Nigeria’s central bank governor has rejected growing calls for strong regulatory intervention in the country’s financial markets as panic-stricken financiers withdraw en masse.
“If the fundamentals are wrong, then you can do something. But if the fundamentals are sound then there is less need,” he told Emerging Markets in an interview this weekend.
Nigeria has been hailed as a key frontier market benefiting from an avalanche of cash from Western investors in recent years. But as investors and banks shun risk and build up cash, its stock market has fallen by 30% since March.
Soludo said the global financial turbulence had been fuelled by “the animal spirit that is dominating globally” – a term used by economist John Maynard Keynes to refer to waves of optimism and pessimism driving markets.
Nigeria is “weathering the storm well”, Soludo said. He cited the banking system consolidation drive he pioneered in 2005, that has brought the number of banks down from 84 to 25.
He argued this has now created well-capitalized financial institutions with significant market power, stable earnings and sound management, serving as a “buffer” against the global credit crash. As a result, he did not envisage further regulatory interventions in the banking system in the near term.
In a telling sign of the newfound confidence of emerging market players in the wake of the developed world meltdown, Soludo said for Nigerian banks “it is time to take over the world, now [asset] prices are low”.
He rejected suggestions that financial institutions should be less enthusiastic about beefing up their securities portfolio and operations in wake of the bonfire of Western investment bank failures.
Referring to the swathes of jobless bankers and investors in the West, he said Nigeria was well positioned to be “net beneficiaries of the surplus of skilled manpower now coming into the market place”.
Nevertheless, Nigerian banks are threatened by reduced credit lines in advanced economies for trade finance. But Soludo argued that domestic institutions had limited leverage and “strong balance sheets”. He vowed to “open up our lending window for them so they can borrow as much as possible”.
Last month, Nigeria’s monetary policy committee reduced the benchmark interest rate to 9.75% to 10.25%, while reducing the cash reserve requirement from 4% to 2%.
Soludo argued the country was insulated from the storm as the country has a conservative oil price benchmark of $59/barrel for national budgeting while foreign investors account for only 8% of capital market liquidity.
He was sanguine on inflation despite consumer pries of 12.4% year on-year in August. He said that core inflation – that strips out volatile food and oil commodity prices –is at 3.9%, and the long-term price performance outlook is stable.
The IMF predicts sub-Saharan Africa’s second-largest economy will witness a high growth rate of 8.1% in 2009, compared with expected 2008 growth of 6.2%.