Transcript THE GLOBAL ECONOMIC CRISIS AND THE NIGERIAN FINANCIAL

THE GLOBAL ECONOMIC CRISIS AND
THE NIGERIAN FINANCIAL SYSTEM:
THE WAY FORWARD
BY
CHARLES MORDI
DIRECTOR, RESEARCH DEPARTMENT
BEING A PAPER DELIVERED AT THE 14TH SEMINAR FOR FINANCE
CORRESPONDENTS AND BUSINESS EDITORS, AT BENUE HOTELS,
MAKURDI, JULY 16, 2009
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OUTLINE
1.0
Introduction
2.0
Stylized Facts about the Nigeria
3.0
Impacts of the Financial crisis on the Nigerian
Financial System
4.0
Nigeria’s Response to Stabilize the Financial
Sector
5.0
Way Forward
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Economy
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1.0 Introduction
Conceptual Definition of Financial Crisis:
– A situation where financial institutions or assets suddenly
lose a large part of their value.
– Types of Financial Crisis
Banking crises
– Bank run (one Bank)
– Systemic banking crisis (bank run on several banks)
– Credit crunch (insufficient funds for borrowing)
Speculative Bubble and Crashes
– Bubble (present price has higher value than future income)
– Crashes (when there are many sellers and no buyers)
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Introduction……Contd.
International Financial Crisis
Balance of payments or currency crisis
Sovereign Debt default
Sudden stop in capital flows and capital flight.
Wider Economic Crisis. Low/Negative GDP growth
Recession
Depression-prolonged recession
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Introduction……Contd
Causes of Current Financial Crisis
The genesis of the current financial crisis could be traced to the
default on sub-prime mortgage loans in the United States (US).
In the pre-2007 era, the US government encouraged financial
institutions to lend to individuals that would not have otherwise
qualified for housing loans. These loans were backed by the
federal government.
This resulted in cheap borrowing and an unprecedented boom in
the US housing market.
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Introduction……Contd
Causes of Current Financial Crisis
By 2005, 1 out of 5 mortgages were sub-prime lending in the US. The rates
for the sub-prime were higher because they had Adjustable Rate Mortgages
(ARMs) that were fixed for two years; thereafter the rates were marked to
the Fed interest rates which rose substantially.
Home loans granted to people with questionable ability to pay back i.e.
people with no income, no job and no assets (NINJA)
Weaknesses in the application of originate-to-distribute model, leading to
compromises in underwriting standards
As interest rates on mortgage loans increased, the prices of houses fell,
consequently the houses were valued less than the mortgage loans, thus
default rate on loans increased.
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Introduction……Contd
Causes of Current Financial Crisis
The magnitude of the repossession that followed coupled with
the mortgage company’s inability to renegotiate loans led to
the collapse of the government backed mortgages
Owing to the wide spread defaults, house prices began to fall
due to huge foreclosures.
 Banks and financial institutions repackaged these debts with
other high risk debts and sold them to worldwide investors
creating financial instruments called Collateralized Debt
Obligations (CDO)
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Introduction……Contd
Causes of Current Financial Crisis
 Financial
derivatives called Mortgage-Backed Securities
(MBS), which derive their value from mortgage loans spread
the risk to financial institutions and investors around the
world.

Major Banks and financial institutions borrowed and invested
heavily in MBS and reported losses of approximately US$435
billion as of July 17, 2008.
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Introduction……Contd
Causes of Current Financial Crisis
 First stage
- "liquidity constraints," leading to difficulties in
raising funds in the US.
 Second stage -"credit contraction." this exerted strong
downward pressure on the economy.
 Third stage
- financial contagion arising from interlinkages of the world financial system-Economic
Recession
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Introduction……Contd
Effects
The stock markets capitalization recorded unprecedented
losses, as at end-December 2008.
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London
New York
Frankfurt
Sydney
Tokyo
Paris
Hong Kong
Singapore
Mumbai
Shanghai
Nigeria
31.3%
33.84%
40.4%
41.3%
42.1%
42.7%
48.3%
49.2%
51.9%
65.2%
45.2%
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2.0 Stylized Facts about the
Nigeria Economy
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Stylized Facts about the Nigeria
Economy
Economic growth averaged 6.3 per cent between 2006 and
2008, projected to fall in 2009
Inflation rate fell from 8.5 per cent in 2006 to 6.6 per cent
in 2007, it however increased to 15.1 in 2008 due to
worldwide high food and energy prices
Reduced Foreign exchange inflow due to drop in the price
and volume of crude oil sold
Economy dependent on a crude oil as a major source of
foreign exchange
– Crude oil accounts for
about 90% foreign exchange earned
65% of government
revenue
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Stylized Facts about the Nigeria
Economy
Import dependent
A Emerging financial sector
– 2 domestic banks among the top 500 banks in the world
Susceptible to oil shocks
– International crude prices
Low non-oil exports
Decrease in volume of oil exports mainly due to restiveness at
the Niger Delta
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Stylized Facts about the Nigeria
Economy
Poor and dilapidating infrastructure
Low level of financial sector integration into the
global economy
Central Bank of Nigeria remain the major source of
FX in the official market
Wide margin between lending and saving rates
Exchange rate Depreciation
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Overview of the Nigeria Economy Cont.
Macro-Economic Indicators
Indicator
GDP Growth Rate (%)
Inflation Rate (%)
M2 Growth Rate (%)
Current Account Balance
FDI
External Reserves
(US$ billion)
Exchange Rate End-Period
External Debt (US$ billion)
2006
2007
2008
6.0
8.5
30.6
18.5
13.9
6.5
6.6
44.2
11.8
5.6
6.4
15.1
58.0
17.5
5.8
42.3
51.3
53.0
128.2
117.9
132.5
3.5
3.6
3.7
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3.0 Impact of the Crisis on the
Financial Sector of the
Nigerian Economy
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Nigeria Financial Market Comprises:
Financial Sector Regulators
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The Central Bank of Nigeria
The Nigerian Deposit Insurance Corporation (NDIC)
The Security and Exchange Commission (SEC)
The National Pension Commission (PENCOM)
The National insurance Commission (NAICOM)
The Federal Mortgage bank
Deposit Money Banks
Discount Houses
Microfinance Banks
Finance Companies
Bureaux de change
Nigeria Stock Exchange (NSE)
Primary Mortgage Institutions
Development Finance Institutions
Insurance Companies
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Impact of the Crisis on the Financial Sector of
the Nigerian Economy
The Capital Market
Capital market downturn caused by foreign investors’
divestment and panic sales by local investors
Stock market crash of All-Share Index (ASI) and Market
Capitalization (MC) by 67.2 and 61.7 per cent, respectively,
between April 2008 and March 2009
Reduced capitalization of companies predisposing them to
takeovers
Weak source of financing to listed companies
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Banking Sector
Limited foreign trade finances for banks drying-up of credit lines
for some banks
Liquidity & Credit crunch in the domestic economy
Tightness in the balance sheet of banks and counter party risks visà-vis external reserves
Higher provision for loss by banks could reduce profitability and
lending.
Increase unemployment rate as a result of low profit
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Banking Sector
Exchange rate exposure
Counterparty exposure
Interest rate spread on the increase
– Prime lending
– 16.08% end 2008
– 18.95% Feb 2009
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Money Market
Increase in Interest Rate
– As funds dry up, Liquidity squeeze sets in, the financial market, interest rates
resets higher in the money market:
– Higher interest on deposits as investors move from the stock
market
– Higher lending rates to cover risk in economic downturn
Increased demand pressure in the foreign exchange market
Depreciation of the Foreign Exchange rate
– Exchange rate depreciated from N117 to N135 per US dollar as at end of Dec 2008
Wide supply and Demand gaps
High outflows and low inflows of foreign exchange into the economy
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Exchange Rate (2001-2008)
End-Period Exchange Rate (2001-20091)
150.0
140.0
130.0
2009 May
2008
2007
2006
2005
2004
2003
2002
120.0
110.0
100.0
2001
(US$/N) Rate
N146/$
Years
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Bond Market
Increased preference to use bonds for fund
raising
Increase patronage in fixed income
securities by investors
Higher rates on bonds
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4.0
Nigeria’s Response to
Stabilize the Financial Sector
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Responses by the Monetary Authority
Reduce MPR by 50.0 basis points from 10.25 to 9.75 per cent
and later to 8.0 per cent
Reduce CRR from 4.0 to 2.0 per cent and liquidity ratio from
40.0 to 30.0 per cent currently 25 per cent
Expanded discount window facility from overnight to 360
days, interest rate not exceeding 500 basis point above the
MPR
Buying and selling of securities through the two-way quote by
the CBN
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Responses by the Monetary Authority
Aggressive mop up suspended as monetary authority embraced relaxed
monetary policy.
Adoption of a +or -3 per cent band for exchange rate movement
Reduced banks’ foreign exchange net open position from 20.0 to 10.0 per
and later to 1.0 per cent of shareholders’ funds
Reintroduction of the Retail Dutch Auction System (RDAS)
CBN suspended daily inter-bank foreign exchange market to ward off
speculative attacks on the domestic currency
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Responses the Security and Exchange
Rate Commission.
Five market makers to provide continuous liquidity and stabilize stock
prices,
Strict enforcement of listing requirements with zero tolerance for
infractions
Downward movement of share prices pegged at 1%, upward movement
remains at before it was restored to 5% either way
Recapitalizations of security companies
Reduction in transaction fees
De-listed moribund companies; & released rules on share buy-back with
limit of 15.0%
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Responses by the Federal Government
A Presidential Advisory Team on capital market was set up to
reverse the declining fortunes of the Nigerian capital market
2009 Budget Review:
– Oil price benchmark reduced from US$59.00 to US$45.00 per barrel
– Allocation to state governments reviewed
– Projects prioritized
Economic Management Team mandated to come up with
measures to curb the contagion effect of the global financial
meltdown on the domestic economy
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5.0
The Way Forward
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The Way Forward
Priority areas for domestic financial
institutions
– Ensure access to liquidity
– Recapitalizing weak but viable institutions
Assessment of the quality of assets and robustness of the funding,
Funding may be from government and private sources
Establishment of viable business plan and risk management process
– Help to reduce uncertainty and public skepticism
– Resolving failed institutions
Orderly closure or mergers
– Identifying and dealing with distressed assets
Establishment of a standardized methodology for the valuation of
illiquid securitized credit instruments
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Way Forward
Tightening of regulation and supervision
– Keep vigilance on early warning signals through vigorous examinations
– Encourage banks to strengthen and reduce bank specific contingency
plans
– Greater coordination between the regulatory and supervisory agencies
– Appropriate corrective actions
Collective action required to reduce overall risk in the banking
system.
– Greater domestic cooperation between regulators
– Greater international cooperation required to avoid the exacerbating
cross-border strains
Need for financial institutions to embrace transparency on
activities and products
– Full and transparent disclosure of impairment in bank’s balance sheet
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Way Forward
Adoption of the International Financial Reporting
Standards (IFRS)
Review of all relevant laws relating to the financial
sector to strengthen regulatory capacity
Greater emphasis on e-FASS as a tool for banks’
returns analysis for speedy identification of early
warning signals
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Way Forward Cont.
Capacity Building for Financial System staff professionalism
(Knowledge, skills)
Greater emphasis on enforcement of Code of Corporate
Governance
Introduction of Asset Management Companies (bad banks)
– To clean out the balance sheet of financial institutions
Restoring confidence based on clarity, consistency and
reliability of policy responses
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I Thank You
All For
Listening!
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