In view of the declaration yesterday by the Movement for the Emancipation of the Niger Delta (MEND), that they will be compelled to resume with ferocious attacks on the oil industry at the end of their ceasefire on September 15, 2009, our question is this: is S&P and Sanusi not being overly optimistic? Lamido Sanusi became the governor of Nigeria’s Central Bank riding on the crest of his reputation as a risk manager, but recent actions and utterances are bringing many to question whether he was properly briefed on the systemic risk that goes with his decision to sack the MD’s of 5 Major Nigerian Banks.The sack of banks’ chief executive officers by the Central Bank of Nigeria last week has triggered a crisis of confidence outside the shores of the country. This is coming on the heels of reported increase of the country’s credit risk profile, leading to drop in its rating to B-Plus as announced by Standard and Poors – the leading provider of world financial market intelligence. Before now, the country had enjoyed a B-minus rating, making it a viable financial market. While S&P in a statement, said Nigeria has a stable outlook, stressing that the financial, economic and political risks are balanced by a strong external and fiscal balance sheet; S&P further said the rescue package for the five banks whose CEOs and executive directors were removed last week by the CBN could have a positive result.Furthermore, Sanusi in an interview yesterday in Kinshasa where he’s attending a conference of African central bankers said the central bank will intervene in the foreign exchange market to protect the Naira if there is a depreciation which is completely out of tune with fundamentals. He added: “What we’re going to have is a stable depreciation if at all. Given what’s happening with oil prices and the improvements with peace in the Niger Delta, we may actually be able to stem it.”However, in view of the declaration yesterday by the Movement for the Emancipation of the Niger Delta (MEND), that they will be compelled to resume with ferocious attacks on the oil industry at the end of their ceasefire on September 15, 2009, our question is this: is S&P and Sanusi not being overly optimistic?MEND says they have also suspended talks with the Special Adviser to the President on the amnesty, Mr. Timi Alaibe who they announced, “expects disarmament without the real issues being addressed”.
“MEND will not enter into talks with governors from the region that has tainted the amnesty program with politics and monetary inducements”, they said, adding:
“Many of the boys who have received money today will at best squander it on material things and what happens next can best be left to the imagination. Our solemn pledge to the people of the Niger Delta still remains to emancipate the region from the forces that have held it down for over 50 years with divide and rule, monetary inducements and treachery”, they concluded.The Forex market behaves differently from other markets! The speed, volatility, and enormous size of the Forex market are unlike anything else in the financial world. Just like any other speculative business, the unpredictable nature of the currencies is what warns regulators to beware forecasting events based on their present value.Same goes for the oil market; volatile oil prices threaten economies of oil-exporting and oil-importing developing countries, and pose challenges to financial sector stability, growth and poverty. Oil prices hit N147 per barrel last year but tumbled in the wake of the global economic downturn and currently stand at $74 per barrel.
Policymakers the world over are looking for information and analysis on oil-price dynamics as well as instruments for risk management.If MEND resumes attack next month as threatened, what will happen to Nigeria’s foreign exchange earnings, our foreign reserve and the stability and value of the Naira?All businesses take risks based on two factors: the probability an adverse circumstance will come about and the cost of such adverse circumstance. As opposed to risk that is faced by an investor or a portfolio, systemic risk is the risk of collapse of an entire financial system or entire market; the risk that is posed to the financial system or the economy.Systemic risk is most commonly discussed in relation to the risks posed by banks and financial institutions. The failure of a major financial institution can have serious consequences. If a bank fails, not only will its depositors lose money, but it is also likely to renege on obligations to other financial institutions. Both the depositors and the other institutions are then likely to be under financial pressure, which can lead to further failures of both banks and other businesses. The resulting ripple effect can bring down an economy. Controlling systemic risk is a major concern for regulators, particularly given that consolidation in banking has lead to the creation of some extremely large banks. Even though governments usually bail out those banks that are “too big to fail”, the cost of doing so would have its own multiplier effect. So, there is significant risk in any decision to sack bank executives or in government injecting funds into or taking over a bank because of the terrible repercussions on investor confidence.Sanusi might have been justified in acting in releasing the details of the billionaire debtor’s debt profile because analysts say Nigeria needs far higher levels of disclosure in its banking sector if it is to restore the confidence of foreign investors and realise its ambition of becoming a continental financial services hub.Massive asset growth and capital raising after consolidation in the sector in 2005 attracted portfolio investors who saw huge potential in an under-banked market of 140 million people and an economy buoyed by rising oil prices.But auditing standards have failed to keep pace with explosive balance sheet growth, much of it involving higher levels of unsecured risk, raising investor nerves as falling oil prices sour Nigeria‘s economic outlook.But in sacking the Bank MD’s, has Sanusi do his homework very well?Lamido Sanusi based his optimism that he will “defend the nation’s currency should it come under “speculative attack” not warranted by developments in the economy”, and that Given what’s happening with oil prices and the improvements with peace in the Niger Delta”, they could control whatever fall-outs result from the present hurricane Sanusi.But I think this is fundamentally in error, and leads to a mistaken impression with respect to where oil price and earnings is headed.Oil export earnings fell by about half to $4.92 billion in the first quarter of 2009 compared to the previous quarter, according to the National Bureau of Statistics, with falling global prices adding to the pressure. Reflecting the strain on its finances, Nigeria‘s foreign reserves fell to $ 43.2 billion in the first half from $53 billion at the end of December. In its last monthly report, the International Energy Agency (IEA) said Nigeria‘s production fell to 1.72 million bpd in June from 1.8 million bpd in May and 1.78 million bpd in April. The most pessimistic of foreign analysts recently put production at the end of June at between 800,000 and one million bpd. Sanusi believes the situation will change soon, but if MEND resumes attack, this situation cannot be expected to go away. In fact, it is certain to get worse in years ahead, as oil supplies become tighter. Even S&P, in lowering of the sovereign rating on Nigeria said it reflects their view of the government’s reduced fiscal flexibility due to costs associated with its recent bail-out of five large domestic banks, and also the fall-off in government oil revenue.
“In our opinion, the central bank’s action has begun a welcome restructuring of Nigeria’s banking system, but it also reveals deep problems in Nigeria’s credit markets, with the extent of problem loans beyond our previous estimates,” S&P said.
The downgrade in Nigeria‘s ratings, the cost of raising funds in the international markets by local firms in the country could rise given the risk involved.
S&P some months ago lowered Nigeria’s ratings outlook to “negative” from “stable”, citing falling oil revenues which were hurting public finances.
Perhaps out of realisation that he has bitten more than he can chew, it was reliably gathered, that, consequent upon the controversy generated by its approach in handling the banks’ crisis, the CBN might be considering a rethink on some of its strategies. Sanusi has indicated that no more bank bosses will be sacked. But this idea is fraught with problems. It would give credence to the argument that the reserve bank by acting on the basis of CBN auditors’ findings to remove the board and management of 5 bank when it had not even had time to assess the findings of the audit report, nor finished the auditing of the remaining 14 banks were working to an answer; Why would Sanusi rush to take action against 5 banks when the auditing of the remaining 14 banks is still ongoing?Already, there are concerns in several quarters that the disagreement over the ‘sanctity’ of the figures published by the CBN, as well as the haste with which it was done, the ethnic sentiments attached to the crisis and seemingly overzealous approach of the EFCC have given room for unhealthy attacks on Sanusi’s intentions. The apex bank is also said to be worried that the may negatively rub off on the integrity of the apex bank’s reform agenda. Analysts argue that although the move to sanitise the banks and inject over N400 billion into their coffers was in good taste, the apex bank ought to have concluded the audit process before embarking on far-reaching sanctions so as to avoid the perception that the approach was punitive of a section of the bank and their owners.