.292 million barrels per day (mbpd) and a 
benchmark price of $45 per barrel (reftel F).  A major drop in 
revenues may lead to a significant cutback in the Millennium 
Development Goals (MDG) grants to states, which are increasingly 
important incentives to state governments. (Comment: The Mission has 
not seen any sign of things amiss in the MDG program plan, though we 
are cultivating contacts to see if that is the case.  End Comment) 
 
GFC Impact in Financial Sector 
------------------------------ 
 
¶6. (SBU) Most bankers and other financial sector officials agree 
that the financial crisis is having the following effects on the 
Nigerian economy: 
-- Reduction in the flow of funds to Nigeria from external funding 
sources (foreign remittances, foreign direct investment, credit 
lines from multilateral institutions/banks, non-oil exports, donor 
funds); 
-- Major drop in the price of oil causing decrease in consumer 
spending; 
-- Nigerian stock market has lost value which affects lending based 
on securities as collateral. 
 
¶7. (SBU) Some banks indicate that their institutions are not facing 
serious ramifications yet due to strong deposit bases while other 
indicate that their cost of funds , as well as lending rates, had 
increased which will result in less lending in 2009. (Comment: It is 
not possible to ascertain the health of the Nigerian banking system 
as most banks engage in under the table activities to shore up their 
balance sheets.  Banks tend to exaggerate their levels of growth and 
performance and such statements cannot be taken at face value. End 
comment.)  Banks are offering fewer mortgages at higher interest 
rates, while some refuse to offer any altogether.  Deposit rates 
have increased, according to one estimate from 11% to 16% for 10 
million naira ($66,666) deposits. (Comment: Up to this point, high 
lending rates and low deposit rates have been an accepted fact of 
doing business in Nigeria. End Comment.)  According to industry 
sources, in August 2008 banks were getting comfortable with the idea 
of medium term financing, but now are retreating given the drying up 
of liquidity in the international and domestic markets. 
 
¶8. (SBU) Drop in the stock exchange is seen by the Nigerian 
financial market regulators as a "market correction" and not a 
symptom of larger problems.  Since February 2008, market 
capitalization declined from 12 trillion naira ($102 billion) to 
nine trillion naira ($76 billion) by the end of October 2008. 
(reftel G).  Policies are presently being developed to assist 
 
ABUJA 00000079  003 OF 003 
 
 
companies whose shares have suffered a free fall to cope and protect 
stock holders from bankruptcy. 
 
¶9. (SBU) International organizations are more realistic in their 
reports when it comes to the GFC impact.  The International Monetary 
Fund (IMF) reported in November 2008 that Nigeria's economy is 
slowing down because falling oil prices will push GON revenues 
downward.  IMF also forecasts rising inflation (reftel D). 
 
Millennium Development Goals 
---------------------------- 
 
¶10. (SBU) Given the nature of the development partner relationships 
with the GON and the dynamics of the scale of donor funding with the 
GON budget, the U.S. Mission in Nigeria is unaware of any moves to 
accelerate MDB disbursements on projects given the crisis. 
Depending on the ultimate depth and length of the recession in 
different countries, there may be sector effects that will 
exacerbate already existing under-investment, particularly in health 
and education. 
 
¶11. (SBU) While not having seen data from the GON (federal or state) 
about direct reduction in or reprioritizations of funding for HIV or 
TB related initiatives, one could presume the sector as a whole may 
be vulnerable from three aspects: reduction in funds from GON, 
decrease of funds from donor community, and increase in risky 
behavior due to downturn in economy. 
 
¶12. (SBU) Reduction in funds and resources such as commodity 
procurements and pharmaceuticals available at the Federal or State 
levels for the HIV and TB response might result in increased demand 
for donor supports for maintenance of current programs. 
 
¶13. (SBU) Decreased availability of funding from other donors may 
specifically come into play with regard to Global Fund support 
(i.e., further restrictions on the funds available for Round 9 
proposals which are key for both the HIV and TB response in Nigeria) 
due to drops in multilateral contributions to the fund across the 
board. 
 
¶14. (SBU) Generalized economic downturn may increase individual 
vulnerabilities, leading to increasing susceptibility to HIV 
infection through risky behaviors such as commercial/survival sex 
work, increased migration in search of economic opportunity leading 
to disruptions in protective familial structures and reduced ability 
to seek/maintain regular medical assistance for HIV+ people in 
care/treatment. 
 
¶15. (SBU) Prior to the GFC, the GON responded to the emergent Global 
Food Security crisis and expanded its focus on creating jobs and 
economic wealth in the agricultural sector.  An overall slow down in 
revenue is likely to limit the capacity of the GON to provide 
sufficient resources for seeds, fertilizer and to expand their 
mechanization programs.  The GON, donors and International Financial 
Institutions, which are in the process of developing a 3 three year 
Country Partnership Strategy that includes a focus on expanding 
non-oil sector growth, will take on a heightened importance.  The 
USG response of a $25 million Global Food Security Response program 
in Nigeria will not be sufficient to offset the reduction in 
revenues and the GON is likely to ask the USG to continue its 
support at comparable levels over the next few years. 
 
Comment 
-------- 
 
¶16. (SBU) The GFC and the fall in oil prices may impact on the 
amount of resources that many African governments, including 
Nigeria, will have for investing in infrastructure and building the 
capacity of their institutions, especially governance institutions 
at the federal, state and local government levels.  There are fears 
that the gains already recorded in fiscal policy reforms may be lost 
due to dwindling resources that may be available to the GON. 
Nigeria's economic and political reforms are at a point where the 
government needs to demonstrate political will as well as ensure the 
allocation of appropriate resources for effective implementation of 
its reforms. 
 
¶17. (U) This message was coordinated with ConGen Lagos. 
 
PIASCIK