Thursday, October 06, 2016 10:05am / CBN
Global output growth in the first half of 2016 was sluggish and uneven, mainly because of the slow recovery of commodity prices and the impact of the British vote to exit the European Union. In many of the advanced economies, growth has remained depressed, but was divergent in emerging and developing economies.
Furthermore, inflationary pressures increased in the first half of 2016 around the globe, reflecting increased domestic demand pressures, owing mainly to the expected consequences of increase in economic uncertainties. Although commodity prices recovered marginally from the position at end-December 2015, they remained generally depressed.
The international stock and currency markets recorded mixed performance during the first half of 2016. Factors that impacted the performance of many stock markets and currencies included the generally low commodity prices and the normalisation of US monetary policy. Monetary policy rates of most central banks were fairly stable in the review period.
In Nigeria, macroeconomic concerns increased as the National Bureau of Statistics (NBS) estimated that output growth contracted in the second quarter of 2016 by 2.06 per cent, compared with a growth of 2.35 per cent in the corresponding period of 2015, and that inflation had increased to 16.48 per cent.
Average interest rates during the period were lower than their levels in the second half of 2015. The low average short-term rate was due mainly to increased liquidity in the system. In a bid to stem inflationary pressure, the Monetary Policy Committee tightened the stance of monetary policy during the review period.
Key monetary developments during the review period included the increase in broad money supply (M2) by 8.26 per cent and narrow money supply by 6.47 per cent. Total bank loans and advances to the private sector of the economy grew by 17.62 per cent at the end of the first half of 2016, in contrast to the decline of 1.44 per cent at the end of the second half of 2015.
The structure of bank credit and deposits indicated that short-term maturities remained dominant. Also, the market structure of the banking system remained largely oligopolistic in the first half of 2016.
Key developments in the other financial institutions sub-sector included: the licensing of new institutions to deepen financial inclusion; the continuation of the Microfinance Certification Programme; and the implementation of new capital requirements for finance companies. The implementation of the various aspects of the National Housing Finance Programme also continued in the review period.
Monetary policy in the first two months of 2016 was accommodative, consistent with the goal of stimulating the economy. However, in March 2016, the MPR was increased and the asymmetric corridor for Standing Deposit and Lending facilities of the CBN was narrowed to curb the excess liquidity in the banking system and tame inflationary pressures.
The Bank introduced the Flexible Exchange Rate regime in the review period as part of efforts to deepen the foreign exchange market and achieve exchange rate stability. External reserves declined from $28.29 billion at end-December 2015 to $27.22 billion at end-June 2016.
The CBN continued to support the economy through various credit guarantee and intervention schemes to stimulate the real sector. These had started to yield results noted in the form of increased productivity and job creation. The National Collateral Registry (NCR), aimed at improving access to finance for MSMEs, became operational in the review period.
Financial soundness indicators for the banking system reflected a slight decline in capital adequacy positions of the banks in relation to December 2015. However, the banking industry capital adequacy ratio at end-June 2016 was above the regulatory minimum.
The increasing quantum of non-performing loans posed a major concern for regulators in the review period. To address this, the Bank enhanced the supervision of the exposure of banks to the oil and gas sector and the foreign exchange market. Cross-border supervisory collaborations were also sustained.
To sustain public confidence, the Bank processed customers’ petitions against banks and other financial institutions, in addition to the continued implementation of the Bank Verification Number (BVN) Scheme.
Although the outlook for the rest of the year appears to be challenging, the current measures put in place and others being considered by the Bank, together with to the efforts of the Federal Government, are expected to minimize the impact of shocks to the domestic economy.
Global Economic and Financial Developments
Global output growth has remained sluggish and uneven since the beginning of 2016. The slow recovery of commodity prices and the recent Brexit heightened global economic uncertainties. Notwithstanding the continued monetary expansion in many of the advanced economies, growth has remained depressed in advanced and divergent in emerging and developing economies.
Global output was 3.1 per cent in 2015, but the projections of 3.2 and 3.5 per cent for 2016 and 2017 were revised downwards to 3.1 and 3.4 per cent respectively, representing 0.1 percentage point reduction from the earlier projections1. The downward revisions of the projections were driven by the expectation that the recovery of global output growth would be slower.
In advanced economies, output growth was estimated at 1.8 per cent in 2016 and 2017 compared with 1.9 per cent in 2015. In the United States, growth was projected to decline to 2.2 per cent in 2016 from 2.4 per cent in 2015, reflecting the weaker growth recorded in the first-quarter of 2016. In the United Kingdom, output growth in 2015 was 2.2 per cent but was projected at 1.7 and 1.3 per cent for 2016 and 2017 respectively. Output growth in Japan was 0.5 per cent in 2015, but projected at 0.3 per cent in 2016 and 0.1 per cent in 2017.
In the Euro area, output growth was 1.7 per cent in 2015 and was projected to reduce to 1.6 per cent in 2016, higher than 1.4 per cent forecasted for 2017. The projection for 2016 was influenced by better-than-expected output growth of 2.2 per cent recorded in the first quarter, resulting from strong domestic demand and rebound in investments. The projected figure for 2017 was revised downwards by 0.2 percentage points, owing to increased uncertainty in consumer and business confidence.
Growth in emerging market and developing economies in 2015 was 4.0 per cent and projected at 4.1 per cent in 2016 and 4.6 per cent in 2017. In China, output growth was 6.9 per cent in 2015 but expected to decline to 6.6 per cent in 2016 and 6.2 per cent in 2017, reflecting low investment growth as the country continues to rebalance its economy.
Latin America and the Caribbean output growth was projected to contract from 0.0 per cent in 2015 to negative 0.4 per cent in 2016, reflecting the economic recession in Brazil and declining commodity prices and demand. In the Middle East, output growth was projected at 3.4 per cent in 2016 from 2.3 per cent in 2015, but estimated at 3.3 per cent in 2017. However, lower oil prices and geopolitical pressures are expected to influence the outlook.
Output growth in sub-Saharan Africa was projected to reduce significantly to 1.6 per cent in 2016, compared to 3.5 per cent in 2015. The expected decline reflected the low commodity prices, declining financing inflows and adverse climatic conditions affecting most countries of the region.
In Nigeria, output growth was estimated to decline to negative 1.8 per cent in 2016 from 2.5 per cent in 2015, reflecting low oil receipts, foreign exchange volatility, inadequate power supply and the Niger Delta crises. However, output growth is expected to improve to 1.1 per cent in 2017 due to ongoing economic reforms.
Global inflationary pressures increased in the first half of 2016, reflecting increased domestic demand pressures in most countries. The rise in the rate reflects the expected consequences of increase in economic uncertainty and reduction in market confidence and investment.
Inflation in advanced economies was projected at 1.0 per cent in 2016 and 1.9 per cent in 2017 from 0.3 per cent recorded in 2015. In the US, inflation rate is estimated to increase to 1.3 per cent in 2016 and 2.2 per cent in 2017 from 0.1 per cent in 2015.
Inflation in the Euro area was 0.2 per cent in 2015, projected at 0.3 per cent in 2016 and 1.4 per cent in 2017. Japan recorded 0.7 per cent in 2015, but projected to negative 0.1 per cent in 2016 and 0.7 per cent in 2017. In the United Kingdom, the rate was 0.1 per cent in 2015 less than 0.7 and 2.2 per cent projected for 2016 and 2017, respectively.
In 2015, inflation rate in Emerging and Developing Economies was 5.6 per cent, but projected to 6.6 per cent in 2016 and 5.4 per cent in 2017. The MENA Region had 6.5 per cent inflation rate in 2015 which was projected to 3.9 per cent and 4.0 per cent in 2016 and 2017, respectively.
In Sub-Saharan Africa, inflation rate was 6.9 per cent in 2015 which was projected to rise to 11.1 per cent in 2016 and 9.0 per cent in 2017. The projected rates for 2016 and 2017 for Nigeria were 14.8 and 12.1 per cent, from the 9.1 per cent recorded in 2015, respectively.
Global Commodity Prices
Crude oil prices remained low in the first half of 2016, reflecting the excess supply2, lower oil demand3 and the general slowdown in the global economy. However, the crises in the Niger Delta region of Nigeria and some MENA countries, and the Canadian wild fires disrupted supply, which accounted for some slight increases in oil price during the review period.
In June 2016, the OPEC Reference Basket4 increased by 36.3 per cent to $45.84/b from $33.64/b in December 2015, but was lower by 23.5 per cent than the level of $59.91/b as at June 2015.
Intercontinental Commodities Exchange (ICE) Brent increased by 25.5 per cent to $47.80/b in June 2016 from $38.08/b in December 2015, but was lower by 20.6 per cent than the $60.21 recorded in June 2015.
West Texas Intermediate (WTI) increased by 29.4 per cent to $48.24/b in June 2016 from the $37.28/b recorded in December 2015, but was lower by 18.9 per cent than the $59.47 recorded in June 2015.
Global oil production was 95.14 mb/d in June 2016, compared to 95.12 mb/d in December 2015 and 94.67 mb/d in June 2015. The OPEC supply increased marginally in June 2016, driven majorly by supply increases in Iran and Saudi Arabia.
The growth in global crude oil demand in 2016 was projected at 0.31 mb/d above the 93.95 mb/d for December 2015. The global consumption of petroleum and other liquid fuels, which grew by 1.4 mb/d in 2015, is projected to grow further by 1.4 mb/d in 2016 and 2017, owing to expected increases in consumption by non-OECD member countries.
The growth in consumption by non-OECD member countries was 1.0 mb/d in 2015, and is projected at 1.3 mb/d in 2016 and 1.5 mb/d in 2017, with China and India expected to account for the largest shares.
The Food and Agriculture Organisation (FAO) Food Price Index averaged 163.4 points as at June 2016, compared to 153.4 points as at December 2015 and 165.1 points as at June 2015, reflecting an increase of 6.5 per cent from the December 2015 position but a fall of 1.0 per cent below the level as June 2015.
The FAO Cereal Price Index averaged 156.9 points as at June 2016, reflecting an increase of 3.5 per cent from the level in December 2015, but 4.0 per cent less than the level as at June 2015. The increase as at June 2016 was triggered by a positive change in the price of maize, owing to contraction in export supplies from Brazil.
The FAO Dairy Price Index averaged 137.9 points as at June 2016, lower than the level of 149.5 points as at December 2015. The index was also lower than the 160.5 points recorded as at June 2015 by 22.6 points, or 14.1 per cent. The price as at June 2016 reflected the cumulative effects of lower prices that prevailed in the preceding three months. The decline in the dairy index was due to over production in the first half of the year.
The FAO Meat Price Index averaged 157.9 points as at June 2016, higher than the 150.0 recorded in December 2015 by 7.9 points (5.3 per cent). The value was lower than the 169.8 points recorded as at June 2015. The FAO Vegetable Oil Price Index averaged 161.9 points as at June 2016, higher than the level of 141.5 points as at December 2015 and 156.2 points as at June 2015. The increase in sunflower and rapeseed oil supplies accounted for the increase in Vegetable Oil Price index.
FAO Sugar Price Index averaged 276.0 points as at June 2016, higher than the December 2015 figure by 68.2 points (32.8 per cent). The June 2016 level was higher than the 176.8 points recorded as at June 2015. The increase in the price reflected the fall in Brazil’s production owing to adverse weather conditions, and increased conversion of sugarcane to ethanol production (Table 1.3).
International Financial Markets
International Stock Markets
The international stock markets recorded mixed performances during the first half of 2016. In North America, the Canadian S&P/TSX Composite, Mexican Bolsa and United States S&P 500 indices increased by 8.1, 7.0 and 2.7 per cent respectively between end-December 2015 and end-June 2016.
In Europe, the MICEX and FTSE 100 indices increased by 7.4 and 4.2 per cent, while the DAX and CAC 40 indices decreased by 9.9 and 8.6 per cent, respectively. In South America, the Argentine Merval, Brazilian Bovespa and Colombian IGBC General indices increased by 25.8, 18.9 and 13.8 per cent respectively.
The increases were due to strong domestic demand and rebound in investments recorded in the first quarter of the year, while the decreases were due to the downward trend in global economic growth.
In Asia, the weakening economic conditions in China added to the bearish trend in other Asian markets. During the period under review, Japan’s Nikkei 225 and China’s Shanghai Stock Exchange-A indices decreased by 18.2 and 17.2 per cent, respectively, while India’s BSE Sensex index increased by 3.4 per cent.
In Africa, the Nigerian NSE and South African JSE All-Share indices increased by 3.3 and 3.0 per cent, while the Ghanaian GSE ASI, Kenyan Nairobi NSE 20 and Egyptian EGX CASE 30 indices decreased by 10.4, 9.9 and 0.9 per cent respectively. Most of these markets were responding to developments in the international economic arena, especially with the normalization of the US monetary policy (Table 1.4).
International Foreign Exchange Markets
During the first half of 2016, most of the currencies under review experienced mixed performance owing to the slowdown in global trade and uncertainties in the international financial markets.
Low commodity prices continued to adversely impact the currencies of commodity exporting Latin America and African countries during the first half of 2016. In Asia, the trends in monetary policy stance in China and Japan continued to affect their currencies.
Trends in Exchange Rates
Africa: The South African rand and the Kenyan shilling appreciated against the U.S. dollar by 6.32 and 1.19 per cent respectively, while the Nigerian naira, Egyptian pound and Ghanaian cedi depreciated against the US dollar by 30.39, 11.92 and 3.54 per cent respectively.
North America: The Canadian dollar appreciated against the US dollar by 6.15 per cent, while the Mexican peso depreciated against the US dollar by 6.71 per cent.
South America: The Brazilian real and Colombian peso appreciated against the U.S. dollar by 23.63 and 8.70 per cent, respectively while, the Argentine peso depreciated against the U.S. dollar by 14.09 per cent.
Europe: The euro and Russian ruble appreciated against the U.S. dollar by 2.22 and 13.93 per cent, respectively while the British pound depreciated against the U.S. dollar by 9.33 per cent.
Asia: The Japanese yen appreciated against the U.S. dollar by 16.48 per cent, while the Chinese yuan and Indian rupee depreciated against the U.S. dollar by 2.41 and 2.04 per cent respectively (Table 1.5).
International Monetary Policy Rates
Monetary policy rates in most central banks were fairly stable during the first half of 2016. The Bank of Japan, Bank of England, US Federal Reserve, Bank of Canada and Bank Negara Malaysia held their rates constant.
Rates was also kept unchanged in Chile, while the European Central Bank, Bank of Korea, Reserve Bank of Australia, Bank of Indonesia and Reserve Bank of New Zealand lowered their rates during the review period. The divergent monetary policy stances reflected the underlying fundamentals in the respective economies (Table 1.6).
In the BRICS, monetary policy rates varied during the review period. Brazil maintained a rate of 14.25 per cent through the first six months of 2016, Russia reduced its rate to 10.50 per cent from 11.00 per cent in June, 2016.
India reduced the rate to 6.50 per cent from 6.75 per cent in April 2016, while China’s rate fluctuated through the period. South Africa increased to 7.00 per cent from 6.75 per cent in March 2016.
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