US & European Markets

Currency anxieties among countries are mounting as they crave for a weaker exchange rate to sustain growth through net export improvements increases. This usually translates into; one country’s gain becoming another country’s loss which tends to lead to a competitive devaluation war among trading partners. Protectionist concerns are on the rise. Currency wars in due course pilots trade wars, as the recent United States (US) trade legislation threatening China has indicated. With the US unemployment rate at almost 10% and Chinese growth at approximately 10%, it is no surprise the recent threat.

The US quest to accomplish a balanced budget in the interim, thus heightening confidence in its economy is fast disappearing. With signs of economic rebound receding, the Federal Reserve Chairman Ben S. Bernanke on 10/15/10 at a Boston conference indicated the application of the unconventional methods of quantitative easing (QE) to stimulate the US economy. The game plan would be the purchase of hundreds of billions of dollars of government treasury bonds.

A lean towards this strategy has seen the US dollar incessant slide against a basket of major currencies including the emerging ones. The Dollar Index, used by International Exchange Inc. to track the greenback (dollar) against a basket of currencies including the euro, yen and pound sterling, dropped 0.4 % on Friday to $77.041, the lowest level in 10 months. It fell to a 15 year low against the yen same period. The anticipated second round of quantitative easing is being dubbed “quantitative easing two” (QE2).

With the threat of deflation looking imminent by the day, the worries with policy makers in the US is the need to avert it. The Federal Reserve bond purchases would be intended to lower long-term interest rates to stimulate buying and spending and aid further employment. Critics fear that embarking on such a policy could trigger increase volatility in financial markets eroding confidence it so desires as a result. Others see it as another license for the treasury to print money, creating a new credit bubble in the process.

The European counterpart see the circumstance differently. According to a recent statement by the European Central Bank (ECB) President Jean – Claude Trichet at the World Policy Conference in Marrakech – a “modest” recovery persists in the euro zone. He confirmed he is completely against changing the euro- area’s inflation target and not convinced any major central bank is preparing to change the definition of price stability. In response to a question about the plans of the US Federal Reserve – “No central bank finds it appropriate to raise inflation at present.”

The US Consumer Price Index (CPI) has been lifeless for the past year. Although this has kept inflation on check, it raises the risk of tipping the economy towards deflation – a widespread drop in prices of goods and services that can set off a cascade of falling company profits. In the past twelve months, core prices rose only 0.8%, the smallest yearly gain in more than 49 years. According to the Federal Reserve Chairman: The economy is growing at a pace “less vigorous than we would like.” Unemployment, now at 9.6%, has been stuck near double digits for more than a year. Bernanke indicated that the Federal Reserve is concerned that the economic growth is likely to remain subdued and high unemployment is likely to keep consumers cautious in their spending.

The stock market saw its fortune turn for the better as a result of Chairman Bernanke’s remarks. It makes more sense for investors to buy stocks in this market as equities are cheaper and a more rewarding investment. But for how long? The expectation is that this policy could be short lived – instead of the interest rate dropping, it could ascend in the near future (four to six months) strengthening the dollar in the process. A turning point for global financial markets because as interest rate begin to rise the US dollar should gain – negatively impacting the equity and commodity prices across the board.

Another ensuing problem for the US markets is the high budget deficit that has become an intense campaign issue for the congressional election in November. The deficit for the fiscal year 2010 narrowed to $1.294 trillion from last years record $1.416 trillion. This is as a result of increase in tax collection and an evident drop in bailout spending. This is still considered very high. According to the Treasury Department statement on Friday, the deficit was @ 8.94% of GDP (Gross Domestic Product) for year ended September 30, versus 10% in fiscal 2009. Market observers including policy makers see this as very high and figures in the 6% range to change perceptions.

Chinese Markets

As the US and China politicize the issue of valuation of the Chinese currency (Renminbi)- China’s equity market in recent months has been on the rise as economic growth spurs higher fund flows into the country. With foreign direct investment on the increase has seen confidence return and as a result a boost to its stock market. According to the Ministry of Commerce, direct investment gained 6.1% in September from a year earlier to $8.38 billion. Foreign investment for the first nine months also rose 16.6% to $74.34 billion. The Shanghai stock index has recovered almost 26% in the last 3 months as a result of growth prospects.

Chinese property prices rebounded in September as urban property prices increased 9.1% y/y, according to the 70- city index of the National Bureau of Statistics, down from the 9.3% y/y gain in August. After two months of flat prices, the m/m index showed that prices increased 0.5% in September. Among the 70 cities surveyed, only one saw a m/m contraction in prices. Meanwhile, transaction as measured by the value of the real estate sold increased 15.8% y/y for the year through September, up from 12.6% in the first eight months of 2010.

Obviously the recent market appreciation has incited inflationary worries. In an attempt to stay ahead of the inflation curve, its policy makers unexpectedly yesterday raised its benchmark lending and deposit rates for the first time since 2007. This is ahead of October 21st data release. The fear is that the ensuing statistics may show inflation accelerated to the fastest pace in almost two years. The one-year lending rate will increase to 5.56 percent from 5.31 percent, effective October 20th, according to the People’s Bank of China. The deposit rate will increase to 2.5 percent from 2.25 percent.

The impact of the increase was felt by global markets as commodities and equities turned negative and the greenback rose. Another rate increase could be in the offing if increase in asset prices and inflation remains obdurate. “This is a bucket of cold water for the market,” said Zhang Yuheng, an analyst with Capital Securities in Shanghai. “The hike itself is not a big one, but the psychological impact is big as the expectations for more rate hikes will appear.” The quagmire with higher interest rates is that it may encourage inflows of speculative capital from abroad that could put a damper on the management of the fastest- growing major economy.

African Markets

Africa’s capital markets are categorized as emerging markets and can be defined as countries with developing economies that often experience rapid growth and offer good investment opportunities. They are also considered to be unstable and high risk due to the threat of unpredictable geopolitics.

Nonetheless, despite the dangers, money continues to flow in. The Emerging Markets Private Equity Association reported in August that private equity investment in emerging markets including Africa had risen to $13bn in the first half of 2010, up from $8bn the previous year. Year-to-date returns also look healthy. The S&P Africa 40 index, which includes stocks from frontier countries such as Botswana, Côte d’Ivoire, Ghana and Nigeria, is up 9.4 per cent year to date, while the MSCI Frontier Index, which covers 26 countries, is up 8.01 per cent.

Major western banks are raising money to capitalize on the booming frontier markets such as Africa. British bank Standard Chartered PLC surprised the market last week by asking its shareholders for nearly $5.2 billion in a rights issue to satisfy tighter international capital requirements. The company said it needs to be sure it has cash available for expansion after meeting the so-called Basel III rules, which are expected to raise the amount of money banks need to set aside as a buffer against potential problems. “We see many opportunities for growth across Asia, Africa and the Middle East as the world continues to rebalance between East and West,” said Chief Executive Peter Sands.

Emerging economies now account for more than 30 per cent of global GDP. Investors see an attractive scope for huge asset re-allocation. With the probability of QE2 in the US comes aggressive printing of money that is likely to incite investors to capitalize on this cheap money by allocating capital to emerging countries such as those in Africa. This could trigger asset bubbles and instability for a continent that is developing with weak infrastructure, income inequality, political instability, challenging business environments and crass corruption levels.

According to the International Monetary Fund (IMF), “fund managers’ habits are the core of the problem: with a powerful herd instinct, they tend to move together and risk swamping markets with their buckets of money.” It further stated in its report: “Investor flow data suggests emerging markets tend to suffer from herding behavior.”

Contact:info@cmcapitalmarketresearch.com

October 15th 2010

It is stomach-turning when one reads or takes notice of how government and corporate bureaucrats abuse their positions of office in Nigeria. The country is dreadfully notorious in that respect and citizens have come to recognize and accept this as a way of life. As one observer put it…”sleepwalkers”- Nigerians more often use the notion; “follow – follow.”

It is an ignominy not just for the culprits that coddle in the crooked behavior of misappropriation of resources but for the citizens that appear brain washed and seem to accommodate the status quo. Could it be that society that have been subdued over the years now accept this as a way of life? A major problem for Nigeria is that the populace does not understand the mess the country is in – yet they opt to follow. A miserable and depressing situation.

Nigeria is Africa’s most populous country with population @ 154.7 million (UN, 2009). A major oil exporter and a member of OPEC (The Organization of the Petroleum Exporting Countries). Life expectancy is about 47 years (men), 48 years (women) (UN). Income per capita is @ US $1,160 (World Bank, 2008) and Gross Domestic Product (GDP) of $339 billion (2009 est. – CIA World factbook.) Nigeria’s foreign exchange reserve as of September 2010 was at $34.57 billion and diminishing. A 15% drop from same period last year.

The mainstream population lives on acute poverty, surviving on less than $1.00 a day whilst less than 2% of the economy lives extremely wealthy boasting billions of dollars as net worth. Most of these billionaires are products of swindlers of Nigerian treasury and corporate bank accounts. This billion dollar precedence was set by previous treasury plunderers: Alhaji Umaru Diko (a former minister), Gen. (Rtd) Ibrahim Babaingida (a former military leader) and the late Gen.Sani Abacha (a former military leader). In recent year’s bankers, government officials and politicians followed suit using this number as a benchmark to enrich themselves, ransacking and looting companies and the country of their reserves as the economy decays.

The amount stolen over the years, by government officials total over $40 billion. The money robbed by corporate officials in recent years is estimated at $18 billion. The 2009 banks bailout at $4 billion. These numbers total over $62 billion and mounting. Nigeria’s annual oil revenue is circa $60 billion. The country is on a binge of accelerating its domestic and foreign debt for the next generation. The leaders and their associated plunderers appear to embrace the situation but trickling down to the average Nigerian – no one seems to have a clue. The ones that do choose to ignore. In the eyes of the international community, Nigeria has become a laughing stock.

A recent and well popularized case was the conviction of Mrs. Cecilia Ibru, an elite name in Nigeria. She was the Chief Executive Officer (CEO) of a well-known Nigerian bank- Oceanic bank that was financially bailed out by the Nigerian treasury together with eight other banks in 2009. While at the helm of the bank, she was said to have embezzled money to further her lifestyle. The indictment and conviction in a Nigerian court revealed money laundering and stolen assets that ran into almost $2 billion (the ones that could be traced). She owned two private jets, multiple single homes and streets listed as assets in the United States and Nigeria. These assets were allegedly masked in family and accomplices names. In a plea bargain struck with her investigators and prosecutors she agreed to forfeit these assets for a six month jail incarceration. A yarn for a crime this magnitude. There are other akin pending cases that the Central Bank of Nigeria Governor (Lamido Sansui) has acknowledged are worse and awaiting trial.

Some observers see her sentence as fair comparing it to white collar crimes committed in the United States and other western countries. Others seem to confuse it with the adage “Follow the money” principle that I perceive is used in the wrong context. The phrase “follow the money” is not associated with bank robbers and government/political thieves that embezzle from company /country coffers. “Follow the money” (smart money) would not want to be tagged in this manner. A ghastly stigma. It should be labeled – “follow the loot.”

Some have compared her crime to the recent Robert Moffat IBM hedge fund inside trading scandal of $50 million and Martha Stewart inside trading conviction of 2004. Both cases were in the United States and are laughable comparisons. In Moffat’s case he pleaded guilty to securities fraud and conspiracy to commit securities fraud. Authorities acknowledge his action (tips) resulted in no profits and he received no money. Lawyers on both sides agreed. Instead, Moffat was motivated by a desire to impress fellow defendant Danielle Chiesi, with whom he had an affair -court papers showed prior to sentencing. It further stated she “played” him by using their intimate relationship to get confidential information. He was sentenced to six months jail term and ordered to pay a fine of $50,000 by the District Judge.

Martha Stewart in 2004 was convicted of lying to investigators about a stock sale and served five months in prison with a fine of $30,000. According to U.S. Securities and Exchange Commission she averted a loss of $45,673 by selling all 3,928 shares of her ImClone Systems stock on December 27, 2001 after receiving inside information from her broker at Merrill Lynch – an investment bank.

Mrs. Cecilia Ibru’s crime is in the enormity of Bennie Maddoff and his ponzi scheme, Mr. Bernard J Ebbers – World Com, Jeffrey K Skillings of Enron and Dennis Kozlowski of Tyco. The first three names swindled investors billions of dollars. D. Kozlowski abused hundreds of millions of dollars of shareholders money. Bennie Maddoff got sentenced 150 yrs in jail and forfeited properties. The other three convicts received at least 25 yrs incarceration and forfeited properties for embezzlement. Compare the punishment. Nigeria’s privileged lawbreakers and criminals are normally set free after a short while and are released into the wild to continue their blitz raiding of accounts.

The current status quo of financial abuse is a dishonor and demoralizing for the country. The Berlin based agency; Transparency International (TI) that carries out the Transparency International index on corruption, ranks countries according to the attitudes of analysts and public officials and defines corruption as abuse of power for private gain. It rates Nigeria as one of the most corrupt and scandalous in recent years where massive misappropriation of public money by members of government is seen as common practice. The retired General Ibrahim Babaingida and the late General Abacha’s regime present a typical example where billions of dollars were siphoned out of the country’s coffers for private gain.

The country appears on the edge experiencing severe emotional distress through no fault of its own. It’s highly regarded human resources that can be applied locally to further the economy are scattered globally. The ones that are in Nigeria seem to be unreservedly confused. Doctors, lawyers, economists, accountants and other professionals crave for a political post. Several yearn for a bank manager assignment or associate of bank manager. The failed ones resort to 419 or drug smuggling. The successful ones become ‘fund managers’ for the Nigerian treasury and disperse accounts for self-seeking reasons. Some become bank robbers, conspiring with bank managers to raid accounts. Reason – easy access to money and greed. The naive and the hardworking tag along for the ride. There is a disconnect.

With this entire said, the country major sectors for growth are diminishing fast. Nigeria suffers from a deprived infrastructure. Sectors that are supposed to drive the economy are pooped. These segments: energy, financial, transport and agriculture are exhausted and begging for the right investment. Adding to these includes a depleted excess crude account, a tired and worn out currency, defective electoral process, a blemished health care sector, poor security, bombings and kidnapping. The country was recently linked to a slavery and prostitution ring in a neighboring country of Mali.

There is no visible growth although the treasury and the IMF (International Monetary Fund) claim otherwise. People on the ground find this assertion laughable and are demanding proof. No doubt IMF and other donors have capital they can lavish on developing countries. A country like Nigeria fits the bill. Obviously this comes at a cost-no free lunch. Current leaders have to be made accountable and society should carry a “big stick” to enforce it. With its current egalitarian leadership, the country still faces the threat of breaking away from each other down ethnic and religious lines. Nigeria appears on the brink of collapse and time is of the essence.

Contact: info@cmcapitalmarketresearch.com

The Asset Management Bill passed by parliament in June was signed into law today by Nigerian President, Goodluck Jonathan, creating a company; Asset Management Corporation of Nigeria (AMCON). The corporation will buy back distressed debts from the nation’s troubled financial institutions with the hope of restoring confidence in its financial markets. This is after last year’s $4 billion bailout of nine undercapitalized banks.

Following today’s development, the Central Bank and Finance Ministry set up a technical team to decide on the value of bad bank loans purchased in exchange for government bonds. The bill requires bad assets be exchanged for seven-year bonds or other debt instruments issued by AMCON and guaranteed by the finance ministry.

AMCON’s value will be 10 billion naira ($67 million). The asset management company will be buying approximately $10 billion in toxic debts by the end of the year. With these loans off their books, the central bank hopes to fuel recovery in its financial system by boosting liquidity of troubled banks, thus enhancing credit facilities to the private sector

While the signing of the bill is expected to calm markets somewhat in the interim, questions remain on who will be managing the new corporation, legal implications surrounding the bill and how the bad bank loans will be valued. These are deciding factors for investors as they make a decision on how to allocate capital.

The central bank warned last week that it would have no other option but to liquidate any of the rescued lenders that are unable to find new capital.

AMCO is expected to begin operations by the end of September 2010.

The Nigerian All Share Index closed today at 24,766.1. It has risen 19 percent so far this year.

Contact: info@cmcapitalmarketresearch.com

The recent drama at the Nigerian Stock Exchange (NSE) resulted in today’s sacking of its Director General, Prof. Ndi Okereke Onyuike and the suspension of its president, Alhaji Aliko Dangote. The situation became scary as past gains in the stock market were viciously attacked and eroded as confidence in the marketplace waned. Although the NSE was in denial, investors bailed as an exodus of fund withdrawals increased. The fear is that NSE is insolvent and unable to meet its financial obligations.

How events unfolded

Alhaji Aliko Dangote, the suspended president of the NSE in a statement last week stated that the exchange was indeed broke as it could no longer honor its obligations. He said the exchange is currently dipping its hands in the Central Securities Clearing Systems (CSCS) accounts for N900 million to support its cash deficit position.

It was revealed that the NSE is indebted to the tune of N119.5 million to Accenture; a company that is engaged in the work of executive selection, trading platform selection/ completion and implementation of the operating model for the exchange.

According to him, Accenture had in the June 9, 2010 letter addressed to the Council of the NSE on and signed by the company’s country managing director, Niyi Yusuf, notified the Exchange of its decision. “As agreed in the contract with the NSE, our payments were to be made in installments and based on invoices which are payable upon presentation. However, despite all the necessary invoices, Accenture is yet to receive any payment on all outstanding invoices. We have written formal letters of reminder of this indebtedness to the management of the NSE to no avail,” the letter stated.

The letter further stated that “while we are mindful of the constrained financial position of the NSE but given this level of indebtedness and absence of a firm assurance of payment by NSE management, we will unfortunately not be able to commence any additional work (executive selection, trading platform selection completion and implementation of the operating model), until all outstanding invoices are duly paid in full”.

The suspended president acknowledges that the NSE poor accounting has made it difficult for it to function as an independent entity. This has further weakened investor confidence in the market place as lack of detail and poor accounting at the exchange has restricted investor’s ability to make informed decisions about investment alternatives. Fear and panic gripped the Nigerian capital markets following the news of financial misappropriation and mismanagement of the exchange.

This market has made great efforts to build investor confidence since last years bailing out of the nine banks that threatened the survival of its financial sector. Hard work by the Central Bank of Nigeria (CBN), Economic and Financial Crime Commission (EFCC) and Security and Exchange Commission (SEC) to create a clear awareness in the minds of both local and international capital market operators that investing in the Nigerian capital market would reap benefits appear vulnerable.

Transparency

The Nigerian All Share Index that is already up almost 20% percent this year lost about 3% in the last three trading days indicating lack of trust and confidence in its markets.

The current status quo is calling for transparency within the NSE that should aid unravel the true picture of their books. The request by the suspended president to dispatch Income Auditors and Resident Examiners to the exchange should enable SEC to establish any fraudulent act within the exchange.

Nigeria’s economy has benefited from foreign investment and these investors that have been fervently deposited money into Nigeria’s equity and bond markets are certainly begging for transparency.

Challenges

The threat; with foreign investors likely to rush out of the emerging market following the latest NSE crisis, the effect on the Nigerian capital market could be compelling. In 2007, Nigeria enjoyed one of the strongest performances of any emerging market, on the back of surging banking and insurance stocks. Loaded with cash, some of the bigger banks were able to expand their operations globally.

But growing international anxiety over transparency and valuations is a concern. These are serious challenges for the markets if the current crisis in NSE is not resolved any time soon. The outcome is that Nigerian financial institutions will find it challenging to secure enough credit internationally to finance trade – a bread and butter business for banks in an economy which imports goods worth thirty billion dollars per year.

The Nigerian currency may weaken as volatility in the markets augment. Foreign banks may put off trading with their Nigerian counterparts. The ongoing concerns about the outcome of the SEC’s investigation may trigger further capital flight. This may result in greater demand for foreign exchange, and is expected to negatively impact the Nigerian stock market. Naira will suffer as a result

Fraud

A wave of white collar fraud is a major worry for Nigeria. SEC and EFCC have their job cut out on this one. It is a major concern as they investigate. These frauds come in the form of granting of unauthorized loans, posting of fictitious credits, fraudulent transfers or withdrawals, outright money theft etc.

These two agencies should support all legitimate efforts aimed at safety and soundness, as well as sustainable growth and the development of Nigeria’s capital markets. In doing so they should ensure that those holding public posts should not use their position to abuse the system.

Contact: info@cmcapitalnmarketresearch.com

Charles Malize
It’s absurd to hear about the enormous quantity of pollution caused in the Niger Delta that makes one quip: Is life more expendable just because it’s in a less developed nation?

The shocking news is that since oil exploration and drilling began over 50 years ago in Nigeria, millions of barrels of oil have spilled into the country’s Niger Delta that has created serious environmental and social impact in the region. There is an oil spill that occurs almost on a weekly basis and most of these leaks go unreported. The ongoing spillage has proved devastating and made the region an ecological disaster area.

Niger Delta is home to 31 million people, the world’s third largest area of wetlands, surrounded by mangroves and thrive in the business of fishery. These leakages are not cleaned up quickly and in some cases are not attended to at all. Experts monitoring the situation claim there are approximately 2,000 sites in the region that needs to be unsoiled.

It is estimated that approximately 60 percent of the leakages is due to deterioration of equipment and infrastructure. What’s more, there are issues related to sabotage by militants. Disruption by combatants has led to oil production diminishing by roughly twenty percent between 2006 and 2009.

Oil leakages in the region have resulted in reported health issues with children suffering from skin lacerations to breathing problems. Other ills include an acute poverty level with diminishing life expectancy in the area. All these are negatively impacting livelihood as villages and its populations that have depended on fishing, wildlife and farming are affected and to make matters worse – they are not compensated for it. Very complex subject as human rights of the locals are violated since their access to the necessary basics for survival are hampered.

What is the Government Doing?

The Nigeria government appears to have done very little to help the province. There has been little effort by the government to respond to the spills. Evidently, since independence, the country has earned over six hundred billion dollars in oil revenues and very little of it has been returned to the people. The region have seen very little of that money. There is such a discrepancy in terms of wealth and as a result the region has experienced an uprising in the form of terrorism that are engaged in sabotage and kidnapping. This has made it challenging for a lot of the oil and other foreign companies to successfully operate.

In terms of the Nigerian government taking responsibility in safeguarding the situation, the regulatory agencies which have been monitoring the situation and the spills have been practically powerless. Hence, companies are left to regulate themselves. This status quo is costing Nigeria and the oil companies so much and creating more headache as they struggle to find more assertive method in dealing with the situation. There is a growing anxiety, as observers especially in Nigerians have been watching what’s happened in America’s response to the Gulf and from their president.

The last few months have seen groups speaking out more on the issue and there are calls on the president; Goodluck Jonathan to give the regulatory agency some teeth to tackle the problem. Gas flaring which is acknowledged globally to be a very dirty and polluting fixation is not allowed in the US but is common in the Delta region of Nigeria. Nigerian courts have continuously – ruled against it but it continues to go on. It is disastrous for the region especially when you see pictures of people plodding through pools of oil, and at night, the sky is lit up by these gas flares which are putting toxins into the atmosphere – creating an excessive health hazard in the process.

Corruption

Corruption is frustrating the needed due process for this predicament as a major part of the country’s revenue is siphoned into offshore accounts. The country appears to have all the laws but everything seems to hinge on who is going to pay off whom. Paying lip service is very common practice. Unfortunately the country is branded as corrupt where laws don’t make that much difference. As one observer noted; “it is like – keep them quiet, – pay the chiefs off, pay the people at the top off. They’ll keep some of the other people under control. And so, it’s left down to this sort of terrorism, because local people don’t get any response from anybody unless they go and blow something up.”

As the 2011 general election draws close there are certainly advocates who are trying to draw international attention to what’s going on there, to at least the environmental problems, which in the end impact the Nigerian people and the global oil market

Technology

Ten percent of US oil comes from Nigeria. There are talks in various camps on whether the international community should embark on some kind of global coordination and planning process to tackle oil spillage. For example, oil companies cannot drill unless they have the proven technology and capacity to respond to leaks, explosions or to saboteurs. If it is made a requirement, this could actually lead to an enormous drive in innovation in cleanup technology.

One of the problems in the Gulf (United States) was not having the technology at hand to deal with the British Petroleum recent oil spillage. Apparently, some of the documents put out by the American Coast Guard in 2002, warned of that problem. The argument is that; unless it was actually a requirement, the companies would not invest in any appropriate technology. This needs to be enforced at a global level given these are global companies that are supported in different ways.

Contact: info@cmcapitalmarketresearch.com

Snap shot

Dogged by global financial squeeze and stagnation on oil prices, the Nigeria government has found a way to source money to fund its depleting infrastructure via the nation’s private pension plan. While this seems plausible, one must not overlook the risk factor associated with such scheme that could threaten life savings of retirees and older workers. There is a risk especially with the investment instruments available in the current economic environment. Nigeria needs to understand that when people approach retirement age, they should avoid exposure to peril such as speculation. Otherwise you could be looking at a lottery that involves financial hearsay.

Some questions:

1. What are the mechanics in protecting savers pensions? This investment is not is risk-free. Financial markets, whether they are shares, bonds or general financial instruments, operate with high levels of volatility, and none are immune from risk.

2. One has to acknowledge by their very nature, these markets provide significant levels of speculation that incubate like bubbles.

3. Savers should be concerned as the value of these funds can result in a sharp drop in the value of their financial assets. Assuming this to be the case, it will be difficult to predict how long it will take for the value of the assets to rally.

4. What experience does Nigeria local managers have in this arena? The West that claims to be experts in this area has had problems of their own. For example, In the United States where employees were encouraged to save in a 401k fund (a sort of pension fund) saw their “nest egg” evaporate due the recent global financial mayhem and as a result retirees in their sixties and seventies are back to work struggling to make ends meet.

5. The drop in the value of the funds could prove drastic for the country. The global economic crisis is still upon us; hence it will be interesting to know how managers of the fund are going to allocate assets.

6. Easier said than done – Given the situation, the government plan may not make it through both houses of Congress, as some lawmakers may oppose the plan.

7. Protesters/labor unions may see the government measures as a plan to plunder the funds of the retirees.

No doubt the scheme proposed could provide the country with much needed cash to meet its venture requirements. The country should be cautious especially when protecting investors from losses that could result from global market turmoil and impaired management of the fund. Nigeria’s national debt is on the rise as its financing needs spiral out of control. Reserves are faltering as global financial crises puts pressure on oil exports. Its capital markets have been on a down path as of late. The Nigerian stock market (All Share Index) has lost over 3% in the last 2 months, mainly due to global financial crisis and the recent allegations at the exchange on financial irregularities.

The impending outcome is government extending its powers by nationalizing pension fund accross the board as it struggles to meet future obligations on its foreign debt obligations. Control of the funds could translate into the government raiding new pension contributions to cover short-term debts that are due and financing the rest by dipping into foreign reserves. Nigeria needs to avoid been largely shut out of international capital markets as a result of a sovereign-debt default. This is another step in the country’s road to an unwelcoming severe structurural adjustment program (SAP). A familiar territory following more than a decade and half of a purnishing military rule.

Contact:info@cmcapitalmarketresearch.com

Doing Business in Ghana

Ghana’s population totals approximately 22 million people. Having made the necessary investment within, it has led a peaceful democracy for nearly two decades. This can be observed in the economy where poverty and corruption level has steadily dropped.

As highlighted in the previous essay, a major oil discovery off the coast of Ghana in 2007 has led to significant international commercial interest in the country. This discovery affords the country the potential to be the third-largest producer of oil in West Africa within a five year period. It has an active chemicals industry, as well as being one of the larger markets in the lubricants industry in the region.

For now, Agriculture – mainly cocoa remains a major source of income for the economy and accounts for more than one-third of Gross Domestic Product (GDP) and about 55% of their formal workforce. Other agriculture earners include timber, coconuts and other palm products, and coffee.

Ghana’s industrial base is relatively advanced compared to many other African countries. This includes mining, manufacturing, construction and electricity that accounts for approximately 30% of GDP. Remittances from Diasporas abroad remain a major source of foreign exchange earning.

Corruption

Ghana’s post-independence economic story was a problematic one that took a turn for the better in the late 1980’s. During this era many investments were poorly visualized and managed particularly in the agricultural and industrial sector. With cocoa prices declining and the country’s foreign exchange reserves dwindling, the country could not meet repayment schedules on its sovereign debt – the country was virtually insolvent and stagnated during this period. The government responded by abandoning unprofitable projects and selling some inefficient state-owned enterprises to private investors to raise capital.

At this time corruption and mismanagement of state accounts became apparent at the highest political level. With bribery and misconduct of affairs, there was a record inflation that led to growing dissatisfaction within. Industrial and agricultural production suffered due to inadequate imported supplies. Budget deficits surged almost 40% of expenditures in the late seventies. The local currency, Cedi, was increasingly overvalued and smuggling in black markets became rampant. Theses negatively impacted foreign exchange revenues.

Flight Lieutenant G. Rawlings’ second stint at the helm was in I981.Prior to his successful coup, no effective measures were taken to reduce widespread corruption and black marketing as the economy remained quiescent. Industry ran at about 10% of capacity due to the never-ending shortage of foreign exchange to cover the importation of required raw materials and replacement parts. Economic conditions deteriorated further in early 1983 when Nigeria, a trading partner, expelled an estimated 1 million Ghanaians back to their home country. It further had to absorb an additional 100,000 citizens expelled from Nigeria in 1985.

In April 1983, Rawlings was able to coordinate with the International Monetary Fund (IMF), and launched an economic recovery program, aimed at reopening infrastructure log jam and reviving waning productive sectors–agriculture, mining and timber. The economy’s response to these reforms was initially hampered by the absorption of 1 million returnees from Nigeria, compounded by the decline of foreign aid. However, his two terms in office saw an overture of unyielding macro economic reforms, improvement in security and the obliteration of corruption that has aided economic growth till date.

Turning the corner

Returnees from Nigeria and a drop in agricultural prices, especially coca in the 1980’s made situation worse. But in the summer of 1988, the status quo changed as improved weather helped the agricultural sector and cocoa prices turn the corner helping much needed revenue. The end result was a boost in infrastructure repairs and other sectors. Also, there were producer incentives from donors that aided the revitalization of output, renewed exports, and a foreign exchange auction that helped ease hard currency constraints.

The continuation of concrete macro – economic management together with major debt relief, large inflows of donor resources, relatively high cocoa and gold prices resulted in steady improvements in real GDP growth, which reached 5% in 2004. It attained an estimated 6.2% of GDP growth in 2006. Annual remittances totaling approximately $4 billion from individuals as well as non-governmental organizations (NGOs) and embassies in 2008 helped put Ghana in an assenting balance of payments position.

Ghana was recognized for its economic and democratic achievements in 2006, when it signed a 5-year, $547 million anti-poverty accord with the United States’ Millennium Challenge Corporation. This focused on accelerating growth and poverty reduction through agricultural and rural development. The accord has three key components:
1. Enhancing the profitability of commercial agriculture among small farmers
2. Reducing the transportation costs affecting agricultural commerce by improvements in transportation infrastructure,
3. Expanding basic community services and strengthening rural institutions that support agriculture and agri-business.
After a decade of structural adjustment reforms, the country has established a significant record of economic growth, expanding export industries, a growing stock market and a favorable private investment setting for local and international investors. This has supported a stable political climate and is on track to meet the Millennium Development goal of severing extreme poverty by 2015.

Challenges

Amid the progress made so far, the country still has some economic challenges that need advancing and just like any other developing country, this comes with the territory. There are still infrastructure bottlenecks, pitiable management in some sectors especially natural resources; improving human resource capacity and development; sustaining an investment climate that encourages and allows private sector-led growth, and privatizing remaining state-owned enterprises.

It is a given that the recent discovery of a major offshore oil project that is expected to produce about 200,000 barrels of crude per day, delivering a windfall of profits, is expected to change the lives of the people. The anxiety with market observers is that they could follow the path of Nigeria where the oil windfall over the decades has been squandered by administrators leaving most of the country in poverty. Nigeria earned more than $200 billion from its huge oil reserves between 1970 and 1999, but during that time, the average Nigerian grew poorer. Rather than develop the country and build a future, oil created a political system obsessed with greed and plunder. The country lacks a commanding political force with the interest of the people at heart in holding the government accountable for their excesses and unrestrained behavior.

Doing Business in Nigeria

Nigeria is regarded as the most populous country in Africa, and the eighth most populous country in the world. Its economy is one of the fastest growing in the world; the third largest economy in Africa and the country is a regional power in West Africa.

Nigeria is classified as an emerging market, with its abundant supply of natural resources, a sound financial and legal system. It enjoys a fast developing communications and transportation sector. The stock exchange (the Nigerian Stock Exchange), is the second largest in Africa. Nigeria is ranked 37th in the world in terms of GDP (PPP)

What is PPP – Purchasing Power Parity? : A measure for an appropriate exchange rate between currencies. It is a rate that represents basket of goods in country ‘A’ costs the same as in country ‘B’ if the currencies are exchanged at that rate.

Nigeria is the United States’ largest trading partner in sub-Saharan Africa and supplies a fifth of its oil. It is currently the 50th-largest export market for U.S. goods with the United States the country’s largest foreign investor.

Previously, economic development was mired by years of military rule, as corruption, and mismanagement nearly brought the country to its knees. The restoration of democracy and subsequent economic reforms has successfully put Nigeria back on track towards achieving its full economic potential. According to the Economist Intelligence Unit and the World Bank, the Nigerian GDP at purchasing power parity has nearly doubled from $170.7 billion in 2005 to 292.6 billion in 2007. The GDP per head jumped from $692 per person in 2006 to $1,754 per person in 2007.

During the oil boom of the 1970s, Nigeria accumulated a significant foreign debt to finance major infrastructural investments. A fall in oil prices in the 1980s translated into the country struggling to meet its sovereign debt obligations. Default resulted in arrears and penalty interest accumulation on the unpaid principal that ballooned the size of the debt.

Negotiations by the Nigeria authorities, in October 2005 with creditors resulted in an agreement to write off majority of the outstanding loan. It then used part of its oil profits to pay off the remainder to its creditors (Paris Club) in April 2006. The country made history at this time by being the first African country to pay off its sovereign debt.

Challenges

A decade and half of military rule was a disaster for the Nigeria economy. At this time there was a collapse of law and order, unsavory reputation for corruption, a run down infrastructure and unpredictable conduct of public affairs. This negatively impacted economic growth.
The return to democratic rule in 1999 resulted in the administration eagerness to try to reverse the situation by attempting to attract investment in the various sectors in the economy. They understood the need to augment economic growth by providing an enabling environment for investment to flourish.

For this reason, it took the necessary steps to strengthen the Nigerian Investment Promotion Commission (NIPC) to drive the program of willfully marketing Nigeria to investors both home and abroad.

NIPC is a Federal Government Agency in Nigeria established to encourage, promote, and coordinate investments in Nigeria. The Agency provides services for the grant of business entry permits, licenses, authorizations and incentives in a One-Stop-Shop environment. The services are provided in a co-coordinated, streamlined, efficient and transparent manner to meet the needs of investors. Source: NIPC website.

Although the situation has improved somewhat, the economic climate is still exposed to unpredictable policy formulation and implementation. Also there is a problem that lies in the competence of civil servants that lack the sense of responsibility to execute and would choose to aggravate and discourage any would-be investor.

Another challenge is the unease in the Niger Delta that is creating unnecessary headache for the administration. Nigeria’s Delta region is home to vast oil reserves, which make the country one of the worlds biggest oil exporters. Disfigured with corruption, the region remains poor and undeveloped. For many years, Delta militants that hide out in the swamps and creeks have attacked oil pipelines and kidnapped foreign workers for ransom. There was an amnesty deal struck with the militants in 2009 by the administration. Albeit the case, abduction for money is still widespread.

Corruption

Last essay on corruption highlighted that; as the country embarks on the path of providing a series of incentives to attract foreign investment, deception within public agencies continues to be a major obstacle for international investors. Nigeria’s rating suffered a set back in the 2009 Transparency International ‘Corruption Perceptions Index’ highlighting the extent of the problem. According to the agency; the legal, accounting, and regulatory systems meet international standards, but enforcement is inconsistent and often appears arbitrary.

Citing a recent joint survey by the Nigerian Economic and Financial Crime Commission (EFCC) and National Bureau and Statistics (NBS); one out of three Nigerian businesses bribes public officials. The report identified crime and corruption as key obstacles to doing business in the country. One out of three enterprises on the average had to pay a bribe to public officials when carrying out certain administrative procedures.

Both agencies acknowledge that crime and corruption represent very serious obstacles to doing business in the country and creates an unsympathetic obstruction to economic activity.
As highlighted in the report, other impediments following closely to crime and corruption include inflation, political instability, changes in laws and regulations, unclear laws, complicated business registration as well tax regulations.

Resources

Oil accounts for more than 80% of the Nigerian government revenue. It is common knowledge amongst political and economic observers that the nation has the potential to earn more revenue from sources other than oil. Opportunities in other resource avenues remain largely untapped owing to neglect of the sectors.

Agriculure

In the last essay I pointed out that oil remains a major source of revenue for the country and that the nation has the potential to enhance earnings from other sources like agriculture, but is neglected..
Lack of national focus on agriculture and manufacturing has weakened the country’s ability to create much needed jobs. This is a sector that has the ability of supporting the majority of the workforce in the country. Research and Development (R&D) in this sector is weak and corruption is extensive.

With the immense resources at hand, the obvious constraints including flawed infrastructure, corrupt institutions, difficulty in accessing bank credits, high lending bank rates, poor literature and governments inability to execute makes it challenging for this segment to progress. This space needs a government policy that favors a climate of strong alliance and support with private sector and this is misplaced.

Cement
A success story;

The Obajan Cement Company is an example of the new lease of life for the growth of Nigeria’s non-oil sector of the economy. A $1billion project that commenced in 2002 with local and foreign investors in Nigeria. This was initiated by the business entrepreneur, Mr. Aliko Dangote. This project has been completed and now feeds the Nigerian market. The company is described as the single largest cement plant in Africa with a capacity to produce close to 7.5-million tons of cement per annum.

The cement company is projected to save Nigeria about US$385-million in foreign exchange annually from cement imports. Source Case study: Obajan Cement Company; Ogbe Armstrong

Conclusion

To conclude, Nigeria and Ghana are rich in natural and human resources with a trading relationship that has spanned for decades. So why the recent backbiting? It is a given that just like any other sovereign nation they do have their own challenges.
A recent development lends credence that both countries have agreed to resolve any outstanding trade disputes by September 2010. As both countries embark on this positive path, it is in their interest to allow access to their markets. They are growing emerging frontier markets that should work on strengthening their affiliation. This remains strategic for the region. The two countries enjoy pulsating industries that need to be made stronger. The unnecessary government regulation to limit movement of trade defeats the free trade objective. It is anti- globalization. The world now is a “global village” and in the case of both sovereign nations, a partnership that has existed for decades should be fortified. Global markets necessitate free trade that promotes businesses which compliment one another.

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Ghana

Ghana remains one of the fastest growing economies in the Sub Sahara Africa gifted with an assortment of natural resources. The domestic economy continues to create growth through agriculture. With a 55% workforce in this sector it generates approximately 35% of the country’s Gross Domestic Product (GDP).

In 2006, the country signed an agreement with the Millennium Challenge Corporation (MCC). This is an independent United States aid agency that is helping lead the fight against global poverty, and in the case of Ghana assists it in transforming its agricultural sector. It took advantage of the debt relief program under the Heavily Indebted Poor Country (HIPC) in 2002, and is also benefiting from the Multilateral Debt Relief Initiative that took effect in 2006.

Gold, cocoa productions and individual remittances remain major sources of foreign exchange. Sound macro-economic management along with high prices for gold and cocoa helped sustain GDP growth in 2008 and 2009. Albeit the case, it continues to some extent rely on international financial and technical assistance to grow its economy.
Ghana recently made a major oil discovery that could translate into 800 million barrels of recoverable oil. Its new found wealth is expected to have a major impact on growth within the next few years. Without doubt, this has made the country more attractive in the eyes of foreign investors at a time global investments in the petroleum industry are diminishing.

The new oil discovery well was struck by an American company – Anadarko Petroleum Corporation on the deepwater Kosmos Energy’s West Cape, while Ireland’s Tullow Oil announced the findings of its nearby Hyedua-1 well in the adjacent Deepwater. This deepwater find reveals the immense potential that exists in Ghana’s oil industry.
Ghana first discovered off shore oil reserves at commercial levels in the 1970s. In the year 1983, the government set up the Ghana National Petroleum Corporation (GNPC) to promote exploration and production. It began its production in 1990.The GNPC entered into several agreements with western oil exploration and development companies to prospect which led to a production of about 6,900 barrels a day by 1992.
With these new discoveries, the country entered into a pecuniary agreement with the oil giant, Exxon Mobil, to buy Kosmos’ interest in Ghana’s Jubilee Field at US$4 billion. This transaction reveals the magnitude of the growing interest in Ghana and its potential contribution to the region’s oil and gas industry.

Assuming all goes according to plan; this offshore oil project is billed to produce approximately 200,000 barrels of crude per day, bringing in a windfall of earnings. Gold and cocoa exports, the driving forces of the economy for decades, will certainly take a back seat. Although this seems to be the case, there is the anxiety within global community that oil could incite unpleasant corruption in the country and, just like other countries, ravage its economy and politics.

Nigeria

Nigeria is ranked number eight amongst the world’s largest oil producers. With this status, the country has struggled to boost its economy as progress has been undermined by corruption and mismanagement of its oil revenue. As a result, growth in real economy that is dependent on addressing and building key infrastructure has suffered. This is further aggravated by power cuts.

Telecommunications, transport, energy infrastructure and security are poor and present operational challenges for companies. These items are fundamental components for longer-term stable growth for any economy. The country is keen to attract foreign investment but is hindered for these reasons.

Additionally, mismanagement of earnings has fuelled violence and corruption in the Niger Delta – the home of the oil industry. This negatively impacted the overall budgetary position as output declined and budget deficit widened.

As of recent, the status quo seems to be in reverse following an accord signed by the Niger Delta militants and the current administration. The situation is somewhat calm and as a result-oil production, has increased to over 2 million barrel per day compared to the middle of last year’s figure of a low 1.6 million. It is projected that output should remain at this level provided this calm remains in the region. With its budget on crude oil price set at US$57 per barrel (oil provides about 80% of government revenues), the government can easily finance its deficit for the next few years given its low level of indebtedness.

The country benefited from the debt relief program in 2005 and as a result its sovereign debt burden is quite low. This should aid the country to further its economy in the ensuing years. The debt relief with oil windfalls coupled with a build up of foreign reserves has to a large extent reduced external debt to 6% of Gross Domestic Product (GDP).

The government has recently introduced some reforms aimed at improving the investment environment. Notably and recently, is the announcement of its plans to reorganize the troubled oil sector. The plans propose to restructure the management of the Nigerian National Petroleum Corporation (NNPC), into five functional companies that should tackle corruption and deficiencies in management head on.

Other Resources

Although oil remains a major source of revenue for the country, it is common knowledge that the nation has the potential to enhance earnings from other sources like agriculture. However, these opportunities remain mostly untapped owing to neglect of the sectors.

Nigeria has one of the finest arable farmland in the region. Reports in this sector show that investment in the agricultural segment could earn the country an extra windfall and feed its citizens if the government executes the necessary reforms it so deserves. This should assist the country to compete profitably with global trading partners as well as earn the much needed foreign exchange to fuel its economy

The Cement sector is another space that is beginning to display signs of life as building construction in the region booms. It needs this sector to grow to enable it cope with the country’s vital infrastructure and housing needs.

Corruption

As the country embarks on the path of providing a series of incentives to attract foreign investment, subornment within public agencies continues to be a major obstacle for international investors. Nigeria’s rating suffered a set back in the 2009 Transparency International ‘Corruption Perceptions Index’ highlighting the extent of the problem. According to the agency, “the legal, accounting, and regulatory systems meet international standards, but enforcement is inconsistent and often appears arbitrary.”

Loggerheads on trade agreement

It is a given, Nigeria and Ghana, are two powerful “market frontier” neighbors that boast of healthy natural resources. Both countries have a long standing relationship and share historic bonds in terms of trade, traditions and culture. Amid such ties, tension on trade has been looming for some time.

Recently, both countries are at a stand-off in trade and commerce agreements that are expected to hinder their economic growth. Not too long ago, Nigeria banned trade in certain products with Ghana despite its ratification of the West African Protocol on trade liberation, which ensures free movement of goods and services among member states.
Equally, Ghana set conditions for Nigerians business community in Ghana that is considered “harsh economic conditions.” It recently introduced a $300,000 threshold deposit on Nigerians that want to venture into business in Ghana. What’s more, an entrepreneur under the condition must employ no fewer than ten Ghanaians before they are licensed to do business in the country. These extreme conditions are regarded as excessive and are likely to drive Nigerian nationals that want to set up shop in Ghana to leave.

As each country embarks on a troubling path of protectionism they should benevolently study and review the situation at hand and carefully seek reconciliation that should eliminate trade barriers across their borders. A resolution needs to be sort to maintain the long term economic ties that has existed between both countries over the years.

The partnership according to GIPC

According to a recent statement at a forum in Lagos, Nigeria by the Director of Marketing and Public Relations for the Ghana Investment Promotion Centre (GIPC), Mr. Edward Ashong-Lartey, “Nigerian businesses account for about 60 percent of foreign investment in Ghana.”

GIPC is a government agency that encourages, promotes and facilitates investments in all sectors of the economy except mining and petroleum. They facilitates and supports local and foreign investors in both the manufacturing and services sectors as they seek more value-creating operations, higher sustainable returns and new business opportunities.
Source: GIPC website

The agency regards Nigeria’s interest in the country as very high, especially in the area of communication, banking along with other sectors. It further added that the Ghanaian officials are discussing possible areas of further collaboration with Nigerian investors, the kind of incentives that will promote investment and business relations between both countries.

In, Mr. Ashong-Lartery’s talk titled “Investing and Growing Your Business in Ghana – Challenges and Opportunities”, he stated that it is aimed at enabling investors both in Africa and other continents to harness the business opportunities that are abound in Ghana, adding that the interest on Nigeria is borne out of the fact that she has the experience in manpower and technical capacity that are believed would be relevant to Ghana to develop its nascent sectors, especially oil and gas. Said Mr. Ashong-Lartery, “Talk about the population, the land mass, abundant natural resources, technocrats and so on. Already, Nigeria is seriously playing active role in Ghana’s economy.

“Ghana investment opportunities for Nigerians are in agriculture and agro-processing, fish processing, sports, Leisure, transport infrastructure, power and telecommunications, among others.

“Government would harness the opportunity that abounds in the discovery of and exploration of oil in the country to woo and encourage would-be investors. All expectations of investors are assured and would not be dashed.”
According to American Central Intelligence Agency (CIA) fact book on Imports – partners: China 15.6%, Nigeria 14.7%, India 7.4%, US 5.5%, France 4.4%, UK 4.4% (2008)

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With global food price inflation at a ten-year high and the United States dollar losing steam, supermarkets items globally have gotten more expensive. Records show that prices of basic staples, especially in Europe and the United States, have shot up between 10 and 12 percent over the past year.

As of 2008, the market saw the effects of such substantial increases on the poorer nations. An example is the riot in the Caribbean island of Haiti over exorbitant food prices that saw the removal of their Prime Minister. In 2008 Egypt saw riots over high prices of wheat. Recently, riots broke out in Mexico when tortilla prices rose.

The Law of Supply and Demand

The news is that agricultural commodities are now on most investors’ radar screens. (This is where the money is to be made.) Smart money investors like commodities sage Jim Rogers argue that soft commodities are where the big gains are at least for the next five to ten years. The reasoning behind this is the law of supply and demand.

On the demand side, global growth and rising wages among the world’s middle class are heightening the demand for food and luxuries. The new middle class wants to eat and enjoy the same luxuries as the West. Days of relying on a starch-based diet are becoming a thing of the past as populations crave more protein-based foods. China has over a billion people and their average calorie consumption is expected to double over the next decade.

Climate change is a major challenge for the supply side. Global inventories of soft commodities are at a low. For the past decade, China has been losing fertile land at an alarming rate each year. This drop has been blamed partly on weather conditions that have negatively impacted supply.

Australia, on the other hand, is a major producer of soft commodities and has, over the years, been facing water shortages that led the government to invest heavily in irrigation for its farmers. Rice production has dropped over 90 percent and cotton production has more than halved.

Biofuel Subsidy

Ethanol demand is set to jump significantly thanks to the US’s introduction of corn-based ethanol subsidy. Today, one out of five bushels of corn produced in the United States is likely to go toward ethanol. This subsidy is aggravating the problem of high prices in the soft commodity market. The estimated demand for crops for biofuel is set to double within the next 20 years. The projection is that half of the cars produced in America will run on mixed fuels by 2012. Statistics shows that for Europe to meet its green goals, it will have to allocate 25 percent of arable land toward ethanol production.

The quagmire here is the inadvertent consequence as land shifts toward corn. This move by the US government should make soybeans more expensive. The same case can be made for wheat and barley as fields are turned toward rapeseed crops. Also the new demand for corn means a bidding war has erupted between livestock producers and the ethanol industry. The consumer will be driving cleaner cars but eating less meat as global output of beef, pork, and chicken is expected to nose-dive.

Dollar

Most global commodities are traded in dollars and this tends to have an effect on commodity prices. For example, in October 2009, when the dollar lost value against major currencies, global commodity buying—especially precious metals—surged, including soft commodities.

When markets are in a panic mode over the unforeseen or bad news, investors tend to pull large amounts of money out of all markets. This occurred in 2007 and 2008 when the global financial crisis put a damper on the markets. This negatively impacted commodities in general. The credit turmoil saw the likes of corporate giants AIG, Citibank, and General Motors on the brink of insolvency. It resulted in investors pulling large amounts of funds out of the market that spread to other asset classes including commodities. An anxiety laden period hung over all markets as investors remained jittery while awaiting the fate of these institutions.

United States Department of Agriculture (USDA) Supply and Demand Report

The United States is the world’s largest corn and soybeans producer and the third largest producer of wheat. Total acreage of cultivable land in the US for soybeans and corn is 160 million acres.

Grain investors usually have a number of factors to consider, with the main focus being the USDA monthly report before placing their bets. Analysts’ projections and the government forecast on the amount of grains left for supply at the end of a given period tend to affect market prices. For example, a March 2009 US soybean and stocks report forecast a drop of 10 million bushels. This led to prices of soybeans rising. Investors and traders normally watch for open interest on the reports before venturing into the market. They study the report of the growing countries (the United States, Brazil, and Argentina) which may show the planting supply of soft grains meeting demand. (This report tends to be heavily dependent on grain drought worries.)

In the United States it is customary for investors to pay attention to the most important crop reports of the year when the US government forecasts how much corn and soybeans farmers will sow over a period across the country. This report normally is expected to project plantings of soy and corn for the period. It is billed the March 31 USDA Annual Planting Intentions report, the first official word on what farmers intend to plant during springtime based on actual farmers’ surveys.

This data is a market driver as the report is eagerly awaited by investors in farm equipment companies, livestock producers, grains transporters, and/or makers of products ranging from bread and pasta to ethanol. Investors at times need to make a decision quickly as they await the report, because this is usually their last chance to see a price change that could sway them one way or the other.

Also, investors are eager to know how the US grain competitors are doing in terms of having an adequate supply in the marketplace. For example, farmers in Argentina, which competes with the United States in the world grain, export market, with a recent long boycott of selling their grains normally leads to investor’s anxiety in terms of supply. The problem in Argentina has always been the government imposition of high taxes on their produce and the fight of these farmers for the higher export taxes proposed. With this distraction in mind, grain investors tend to pay attention to the basic supply fundamentals: spring planting.

USDA Annual Outlook Conference

The United States’ prices are usually supported by short covering ahead of the USDA Annual Outlook Conference. The 2009’s conference was held in Arlington, Virginia. Investors and traders are generally interested in the USDA estimates of global wheat planting as well as expectations of US soybean vs. corn plantings.
The market will generally factor in USDA projections that are expected to come in the form of an increase in US soybean plantings opposed to corn, or vice versa.

Fertilizer Prices

It is a known fact among traders, investors, and analysts that the price of fertilizer combined with the national crop insurance rate help set grain prices. The insurance targets are used as the base price to determine crop loss payouts. In 2008, priced fertilizer and national crop insurance facilitated the setting of corn prices at $4.04 and soybeans at $8.80 per bushel. 2009’s retail price for fertilizer traded in the range of $850 to $900 a ton. Wholesale price is in the $350 to $400 range. Retailers in 2008 were stuck with exorbitantly high-priced fertilizer, buying it at high prices due to supply fears.

Weather

Weather conditions have always played a part in the pricing of commodities. For example, floods in the upper reaches of the United States bordering Canada have in the past threatened the seeding of spring wheat. Also, a drought in California and southwest Texas created a severe impact on crop yields.

The harvest in the growing countries, which tends to hinge on climate conditions, usually helps indicate how well the crop season will be. Soil moisture is equally important. Weak soil moisture tends to impact crop yield negatively and will result in future high prices. When there is a continuous hot dry weather on farmland it negatively impacts future supply and, as a result, prices. Therefore investors and farmers pay attention to weather and soil moisture conditions before deciding which direction to follow.

Mother Nature issues leading to disruptions of commodities supply usually translate into investors and traders holding long positions.

Economy

The recent global recession (2008–2009) clouded investments in soft commodities as the world wide grain demand dropped. During this period, the market experienced a global trade volume drop of almost 10 percent. This was the most major contraction since WWII according to a World Trade Organization report.

One of the real challenges that surrounded grain pricing in early 2009 was the fast pace of the changing economic environment. Traders, investors, and farmers were eager to know when demand strength would return and how the likelihood of inflation would influence grain prices.

To conclude, the United Sates is the world’s largest exporter of grains and it has become customary for the markets to shadows its spring planting intentions. In addition, the strength of the dollar is a convincing factor in terms of moving the market. A weak dollar against a basket of major currencies makes all US commodities cheaper to overseas buyers and vice versa.

Seeding expectations, the recent US government action to heighten the debt market following the recent recession, and politics especially in Argentina have all aided the bullish run in the soft commodity space. (Argentina is the number three soybean exporter after the United States and Brazil and the number one shipper of soybean meal.)

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Charles Malize

When governments demonstrate inability to repay debt or default on their loan agreement the outcome is a trigger of a financial meltdown in their capital markets. A depressed economic growth and a weak stock market, make it harder to raise capital in the international markets and even more challenging to satisfy outstanding loans.
In light of the euro zone crisis, some African countries in the 1980s and 90s have been down this road before with similar severity if not worse. South African and Nigerian foreign trade and investments were affected by sanctions and boycotts during this period.

In the case of South Africa, the most effective sanctions measured during the apartheid era were the withdrawal of short-term credits in 1985 by a group of international financial institutions. Many foreign corporations sold off their South African investments and left hence immediate loan repayments proved challenging to meet. This negatively impacted its external debt and the economy.

In the case of Nigeria, the military coup by Rtd. General Ibrahim Babangida and Rtd. General Sani Abacha led to foreign investors withdrawing their investments amid international pressure to return the country to a democratic system. The outcome was a ballooned budget deficit that necessitated their seeking a lifeline from international donors –the International Monetary Fund (IMF) and the World Bank. This led to a number of austerity measures by these agencies popularly known as SAP (Structural Adjustment Program).

South Africa recovered following the end of the apartheid era. Nigeria avoided financial collapse following a change to a much needed democratic structure that resulted in debt forgiveness by international donors.

What is SAP?

Structural Adjustment Program are economic policies which countries must follow in order to qualify for new World Bank and IMF loans and help them make debt repayments on the older debts owed to commercial banks, governments and the World Bank.

SAPs’ generally require countries to devalue their currencies against the dollar; lift import and export restrictions; balance their budgets and not overspend; and remove price controls and state subsidies.
Devaluation makes their goods cheaper for foreigners to buy and theoretically makes foreign imports more expensive.

Balancing national budgets can be done by raising taxes, which the IMF frowns upon, or by cutting government spending, which it definitely recommends. As a result, SAPs’ often result in deep cuts in program like education, health and social care, and the removal of subsidies designed to control the price of basics such as food and milk. So SAPs’ hurt the poor most, because they depend heavily on these services and subsidies. Source: The Whirled Bank Group

Africas’ Sovereign Debt

Amid the current financial crisis in the euro zone, African governments’ sovereign debt is increasingly being seen as less risky and more attractive than that of advanced economies. It is hard to underestimate the appeal of some of the emerging African countries, as financial institutions invest assertively for their securities, revealing a shift. The old status quo where these countries were considered a risky environment in part due to their troubling Debt to Gross Domestic Product ratio has changed. Today, it is the industrialized governments that are accumulating the biggest debts, not emerging market countries, and revealing a big change from previous sovereign debt crisis.

The diminutive sovereign debt in some of these emerging African countries has benefited them. A large part of debts were reduced as a result of debt forgiveness by donors. This aided them to record fast growth while restraining government spending. It helped their Debt to Gross Domestic Product (GDP) ratio contract sharply.

Note: As any nation’s debt level advances towards 100 percent of their GDP, it increases the country’s sovereign risks enormously. The obvious is that most of the country’s earnings from taxes and other sources have to be spent on interest payments to satisfy debt. The end result is one having their hat in hand to donors such as the World Bank and International Monetary Fund for help that is usually accompanied with punitive measure to qualify.

Although public finances in the emerging market countries appear somewhat strong, much needed attention is required and should focus on management of their sovereign risks. Assuming these countries find themselves in the same demise as their European neighbors the outcome is the risk of being denied access to raising new capital in the international markets. The ones that can raise funding will have to do so at a painful cost.

The interest rate for long term financing charged to developing countries in the international capital markets comes at a price and in some cases could be as high as 12 percent compared to the United States that is financing its own debt for less than 3 percent. This restricts economic growth and could lead to a cavernous recession as cost for a lifeline will have a profound impact on the revenue the government can raise. This will certainly make it challenging for the country to meet the needed targets for cutting the fiscal deficit. The outcome; a default as debtors are forced to repay every dollar owed.

Institutional Investors in Africa

While much of the distress today is confined to the euro zone, unsustainable government debt has become a global concern. As the debt crisis rages out of control the fear with investors is a threat that could cripple euro zone governments and spread to other regions around the globe including Africa. This will impede global economic growth going forward. With such a scenario, investors become self-protective with their investments.

Some of the European and American institutional investors that are exposed to the sovereign risks in the euro zone have operations in Africa. Muddling through the current mess in Europe is creating panic with investors as they dry up. They are fast disappearing as they become defensive in the market place. This is not conducive for global financial markets. The ones that are invested in Africa where markets has somewhat been less volatile are looking to raise cash. Their withdrawal of investments could threaten the stability of some of their African affiliates and the capital markets in the process. This could prove disastrous for the region that is trying to recover from decades of neglect and abuse. For this reason, containing the crisis requires euro zone policy makers to strengthen control and management of their fiscal position to avoid further financial mayhem from spreading.

Currency

In summary, beneficiaries of the current euro zone crisis have been the emerging markets, especially those seen as having well managed fiscal policies and reasonable growth prospects. These markets have seen strong capital inflows as investors choose their bonds and equities over those of the industrialized countries. This generally translates into stronger currency for the countries issuing those bonds. Although this appears good in the interim it does come with its own headache as there is a risk, exports could diminish leading to elevated budget deficits and creating more problems that it was suppose to solve.
Hence it is central that policy makers shadow the current euro zone fallout of the debt crisis carefully, and develop strategies to assist them manage their risks effectively.

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