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Crisis? What crisis?

May 5, 2009

In a complicated and uncertain world, regular analysis is somewhat reassuring. I’m no gloom monger or doom peddler but my attention was drawn to a statement by Mr Olivier Blanchard, chief economist of the IMF. “On the portfolio side, establish a price, or at least a floor on the price, of the troubled assets. Ring-fence them or take them off bank balance-sheets.”

This evokes one of the “known unknowns” troubling the Nigerian stock market: the size and composition of margin loans. These were aggressively extended by Nigerian banks during the stock market boom. Now things have gone awry. Equities, especially bank shares, are trading at a record low (a good time to buy shares of a select few). The collateral used in getting the margin loans also lost value, as borrowers scrambled to offload. Hence, the bearish hold on the market.

Mr Blanchard’s advice is as perceptive as they come. Yet the CBN, SEC and NSE seem to be out of their depth as regards what to do. Current research calls for a definition of margin loans so that banks can come clean as regards how steep in the mire they are. Will they? Maybe if they are coerced to do so. The same research suggests that share buy-backs are the most profitable option. Profit is the only incentive banks understand.

Fear, greed, lax regulation and flight of foreign capital are the reasons why the stock market has plunged. A microcosm of the global financial crisis. What’s amiss at the moment is a coordinated effort to act fast. Governments around the world are responding by pouring money into infrastructure: roads, bridges, electric and digital cables. As the recession bottoms out they’ll have roads to transport goods from factories; bridges to connect markets; electric wires to power homes and factories, and expanded bandwidth to carry terabytes of data. Needless to say, alternative energy to power their cars. But above all, jobs for their citizens.

We certainly could do with this sort of investments. Our infrastructure is horrendous and ages behind what obtains in developing countries today (which is now being upgraded). The World Bank’s assertion that Africa may lose 10 years if it fails to act like its peers is not an attempt to paint a grim picture. It’s the fact.

Yet should either the IMF or World Bank be listened to? Purveyors of the free market doctrine of low taxes and minimal regulation; their straitjacketed belief in these ideas became dogma. Adherence was a must, refusal was apostasy. For nearly three decades they embarked upon a one size fits all prescription spree. Countries of all shapes and sizes, from Argentina to Russia, were urged to apply the formula. Low inflation, stable exchange rates, capitalist institutions eg, an independent central bank and a stock exchange, privatisation at the speed of light etc, were the hallmarks of that era. That brand of capitalism is daily becoming passé – more on this later.

So what’s next, Russia or China style capitalism? I think not. There’s no leapfrogging from developing to developed economy. Though ICT still offers that world-flattening opportunity; without bridges to somewhere and electricity to keep the computers and servers humming it’s all a pipe dream.

On a bright note, in country of 140 million people, and counting, some stocks are scrumptiously worth buying. Man was wack, waka and wake up under a roof. Buy right and sit tight!

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