CBN Publishes 2016 Financial Stability Report

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Wednesday, April 5, 2017/12:46 PM/ CBN

Executive Summary
Output growth in the global economy remained slow in 2016 due to uncertainties in some advanced economies, several emerging markets and developing economies. Consequently, global output growth remained at 3.1 per cent in both 2016 and 2015, but lower than the 3.4 and 3.6 per cent projected for 2017 and 2018, respectively.

Inflation remained a challenge for emerging market and developing economies due mainly to domestic demand pressures and supply shocks. However inflation in most advanced economies was moderate, though it experienced an upward movement in many of the countries, except for Japan where there was a slight dip in the inflation rate. Crude oil prices showed a moderate recovery in the review period to a level above $50pb at end-December 2016.

Similarly, food prices rose, with most components of the FAO Food Price Index showing increases. International stock markets showed a mixed performance across the different regions of the globe. While market indices in Europe and America showed increases, many African stock markets experienced a decline in the second half of 2016. In Asia, economic conditions in China were among the factors that impacted the performance of many Asian stock markets in the review period.

Monetary policy rates of most central banks were fairly stable. In the foreign exchange markets, most currencies depreciated against the US dollar with the exception of the Russian ruble and the South African Rand which appreciated in the second half of 2016.

In Nigeria, there was poor output performance as the growth rate remained negative. This was largely attributed to low oil prices, the impact of the insecurity in some parts of the country and foreign exchange shortages.

Inflationary pressures persisted as headline inflation year-on-year remained double digit. The economy recorded a net foreign exchange inflow, representing a 12.21 per cent rise above the level in the first half of 2016.

Similarly, the total foreign exchange transactions through the Bank resulted in a net inflow. However, the external reserves declined marginally in the second half of 2016. Money supply expanded during the review period as the growth in broad money supply, M2, was mainly driven by the significant growth in narrow money components such as demand deposits with banks and currency outside banks. Aggregate credit to the economy also increased in the review period.

The Bank maintained its contractionary monetary policy stance in the second half of 2016 in order to stimulate capital inflow, reduce demand pressures in the foreign exchange market and tackle rising inflation. Activities in the money market reflected largely the tight liquidity in the banking system.

Activities in the equities market remained subdued as the key indices decreased compared with the preceding period. This arose mainly from the uncertainties in the macro-economy, poor corporate performance due to tougher operating environment and rising operating costs, as well as depressed household demand.

However yields in the fixed income market increased, and hence attracted investors to that market. The Bank continued to operate its risk mitigation and insurance schemes as well as the credit support schemes with the main aim of providing support to the real sector. Key financial soundness indicators showed a decline in asset quality as the ratio of nonperforming loans (NPLs) to gross loans deteriorated in the second half of 2016 by 2.3 percentage points, compared with the levels at end-June 2016.

Capital adequacy indicators declined marginally, but remained above the regulatory thresholds. A solvency stress test of the banking industry at end-December 2016 showed that the resilience of banks to moderate and severe shocks deteriorated marginally during the review period.

Although the sector is more exposed to credit concentration and default risks, there were no significant systemic threats. The result of examinations conducted in the review period confirmed the resilience and soundness of banks in the face of daunting challenges.

Other regulatory activities of the Bank included the issuance of a guideline on Recovery and Resolution Plans for domestic systemically important banks and the guidance notes on the implementation of IFRS 9. The Bank continued the implementation of the PSV 2020, registering a majority of account holders in the banking system under the BVN scheme, which has proved to be effective in fraud prevention and investigation. The outlook is positive, despite current challenges.

It is expected that with the implementation of the Government’s Economic Recovery Plan, the country will return to the path of growth in 2017.

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