Thursday, November 28, 2013 / By KA/ Project Research
The global financial crisis, of which the aftermath is still being felt, has been tagged the most severe financial crisis experienced by the world since the great depression of the last century. The crisis had an unprecedented impact on credit and capital, taking offshoot from the financial markets in the US, with the contagion and impact spreading unevenly across the globe.
The “home for all” program which started in U.S in 2004 finally met its waterloo,as refinancing became more difficult; major global financial institutions that had borrowed and invested heavily in subprime mortgage, reported significant losses as borrowers during the boom were now unable to service their due loans. Starting with credit squeeze, reduction in household demand, rise in unemployment and falling housing prices in late 2005 to 2006, the bubble finally ruptured, and heralded the sub-prime mortgage crisis with multiplier effect in 2007.The crises causedmajor business failures, with consumer wealth falling by trillions of dollars, and economic activity dipping considerably,engendering the European sovereign-debt crisis and the2008-2012 global recession era.
In Nigeria, the effect of the crisis was not felt until the mid-2008. World economic interdependence gave room to the financial crisis in all economies of the world including Nigeria. The sell off by foreign investor affected the stock market and the economic downturn in US (a major export destination for the Nigeria Crude oil) affectedthe demand and thereby price of oil.With most economies staring down the barrel of the imminent second wave of effects of the financial crisis, they were left with no other option than to enact policy strategies/measures that will hedge or combat this likely impact on their respective economies.
Impact of the Financial Crisis on the Nigeria economy
The risk of the global recession and the volatility of commodity prices, which is the mainstay of most developing countries like Nigeria, further increased during the crisis due to the exposure of nascent economies to shocks in commodities prices. The Nigerian economy was exposed to the crisis via over-dependence on crude oil for foreign exchange earnings and revenue, and the crisis impacted all the sectors of the Nigerian economy from the financial to the real economy. The global financial crisis had an impact on the capital market, the banking sector, foreign exchange and the balance of payments, as well as the real sector. At inception, the potential effects of the global financial crisis on the Nigerian economy and financial markets were downplayed. Analysts drew confidence especially from the strength of the economy’s external balances, volume of external reserves and the strength of the Naira pre-crisis. As the crisis intensified, however, it became clear that there would be significant impact once the financial stormtouched down.The effect was exacerbated by the home-grown banking sector crisis.
The financial crisis crystallized into an economic slowdown as the collapse of confidence, biting credit crunch, deleveraging consumers and businesses depressed activity in the advanced economies. Emerging markets, many with export-dependent growth models, had to contend with breaks in the speed of growth in their economies, owing largely to depressed demand from the advanced economies.
In Nigeria, Gross Domestic Product (GDP) grew at a decreasing rate during the crisis. The growth rate dropped from 6.4 percent in 2007 to 6.04 percent in 2008 but immediately rebounded despite the crisis. The Oil sector GDP suffered the greatest fall at the peak of the crisis, touching a low of-6.19 percent growth rate in 2008. The Non-oil sector GDP growth fell from 9.46 percent in 2007 to 9.01 percent in 2008 and has been falling till date with 7.89 percent recorded for 2012.
The crisis didn’t spare the Nigerian Stock exchange either as foreign investors, who realized the danger posed by the on-coming financial turmoil, withdrew their funds and took flight back to safety, depressing the stock market,as the All Shares Index (ASI) shed more than 70 percent of its value between March 2008 and April 2009.
The crisis brought in its wake shortage in capital flows as well as diaspora transfer. Capital inflows into the economy declined, foreign portfolio investment withdrawals and withholdings became the order of the day. At the peak of the mortgage boom in 2006, direct and portfolio investment recorded a growth rate of 126.6 percent and 11.48 percent respectively. At the inception of the crisis in 2007, the growth rate of FDIslowed to 45.6 percent, while that of FPI contracted by 3.3 percent. Both, however, rebounded by the next year.
The level of poverty tripled between 2008 and 2009, with value erosion intensifying. Inflation rose from 6 percent in 2007 to 15.1 percent in 2008 and remained at double digits till January 2013 when it returned to single digit.Furthermore, the food price index grew by 16.6 percent in 2009 and 26.5 percent in 2010 after recording a decline of 18.1 percent in 2008.
The exchange rate has been volatile since the crisis ensued. The official exchange rate showed that the Naira depreciated against the dollar by 25.6 percent (highest depreciation recorded since 2000 till date) between 2008 and 2009,reflecting the demand pressure relative to supply with implications for the foreign reserve. Nigeria’s External Reserves which was strong before the time of crisis dropped from USD62 billion inmid-2008 to USD42.4 billion in 2009 and USD32.3 billion in 2010.
Oil prices wentplunged due to reduced demand of oil in the global market inducing a reduction in the level of revenue from the mainstay of the Nigerian economy. Prior to the crisis, Nigeria’s reference crude oil benchmark, the bonny-light, averaged USD100.6 per barrel as at 2008 (highest price recorded between 1999 and 2008), but declined to USD63.3 per barrel in 2009 – over 37 percent decline between the period but thereafter has recovered, but remains volatile.
The fall in oil price had implications for oil revenue as well as borrowing.Total revenue which recorded a growth of 34 percent in 2008, flipped into a contractionof 38 percent in 2009 (over 72percentage points difference) -- highest decline recorded since 2000. Whereas oil revenue which recorded a growth of 46.3 percent in 2008, contracted by 51.6 in 2009 (a difference of over 97 percentage points) but non-oil revenue growth which slowed from over 77 percent in 2007 to about11 percent in 2008, rebounded and recorded a growth of 23.7 percent in 2009.
The rise in exchange rate was translated into trade as the current account receded and recorded a decline of 39.6 percent in 2009. Although the account is still in surplus,it’s yet to attain the growth rate of over 147 percent recorded at the peak of the mortgage boom in 2005. The balance of trade although favourable, declined by 34.1 percent in 2009 from a growth of 12.1 percent recorded in 2008. Export recorded the worst fall in 2009 as it contracted by 17.7 percent from a growth of 22.3 percent in 2008, while import declined from 33.9 percent in 2008 to -2.32 percent in 2009.
Being the main source of revenue, the fall in oil price prompted the government to seek other sources of financing expenditure, as it could not rely on earnings from crude oil exports. Governments at all levels cut down on budget and social spending. Faced with revenue constraints and shortfall in foreign exchange earnings, debt at all tiers of government increased significantly
Total debt grew by over 32 percent in 2009 after recording a decline of 39.9 percent in 2008 and it has continued to grow but at a declining rate since 2011. While domestic borrowing which declined by 46.12 percent in 2008 recorded a growth of 36.4 percent in 2009, external borrowing fell from 21 percent in 2008 to 12 percent in 2009. Reason being that most economies were overwhelmed by the crisis and could not lend to fellow nations.
The prime lending rate grew by 14.9 percent, rising from 15.9 percent in 2008 to 18.4 percent in 2009, although it declined by the following year to 17.6 percent. The gross fixed capital formation, although declined marginally by 0.73 percent in 2008, thereafter grew by 34.7 percent and 18.3 percent in 2009 and 2010 respectively. In 2011, capital stock was halted severely and declinedby 10.8 percent. The Non-Performing Loan (NPL) ratio of banks rose to 20.7 percent in 2009. Some distressed banks downsized and tightened expenditure. This did not prevent a number of the banks from being partially nationalized.
With the benefit of hindsight of nearly half a decade, prevailing economic conditions triggered by the subprime crisis in the US mortgage market could have been prevented if the regulators had been effective in their oversight on the activities in the financial markets. The impact of the devastating blow that hit the Nigerian financial markets in 2008, and thereafter the real sector is still being felt. With Nigeria now more closely linked with international markets and economies, the impact of a shock of the magnitude of the 2008 crisis will hit harder than was experienced. It is time to stem the tide of the dependence on oil revenue and develop a more broad-based economy, capable of earning Forex from multiple sources. This will mitigate the shock emanating from the crude oil market, and in essence, preserve revenue even in the face of dwindling crude oil prices, with positive implication for the Naira. With major macroeconomic indicatorssuggesting a rebound, we can safely say the economy is on a stable growth path,but with risks still lurking. The policy authorities,therefore,must develop strategies to mitigate any unwholesome and unexpected shock.
You can also take part in the “The next CBN governor; whom the cap fit?” discourse. Send your contributions and comments to email@example.com
Other Articles/News on the Central Bank: