EFFECTS OF THE GLOBAL FINANCIAL CRISIS ON DEVELOPING ECONOMIES, A CASE STUDY OF NIGERIA

EFFECTS OF THE GLOBAL FINANCIAL CRISIS ON DEVELOPING ECONOMIES, A CASE STUDY OF NIGERIA A research work on the effects of the global financial crisis on the economies of developing countries in the world. A case study of the Nigerian economy. By Ojuola Tolulope Daniel. (B.sc/ed Econs) CHAPTER ONE 1.1. INTRODUCTION The world is facing the most severe financial crisis since the great depression of the last century. The current financial crisis is unprecedented in the history of the modern world and it is having a catastrophic effect on the financial wellbeing of millions of people around the world. The current crisis is rooted to the mortgage loan crisis, which became heightened in the United States in the early 2004 until mid 2007 when it escalated. During early 2004, the mortgage industry in the United States enjoyed an unprecedented boom whereby mortgage brokers enticed prospective buyers with inadequate income or poor credit history into taking mortgage loans with little or no down payment, Adamu. These subprime loans were later repackage and resold to banks and other financial institutions which then created collaterised debt obligations (CDO) and sold these financial instruments to world wide investors who unsuspectingly relied on the strength of the sellers rather than the risk rating of the underlying financial instruments. The crisis escalated in the mid 2007, when subprime mortgage borrowers `unable to service their loans which were then due for refinancing began to default en-masse. The mass default triggered the beginning of the global credit crunch because investment banks who sold the collaterised debt obligations could no longer service the huge debts packaged as purchase notes from commercial banks. The global financial crisis began in the United States of America and the United Kingdom, where the global credit market came to a standstill in July 2007, Avgouleas. The original root of the financial crisis is the United States of America- the world’s largest military-industrial complex. No economy whether developed or underdeveloped is so far insulated from the global credit turmoil. The crisis has already resulted into a recession in some industrialised economies and is already having a huge impact on emerging or developing economies like Nigeria. The Monetary Policy Committee (2009) has observed that the Nigerian economy is being imparted by exogenous factors. Such factors include the deepening recession of the industrialised economies. This is because there would be low remittances from abroad, decline in foreign aids, low foreign direct investment and portfolio investment. The current crisis is affecting Africa in two ways and these two ways are, firstly there could be financial contagion and spill over for stock markets. This is because stock markets in Africa have been showing volatility driven by a sell off by foreign investors. Secondly there is an indirect effect of volatile and falling commodity prices particularly oil, on export revenue and the inflow of the capital into the region. The financial crisis is already in the Nigerian economy even though the financial authorities have chosen to believe that the country is insulated from its effects. The unabated crisis in the capital market may likely escalate particularly the price slump in the Nigerian Stock Exchange. The dearth of the liquidity and global credit squeeze is having its impact on the Nigerian Stock Exchange. The financial crisis has also affected the prices of the oil in the global market. For instance, Nigeria exports 45 percent of its oil to the United States of America, therefore the crisis made America to reduce its demand for oil thereby causing a major price slump in the global market. Another indicator of the effects of the financial crisis on Nigeria is the persistent decline in the value of the national currency, the naira. The free fall of the naira at the Foreign Exchange market climaxed with the naira being exchanged with the dollar at =N=153. For avoidance of doubt, the global financial crisis started with banks and mortgage lenders who could not follow the traditional rule of lending. This scenario has caused bank collapse world wide and economic disaster in several countries. In Nigeria, the current crisis in the capital market is traceable in parts to the aggressive entering of banks to the financial markets. The banking consolidation of 2005 by the Central Banks of the Nigeria resulted in twenty one out of the twenty banks listing in e Nigerian Stock Exchange. The race for higher capitalisation led to several initial public offers which boosted the Nigerian Stock Exchange market capitalisation to an unprecedented level. Banks account for over sixty five percent market capitalisation at the stock exchange. Hence bank shares became actively traded and some banks in connivance with some brokers engaged in shady practices. Their actions coupled with the influx of foreign hedge funds lured by prospects of huge capital gains fuelled the markets and stock prices shot up to levels unseen before. As soon as the Central Bank of Nigeria released a directive to harmonies bank year ends, the crisis escalated. Banks then went on an aggressive process of generating liquidity to raise their balance sheet, interest rates shot up sporadically and broker’s credit lines dried up. Panic sets in and brokers and some investors started dumping their shares to cut their losses thereby depressing the market. The financial crisis is also affecting Foreign Direct Investments and equity investments in Nigeria. While 2007 was a record year for foreign Direct Investment, Nigeria’s equity finance is already weakening. The fall in inward investments will affect important sectors such as agriculture, infrastructure, development, health and education. While the effects could vary from country to country, but the impacts could include export revenues, further pressure on the current accounts, and Balance of Payment, lower investments and growth