THE GLOBAL ECONOMIC CRISIS AND THE NIGERIAN FINANCIAL SYSTEM: THE WAY FORWARD

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National BANK OF NIGERIA. 2. Layout. 1.0 Introduction2.0 Stylized Facts about the Nigeria Economy 3.0 Impacts of the Financial emergency on the Nigerian Financial System4.0 Nigeria\'s Response to Stabilize the Financial Sector5.0 Way Forward. National BANK OF NIGERIA. 3. 1.0 Introduction.

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THE GLOBAL ECONOMIC CRISIS AND THE NIGERIAN FINANCIAL SYSTEM: THE WAY FORWARD BY CHARLES MORDI DIRECTOR, RESEARCH DEPARTMENT BEING A PAPER DELIVERED AT THE 14 TH SEMINAR FOR FINANCE CORRESPONDENTS AND BUSINESS EDITORS, AT BENUE HOTELS, MAKURDI, JULY 16, 2009 CENTRAL BANK OF NIGERIA

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OUTLINE 1.0 Introduction 2.0 Stylized Facts about the Nigeria Economy 3.0 Impacts of the Financial emergency on the Nigerian Financial System 4.0 Nigeria's Response to Stabilize the Financial Sector 5.0 Way Forward CENTRAL BANK OF NIGERIA

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1.0 Introduction Conceptual Definition of Financial Crisis: A circumstance where money related organizations or resources all of a sudden lose a vast piece of their esteem. Sorts of Financial Crisis Banking emergencies Bank run (one Bank) Systemic managing an account emergency (bank keep running on a few banks) Credit crunch (inadequate assets for acquiring) Speculative Bubble and Crashes Bubble (show cost has higher incentive than future salary) Crashes (when there are numerous dealers and no purchasers) CENTRAL BANK OF NIGERIA

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Introduction… … Contd. Universal Financial Crisis Balance of installments or cash emergency Sovereign Debt default Sudden stop in capital streams and capital flight. More extensive Economic Crisis. Low/Negative GDP development Recession Depression-delayed subsidence CENTRAL BANK OF NIGERIA

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Introduction… … Contd Causes of Current Financial Crisis The beginning of the current money related emergency could be followed to the default on sub-prime home loan credits in the United States (US). In the pre-2007 period, the US government urged monetary organizations to loan to people that would not have generally met all requirements for lodging credits. These credits were upheld by the national government. This brought about shoddy getting and an uncommon blast in the US lodging market . National BANK OF NIGERIA

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Introduction… … Contd Causes of Current Financial Crisis By 2005, 1 out of 5 home loans were sub-prime loaning in the US. The rates for the sub-prime were higher in light of the fact that they had Adjustable Rate Mortgages (ARMs) that were settled for a long time; from that point the rates were set apart to the Fed financing costs which climbed considerably. Home advances allowed to individuals with flawed capacity to pay back i.e. individuals with no salary, no employment and no advantages (NINJA) Weaknesses in the use of begin to-disperse show, prompting to bargains in endorsing models As financing costs on home loan advances expanded, the costs of houses fell, therefore the houses were esteemed not as much as the home loan credits, in this way default rate on advances expanded. National BANK OF NIGERIA

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Introduction… … Contd Causes of Current Financial Crisis The greatness of the repossession that took after combined with the home loan organization's failure to renegotiate credits prompted to the crumple of the legislature sponsored contracts Owing to the boundless defaults, house costs started to fall because of immense dispossessions. Banks and monetary establishments repackaged these obligations with other high hazard obligations and sold them to overall speculators making money related instruments called Collateralized Debt Obligations (CDO) CENTRAL BANK OF NIGERIA

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Financial subordinates called Mortgage-Backed Securities (MBS), which get their incentive from home loan advances spread the hazard to budgetary foundations and speculators around the globe. Significant Banks and monetary organizations obtained and put vigorously in MBS and detailed misfortunes of roughly US$435 billion starting at July 17, 2008. Presentation… … Contd Causes of Current Financial Crisis CENTRAL BANK OF NIGERIA

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Introduction… … Contd Causes of Current Financial Crisis First stage - "liquidity constraints," prompting to troubles in bringing stores up in the US. Second stage - "credit contraction." this applied solid descending weight on the economy. Third stage - monetary infection emerging from between linkages of the world money related framework Economic Recession CENTRAL BANK OF NIGERIA

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Introduction… … Contd Effects The securities exchanges capitalization recorded uncommon misfortunes, as at end-December 2008. London 31.3% New York 33.84% Frankfurt 40.4% Sydney 41.3% Tokyo 42.1% Paris 42.7% Hong Kong 48.3% Singapore 49.2% Mumbai 51.9% Shanghai 65.2% Nigeria 45.2% CENTRAL BANK OF NIGERIA

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2.0 Stylized Facts about the Nigeria Economy CENTRAL BANK OF NIGERIA

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Stylized Facts about the Nigeria Economy Economic development arrived at the midpoint of 6.3 for each penny in the vicinity of 2006 and 2008, anticipated to fall in 2009 Inflation rate tumbled from 8.5 for every penny in 2006 to 6.6 for each penny in 2007, it however expanded to 15.1 in 2008 because of overall high nourishment and vitality costs Reduced Foreign trade inflow because of drop in the cost and volume of unrefined petroleum sold Economy subject to a raw petroleum as a noteworthy wellspring of outside trade Crude oil represents around 90% remote trade earned 65% of government income CENTRAL BANK OF NIGERIA

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Stylized Facts about the Nigeria Economy Import subordinate An Emerging budgetary segment 2 residential banks among the main 500 banks on the planet Susceptible to oil stuns International rough costs Low non-oil sends out Decrease in volume of oil fares primarily because of fretfulness at the Niger Delta CENTRAL BANK OF NIGERIA

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Stylized Facts about the Nigeria Economy Poor and dilapidating foundation Low level of money related segment reconciliation into the worldwide economy Central Bank of Nigeria remain the real wellspring of FX in the official market Wide edge amongst loaning and sparing rates Exchange rate Depreciation CENTRAL BANK OF NIGERIA

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Overview of the Nigeria Economy Cont. Full scale Economic Indicators CENTRAL BANK OF NIGERIA

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3.0 Impact of the Crisis on the Financial Sector of the Nigerian Economy CENTRAL BANK OF NIGERIA

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Nigeria Financial Market Comprises: Financial Sector Regulators The Central Bank of Nigeria The Nigerian Deposit Insurance Corporation (NDIC) The Security and Exchange Commission (SEC) The National Pension Commission (PENCOM) The National protection 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 CENTRAL BANK OF NIGERIA

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Impact of the Crisis on the Financial Sector of the Nigerian Economy The Capital Market Capital market downturn brought on by remote speculators' divestment and frenzy deals by neighborhood speculators Stock market crash of All-Share Index (ASI) and Market Capitalization (MC) by 67.2 and 61.7 for each penny, individually, between April 2008 and March 2009 Reduced capitalization of organizations inclining them to takeovers Weak wellspring of financing to recorded organizations CENTRAL BANK OF NIGERIA

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Banking Sector Limited outside exchange accounts for banks becoming scarce of credit lines for a few banks Liquidity & Credit smash in the residential economy Tightness to be determined sheet of banks and counter gathering dangers versus outer stores Higher arrangement for misfortune by banks could lessen gainfulness and loaning. Increment unemployment rate subsequently of low benefit CENTRAL BANK OF NIGERIA

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Banking Sector Exchange rate introduction Counterparty presentation Interest rate spread on the expansion Prime loaning 16.08% end 2008 18.95% Feb 2009 CENTRAL BANK OF NIGERIA

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Money Market Increase in Interest Rate As assets go away, Liquidity crush sets in, the budgetary market, financing costs resets higher in the currency advertise: Higher enthusiasm on stores as speculators move from the share trading system Higher loaning rates to cover hazard in monetary downturn Increased request weight in the remote trade showcase Depreciation of the Foreign Exchange rate Exchange rate devalued from N117 to N135 per US dollar as at end of Dec 2008 Wide free market activity holes High surges and low inflows of outside trade into the economy CENTRAL BANK OF NIGERIA

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CENTRAL BANK OF NIGERIA

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Exchange Rate (2001-2008) N146/$ N121/$ CENTRAL BANK OF NIGERIA

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Bond Market Increased inclination to utilize securities for gathering pledges Increase support in settled pay securities by financial specialists Higher rates on securities CENTRAL BANK OF NIGERIA

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4.0 Nigeria's Response to Stabilize the Financial Sector CENTRAL BANK OF NIGERIA

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Responses by the Monetary Authority Reduce MPR by 50.0 premise indicates from 10.25 9.75 for each penny and later to 8.0 for every penny Reduce CRR from 4.0 to 2.0 for every penny and liquidity proportion from 40.0 to 30.0 for every penny as of now 25 for each penny Expanded markdown window office from overnight to 360 days, loan cost not surpassing 500 premise point over the MPR Buying and offering of securities through the two-route cite by the CBN CENTRAL BANK OF NIGERIA

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Responses by the Monetary Authority Aggressive wipe up suspended as fiscal expert grasped loose money related arrangement. Reception of a +or - 3 for each penny band for conversion standard development Reduced banks' remote trade net vacant position from 20.0 to 10.0 for every and later to 1.0 for each penny of shareholders' assets Reintroduction of the Retail Dutch Auction System (RDAS) CBN suspended day by day between bank outside trade market to avert theoretical assaults on the local cash CENTRAL BANK OF NIGERIA

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Responses the Security and Exchange Rate Commission. Five market producers to give consistent liquidity and balance out stock costs, Strict authorization of posting necessities with zero resilience for infractions Downward development of share costs pegg

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