By Olu Ajakaiye &`Tayo Fakiyesi 1
Introduction to the Issue; Impact on Capital Market; Capital Market, Banking and the Real Sector, The Oil Sector; Trade and Capital Flows; Remittances and ODA Flows and Assistance; On the Social Sector; On Growth and Poverty; Summary Impact of the Crisis; Govt Responses; and Possible areas of responses. 2
The global financial crisis triggered credit crunch has hauled countries into recession in spite of measures taken to reverse the trend. The integration of the financial markets has increased the contagion effects of the financial crisis. Nigeria financial markets being part of the integrated world market is expected to be affected. Evidences have emerged in this direction: Nigeria Stock Exchange s market capitalization fell by 45.8%; Crude oil declined precipitously from $147 per barrel in July 2008 to $47 per barrel in January 2009, thus, making the implementation of the 2009 budget a hard task because of the reduced earnings from the crude oil export. 3
All share index and market capitalization of the Nigeria Stock Exchange has grown over the years only to fall precipitously after peaking in March, 2008 at 66371 and N12,640bn, respectively to 21813 and N4,879bn by end of January 2009. How the economy might have been affected? Foreign portfolio investments withdrawals Credit crunch became manifest in banks who had given out loans to some investors to invest in other financial instruments (particularly IPOs of other banks) with the hope of making profit. 4
70000 All-Share Share-Index 60000 50000 40000 30000 All-Share-Index 20000 10000 0 2002 2003 2004 2005 2006 2007 Mar. 2008 Jan. 2009 5
Market capitalization (N billion) 14000 12000 10000 8000 6000 Market capitalization 4000 2000 0 2002 2003 2004 2005 2006 2007 Mar. 2008 Jan. 2009 6
Economic downturn in developed world; crisis in the Niger-Delta region; increased interests by developed world in innovative energy resources like solar, bio-fuel and wind, and bitumen further plunge the economy to crisis. The effect of Intensifiers that include policy misadventure by the government: government s initial stand on crisisinsulated economy and the proposed recapitalization plan for the stock market players (brokers). 7
Due to withdrawal of funds and possibility of increase bad and doubtful debt of the bank, the net worth as well as the share holders values have been seriously eroded. The consequence of that is the inability to finance the industry and the real sector. Reports by MAN and NACCIMA show that bank lending has increased by about 60.9% which according to the CBN is an indication that Nigeria banks are doing well in the face of financial crisis. However, most of the loans were not channeled to the real sector. 8
Rising general interest rate in the economy between July 2008 to January 2009 may be an indication of reduction in liquidity. Reports indicate that Nigerian Inter- Bank Offer Rates (NIBOR) went up from 13.8% to 14.6% as at December 2008. This may be an indication of tightening loanable fund conditions. 9
The changing international oil market poses grave concerns for Nigeria s fiscal outlook. The global financial crisis has led to slow growth across the world s economies, resulting in a lower demand for commodities, especially oil. Oil price fell by 68% in 7 months and no respite despite OPEC s recent mitigating efforts(e.g. cut in production quota). 10
This affects the foreign reserve which has dropped from $64 billion in 2008 to $56 billion presently. Continuous fall implies less government spending for capital projects (e.g. power plants) Withdrawal of certain foreign commitments in areas of bitumen and deep-sea exploration. Reappraisal of prior plans commitments. 11
160 140 120 100 80 60 40 20 0 FLUCTUATION IN THE PRICE OF CRUDE OIL (1970-2008)) Peak period in mid-2008 before the crash in oil price PER BARREL 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YEARS 12 NOMINAL DOLLARS
The expected eventual effect of the crisis on the Nigeria economy would depend on its influence on the following: The level of interdependence with international capital markets The level of export trade diversification and of foreign direct investments The level of liabilities in foreign currencies The level of foreign currency reserves and the trade deficit The level of inflation and the budget deficit The diversification of local economies and the macroeconomic stability The performance of local institutions. 13
The expected direct impacts of the crisis on the Nigerian finance and banking system; The potential impacts on private capital flows and ODA levels; The potential impacts on commodity demand and prices and, The potential impacts on macroeconomic indicators, growth and the MDGs (development of global partnership, achievement of universal education, eradication of extreme poverty and hunger, etc.) 14
The crisis could also have negative impacts on remittances from those Nigerians working abroad. On average, Africans working abroad transfer about $9 billion back to Africa yearly, of which a substantial share goes to Nigeria. Remittances from Africans increased considerably from about $5 billion in 2000 to $12 billion in 2007. The impact in 2008 and 2009 are yet to be seen but we expect a dire consequence of the crisis. ODA pledges by developed countries might reduce because of their budget deficit which could result from measures to address the crisis. 15
14,000 12,000 12000 10,000 8,000 6,000 5000 4,000 3,329 2,000 1,392 0 2000 2007 Workers' remittances and compensation of employees, received (US$) (millions)nigeria Workers' remittances and compensation of employees, received (US$) (millions)africa 16
1200 1000 800 600 400 200 0-200 ODA growth ODA growth 17 % 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Government s commitment on health, education, gender and equity issues. There were strong commitments by several developed countries towards achieving Millennium Development Goals before the crisis. Various challenges are likely to emerge towards meeting such commitments owing to the expected impact of GFC in those countries, and hence, in the outflow to development goals in other countries due to the anticipated reduction in their revenue. 18
Tentative results indicates closures and layoffs in an already weakened sectors particularly manufacturing and allied sectors in the economy. Lower growth translating into higher poverty; More crime, weaker health systems, increase in HIV/AIDS prevalence and even more difficulties meeting the Millennium Development Goals. 19
Foreign portfolio withdrawals Decline petroleum prices. National budget Implementation Reduction in development funds. Diminution in net capital flows. Lower growth estimates. Worsen poverty level. 20
Reduction of 2009 budget benchmark Fresh Recapitalization of banks Suspension of liquidity mop-up Surveillance on the financial sector Review of cash reserve ratio from 4% to2% Reduction of liquidity ratio from 40% to 30% Reduction in the Monetary Policy Rate (MPR) from 10.25% to 9% Suspension of recapitalization of Capital Market Operators 21
Need to understand what can provide financial stability in the country Need to understand whether and how Nigeria can minimize financial contagion in an integrated financial world Increase bank regulation Economy base diversification into other non-oil sector to enhance foreign exchange earnings What should be the policy implication for Nigeria if the crisis is short-lived in Europe and the USA? If the crisis evolves into depression in Developed countries, what should be the policy import for Nigeria and other African countries? 22
23