Lucky Fiakpa, Adekunle Adekoya, Hector Igbikiowubo, Babajide Komolafe
13 October 2008
(Page 2 of 3)
Those who had the eyes to see it warned then, but those who had the ears to hear probably did not listen, or if they did, they could not do anything about it, while the efforts of those who tried to do something amounted to very little.
The current financial meltdown, at first localized in the United States where it began last year as a result of bad mortgages seem to have been derived from two human needs that largely drive economic activity in structured societies - homes and energy. For nearly four years, oil prices have remained skyward bound, which in itself had been preceded by three price crises - in 1973/74, 1979/80 and 1990/91. In the first case, oil prices surpassed US$10, while in case of the latter two, oil prices rose to $40. We should not lose sight of the fact that the first had to do with the Arab oil embargo, the second - the Iran/Iraq conflict, while the third was propelled by the Gulf War.
Finally, Saddam Hussein was ousted, later executed, with Iraq occupied by Western powers searching for weapons of mass destruction, in reaction to which unspeakable carnage rages in that troubled country. As the prices rose and the West paid more for fuel, the oil producers smiled to the banks and their economies boomed. OPEC tried futilely to moderate prices with a regime of production quota ceilings, but we all know the result.
As a result of the political instability in the Middle East, which has been worsened by a mushrooming of terrorist activities, full oil production could not be maintained, talk less of exploring reserves. To compound the oil market scenario, countries like Nigeria and Venezuela started experiencing domestic problems which seemed slight, at first, like strikes. But soon the problems snowballed, like in the Niger Delta, resulting in crude shut-ins in the neighbourhood of nearly one million barrels per day of production.
To cap it all, US policy shifted towards accumulation of oil reserves, instead of releasing strategic reserves as had been done in the past to battle high crude prices. In a market where human beings operate, it was only a matter of time that all the in-built shock absorbers would deflate, hence the bubble burst.
Now it has come round since it went round; oil prices are falling, bankers that lend money to finance trading activities now have no money to lend, and indeed are looking for money to remain in business. As the world's leading brand names in banking and finance continue to tumble, governments are stepping in to see what can be done to halt the spread of a deadly disease: poverty.
They are hardly succeeding; the $700 billion lifeline offered by the US government has not calmed the markets as investor confidence continues to fall. Last Wednesday the US Federal Reserve announced interest rate cuts so that banks can lend more easily, a move copied almost instantly by the central banks of Japan, England, and other European nations.
But the damage had been done, and the global economy has taken a beating, the extent of which is yet to be determined. This is because many emerging markets hold huge reserves denominated in US dollars; like China, and thus financing imports for industries back home may be threatened in the short or medium term. Same holds true for Nigeria, whose oil economy is threatened directly as the national budget may collapse if oil prices go into a free fall. Already the IMF has predicted in its World Economic Outlook released Wednesday that global economic growth would drop from this year's five per cent to 3.9 next year.
As we all watch events unfold, one thing is clear: the world's most vulnerable people have been rendered more vulnerable; there is fear of great deprivation ahead as investment losses may trigger factory shut-downs and generate more unemployment.
The initial reaction of government to the global financial meltdown was to play dumb or so it seemed. While the rest of the world was making frantic efforts to tidy things in their economy Nigeria pretended that the country was immune from whatever shocks that were coming from the US. This was not for nothing.
There is the general believe that the Nigerian informal sector is so resolute and will always provide some shocks absorbers to any thing that may want to disturb the economic equilibrium. But if the country had survived past external shocks through the instrumentality of its informal sector, the current one appears to be too tough for the sector to absorb.
First it came by a meltdown of the capital market. The stock market, which witnessed recorded growth in the first two months of the 2008, began its decline early March and has so far lost some 23 per cent or N2.9 trillion in market capitalisation. The market capitalisation, which stood at N12.6 trillion in the early period of March, closed last Friday at N9.7 trillion.
Initially, the decline in activities was attributed to some malfunctioning of the trading system.
But as price depreciation continued unabated, the authorities decided to have a second look at the market.
The market fundamentals were strong, what could therefore be wrong with the market, questions were asked? It did not take long for answers to be found.
At the peak of the market, several investors from abroad took advantage of the high returns to invest heavily in the economy. Well over $200 billion was invested by foreign investors in the economy. It was this push from abroad that largely explained the sharp increase in stock price during the boom period.
So many Nigerians who knew little or nothing about the operations of the capital soon became experts in the market over night. Tales of how people were making millions of naira overnight from the market were commonplace. This activated more people to enter the market.
Not willing to play small, some investors even went the extra mile to borrow from the banks to invest. Given the profit some banks made from early borrowers in the market, bankers were not shy to lend big to anyone that wanted to play the market. It was good while it lasted.
Then suddenly the center, so to say, started failing in the US. First it was the sub-prime crises and this dove-tail into credit crunch and before President Bush could spell Lehman Brothers, the over 150 year old financial institution had become history. Merry Lynch and AIG were already on the brinks. It dawned on the God's own country that what they had to grapple with was more than a child's play.
US investors started calling home their foreign investments including those in Nigeria. This gave rise to a glut of shares in the market, which prompted the sharp depreciation of share prices. The impact of this on the Nigerian Stock Exchange has been quite severe as the market capitalization tumbled more than 30 per cent within the period.
Nigeria's Oil & Gas Projects at Risk As the world tethers on the brink of an economic tsunami of cataclysmic proportion, indications are that inflow of foreign direct investment to drive expansion in the Nigerian oil and gas industry albeit economic growth in the country may be stunted. Investigations show that growth and development of projects witnessed in the sector in the last eight years have been largely driven by foreign direct investment.
Contrary to earlier claims that the Nigerian economy is insulated, Financial Vanguard checks revealed that the sharp drop in share value in the Nigerian capital market was a direct result of foreign investors pulling out their funds from the market leaving it saturated with stocks. Indications are that a sustained investment in stocks is needed to rally investor confidence. Unfortunately, almost one month after the Nigerian stock market prices took a dive, and three weeks after the US economy posted clear signs that a recession was imminent; there hasn't been a coherent effort on the part of the organized private sector or even the government, save for discordant rhetoric, to salvage what is left of the economy.
The government of the United States of America (USA) has risen to the challenge, proposing a $700 billion stimulus package to cushion the impact. Following the collapse of the Lehman Brothers, the US government had moved in to safeguard AIG, its pre-eminent insurer. In Europe, the Far East and South East Asia, efforts are on to mitigate the impact of the economic downturn. It would be recalled that in Nigeria however, the apex bank and the Ministry of Finance have been quick to allay worries, noting that the economy is insulated from unfolding events.
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