Exit of the banking giants and the crisis of confidence in the Nigerian economy

Early this week the CBN reported that two of the world’s banking giants HSBC and UBS have decided to take their representative offices out of our shores.

UBS is a Swiss global banking firm providing financial services to private, corporate and institutional clients. It is co-headquartered in the Swiss cities of Zurich and Basel. UBS is the 11th largest banking institution in Europe, with an asset base of about US$920 billion. It has offices in more than 50 countries, with a presence in all the world’s principal financial centres. As we understand it, UBS opened their Representative Office in our commercial capital of Lagos sometimes in mid-2014. The bank provides services in terms of wealth management, investment banking and asset management within an integrated framework and leveraging on its global reach.

HSBC is one of the world’s most respected financial institutions. In the early nineties at a luncheon event in Oxford I once met the great grandson son of Sir Thomas Sutherland, the original founder of HSBC. Founded in Hong Kong in 1865, the Hong Kong Shanghai Bank, as it then was, grew to be one of the world’s leading international banks, with assets today in excess of US$2.5 trillion.

On July 18 this year, a HSBC research painted a rather gloomy picture of the current administration and its mismanagement of the economy. The report noted that the re-election of President Muhammadu Buhari “raises the risk of limited economic progress and further fiscal deterioration, prolonging the stagnation of his first term, particularly if there is no move towards completing reform of the exchange rate system or fiscal adjustments that diversify government revenues away from oil.”

Titled, “Nigeria: Papering Over the Cracks”, the report identified seven issues that Nigeria’s economic managers have failed to address. The first is the sluggish growth of the economy, which is below 2%, as against 2.7 percent of average annual demographic growth. This actually amounts to negative economic growth in real terms, as demographics outstrip real output. While oil prices continue to rise, the non-oil sector which currently accounts for 90% of GDP remains abysmally sluggish.

It also pointed to the spectre of unemployment which continues to haunt the Nigerian people. Unemployment has risen three-fold in a matter of 3 years, to an estimated 19% by year’s end 2017. As a matter of fact, youth unemployment averages 24%, with the worst hit areas of the North East and North West, having incidences of 70 percent.  Rural banditry, kidnapping, crime and nihilistic violence have driven millions out of the rural countryside, undermining food security and building-up a large army of unemployed youths. The situation is dire.

The report underlined the government’s fiscal follies in terms of over-reliance on oil revenues, failure to expand the tax base and its addiction to domestic and foreign borrowing, with its attendant dangerous threshold in terms of the ratio of debt repayment to total revenue. Nigeria’s debt has ballooned from N11 trillion in 2015 to more than N22 trillion (a staggering sum of US$73 billion) today. What is worse is the opacity surrounding what the loans are being used for. Some would point to the utter folly of incurring foreign loans to build railways to a far-off barbarous Sahelian outpost such as Niger Republic.

The HSBC report concludes that Muhammadu Buhari has become more of a liability than an asset for the ruling party. The APC itself has become a fractious rabble that is no longer fit for purpose. And given the current political-electoral cycle, unbridled spending in an election year can be expected to put more pressure on inflation and spending, thereby worsening the exchange rate while undermining key economic fundamentals.

Aso Rock reacted rather sternly to the rebuke by HSBC, opining that what “killed” the economy in the past was “unbridled looting of state resources by leaders, the type which was actively supported by HSBC.” In a rather unseemly combativeness, the presidency pointed out that HSBC had “no moral right whatsoever” to assert that the re-election of Muhammadu Buhari for a second term risked limited economic progress in Nigeria. The bank pointed to the economic recession of 2016-2017 and the government’s slow response and the accompanying hardships, joblessness and general despondency as factors giving an unprecedented low rating to the current administration.

The anti-graft agency EFCC was not to be left out of the affray. In a statement posted on its official Facebook page, the EFCC declared that HSBC is synonymous with money laundering. They listed some of Abacha’s loot that were allegedly laundered by HSBC, concluding: “We shall not rest on our oars until every penny…is repatriated to Nigeria to improve the lives of the people.”  A question that inevitably arises is why the anti-graft agency never brought those issues to the fore until the quarrel between HSBC and Aso Villa broke into the open, when the bank took a dim view of the government’s economic policies and the prospects of the president’s re-election.

At the beginning of the stand-off between South African telecoms giant MTN and our central bank over repatriation of $8.1 billion, UBS expressed the view that the dispute may erode investor confidence in the country. The presidency again reacted in an infantile manner. They accused UBS of being one of the conduits for money laundering amounting to US$100 million by former military dictator General Sani Abacha.

These controversies came at the wake of a report by the Economist Intelligence Unit (EIU) which paints a bleak picture of the country’s economic conditions and prospect. The EIU, in a September report on Nigeria, declared that the administration lacked competence in managing the economy and that the ruling APC will lose the coming elections.

I do not think it was wise for the presidency to engage in such open warfare against the banking giants. A member of the Economic Team should have written a well-reasoned paper to counteract the accusations from HSBC and UBS. It was not necessary to be so defensive and adversarial. Any government that treat global banking giants as adversaries is digging its own grave. More than anything else, these people respect those who engage with them at a high patrician intellectual level of economic reason, not the low level of plebeian name-calling Logicians will tell you that ad hoiminem argumentum has no place in economists’ debates and discourses. This is not to say that the government may not have a point in the charges it laid at the doors of the banks. Early this year HSBBC had to pay a US$101 million fine for cheating some of its clients in its international share trading. Earlier, in 2016, a HSBC currency trader was found guilty of front-running a US$3.5 billion client order in the United States. As of June this year alone, the Bank’s management had to set aside US$773 million to settle problems relating to tax evasion and money-laundering in India and other jurisdictions.

In matters of fraud, UBS is not a boy scout either. In 2011, a UBS trader, Kweku Adoboli, a Ghanaian national, was involved in a gigantic fraud involving some US$2 billion. As we speak, UBS is battling a tax evasion case with French authorities in Paris that could see it being forced to cough out US$5.76 billion in fines.

Clearly, these banks are not paragons of virtue by any stretch of the imagination. The great industrialist and inventor Henry ford famously expressed a great pessimism about bankers: “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

We have, unfortunately, not acted with maturity in this case. The exit of the two banking giants does not spell doom. They are just closing down their diplomatic outposts. But as signals go, it is a bad sign. It has the potential of discouraging potential investors.

Obadiah Mailafia

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