Transcript Managing the Impact of Economic Crisis on Nigeria: The

Managing the impact of the global
economic crisis on Nigeria: The role
of the media.
By
Boniface Chizea Ph.D, FCIB, MNIM,
KSM.
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Sections of the paper
• The global economic crisis; its genesis,
meaning and causative factors.
• The impact of the crisis; globally and in
Nigeria.
• Measures taken to manage the impact
globally and in Nigeria.
• The role of the media in managing this impact.
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Global Crisis? What really happened?
• There was unprecedented recession in the economies of
the developed world which affected other countries across
the glob.
• The early signs of the crisis manifested in credit crunch with
banks reluctant or may be disabled to lend due to illiquidity
and some extreme cases insolvency.
• This development was traceable to what has been dubbed
as sub-prime loans particularly to borrowers in the
mortgage sector.
• It was generally thought that this was due to greed,
excessive risk taking, unsustainable compensation schemes
underpinned by lax regulatory environment consistent with
the free market environment. etc.
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Global financial crisis.
Following a period of unprecedented economic
boom, a financial bubble, global in scope burst!
• A collapse of the US Sub-Prime mortgage market
and the reversal of housing boom in other
industrialized economies had a ripple effect
around the world.
• Some financial products and instruments have
become so complex, that things started to
unravel and trust in the whole system started to
fall.
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Securitization and the crisis!
• The crisis came about in large part because of
financial instruments such as securitization
whereby banks pooled their various loans into
sellable assets, then off loading risky loans
into other assets.
• The security buyers got regular payments
from such investments.
• Securitization was seen as perhaps the
greatest innovation of the 20th century?
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• Rating agencies were engaged to rate these
products, risking conflict of interest, which
invariably awarded good ratings encouraging
people to take them up.
• When people eventually started to see problems
confidence fell quickly, lending slowed, in some
cases ceased.
• Assets plummeted in value so lenders wanted to
take their money back. But some investment
banks had little deposit, no secure retail funding,
so many collapsed quickly and dramatically.
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• The problem was so large, banks even with large
capital base ran out, so they turned to government for
bail out. There has been an ongoing debate whether a
bank could be too big to fail!
• New capital was injected into banks to in effect allow
them to lose more money without going burst. That
was not enough and confidence was not restored.
• Hedge funds, credit default swaps, could be legitimate
instruments when trying to insure against default but
the problem resulted when the market became rather
speculative.
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• Despite the benefits of a market system, it is
far from perfect. The market suffers from a
few human frailties such as confirmation bias;
always looking for facts that support our views
and superiority bias ( the belief that one in
better than others ). Trying to reign in these
facets of human nature remains the challenge.
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The developing world.
• The crisis has impacted on the developing world in
degrees dependent on the extent of their exposure to
the world market.
• Commodity dependent economies in consequence
were exposed to considerable external shocks resulting
from price boom and bursts in the international
commodity market.
• Foreign investments reduced as a result of the crisis,
also foreign aid declined.
• Debt service obligations came under increased
pressure often arising from depreciated currencies.
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Nigeria and the crisis
• Initially we were sold the dummy of insulation.
• Then there were denials and finally admission. Recall the setting up of the
Presidential Committee on the crisis! There is now a stimulus funding of
200 billion Naira for commercial agriculture and 300 billion to Ministry of
Works and Housing for public works to boost employment. There is also an
aggressive attempt to boost availability of infrastructure through the PPP
scheme.
• The impact is directly felt in the sharp drop in the price of petroleum
products which has considerably affected the 2009 budget and revenue
from the Federation Account accruing to the other tiers of government
resulting in contestations regarding the excess crude account. The issue
currently in the oil market is whether or not to deregulate!
• The crash at the Stock Exchange, the depreciating Naira, and now doubts
about the viability of banks and also the increasing marginalization of the
real sector.
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Nigerian banks.
• Again we were told that the banks are insulated from
the crisis because of the Consolidation exercise. Banks
are now vaunted to be in a position to absorb all the
shock that could be thrown at them?
• The banks continued to declare robust profit positions
which did not even impact their stock prices. The crash
in the values of bank shares is unprecedented.
• There is now worry about the extent of banks exposure
to margin lending and to operators in downstream
petroleum sector.
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• Nigerian banks were at the receiving end as the Central
Bank struggled to stabilize the exchange rate of the Naira.
• De-marketing phenomenon is on the rise! And the Central
Bank has threatened severe sanctions if caught in the act.
• ‘ if you substitute margin lending to finance the purchase of
stocks at the Stock Market to those who do not have
enough income to service the loan for dodgy sub-prime
lending overseas to the mortgage sector the similarities are
confounding’..... Atedo Peterside.
• Internationally credit to Nigerian banks is becoming very
expensive observed Dr. Barth Ebong of Union Bank. The era
of LIBOR+1 and so on would seem to be in the past. And of
course confirmation lines will be at a premium if available.
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• Usually at the end of the financial year some
banks would approach foreign banks for loans to
shore up their balance sheet. Such facilities
would no doubt be difficult to come by
particularly in the context of uniform year end.
• Post consolidation some banks partnered foreign
banks in a bid to swallow the bait of managing
the country’s external reserves. It is quite likely
that such relationship would lead to increased
exposure and therefore vulnerabilities.
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CBN response to the crisis so far.
• Attempts have been made to improve liquidity in the
financial system through: the introduction of the
expanded discount window.
• Adjustment of key monetary policy ratios which
include; liquidity and cash reserve ratios, adjustment
of the Monetary Policy Rate
( MPR).
An attempt to reconfigure the regulatory
arrangement to have one regulatory set up. And
whether or not to divest the CBN of its banking
supervision functions?
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Weakness of corporate governance in Nigeria.
•
•
•
•
To survive banks in the country must embrace the
tenets of good corporate governance as articulated
by the Central Bank and avoid the following.
Ineffectiveness of Board’s oversight functions.
Overbearing influence of chairman or MD/CEO,
especially in family controlled banks.
Weak internal controls.
Ignorance of and non-compliance with rules, laws
and regulations for banking.
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• Non compliance with laid down internal controls
and operating procedures.
• Poor risk management practices resulting in large
volumes of non performing credits including
insider related credits.
• Succumbing to pressure from other stake holders
e.g. Shareholders appetite for high dividends and
depositors request for high interest rates.
• Inability to plan and respond to changing
business circumstances.
• Ineffective management information system.
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Dealing with the recession
• Economic stimulus package; increase borrowing,
reduce interest rates, reduce taxes, and grow
employment by embarking on public works on
infrastructure development.
• Rethink the international financial system; WB and
IMF to give more voice and power to poor countries.
• Reform international banking and finance
• Reform International trade and The WTO.
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• Investments are needed in safety nets, infrastructure
and small and medium-scaled companies to create
jobs and to avoid social and political unrest.
• It is now opportune for the authorities to set up the
proposed asset management company to excise toxic
assets from banks balance sheets and avoid systemic
crisis.
• Warren Buffet has a simple rule: ‘ Be fearful when
others are greedy; and be greedy when others are
fearful. Recall also that every cloud has a silver lining!
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Prospects.
• The prospects: there would be reduction in expected
economic growth across all economies in the world.
There would be recession verging on depression.
Nigeria will not balk this trend.
• If extreme protectionism is avoided and the stimulus
thrusts are allowed to work through economic
system across the globe there would be a rebound of
economic growth. We must recall the great
depression of 1929/33 which the world transcended.
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• This time for instance is most opportune to
invest in the stock market provided you are
using funds in excess of your immediate
requirements; most certainly not borrowed
funds! Share values would inevitably rebound.
• Economic prosperity would return and the
world would get carried away until the next
round of problems. That is the spice of life.
Could you imagine a world without problems?
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I THANK YOU ALL
FOR YOUR KIND
ATTENTION
GOD BLESS US ALL
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