CHAPTER ONE

INTRODUCTION

1.1    INTRODUCTION

The world economy is deeply mired in the most severe financial and economic crisis. With its increasing impact, both in scope and depth worldwide, the crisis poses a significant threat to the world economic and social development, including to the fulfillment of the Millennium Development Goals and other internationally agreed development goals. The crisis, if it lasts much longer, will likely also have profound consequences for global security and stability.

Economic experts have noted that the global economic crisis has clearly manifested in the Nigeria economy, with the nation facing an underlying economic crisis characterized by structural inbalances, market distortations, poor infrastructure, hostility, kidnapping and weak public institutions. This crisis began in the United States of America and the United Kingdom when the global credit market came to a standstill in July 2007 (Avgouleas, 2008). The crisis, brewing for a while, really started to show its effects in the middle of 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.

The reasons for this crisis are varied and complex, but largely it can be attributed to a number of factors in both the housing and credit markets, which developed over an extended period of time. Some of these include: the

2

inability of homeowner to make their mortgage payments, poor judgment by the borrower and/or lender, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial innovation that distributed and concealed default risks, central bank policies, and regulation (Stiglitz, 2008).

•         A financial crisis thus results in the inability of financial markets to function efficiently, which leads to a sharp contraction in economic activity.

The term financial crisis is a nonlinear disruption to financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to efficiently channel funds to those who have the most productive investment opportunities, Bernanke (2009). Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults (Kindleberger. C.P and Aliber, 2005, Laeven and Valencia, 2008).

Also the effects of the global financial crisis were worsened at the critical stage, by rising global energy and commodity prices which pushed up inflation rates worldwide; emerging and developing economies like Nigeria suddenly found themselves paying more for energy and rising cost of food and other commodities.

3

IMF projections showed that by the end of 2008 and early 2009, most developed economies will be on the verge of a recession if not in a recession. As a result of this global slowdown in economic growth, there is reduced demand for oil which has led to its price crashing on the international markets.

Another factor is the collapse of the financial sector and hence its inability to support international trade by way of offering credit lines and providing insurance against certain financial risks.

The year 2008 exposed the weakness in the world financial system. Indeed in line with the axiom that the world is a global village, the global meltdown which started as a crisis in the United States housing market soon spread to all other sectors of the U.S economy, and eventually spread all over the world, becoming a worldwide phenomenon.

As major financial institutions and conglomerates crumbled like a pack of cards, one after the other across the globe, their share prices on the major world stock markets also took an abysmal downward plunge (as shown by their All share index record), despite the massive injection of public funds into the various world economies by the governments under the so-called stimulus package as a way of bailing out these global economies from the crisis.

4

Recently released economic and business activities indicators worldwide, all signal that economic activities have slowed down significantly prompting job losses, fall in production and a drop in retail sales.

Commodity prices, especially crude oil prices, have taken a plunge from their highs earlier in the year. Crude oil prices dropped to a four year low of $37pb from its peak of $147pb in mid July; as a result, emerging markets, like Nigeria, are worst hit with their stock market losing about 60% of their quoted value.

This fall in crude oil prices has impacted negatively on the 2009 budget of Nigeria, which was predicated on a bench mark of $45 per barrel, a daily output of 2.29mbpd and an exchange rate of N116 to the dollar (all of which have been revised).

As a result of these economic woes, the naira has had to be devalued by as much 18% against the dollar from an average rate of N117.5 earlier in the year to N138 at the end of Dec. 2008, with further declines in the first two months of 2009, which is clearly an unhealthy inflationary trend.

Nigeria as a country which depends largely on oil exports earnings for over 80% of its revenue had to devise ways and means of cushioning the effects of these gloomy economic crises on its own economy.

5

1.2    OBJECTIVES OF THE STUDY

1.           To determine the trend in stock prices movement before and during the financial crisis.

2.           To determine the trend of inflation rate movement before and during the financial crisis.