Global Financial Meltdown: Challenges

1
Global Financial Meltdown Challenges
Opportunities

• Presentation made
• On 24th March, 2009
• at
• the LCCI Business Luncheon

2
Where are we?

• Reduced growth in global output
• Growth slowed from 5.2 in 2007 to 3.5 in 2008
• The IMFs World Economic Outlook update in Jan.,
  09 projects growth to slow further to 0.5 in
  2009
• Advanced economies expected to contract by almost
  2 in 2009
• Growth in BRIC and other emerging market nations
  to fall from 6.25 in 2008 to 3.25 in 2009
• Economic activity in nations of Sub-Saharan
  Africa projected to grow 3.4 - this is in
  contrast to the IMFs Oct., 2008 forecast of 5.2
  increase
• Slow output growth is in the context of global
  population rising

3
......Where are we?

• Inflation pressure diminishing
• Fiscal balances in decline
• Governments moving from strong fiscal positions
  (surpluses/low debt) to high debt
• Global trade projected to slow
• High risk of protectionism as nations face up to
  challenge
• Commodity prices are sharply lower
• The IMFs index for All Commodities has fallen
  42 than in Feb., 08 and almost 56 lower than
  its peak in July, 08
• The sub-indicies for Beverages, Agric Raw
  Materials, Metals and Crude Oil are similarly
  14, 29, 49.6, 68.4 respectively lower than
  their peaks in 2008

4
.......Where are we?

• Financial Markets
• Interest rates in advanced low inflation
  economies lower
• The loss of capital valuation of financial assets
  world-wide may have reached well over US50
  trillion approximately equivalent to 1yr of
  world GDP
• The decline reflects the reduced capitalization
  of stock markets
• Loss in the value of bonds, supported by
  mortgages and other assets and
• The depreciation of many currencies with respect
  to the US dollar, on account of a surprising run
  toward the US currency, and perceived to be a
  safe-haven currency

5
How did we get here?

• The increasing imbalances in the world economy
• The US, with low rates of savings, embarked in
  consumption binge and a growing fiscal deficit,
  experienced growing external current account
  deficits.
• These were financed by the surpluses of oil
  producing countries, China, Japan, and to a
  lesser extent Europe and Latin America. These
  imbalances grew rapidly, but markets did not
  respond significantly before 2007.
• Existence of a pre-crisis financial bubble
  characterised by
• Asset prices surging beyond the inherent value of
  the underlying asset
• Prolonged credit expansion (other side of this
  coin is the growth in debt accumulation by
  individuals and governments) driven by/resulting
  in lower standards of credit assessment
• Emergence of new types of financial instruments
  which increased the complexity of balance sheets
• Extensive use of off-balance sheet instruments
• Highly leveraged financial market players
• Close linkage and highly correlated risks in
  markets across borders

6
........How did we get here?

• Asset price bubble most acute in housing markets
  in USA Europe
• In the USA
• the expansion of credit and the lowering of the
  standards of credit assessment saw the creation
  of mortgages for sub-prime buyers
• These mortgages through securitization became the
  basis of derivative instruments which attracted
  investors within and outside the USA
• Loss of employment, especially amongst the
  vulnerable jobs resulted in default on
  mortgages and ultimately default
• In turn defaults led to foreclosures and lowers
  house prices
• In Europe
• High interest rates, designed to combat
  inflationary pressure, raised the cost of
  mortgages and weakened demand for houses leading
  to lower prices
• Recession has since compounded the position

7
.....How did we get here?

• The imbalances and asset price bubble were
  further complicated by
• increasingly integrated global trading and
  financial system which magnified and accelerated
  the transmission process
• inadequate regulation and supervision of national
  financial systems and fragmentation of global
  regulation
• weak surveillance by the IMF and other
  multilateral organizations and
• weak and uncoordinated policy responses to the
  initial signs of trouble in the financial system
• Initial responses that, in many instances, did
  more to shake confidence than to instil a sense
  that policy was up to the task of dealing with
  the banking system crisis and the impact on the
  real economy.
• Recession in the US Economy now recognised to
  have begun in 2007

8

• Global Financial
• Melt-down
• Implications for Nigeria

9
How will we be affected?

• The present crisis simply compounds the recovery
  from the earlier global increases in food and
  fuel price increases in 2007/08 which had
  adversely affected many economies including
  Nigeria
• Impact Channels include
• Financial market links with the rest of the world
  
• Lower commodity prices
• Reduction in diaspora transfers as recession
  deepens in advanced economies
• Diminished access to concessional financing

10
How will we be affected?

• Links to global financial markets
• Reversal of capital flows as international
  investors have sought to strengthen balance
  sheets back home
• Decline in equity markets
• the decline in Nigerias equity market for local
  reasons
• CBN pronouncement on margin loans and
  announcement of intention to harmonise bank
  year-end
• Poor regulatory environment
• Sharply reduced access to external funding
  opportunity
• Virtually all countries have been adversely
  affected by the impact of lower commodity prices
  on
• Export earnings
• Terms of trade
• the Current Account of the Balance of payments
• Fiscal revenues and household incomes

11
.....how will we be affected

• Diaspora Flows
• Vulnerable Financial sector
• Although Nigeria not exposed to complex financial
  products and not well integrated into global
  financial markets, financial market risks remain
  very high as the financial sector is vulnerable
  to weakening borrower incomes and debt servicing
  capacities

12
Nigeria Specific Impact

• Notwithstanding excess crude oil savings,
  estimated to be approximately US20bn, Nigeria
  will not be unscathed by the crisis
• Current futures prices for crude oil suggest year
  average of around US48-55/b
• This means lower revenues to the government
  sector
• Though output growth expected to weaken,
  recession unlikely
• Large contribution of agriculture and non-traded
  sectors to GDP will keep recession away from
  Nigeria
• JP Morgan projects that at US43/b growth will be
  approximately 4 in 2009
• Every US10/b increase will raise GDP by 1.2

13
Nigeria Specific Impact

• The expenditure side likely to remain weak
• It will be affected by the following
• Positively
• Reduction in price of fuel products
• Increases in wages (how likely ??????)
• Adversely affected by
• Reduction in government revenue and consequent
  delays in payment
• Decline in diaspora transfers
• Lower Stock Market derived wealth
• Aggressive drive for non-oil tax revenue

14
Nigeria Specific Impact

• Interest Rates will remain high in face of slower
  deposit mobilisation and rising demand for credit
• Cost driven Inflation pressure will also continue
  resulting in rate of price increase in low-to-mid
  double digits
• Principal inflation drivers include -
• Depreciation of Nairas exchange rate
• Interest rates remaining high
• Likelihood of agitation for wage increases
• Lower ( possibly deficit) Current Account Balance
  as export revenues decline in consequence of
  lower commodity prices
• Exchange rates to range in region
• Best Case N130/US
• Base Case N140-155 (CBN prefers range of /- 3)
• Worst Case N200 - ??????

15
Challenges for Business

• Strategic Direction (thanks to George Thorpe)
• Four scenarios
• Swept away in storm
• Survive storm
• disoriented and reeling
• continue playing as though nothing has changed
• recognise the changed nature of the landscape
  and adjust to the new realities

16
Challenges for Business

• Operational
• Weakened Demand
• Rising costs
• Higher Interest rates
• Devalued Currency
• Rising inflation
• Limited Access to Credit
• Keeping a workforce

17
Opportunities

• Entrepreneurs must target downturn needs such as
• superior value relative to existing players or
• provide good substitutes for the necessities that
  consumers have to forego.
• Low-cost airlines Southwest, Jetblue and Ryanair
  all grew during recessions.
• Auto repair shops do really well in downturns
  while new car sales drop
• A downturn also creates new needs
• A common outcome of downturns is an abundance of
  underutilized resources that may be available at
  a relatively low cost

18
Opportunity

• Opportunity to re-examine business model
• Entrepreneurs who can meet the profitability
  challenge by re-examining the whole business
  model
• a process that might involve customer acquisition
  or retention, or pricing innovations without
  adversely affecting costs or profitability.
• Many industry standards in these areas were set
  during downturns
• Another approach to winning is to lower costs
  without sacrificing productivity or benefits to
  the consumer
• Selective outsourcing is a common practice today,
  but it was pioneered in past downturns.