STOCK MARKET FALL

A Transient Phase or Generic Weakness of the Market?

Public funds must not be used to bail out gamblers

By Peluola Adewale

After losing over Ł20,000 (Ł1.68 million in today’s money) of his fortune to speculation in the infamous South Sea bubble in the 1720s, Isaac Newton, the foremost physicist lamented, “I can calculate the motions of heavenly bodies, but not the madness of people”. It is not people that are actually mad, but the system; capitalism is a madhouse. Nothing has depicted this madness perhaps more than the intervention of government in the ailing capital market of Nigeria. The action is however along the grain of universal profit-first madness of capitalist governments globally using public resources to bail out financial gamblers while abandoning provision of basic need and infrastructure in the name of neo-liberal free-market economy.

Just a few weeks after Yar’Adua government announced the plan to stop allocation of funds for infrastructure in the budget and remove the so-called fuel subsidy, it has resolved to commit public resources to finance gambling at the Nigeria’s capital market. The proposed establishment of capital market stabilisation fund and directive on the CBN to ensure adequate liquidity within the system to oil the operations in the capital market are some of the measures taken by government together with capital market operators to stem the free-fall of share prices at the once over-celebrated Nigeria’s stock market and maintain its artificial growth.

Labour and pro-masses organisations must oppose the use of collectively owned resources to underwrite gambling at the stock market, which has not added meaningful value to the economy. Even at peak of its phenomenal growth, it accounted for less than 3% of the GDP. Remi Babalola, Minister of State for Finance himself has once lamented that the market as a percentage of the GDP is low and lagging. Its growth is make-believe fuelled by oil windfall channelled by banks. Rather than channel public resources to gambling den, labour must demand commitment of wealth of the country to provision of infrastructure and basic needs like electricity, road, water, education, health care, etc.

Before the intervention of government on August 27, about N3.83 trillion (about $ 32 billion) had been lost by investors as the share prices plummeted drastically. The market capitalization plunged by 30 % from the all time high of N12.64 trillion on March 5 to N8.81 trillion as of August 22, while all share index fell by 31% from the historic peak of 66, 371.20 to 45, 500 points in the same period. The market closed in the last week of August shedding about 3% from the loss on account of government intervention. How far the manipulation could offset the loss and restore the eroded investors’ confidence in the market is a moot question.

Bismarck Rewane of Financial Derivates had told the London Financial Times in 2007, “My sister-in-law does not know the difference between a stock and a bond, yet now she has sold property to go into it (stock), she’s going to start crying” (The Financial Times, July 12, 2007). Indeed, she should have started crying already. Not only her, several thousands of investors in the stock market, both individuals and institutional including pension funds, have been bitterly wounded. Newspapers are awash with the pathetic stories of individuals particularly those who have borrowed or sold property to invest in stock counting their losses.

It is not a delight gloating over the misfortunes of those who have burnt their fingers in stock investment. They are victims of false hope in buying and selling capitalism in a rent-taking economy and were sucked into these schemes. A number of these small fish were actually exploited by the dealers and sharks. With harsh economic situation unleashed by neo-liberal attack most people have been forced to go extra mile, albeit short cut, to meet the increasing cost of living. The phenomenal returns posted at the capital market mostly by banks just for a short-term investment spurred a herd effect with many thronged the market for a safe haven. But there is no one under capitalism on the lasting basis.

Then, Rewane’s sister-in-law would have dismissed him with a wave of hand as a prophet of doom. His view swam against tide of roller-coaster development in the capital market in 2007. The Zenith Bank had aptly captured the reigning bubble sentiment in its commercial to attract subscribers with the slogan: “What goes up just keeps going”. Bolaji Balogun of Chapel Hill, an asset management firm, who is now a member of presidential adversary committee on capital market, bragged, “We’ve made a bus load of money betting on this market”. Yes, thousands of investors made a lot of money from astronomical returns on investment in the year total market capitalization recorded phenomenal 75% growth. Indeed, Nigeria market was arguably the fastest growing and with highest returns on investment in the world in 2007. Now, the bubble has burst!

When “what goes up just keeps going”, in defiance to the natural law of gravity, the share price of the Zenith Bank as of last week June 2007 was N66.14. But for the corresponding period, this year, the market value of the stock dipped to N42.00. It slumped further to N37 as of August 22.

The United Bank of Africa (UBA), the self-styled Africa’s global bank, is one of the worst hit. The stock tumbled from the year high of N63.94 to N24 as of August 22. This is despite strong fundamentals and impressive yearly results posted by the bank, which offered a bonus of one share for every two held. Indeed the market value of the bank at present is below the price its share was sold at the initial public offer and right issues, which were N35 and N34 respectively, in April 2007.

At the outset of bearish trend, Ndi Okereke Onyuike the Director General of Nigeria Stock Exchange (NSE), had told the public that the slide in share prices was due to a technical hitch caused by a disengaged nut that connects trading engine to the central securities clearing system. She said this gave opportunity for indiscriminate sale of stocks even below their expected prices. But she lied; the unfortunate nut was just a convenient scapegoat. The bubble had completed its cycle and bearish forces accordingly struck terror and jitters in the spine of the market. Even the attempt to stem the slump by increasing the volume of share units demanded and supplied before there would be price movement from 15, 000 to 100, 000 only reduced the rate of fall; the share prices maintained downward movement. This shows most stocks would have become worthless without this measure.

The Exchange on August 27 put in place a much more desperate measure by tying down the invisible hands of market forces in order to stimulate artificial growth. The elementary book of free market economy has been kept away from the floor of the Exchange. The downward movement of stock prices daily has been pegged at maximum limit of one per cent, lowered from five per cent it used to be, while the current five per cent maximum limit for upward price movement is retained. This means that notwithstanding the presence of parameters that favour massive fall in price, a stock that opens in a day at N100 must not lose more than N1, while the same stock could gain N5 if conditions are favourable. This among other factors was responsible for the gain in market indicators on that day for the first in five months!

The situation of the Nigeria stock market has some similarity with the dot.com bubbles driven by internet technology in late 1990s in major global stock markets because it was driven by a sub sector. The difference is that unlike the bursting of the dot.com, the sharp decline in prices has not triggered collapse of any of the quoted companies. The losers are the investors who gamble on the market. The banking sector drives the market in Nigeria; it accounts for over 70% of total market capitalization. Indeed about 98% of capital raised in the market in 2007 was by the sector. The banking consolidation exercise in 2004/2005 actually created the public awareness and frenzy in the capital market. In 2003 the market capitalization was about $10bn but had reached $100bn mark in February 2008 before bearish forces struck terror.

As against what the promoters of the NSE want the world to believe, the market is fundamentally flawed. The phenomenal growth, the Exchange hitherto posted, was essentially fictitious. It was driven by liquidity as against the fundamentals (health and performance) of the quoted companies. JP Morgan, the US investment banking giant, had issued a damning report on March 13, 2008 that the share prices of some banks were over-valued as much as 57 percent. “Bank share prices have run well ahead of fundamentals and do not incorporate the numerous risks facing Nigerian Banks”, the report observes.

The Financial Times reports in its June 24 2008 issue that the hedge funds in London had held strong opinion of over-valuation of share prices several months before and being acted on in April. It quotes one analyst, who has hedge fund clients, saying, “They knew there was little real value left in the market, but they held steady as long as the bubble-era mentality of others ensured prices kept going up”. The hedge funds and other speculators struck when the credit stimulating the market growth was ending to the crunch.

While the fall of share prices of the NSE has nothing to do with global financial crisis it shares a common feature, credit squeeze. The share prices had been driven by margin credit granted by banks to customers to invest in stocks or speculate in the market. Specifically, about 25% of the market capitalization is the loans leveraged into the equity market through margin trading. The margin account brings a lot of money to the market, as there are many shares in the market with no buyers. Such stocks are kept up by loans. There were some companies that had not been releasing financial results either quarterly or yearly, in other words with no known fundamentals, yet their share prices were going up.

The rumour that the Central Bank had ordered the cancellation of the margin facilities triggered the downward movement of the share prices. Truly, banks withdrew huge funds from the market as part of desperate measures to boost their balance sheets and reconcile their accounts with the Central Bank in preparation for the newly introduced but now suspended uniform financial year-end put at December as from this year. About N2.5 trillion of total N6.7 trillion depositors’ funds are used by banks for margin trading while the real sector is left to rot in lurch with prohibitive cost of funds.

The liquidity squeeze has been worsened by the monetary policy of the Central Bank, which has led to the increase in the rates of the money market. The CBN had increased the money rates as part of the strategy to mop-up what is called excess liquidity in the system in order to control inflation. In rush for attractive high yielding government papers the speculators have switched to the money market from the capital market with dwindling returns.

The stock market is essentially a casino with NSE acting as bookies that collect commission or cut on the bet whether players lose or win. Apart from the funds raised from the primary market of the Exchange, that is through initial public offering or right issue, and are expected to be deployed by the companies into various businesses or investments, there is a huge volume of idle money in the secondary market which is meant to stake bet on stocks. The secondary market is the market for sale and purchase of existing shares where interplay of supply and demand of share is expected to determine its price. Any gain or loss in the share prices is borne by the investors and not the companies. For instance, the UBA offered its share at the primary market at N35 in April 2007 but at a stage in the year the price rose to N63 at the secondary market, the differential amount of N28 times the total volume of the bank’s shares, though added to the market capitalization of the bank, did not go to the bank rather it just constituted paper or phony capital of the bank. In the same vein, when the stock plunged to N24, the bank was not affected immediately. Companies are interested in their shares upward movement having it in mind that they cannot come back to the market to raise fresh funds at price higher than current values. This is in addition to their obsession for stunt and exaggeration of true worth with vainglorious figures. This informs why most companies manipulated their share prices, an act in which Cadbury and Wema Bank have been caught with pants down.

The fact that the Nigeria’s capital market is just a gambling den explains why its exponential growth does not translate to shoring up of the real sector of the economy. It is much easier for camel to pass through the eye of a needle than for manufacturing companies to raise funds in the market. This illustrates a key characteristic of Nigeria’s capitalist economy. One of the reasons for this short-term speculation is that the Nigerian ruling class is generally not prepared to invest in Nigeria, especially in industry beyond food and building. In the world economy dominated by imperialism they see no chance to compete, so they loot and ultimately run. Thus capitalism cannot develop Nigeria, despite the country’s enormous natural and human resources

The investors prefer to invest in the banking stocks with high returns on the investment to the real sector of the economy to the extent the offers from banks are often over-subscribed. For instance in 2007 the First Bank and Intercontinental were 752% and 773% subscribed respectively. Even the banks with huge resources both from shareholders funds and depositors’ funds at their disposal make it extremely difficult for manufacturers to borrow money because of prohibitive lending rate which is as much as 30%. But banks readily finance gambling at the stock exchange with the margin facility.

President Yar’Adua himself could not but lament the situation, “the capital market is still skewed mainly towards the financial system”. He thus advised, “The stockbrokers should do something to incorporate the entire sectors of the economy into the market” (Guardian, July 15, 2008). It is unrealistic to expect stockbrokers as well as individual and institutional investors to put hot money in sectors with no guarantee of quick and huge returns offered by corporate gambling in financial sectors particularly banks.

Chukwuma Soludo, the Governor of the Central Bank had given as the reason for the banking consolidation or recapitalisation the need for banks to have enough capital to drive the economy development. On the contrary however rather than serve as drivers, banks actually constitute clog in the wheel of the economy by crowding out real sector from raising cheap funds in capital market while at the same time making it difficult for manufacturers to borrow money from them.

Soludo has actually turned back to accuse banks of forestalling development in the economy through a regime of confounding interests. He blamed the development on the desperadoes of some banks to mobilize funds by all means to enhance their capital to impress shareholders at year-end meeting (Guardian, August 6, 2008).

Is it correct to blame banks for not lending money to the real sector with all the risks involved on the account of primitive state of infrastructure? After all, banks are in business to make profits. Yes, banks make mega profit by being parasitic on the economy without investment in production. But that is essentially the make-up of capitalist economy. Banks are opening new branches to mobilize deposit from the system while factories are closing shops because of high cost of funds (that is inaccessible) in addition to poor infrastructure that make cost of doing business prohibitive. It is crying for moon to expect the profit sharks like banks to drive economic development.

However, besides lack of provision of adequate infrastructure, government has further contributed to the high interest rate with increase in monetary policy rate (MPR) that is the base rate at which the Central Bank make funds to the banks. Banks are expected to charge additional percent to determine their lending rates. Capitalism is a vicious cycle of crises. What is proffered as solution usually deepens the problem. CBN employs MPR, which is currently 10.25%, as instrument to control inflation. The inflation rate put, as of June; at 12% itself is caused by action or inaction of the government. According to the Soludo, “the increase in the inflation rates was traceable to the sharp increase in the prices of food and fuel particularly diesel” (CBN Communiqué No. 57 August 5, 2008).

In absence of public electricity, factories and other businesses rely on diesel to generate power. Diesel like other petroleum products is expensive and at times scarce in Nigeria despite the country being 7th largest producer of crude oil in the world. According to the manufacturers, power generation accounts for about 45% of their cost of production. Factories have been shutting down in droves or relocating out of the country. To worsen the energy crisis the government has announced removal of so-called fuel subsidies with effect from next January, which means hike in pump prices of fuel. Soaring price of food is also related to high cost of energy and neo-liberal economic policies of the government that discourages social spending on infrastructure and agriculture.

Another contributing factor to the rise in the inflation, according to Soludo, is “huge liquidity injection from the fiscal arm which emanated from the sharing of the excess crude proceeds and the enhanced regular federation account allocation”. The question arises where has the huge resources been sunk to. There is too much money in the system yet the economic activities are very low and costs of living are hitting the roof. The embrace of neo-liberal economic policies means that government has to fail to commit public resources to infrastructure and basic needs of the people. The huge resources shared monthly only find their way to banks vaults both as loots and public sector deposits. Yet this together with increasing private deposit at the disposal of banks is not channelled into productive investments but either used to finance speculative activities in the capital market (about N2.5 trillion depositors’ funds are reportedly used as margin facilities) or left dormant in the vaults. Blue chip companies like MTN and Dangote Group are the only exception of companies with access to credit facilities at ‘reasonable’ rate.

The idle funds in banks’ vaults constitute the excess liquidity. The reaction of the government through the CBN is mopping them up under the guise of curbing inflation instead of a measure that compels banks to invest the funds in productive purposes. This is done largely by borrowing money from banks and other financial institutions through sales of treasury bills. This measure has seen government spending N500bn annually out of public resources as unearned interest income payments to banks (Guardian, June 11, 2008). Expectedly banks are disposed to lend money to government because the level of risk is very low. The heavy patronage of banks by governments at the expense of basic infrastructure for the poor working masses is the main source of the bumper profits banks declare quarterly or yearly and by extension the exponential growth of stock market. This is robbing Peter to pay Paul. A plunge in crude oil prices will reveal that there is no special ingenuity being deployed by banks and capital market to achieve their rosy results being flaunted around.

Already now the world oil price is falling and this latest “oil boom”, really only a boom for the rich and looters, may be coming to an end. Unfortunately, it is the poor working masses, who have not benefited from the oil boom that will be made to pay dearly, with worse virulent neo-liberal attack, when there is slump in crude oil market. Labour has to mobilize workers to demand living wage to be increased with rate of inflation without loss of jobs now. The treasury looters in power have just announced increase in their already over-bloated pay package citing as justification economic indices such as basic fundamentals of the Nigerian economy, external reserves, and the GDP growth rate. The external reserve was put at $60.31 as at July 31, representing an increase of $8.98bn over the level in December 2007, while the inflation rate as at June is 12%, a sharp rise when compared with 7.8, 8.2 and 9.7 recorded in March, April and May respectively.

Nigeria has made huge resources from the sales of crude oil, which has been witnessing soaring prices in the last nine years. Yet, there is nothing fundamental to show for this in term of living conditions of the vast majority of the poor working masses and infrastructure development. Rather, workers and poor masses have been made to pay exorbitantly for education and health care and provide their own electricity and water. Public infrastructures are either non-existent or in primitive state. Nigerian poor masses have been told to prepare to pay more for goods and services as from next January with proposed hike in fuel prices and increase in Value Added Tax. So after gaining precious little from this latest “boom” we are now being told to tighten our belts because world capitalism is entering into a deep crisis.

On the basis of capitalist neo-liberal policies, it is clear that Yar’Adua government will not commit public resources to infrastructure development and basic needs of poor working people. Already, the government has ceded this to commercial interest of private vampires. The anti poor government has to be shoved away. Labour and pro-masses organizations must facilitate the process of wresting political power from the thieving capitalist ruling elite with formation of a mass, fighting working peoples’ party that could usher in a workers’ and poor masses’ government run on socialist programme.

Neither banks nor the stock market, as presently organized and oriented, can drive the economy. As against financing development, they are parasitic on the economy. They mobilise huge resources from the economy without giving anything significant back to the real sector as against their traditional role of financial intermediation. Socialists, therefore argue for public ownership of banks and all the commanding heights of economy to be run in the interests of society under democratic management and control by the working people themselves.