4 October 2008
Abuja — The THISDAY Town Hall meeting lived up to its billing yesterday as local and international financial experts as well as participants brain stormed for half the day over the lingering global financial crisis and its potential impact on the Nigerian economy.
Governor of the Central Bank of Nigeria (CBN), Professor Chukwuma Soludo, who was among the top-notch panelists at the event, called for a coordinated and collaborative response to the global financial crisis by governments and regulators around the world, and not the independent attempts being made by various countries to safeguard their financial systems.
The epoch-making event organised by THISDAY Newspaper and sponsored by Oceanic Bank Intern-ational Plc, attracted the crème de la crème in the Nigerian business world and the public sector as well as those from the international finance scene.
Participants at the occasion chaired by Mr. Oba Otudeko, president, Nigeria Stock Exchange (NSE), included Mr. Lawrence Summers, former US Treasury Secretary; Mr. Steve Forbes, chairman/CEO of Forbes Magazine; Mr. Remi Babaola, Minister of State for Finance; Minister of State Energy (Gas), Emmanuel Odusina; president of the Independent Shareholders Association, Sonny Nwosu; Amab-assador Isaac Aluko-Olokun, former Minister of National Planning and member, NEPAD Steering Committee; Dambisa Moyo, Global Economist, Goldman Sachs; Alhaji Aliko Dangote, chairman Dangote Group of Companies; Mr. Fola Adeola, chairman, Eterna Oil and Gas; Mrs Cecilia Ibru, managing director/CEO, Oceanic Bank; Senator Udoma Udo Udoma, chairman, Securities and Exchange Commission (SEC); director general SEC, Musa Al-Faki, among others.
Soludo believed the problem is not for one regulator or country in the world to solve, explaining the situation is critical enough and requires "a collective action" for all nations to tackle head on.
He said so far the attempts made by various government show that a collaborative response is missing and "what we have are free riders (countries) that are waiting for some to take the hard choices to solve the problems and will ride on the tails of the process.
"But I think more than anything else, what has happened to the global financial system should compel leaders and regulators to evolve a new financial architecture that can respond to crisis like this.
"I am not sure the IMF or the Brettonwoods institutions, as presently structured, have the capacity to do so. Consideration therefore has to be given to a concerted effort to stem the crisis of confidence in our financial systems.
Soludo was of the view that more than anything else, the protracted global crisis which has spread like wildfire across major finance capitals is taking its toll, and should "force the world to think long and hard about evolving a new global financial architecture that will coordinate much more effectively especially even more instruments for reinforcements and monitoring."
The global financial crisis has taken with it, three of the largest investment banks in the world, Bear Stearns, Lehman Brothers and Merrill Lynch, as casualties, among many others in the United Kingdom.
While allaying fears that the collapse of these two major banks will have a negative effect on the position of Nigeria's foreign reserves, Soludo stressed that the reserves are safe, assuring that, even locally, there is enough liquidity to withstand the challenges of crashing stock market without any intervention fund.
"But I must also point out two other lingering threats from Nigeria's point of view; one major threat that people call me to ask about is the safety of our foreign reserve. Whether the failure of these banks threatens our foreign reserve and I want to quickly use this occasion to say our foreign reserve are safe and we have been very prudent in terms of where we put them, the institutions where they are - and I think so far - and I believe given the institutions where they are, our foreign reserve remain safe.
"The other crisis which has not manifested yet and we pray it does not is for this crisis to spill over into a currency crisis. So far the US dollars has still managed not to weaken substantially rather it has in fact strengthened against some other currencies.
"I think that is relatively a good news because were this crisis to become a currency crisis and major countries begin to loose confidence in the dollar as a reserve currency, then we might have a new spiral of some other global financial crisis but thank God we haven't got there," he noted.
Further buttressing his confidence in the Nigerian economy, Soludo said, "our banks are sound, the balance sheets are fine, they are still declaring profits and dividends that is unlike what we find in other countries where banks are collapsing, declaring losses and so on and so forth. So our own response must be different.
Soludo pointed out that when people say "assets prices are crumbling we must think through the response that we make, so that in the process of trying to solve a short term problem, we don't endanger the balance sheet of the banking sector ultimately.
"The banking sector stocks in Nigeria dominate the stock exchange, the banks and several of them of also become heavily exposed to the capital market and we therefore have to have a clear balance and try to think through the medium and the long term.
The governor reminded the audience the CBN had taken several actions in terms of liquidity "and I want to say very specifically that the kind of liquidity that we are allowing into the system today is such that I don't really see what else in terms of liquidity requirements that will be needed to move the market forward.
"Our vaults are open, we are free to lend to the market, our discount windows are open, our liquidity ratios are down, our monetary policy rate is down even the cash requirement reserve is down. So I believe that the market is as liquid as it should be in a time like this."
Throwing more light on the issue, Remi Babalola, said there was no need for any intervention fund to mitigate any negative effect as he asked "what are we going to bail out."
According to him, currently, all the banks and major companies that are on the stock exchange are doing extremely well, "that is what the financial statements are telling me."
Instead of the intervention or stabilization fund, he stated that, "We are actually going to make sure that we scale up on our brain work so that we do not have diminishing assets and we are going to enhance the corporate governance level. That is the direction that we are working on.
He hinted that, before the end of October, "drastic measures" will applied to bolster the economy, to the extent of further giving higher levels of confidence to all the operators in the economy.
Meanwhile, the chairman and publisher of Forbes magazine, Mr Steve Forbes who flew into Abuja yesterday morning with the former US Secretary of the Treasury, Lawrence Summers for the Town Hall meeting, while tracing the genesis of the stock market crisis presently rocking the United States, said the country's Central Bank and the Treasury Department are both culpable for the situation that has sent economic heat-waves across the globe.
Forbes said the two financial institutions made the mistake of ordering the printing of too much money four years ago which may have provoked the current financial crisis in the first place.
"The crisis that we see around the world today, I must say has a historical link with the US financial management. I believe the US may provoke things that brought about this situation. First of all, four years ago, the Federal Reserve made a mistake of printing too much money because they under-estimated the strength of the American family", he said.
He said the resultant excess liquidity which the Federal reserves could not convert made possible the global commodity bubble and also created a housing bubble to disastrous proportions in the US.
"That was the first major error. Another error was a weak dollar policy championed by the US government; the mark to market accounting regime which deals with fair value accounting rules; and Fannie Mae and Freddie Mac - both government sponsored enterprises created to sell mortgages to the public that were intrinsically guaranteed by both institutions.
"Fannie Mae and Freddie Mac intervened in the housing market initially to provide liquidity for the housing market but they came to dominate the financing of the housing capital mortgage in the US of over $5 trillion"
Another factor that brought about the crisis, according to Forbes was the inability of the Securities and Exchange Commission in the US to enforce the rules regulating the sale of stocks through naked short selling, especially of financial stocks, which triggered the downward spiral of their stocks.
The influential magazine publisher, said part of the solution to the crisis lies with the rescue package that was passed by US Congress last night and would enable government to buy up some of the toxic assets in their balance sheets so that banks can start lending once again.
He said the second option is for the US government to do something to reverse its weak bail-out policies and adopt a stronger policy, adding that government should in future take steps to recapitalize the entities whose assets it acquired in the wake of the crisis so that it can recover monies spent on them.
Corroborating the points made by Forbes, Larry Summers who was also once president of Harvard University, said the important question is to understand if the current crisis is a cyclical event, or if there will be a defining failure of the financial system.
Postulating on market economic theories propounded by Milton Keynes, Summers said while in normal times the market has the capacity for equilibration, "there are particular moments when the markets lose their self-sustaining equilibration. That I suspect is what has happened in the current economic crisis."
Also, Cecilia Ibru who spoke on "Staying Calm in Times of Global Financial Crisis," expressed confidence that the Nigerian capital market will surely pick up again. She said the strong fundamentals are pointers to that.
She however said, irrespective of the strong fundamentals, there was the need for the nation to learn from the crisis by setting structures that will safeguard the nation's financial sector.
Ibru advised the CBN and other regulators in the financial services sector to step up regulatory mechanisms to ensure close monitoring of operators' activities.
She added that, regulators should, "invest in human capital development to equip its workforce with updated knowledge on global finance trends; enter collaborative arrangements with regional and global counterparts to enhance knowledge-sharing and efficiency."
Similarly, she also advised regulators and operators to ensure strict compliance with good corporate governance principles, adding: "this should be in force in the selection of boards, consultants, employees and decisions on operational guides for all operators."
Similarly, frontline economist and former Minister of National Planning, Mr. Isaac Aluko-Olokun canvassed for the federal government's intervention in the capital market through the deployment of the nation's Stabilization Fund, saying there is need to revive the middle class through the market.
Making references to the $700 billion bail out plan in the US, he stated "the Stabilization Fund would have been something like a direct intervention that we are witnessing in the US now."
Aluko-Olokun, who is a member of the NEPAD Steering Committee, disagreed with the Minister of State for Finance, Mr. Aderemi Babalola that the Nigerian capital market would not require government intervention as is being witnessed in America.
"I think that just as the Congress is trying in the US to pass a direct law bail-out package, we would need a direct bail-out package here too. I think the finance minister should go back and consider; and, perhaps meet with president of the Stock Exchange, vice president of the Stock Exchange and give us Stabilization Fund."
He pointed out that beyond the present package, "There are medium to long term issues we have to look at. I am very happy that the chairman of the Securities and Exchange Commission is here.
"We must realize that the future of the market, the development of the market, the way we want the market to be, will depend critically on the practice of good governance in this country.
"That is a very critical issue: accountability, transparency, sanctity of contracts. We must practise good governance; we must play the game according to the rules; if we do not play the game according to the rules, we are not going to get there.
"So our task should be very, very clear to us, but we must congratulate the Securities and Exchange Commission because they set up a committee now for good governance and for the Capital Market structure; and, I think we are all in the right place but we have to make sure that we remain very consistent and we educate ourselves."
He bemoaned the lack of adequate knowledge on the part of Nigerians about the operations and the potentialities of the capital market, pointing out that the market remains a veritable way to rebuild the liquidated middle class.
"It is unbelievable how you can create a middle class through the capital market; and, in this country, we need to re-invent the middle class. We talk about 2-3 million participants in the capital market in this country."
He continued: "I think that is small. We have a long, long way to go. For instance, the market is still very shallow; and, what happens in the more sophisticated markets is that market capitalization is always a multiple of the Gross Domestic Products (GDP).
"The GDP in Nigeria last year was $166 billion. The highest capitalization we ever had in the history of this country was in March, this year, and it was N11.6 trillion, which translates to $95 billion. So we have still a long way to go.
"Look at South Africa, the GDP of South Africa last year was about $242 billion; the market capitalization was well over $500 billion. So, you can see that the market capitalization here is below the GDP."
He stated that this was contrary to the rule, pointing out, "The rule is that the market capitalization should be in multiples of GDP, be very, very much higher; but that only indicates that the market here is still shallow. We only just have only about 221 (companies) or so before the Stock Exchange started moving out those that were moribund. So, we do not have enough companies listed yet."
Aluko-Olokun also identified the need by the market to develop the nation's Bond Market. His words: "We do not have a Bond Market. The administration's policy and philosophy of the seven-point agenda; of Vision 2020; and of the perspective plan, hinge very critically on Nigeria's Capital Market developing a Bond Market.
"Without a Bond Market, we cannot begin to borrow what we need to borrow to be able to fund government policies. Seventy per cent of the market, in more developed, sophisticated markets, is the Bond Sector; and, in this country, the state governments are trying.
He said the deepening and broadening of the market in order to enable government achieve its objectives through the market was a main challenge to the nation, maintaining that "we must put on our thinking cap and find a way to develop our Bond Market."
However, Aluko's recommendation for the introduction of a Stabilisation Fund was dismissed by the Soludo who said the decision for the government to use resources from the treasury to prop up asset prices was like making a choice between the devil and deep blue sea.
Raising a poser to the audience, Soludo enquired "if the government had one extra naira to spend, would Nigerians rather it spent it keeping asset prices high on the capital market or expend it on infrastructure needs?"
He said given the circumstances, it would be better to spend the resources at government's disposal is sectors such as the power sector where there is a compelling need for investment and not the capital market.
Agreeing with Soludo, Summers advised that it is not the role of governments to prop up asset prices. "It is not right for your nation like mine (the US) because there are several competing priorities.
"The issue of propping up the market is dwarfed in comparison to the provision of infrastructure. If the government starts to buy assets in order to keep up prices, it will cause market distortions and the market initiative will be stifled."
In summarising his take on the Nigerian economic situation, the one-time US treasury secretary, stated that "as one who has visited your country (Nigeria) before and have had the privilege over time to interact with various leaders of your country, I have some knowledge of your country.
"Although an outsider like myself is not in a position to make that kind of judgement for your country, but I feel comfortable to do so for my own country. But I will offer you these thoughts: Your country is blessed with huge oil resources. If one looks at the history of your country, there was a period in the past when oil prices have risen, when the flow of money into your country was more than what most countries ever realised in their existence.
"When one looks at the oil windfall of the earlier periods and now looks at the living standards of the average Nigerian, one does not see the kind of wealth one will expect to see.
"However, the oil windfall of today, presents the country with a once in a half century opportunity to utilise the resources it has today to meaningfully develop the economy through the right policies. It is an opportunity Nigeria should not let pass by."
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