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Managing the Impact of Economic Crisis on Nigeria: The Role ...


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Managing the Impact of Economic Crisis on Nigeria: The Role ...

  1. 1. Managing the impact of the global economic crisis on Nigeria: The role of the media. By Boniface Chizea Ph.D, FCIB, MNIM, KSM. Thursday, April 29, 2010 BIC Consultancy Services 1
  2. 2. 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. Thursday, April 29, 2010 BIC Consultancy Services 2
  3. 3. 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. Thursday, April 29, 2010 BIC Consultancy Services 3
  4. 4. 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. Thursday, April 29, 2010 BIC Consultancy Services 4
  5. 5. 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? Thursday, April 29, 2010 BIC Consultancy Services 5
  6. 6. • 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. Thursday, April 29, 2010 BIC Consultancy Services 6
  7. 7. • 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. Thursday, April 29, 2010 BIC Consultancy Services 7
  8. 8. • 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. Thursday, April 29, 2010 BIC Consultancy Services 8
  9. 9. 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. Thursday, April 29, 2010 BIC Consultancy Services 9
  10. 10. 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. Thursday, April 29, 2010 BIC Consultancy Services 10
  11. 11. 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. Thursday, April 29, 2010 BIC Consultancy Services 11
  12. 12. • 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. Thursday, April 29, 2010 BIC Consultancy Services 12
  13. 13. • 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. Thursday, April 29, 2010 BIC Consultancy Services 13
  14. 14. 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? Thursday, April 29, 2010 BIC Consultancy Services 14
  15. 15. 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. BIC Consultancy Services 15
  16. 16. • 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. Thursday, April 29, 2010 BIC Consultancy Services 16
  17. 17. 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. Thursday, April 29, 2010 BIC Consultancy Services 17
  18. 18. • 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! Thursday, April 29, 2010 BIC Consultancy Services 18
  19. 19. 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. Thursday, April 29, 2010 BIC Consultancy Services 19
  20. 20. • 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? Thursday, April 29, 2010 BIC Consultancy Services 20
  21. 21. I THANK YOU ALL FOR YOUR KIND ATTENTION GOD BLESS US ALL Thursday, April 29, 2010 BIC Consultancy Services 21