US embassy cable - 03LAGOS123

UNCLAS SECTION 01 OF 02 LAGOS 000123 
 
SIPDIS 
 
 
USAID FOR AA/AFR AFR/WA EGAT 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EINV, EAID, NI 
SUBJECT: NIGERIAN STOCK EXCHANGE SEEKS USAID PARTNERSHIP 
 
 
REF:  02 Lagos 01933 
 
 
1.    (U) SUMMARY:  The Nigerian Stock Exchange (NSE)  seeks 
USAID  assistance to expand its services.  The NSE plans  to 
attract more Nigerians and foreign investors to the equities 
market  through  greater accessibility  and  new  investment 
vehicles in derivative markets.  The NSE raised the issue of 
working  in partnership with USAID and in particular  sought 
assistance in the areas of hardware and software acquisition 
and  provision of technical assistance and training.   USAID 
is  in the process of developing a new five-year strategy to 
begin  in  January 2004, and will seek to identify  ways  of 
working  in partnership with NSE in the context of  the  new 
strategy.  USAID and NSE will develop terms of reference  to 
conduct  an  assessment in early 2003 to  identify  specific 
areas  of partnership.  In addition, USTDA is considering  a 
2003 technical assistance grant to the NSE.  END SUMMARY. 
 
 
2.    (U)  On  October 21, 2002, Econoff attended a  meeting 
between  USAID  Mission Director Dawn  Liberi  and  Nicholas 
Okoye  of  the Nigerian Stock Exchange.  Okoye is  Technical 
Adviser to the Director General and CEO of the NSE,  and  is 
Head  of  the newly created Strategy and Derivatives Markets 
department.   Okoye  presented a  proposal  for  partnership 
opportunities  between  the  NSE  and  USAID,  as  the   NSE 
continues  to  improve its IT infrastructure  and  plans  to 
expand investor services. 
 
 
3.    (U)  Okoye reported that the NSE has achieved  several 
important  international benchmarks  for  equities  markets, 
including   clearing  transactions  in   three   days   (T+3 
clearance)  and  the  development of  a  transparent  review 
system  whereby reports of companies traded on the  exchange 
are  available  via  the NSE Website.   In  addition,  Okoye 
reiterated the NSE's ranking by Standard and Poors  and  the 
International  Financial  Corporation  (IFC)  as  third  for 
return  on  investment among exchanges worldwide  and  first 
among  emerging  markets. (REFTEL).  The NSE  now  plans  to 
attract  more investors by creating new investment  vehicles 
targeted  toward  individuals in Nigeria, institutions  both 
domestic  and  foreign,  and  Nigerians  living  or  working 
abroad.   Okoye  and  the  NSE  Director  General  met  with 
representatives  of the New York Stock Exchange  (NYSE)  and 
the American Stock Exchange (ASE) in May to discuss ways  in 
which the NSE can leverage the expertise and global reach of 
the  US  exchanges through technical assistance and training 
programs.   The  NSE  also  hopes  the  US  exchanges   will 
introduce  the  NSE to key international fund  managers  who 
focus on emerging markets. 
 
 
FOR NIGERIANS AT HOME:  INVESTMENT SAVINGS ACCOUNTS 
 
 
4.    (U)  Okoye  noted  that less  than  three  percent  of 
Nigerians are invested in the NSE in any capacity,  compared 
to  75 percent of Americans and 63 percent of European Union 
citizens  who invest in equity markets directly  or  through 
mutual   funds  and  retirement  plans.   To  attract   more 
individual  investors in Nigeria and leverage the  economies 
of  scales of the current nationwide banking system, the NSE 
plans to partner with banks to develop a new savings entity, 
the  individual  investment account.  Since  Nigerian  banks 
tend  to  have  branches  in  even  small  towns  throughout 
Nigeria, the NSE sees a partnership with banks to be a  more 
efficient way to reach individual investors than encouraging 
stockbrokers to expand their capacity and reach.  Individual 
investment  accounts  would allow bank depositors  to  place 
savings  into  an account that would purchase shares  of  an 
equities   portfolio,   allowing   greater   returns    than 
traditional savings accounts.  According to Okoye, the  1999 
Universal  Banking Act permits licensed banks to participate 
in every aspect of the financial industry, allowing for this 
sort of partnership between banks and the exchange. 
 
 
5.    (U)  To further encourage individual investors to  use 
the  stock  exchange  and  to enhance  the  reliability  and 
credibility of transactions, the NSE is developing an  email 
system  to  notify investors of transactions made  on  their 
behalf.   According  to Okoye, in the  US  an  automatically 
generated confirmation letter notifies each investor when  a 
broker  places a trade on his or her behalf.   The  Nigerian 
postal  system  is  considered too  unreliable  for  such  a 
system,   and  thus,  trades  are  currently  made   without 
confirmation, known as "selling without a mandate."  The NSE 
is considering the creation of a free email account for each 
investor  in  the  exchange through which  confirmations  of 
trades  may be posted.  Okoye notes that while few Nigerians 
have  access to computers and the Internet at home or  work, 
many  individuals  maintain free accounts that  they  access 
from  cyber  cafes,  which are quite common  throughout  the 
country. 
 
 
FOR INSTITUTIONAL INVESTORS AND NIGERIANS LIVING ABROAD: NEW 
INVESTMENT VEHICLES IN THE DERIVATIVES MARKETS 
 
 
6.    (U)  Okoye  estimates that Nigerians  living  overseas 
return over three billion dollars annually to Nigeria, often 
in  the  form  of  real  estate purchases  and  investments. 
However,  Okoye states that these individuals are frequently 
victims   of   unscrupulous   transactions   or   unreliable 
construction  cost  estimates.  The NSE  believes  Nigerians 
abroad,  as  well as institutional investors in-country  and 
abroad,   are   looking   for   credible   and   transparent 
opportunities to invest in Nigeria.  As head  of  the  NSE's 
new   derivatives  markets  department,  Okoye   highlighted 
several  investment  products currently  under  development. 
(REFTEL). 
 
 
7.    (U)  Okoye states his team is developing  an  Exchange 
Traded  Fund (ETF).  Like the NASDAQ "QQQ," or the  American 
Stock Exchange "SPDR," the ETF will consist of a "basket" of 
the  top 30 or so companies listed on the NSE which will  be 
traded  as  a  single  security.   The  Johannesburg   Stock 
Exchange   (JSE)  currently  has  a  fund  of  this   nature 
available.   The  NSE  is also preparing  option  contracts, 
which are not currently traded on the NSE.  Further, the NSE 
is   exploring  whether  foreign  investors  will  be   more 
comfortable  investing in NSE listed companies  through  the 
NYSE and ASE in the form of depository receipts.  To attract 
the  Nigerian expat investor, the NSE is developing  a  real 
estate investment trust and note product, which will involve 
the  issuance  of notes against real estate developments  or 
securities  against ongoing rents.  Similarly,  the  NSE  is 
developing oil and gas trust notes.  The NSE points out that 
indigenous energy companies are now positioned to take  over 
"marginal" or low-volume oil fields from major international 
producers.   Most  of  these  are  capped-wells,   requiring 
capital  investment in flow stations and piping,  which  can 
cost  15  to 30 million dollars, according to Okoye.   Local 
banks  generally do not provide sufficient lending for  such 
projects, so the NSE believes it can offer investment trusts 
of   sufficient  credibility  and  reliability  to   attract 
investors  and generate the funding needed to  launch  these 
ventures. 
 
 
AREAS FOR POSSIBLE USAID PARTNERSHIP 
 
 
8.    (U)  NSE requested USAID assistance with the provision 
of  new  hardware and software needed to develop and  manage 
each  of  the  investment vehicles,  as  well  as  technical 
assistance  and  training in both  IT  systems  and  trading 
aspects of these products.  Such IT systems development  and 
new services training will be necessary both for the NSE and 
a  set  of Nigerian financial institutions that will  become 
custodial  banks to facilitate the derivatives transactions. 
Okoye  states  that  the  NSE would primarily  use  US  made 
products  and consultants for these ventures, including  the 
NYSE and ASE.  He notes that the NSE Board of Directors  has 
approved  the concept of the exchange acting as  a  regional 
clearinghouse  for securities transactions  involving  other 
African  countries.  Thomas Briggs of the US  Department  of 
Treasury  suggested such a concept during a recent  tour  of 
Nigeria.  Okoye states that the NSE is currently negotiating 
with  a  company  in  Boston  to establish  and  maintain  a 
database to record and call-up transactions for the last  12 
years,   a   necessity  if  NSE  is  to  become  a  regional 
clearinghouse. 
 
 
9.    (U)  USAID Mission Director indicated that  USAID  was 
developing  a  new five-year strategy and that collaboration 
with  NSE  could be explored within the context of  the  new 
strategy.  USAID would consult further with NSE and  conduct 
an assessment to identify potential areas of partnership and 
collaboration.  She estimated that such an assessment  could 
take  place in early 2003.  Additionally, the US  Trade  and 
Development  Agency  is considering a  technical  assistance 
grant  to the NSE to upgrade its computer system and develop 
a secondary trading floor in case of catastrophic failure. 
 
 
HINSON-JONES