Operating Environment and Outlook
Global Economy
The contraction in global output growth in 2009 turned out to be a lot deeper than had been forecast a year earlier. From estimates last year of a 3% output growth this year, available data indicate that global economic activity may have contracted by 1% in the 12 months to end December 2009.
Under downward pressure for most of the year, commodity prices stabilised by the second quarter, as efforts by the Chinese authorities to boost domestic demand began to bear fruit. Earlier in the year, the government in China agreed a stimulus package worth USD586 billion over two years for infrastructure development and social welfare spending. This spending boost helped drive strong growth in final demand, offsetting the loss of earnings from falling exports. With China (8.5%) and India (5.4%) leading the way, real GDP growth in emerging economies was slightly under 2% in 2009. Despite favourable returns to domestic stimulus packages in the other emerging economies, the adverse terms-of-trade consequences of a recovery in the global oil price dampened final demand in most oil-importing countries.
Although emerging markets were far ahead of the recovery loop, by the fourth quarter of 2009, evidence had begun to emerge of an upturn in activity in the world's more advanced economies. Better policy frameworks, more robust productivity growth, and a bottoming out of the housing market in the United States of America, were the major drivers of recovery among the Organisation for Economic Cooperation and Development (OECD) countries. Economic activity in the United States contracted by 2.7% in the year to December 2009, having fallen by 2.8% in the year to April 2009. The Euro area, which contracted by 4.2% remained unchanged over the review period, despite marked progress in Germany, the Netherlands and France. Spain and Italy were the region's worst performers. The United Kingdom also saw output growth worsen from a negative 4.1% in April to a further contraction of 4.4% by end December 2009.
Patchy though the evidence of economic recovery towards the end of the year was, by far the bigger worry is the unevenness of the new growth trajectory. Despite considerable easing in financial market strains in the past few months, policy makers in the OECD remain concerned about funding conditions of many companies. Mixed data on the performance of economies across these regions further compounded the debate over when it would be appropriate to rein in the fiscal and monetary stimuli that have supported most of these economies. Credit availability remained a major constraint throughout 2009.
Nigeria
The domestic economy did better than most forecasts of its performance in the review period. Concerns had been raised early in the year over how the decline in oil revenue and the global credit crunch would affect the economy. In the main, there were worries over the impact on the domestic market for credit as the financial services sector adjusts to the changed financing conditions. However, provisional data from the Nigerian Bureau of Statistics (NBS) put 2009 output growth at 6.90% as against 5.98% in 2008. In large measure, better than average output performance in the non-oil sector (8.0%) was the main growth driver, with the non-oil sector contributing 85.6% of GDP. Oil sector growth in the review period was subdued until the amnesty in the Niger Delta region was negotiated in the third quarter of the review period. The output volatility, which had characterised the oil industry because of armed activity in the region, was compensated for by a bullish market.
While the fall in oil revenue may have adversely affected market sentiments, reduction in foreign direct investment, and the reversal of portfolio flows not only put pressure on the foreign exchange market but may have triggered liquidity problems in the banking sector. Nonetheless, the CBN's policy reactions ensured that by year end, the arbitrage window between rates at the official foreign exchange market and the inter-bank market had closed considerably. Compared with the end December 2008 average exchange rate at the Wholesale Dutch Auction (WDAS) (N126.48/USD1) the naira closed the review period at N149.58/USD1.
Growth in monetary aggregates slowed down rapidly in the review period, with broad money growing by 12.80% on an annualised basis, and net aggregate domestic credit to the economy growing by 56.10%. Lower than expected monetary growth figures resulted from the deterioration in the financial services industry's net foreign assets and deceleration in credit to the private sector. Consequently, the inflation rate as measured by the year-on-year increase in 'all items' consumer price index was subdued during the period under review.
Having fallen in the nine months to September 2009, inflation (on a year-on-year basis) began inching up in October, rising to 12.4% by November. Although lower than the 15.1% recorded in December 2008, rising food prices were the main inflation concern in the period under review. On the back of sustained growth in Asia, US dollar depreciation, and rising equity prices, OPEC's reference basket which closed the year to December 2008 at USD35.58/b, reached USD72.67/b in November 2009. Despite the bullish oil markets, the nation's foreign exchange reserves closed the year at USD42.47 billion, down from USD53.00 billion in December 2008.
Major sources of worry in the period under review included concerns over the extent to which the nation's infrastructure deficit could be met from official spending. Mainly, this worry was associated with the fact that about half of the federal government's capital budget remained unspent as at year end.
Domestic Industry
As expected, the financial services industry faced continuing pressure from the aftershocks of the global financial and economic crisis. The apex bank's industry reform initiatives dominated the financial services landscape in the review period. Designed to increase industry resilience in the face of less than optimal monetary growth, to strengthen the banks by addressing undercapitalisation, and to help them rediscover their financial intermediation function, these reforms did however heighten regulatory risk.
The industry's regulatory burden was further heightened when the CBN as part of its statutory duty of ensuring a sound financial system conducted a two-phase special examination of banks in the country. On the strength of its assessment of the health of the banks in terms of their liquidity, capital adequacy and corporate governance, the apex bank took action in support of eight of the banks adjudged to be in a grave situation. Along with its policy of credit easing, the CBN further provided N620 billion as liquidity support and long-term loans to the banks.
Other reform initiatives by the apex bank in the review period included guaranteeing all interbank placements, and placements with banks by pension fund administrators (PFAs). The apex bank hoped thereby to ensure that the markets remained liquid. It sought also to deepen the market for financial services through supporting the long-term debt market, by removing limits to banks' investment in the domestic bond market. Concerns over the extent to which relatively low disclosure levels in the industry contributed to the industry's crisis saw the CBN reinforcing the agreement reached by the Bankers' Committee at its 21 March 2009 meeting to adopt 31 December as the industry's common accounting year end.
On the back of the apex bank's activities in support of industry liquidity, a number of indicative rates trended down towards the end of 2009. The weighted average interbank call rate fell from 12.2% as at December 2008 to 2.91% in December 2009. The secured open buy-back (OBB) rate for December was 2.51%, while the spread reflecting counterparty credit risk narrowed to 40 basis points in December 2009 from 316 basis points at the end of the third quarter.
Outlook
Despite emerging evidence of recovery in North America and Western Europe, sluggish job growth remains a major worry in the United States of America. Across the Euro area, underlying economic conditions remain poor, with labour and product market weaknesses the key blights to the horizon. While credit availability will remain of concern into 2010 when full recovery in global activity is expected, the pro-cyclical responses of most economies to the global crisis reinforces the need for a coordinated response to the challenge of successfully redressing structural imbalances, including large fiscal and current account deficits, overstretched banks, and growing external debt.
Better financial conditions and growth in global trade towards the second quarter of 2010 should lift transition and emerging economies, although on the African sub-continent, further growth prospects would require investment in new capacity in traditional sectors of the economy. Across Africa, the broader policy response would continue to include structural reforms that make it easier for new sectors to emerge, and which conduce to the strengthening of the domestic demand that will support such sectors.
In Nigeria, expectations are of output growth in the region of 5% to 6% in 2010. There will be worries over rising inflation and the implications of the growing budget deficit for certain macroeconomic indicators. But by far the bigger concern will remain over the massive dependence of the economy on oil prices. This ought to set the tone for government to urgently pursue the much-discussed diversification of the economy's revenue base. Invariably, this calls for an increase in the investment of oil revenue in sectors that will boost the economy's long-run productivity and competitiveness. On the basis of recent experience, further savings of portions of the oil revenue is essential, not only because this provides a buffer against lean years, but as a trans-generational down payment. Going forward, it is imperative for government to put adequate infrastructure in place (particularly the public private partnership (PPP)), restructure spending by the three tiers of government, especially through blocking leakages in revenue generation, diversify the economy and efficiently manage resources.
The fortunes of the banking sector will depend on the path of proposed legal reforms to the sector, including but not limited to the prompt establishment of the asset management company (AMC), and the CBN's plans to establish a new regulatory body to be known as the financial services authority. 2010 might see an improvement in the CBN's focus on monetary policy formulation.
However, with the levels of loss recognition experienced by the industry in the last six months, lower growth rates are forecast in the near term. The larger economy may slow down further as a result, especially if a drop-off in the rate of private sector credit growth stifles domestic demand. Further reforms to industry should include improved disclosure standards. With the completion of the special examination, new standards for corporate governance, transparency and risk management should be implemented in the industry. Nonetheless, the immediate set-up of an asset management company would be necessary to address downside risks including investor apathy in the local market, and the size of additional funds to be sourced by banks.
