As has been the case since the most recent global slowdown, 2010 was characterised by divergent output performance between advanced and emerging market economies (EME). Within this context, most estimates of global output growth for the year lie within the 4%–5% range. Buoyed by better pre-crisis policy frameworks and market-based institutional reforms – a number of which continued well after the onset of the global financial and economic crisis – emerging market economies (EMEs) led the nascent global recovery. With output growth in the main Asian economies surpassing pre-crisis levels by year end, emerging markets and developing economies were no longer as dependent on the outlook for advanced economies as was the case in previous crises. The decision in June by the People’s Bank of China (PBOC), the country’s central bank, to increase the ‘flexibility’ of the yuan was further evidence of China’s transition from an economic growth model based on investment spending towards one based on consumption. While a relatively rapid drawdown on China’s USD2.45 trillion foreign reserves and narrowing of its current account surplus might be the more obvious effect of this change, the added fillip to global demand that ought to follow from this change is no less important. Consequently, output growth among EMEs exceeded 6.25% in 2010 following a modest 2.5% increase in 2009.
Output growth in advanced economies (where growth reached 2.25% over the review period) was restrained by low consumer spending, high unemployment levels, stagnant incomes and reduced household wealth. Still, towards the end of the year, evidence of a recovery in the US was stronger than in both the euro area and Japan. Better profit performance in the financial and non-financial sectors, improved consumer and business confidence, and new investment in inventory provided the main impetus for growth in the US as the year wound down. The euro area’s quick resolution of the burden imposed by the ‘Great Recession’, already complicated by existing structural rigidities in the labour and product markets, was moderated further by rising concerns in the markets over constituent countries’ fiscal balance and burgeoning sovereign debt crisis.
The consolation from the fact that the more worrisome sovereign debt cases had occurred in countries at the periphery of the euro area was very soon overtaken by the fear of contagion from the debt crisis. The resolute response of the June meeting in Toronto of the G20 summit helped mitigate this latter threat, with summiteers committing to fiscal plans designed to halve deficits by 2013 and stabilise or rein in official debt-to-GDP ratios by 2016. However, to the extent that most commentators expect full global economic recovery to be led by a significant uptick in private demand, an overly fast process of fiscal consolidation, by further depressing final domestic demand, may have deleterious effects on output growth in economies currently struggling to find new growth triggers, as well as spark a new round of recessions.
Other noteworthy interventions in the different markets during the review period include:
• Plans for a root-and-branch change to Britain’s financial regulatory structure announced by the Chancellor of the Exchequer. Essentially, this will involve the dismantling of the Financial Services Authority (FSA) and the assumption by the Bank of England of supervisory responsibility for banks operating in Britain;
• The US Federal Reserve’s announcement in November that it would buy USD600 billion in long-term treasuries over the next eight months, and reinvest an additional USD250 billion to USD300 billion in treasuries with the proceeds of its earlier investments; and
• The Bank of Japan’s decision to lower interest rates to a record low, while establishing a fund to buy potentially risky assets from the financial services sector
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.
In terms of major sector indices, the liquidity glut in the banking industry remained the most important consideration. Counter-intuitively, both savings and demand deposits appear to grow in the 12 months to end December 2010, despite the lower yields on bank liabilities occasioned by the excess supply of funds. With base rates across the West African sub-region high and positive in real terms, most analysts had expected a rebalancing of investor portfolios away from the domestic market and in favour of higher yielding asset classes in the sub-region. However, the absence of much pressure on the naira’s exchange rate would indicate non-recourse to this option by most investors. With rates at near zero in both Europe and North America, it is a safe bet that the liquidity problem might persist for much longer than had been expected at the beginning of the year.
Monetary aggregates grew gently over the review period under pressure from a 13.40% increase in domestic credit (net). With key vulnerabilities persisting in the banking system, government continued to be the main recipient of bank credit growth during the period. The banking system‘s claims (net) on the Federal Government was the result of both the increase in the Central Bank‘s holding of Federal Government securities, and a fall in the Federal Government’s deposits with the apex bank. Banks’ net foreign assets fell by 17% from N7.59 trillion as at end December 2009, to N6.30 trillion by year end.
The CBN continued to intervene in the interest of the industry, rolling back the universal banking model and issuing new prudential guidelines for the industry and a framework for the regulation and supervision of noninterest banks, among others. Driven by these and other apex bank-related initiatives, a number of indicative rates trended down towards the end of 2010. The weighted average interbank call rate remained volatile throughout the review period.
Measures of global outlook growth show very little dynamism, and the general outlook will depend on how firm the shoots of the recovery, which were evident in the US towards the fourth quarter of 2010 are. Nonetheless, the higher growth rates expected in emerging and developing markets bode well for the domestic economy. Higher and rising gold prices are a worry though, for they suggest that the markets are hedging their bets against adverse movements in traded currencies and other real assets. Still, high and stable commodity prices rule out the possibility of external shocks to the domestic economy. With oil prices expected to remain in the USD70–USD80 per barrel band, there should be limited or no revenue pressures.
Domestically, inflation remains a key worry, although rates softened dramatically towards year end, perhaps in response to the CBN’s tightening of monetary conditions by raising both its policy rate and the asymmetric corridor around the policy rate for its standing lending and deposit facilities. In the first half of next year, inflation may however acquire a lot more poignancy if spending, as part of the electioneering for the 2011 general elections, exacerbates monetary aggregates. Then the CBN might have to tighten further. Already, one impact of the apex bank’s September rate hike was a spike in money market rates. There are obvious downsides to this, especially if current conditions persist until the Central Bank has to decide in June next year whether or not to continue with its guarantee on interbank transactions.
The main challenge for the banking industry over the coming 12 months will be how (and if ) a rebalancing of domestic demand away from the public sector to the private sector takes place. This transition is a necessary requirement, if autonomous private demand is to play a larger role in the economy’s output growth projections for this year. It is also essential if the market for private credit is to experience significant growth. The inauguration of the board of the Asset Management Company of Nigeria (AMCON) and its initial intervention in the industry have been welcome so far; and further intervention by the company should work in favour of a resumption of activities in the credit risk market. Over the medium to long term, industry operators will need to design and implement new responses to the changed environment. The immediate challenge however, lies in dealing with the implications of classifying dated nonperforming loans and the attendant negative impact on revenues and provisions, in addition to income reversals. It is important, therefore, that operators are able to read the credit cycle properly. Ultimately, questions over when the credit cycle will turn up are intimately connected with the process of rebalancing domestic demand.