Sunday, April 11, 2010


The first quarter of this year witnessed interesting reverse shifts in the directions of the money and capital markets.In less than three months,interest rates crashed to unbelievable levels (as low as 1%p.a for deposits),while the capital market, which secondary arm lost over 70% in the last two years, recouped a massive 25% (and is still gaining).From a narrow perspective,investors in the stock market would be happy for this much needed reprieve,but the regulators cannot afford to merely watch with a passive sense of satisfaction.As a matter of fact the government itself must look very seriously into the current situation and capitalise on the veritable opportunity it presents for creating a more efficient resource allocation mechanism.

I've always maintaned that despite the pains,the last meltdown afforded our policy initiators a golden opportunity to identify the weaknesses in our economic and financial structures.I find a lot of interesting analogies between the market surge of late 2007/early 2008 with the experience of the last two months.

First,the financial system was awash with cash way beyond what the Banks could cope with in terms of secured lending.Of course this was money raised in a large part from investors in the Capital Market.What did the Banks do with the money ? Lend to oil and gas projects and speculate in the capital market.Small and medium scale enterprises and other indegenous real sector ventures received only an intangible fraction of the Banks' loans.Secondly,there was a huge inflow of foreign short-term investment in the stock market,as a result of the boom in the financial markets in Europe and the US. Meanwhile the CBN's monetary policies on their part succeeded in keeping interest rates low and relatively stable.The stock market was overstretched, and prices rose beyond the fundamentals.Whereas what the capital market needed was long term investments,what it was actually thriving on was short-term speculative money.

Fast forward to Feb/March 2010,the CBN was again a major factor.With stricter regulatory risk management requirements,Banks have found themselves at crossroads in terms of who to lend to.Without margin loans and the largely mismatched oil and gas outlets,the common phrase these days is 'Banks are not lending'. If 'Banks are not lending',it is only natural to be curious about what they are doing with their customers' deposits.Secondly,I recall that the Nigerian meltdown was preceded by the European/American meltdown months earlier.Our stock market resurgence in 2010 was interestingly also preceded by the recovery of the foreign markets.Simple logic suggests that foreign speculative money is finding its way back into our stock market.It is not a crime,and we may therefore be tempted to conclude that the Nigerian stock market is having its second chance at 'hot' money.But have we learnt any lessons from the unpalatable outcome of the last experience ? More importantly,is the economy now better structured to derive tangible and lasting benefits from this liquidity situation?

We can only truly say the capital market has recoverred when the primary market is revived and we start seeing fully subscribed Public Offers again.That will only happen if the recovery in the secondary market is maintained and kept stable.The major test, which the market failed woefully in 2007, was knowing when to apply the breaks.After over 30% leap in a little over three months,do we continue flying,running,walking or crawling ? For me,any of the four options is welcome,but what the market cannot afford in the next few years is another massive crash.

One point to note is that our capital market has its limits in terms of available instruments at any point in time.If every avalaible cash in the system is pushed into the stock market,there will be a problem.If too little,there will also be a problem. At the macro-economic level,there is clearly a resource allocation problem in the country.Key economic drivers in the manufacturing,agriculture and small-scale sectors are begging for funding,yet Banks and the secondary market are awash with 'excess' liquidity.This has been the pattern for years,so let's not trivialise it by ascribing it to 'Sanusi's policies'.

The CBN,SEC and NSE can only do so much if the fundamental economic structures are not put in place to enable an efficient and development-oriented resource allocation process in Nigeria.The initiative therefore has to come from the Government at the centre,and the current state of both the money and capital markets presents a veritable opportunity to start addressing this issue.

(Photo shows Finance Minister Olusegun Aganga)

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