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THE EFFECT OF THE GLOBAL FINANCIAL CRISIS ON SELECTED MACRO ECONOMIC INDICATORS IN NIGERIA (INFLATION, AGGREGATE SAVINGS, AGGREGATE CONSUMPTION, REVENUE) 2007-2016

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

The global financial crisis was the emergence of crisis in the US market for sub‐prime housing loans in the first half of 2007. Sub‐prime loans, in US terminology, are loans that do not meet standard criteria for good credit quality, such as a sound credit history on the part of the borrower, good income documentation and/or a conservative loan‐to‐valuation ratio. Sub‐prime lending became very significant in the United States from around the middle part of this decade; by 2006, these loans were around one‐fifth of new housing lending and an estimated 15 per cent of the stock of housing loans outstanding in the United States.

An important feature of this period was the securitization of sub‐prime and other loans by their original lenders and their subsequent sale to other investors. This occurred partly through conventional mortgage‐backed securities but also, increasingly, through more complex products such as collateralized debt obligations (or CDOs), which came to play an important part in the spreading of the crisis. CDOs work by layering the claims in a pool of mortgages into tranches, with the most senior tranches provided the most protection against potential losses. That structure enabled some of these securities to gain high credit ratings even when the average quality of the underlying loans was poor. In combination with their relatively high yields, these features made them attractive to investors. What was not well‐understood, however, was that the layering structure could result in substantial losses, even to the senior tranches, in the event of a generalized downturn in the US housing market, which is what subsequently occurred. When these problems first became apparent, in the first half of 2007, the effects seemed to be confined largely to the US financial sector. The first significant impacts on global markets began in August 2007. It was at that time that the major French bank BNP‐Paribas announced the suspension of three of its funds that were investing in US mortgage securities. That announcement drew attention to the fact that a number of European banks, or off‐balance‐sheet vehicles associated with them, had invested heavily in these securities and could therefore be exposed to significant losses. Further, uncertainty about the size and location of these exposures, along with the general opaqueness of many of these securities, meant that financial institutions in general suffered a serious loss of investor confidence. The result was that risk spreads in global credit markets widened markedly, and banks found it more difficult, and more expensive, to obtain funding through financial markets. These developments placed already strained institutions under further pressure. In the months that followed, the crisis widened as more information about the scale of losses was revealed. Some of the more significant developments were the run on the British bank Northern Rock in September 2007, which led to its nationalization; a string of large‐scale losses announced by major banks and investment banks in the United States and Europe shortly thereafter; and the rescue of Bear Stearns in March 2008. The latter appeared for a while to mark a turning point, and for a few months market conditions began to settle down and credit spreads to narrow, although they remained well above their pre‐crisis levels. However, the crisis intensified sharply in September 2008, particularly following the failure of the US investment bank Lehman Brothers, which was the first time in the crisis that losses were incurred by creditors of a major financial institution. The Lehman collapse followed the effective nationalisation of the two US federal mortgage agencies Fannie Mae and Freddie Mac that together had more than $5 trillion in mortgages under management or guarantee a week earlier. These events were followed in quick succession by the nationalization of the world’s largest insurance company American International Group (AIG) along with a string of other announcements of the failure or near‐failure of financial institutions in the United States and Europe. Uncertainty about the nature, scope and passage of the various proposed rescue packages through this period added to the general turmoil. These events sparked a severe loss of confidence, not just in the financial sector, but also across households and businesses. In the weeks that followed the Lehman Brothers’ collapse, world equity markets experienced extreme volatility, with prices falling in net terms to eventually reach levels around 50 per cent below their earlier peaks. It was also during this period that governments around the world moved to guarantee deposits and in some cases wholesale borrowing by their banks, in conjunction with a series of other measures designed to support their financial systems. The crisis also spread quickly to other vulnerable countries; towards the end of 2008, the International Monetary Fund (IMF) announced stabilisation packages for Iceland, Pakistan and several Eastern European countries. The study seeks to appraise the effect of the global financial crisis on selected macro-economic indicators in Nigeria. (Inflation, aggregate savings, aggregate consumption, revenue) 2007-2016.

1.2 STATEMENT   OF   THE PROBLEM

The global financial crisis has been one of the most significant economic shocks in the post‐war period. At its core, the crisis originated in credit markets in developed countries centered particularly in the United States, the United Kingdom and Europe – but the fallout has had a significant effect on activity in every country and region. As the crisis intensified, there was a large swing in the appetite of world financial markets for risk, and in their capacity to accept risk. The result was a shift from the easy credit conditions that had prevailed for some years to a situation of tight credit and in some cases dysfunctional markets. This was accompanied by a loss of consumer and business confidence, with significant effects on global activity. The problem confronting the study is to investigate effect of the global financial crisis on selected macro-economic indicators in Nigeria. (Inflation, aggregate savings, aggregate consumption, revenue) 2007-2016.

1.3 OBJECTIVE   OF THE STUDY

The Main Objective of the study is to appraise the effect of the global financial crisis on selected macro-economic indicators in Nigeria. (Inflation, aggregate savings, aggregate consumption, revenue) 2007-2016; The specific objectives include:

1.   To determine the nature of the global financial crisis.

2. To determine the effect of the global financial crisis on selected macro-economic indicators in Nigeria. (Inflation, aggregate savings, aggregate consumption, revenue) 2007-2016.

1.4 RESEARCH QUESTIONS

1   What is the nature of the global financial crisis?

2        What is the effect of the global financial crisis on selected macro-economic indicators in Nigeria (Inflation, aggregate savings, aggregate consumption, revenue) 2007-2016?

1.5 STATEMENT OF THE HYPOTHESIS

The statement of the hypothesis for the study is stated in Null as follows

HO    The effect of the global financial crisis on inflation between 2007-2016  is high

HO    The effect of the global financial crisis on aggregate savings between 2007-2016  is high

HO    The effect of the global financial crisis on aggregate consumption between 2007-2016  is high

HO    The effect of the global financial crisis on revenue between 2007-2016 is high

1.6 SIGNIFICANCE OF THE STUDY

The study appraises the investigate effect of the global financial crisis on selected macro-economic indicators in Nigeria. (Inflation, aggregate savings, aggregate consumption, revenue) 2007-2016.

 1.7 LIMITATION OF THE STUIDY

The study was confronted with logistics and geographical factors.

1.8 DEFINITION OF TERMS

GLOBAL FINANCIAL CRISIS DEFINED

The global financial crisis was the emergence of crisis in the US market for sub‐prime housing loans in the first half of 2007. Sub‐prime loans, in US terminology, are loans that do not meet standard criteria for good credit quality, such as a sound credit history on the part of the borrower, good income documentation and/or a conservative loan‐to‐valuation ratio. Sub‐prime lending became very significant in the United States from around the middle part of this decade; by 2006, these loans were around one‐fifth of new housing lending and an estimated 15 per cent of the stock of housing loans outstanding in the United States.

An important feature of this period was the securitization of sub‐prime and other loans by their original lenders and their subsequent sale to other investors. This occurred partly through conventional mortgage‐backed securities but also, increasingly, through more complex products such as collateralized debt obligations (or CDOs), which came to play an important part in the spreading of the crisis.

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