ABSTRACT
This study/research was
necessitated owing to the recent financial crisis that enveloped the globe,
commonly referred to as the global credit crunch. This crisis came about as a
result of mismanagement of mortgaged that were made available to the masses
abroad specifically the United States of America. The crisis has its root in a
banking practice called sub-prime lending or supreme mortgage. Even when Banks
got to realize that there was fire on the mountain, they were shy to admit it
because they were scared of being undervalued. Like a wild fire, the whole
globe was enveloped in the crisis. The researcher made use of secondary data,
as many people had views that varied on the topic or issue. The research went a
long way to show to what extent the meltdown affected the stock market
capitalization and GDP of Nigeria during the specified period namely-March 2008
to February 2009, in doing this the researcher employed the technique namely
regression and correlation analysis. From the study we came to see how
adversely the stock market capitalization was affected whereas the GDP was not
affected as such. More details are seen in the body of the research work.
CHAPTER ONE
1.0
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
Never
since the 1930’s Great depression has the world faced such level of financial
crisis as the current credit crunch that has threatened to undermine the
stability of the world’s economic system and in turn rewrite economic theories
that have hitherto been regarded as sacrosanct. The credit crisis which was
ignited in the US, but took its first victims in the UK in 2007 resulting in
the collapse of Northern Rock, was triggered by rising defaults by sub-prime US
mortgage borrowers;
(Simon E. and Tonia O. 2008). In US there are three types of mortgages namely:
Conventional, Interest-only and Sub-Prime
In
conventional mortgages, part of each month’s payment goes towards paying off
the principal and part goes towards interest (Fiakpa, L. et al: 2008).
In an interest-only loan or mortgage, the borrower only pays interest
each month. This makes it cheaper than a conventional mortgage.
Sub-prime mortgage is granted to borrowers whose
credit history is not sufficient to get a conventional mortgage or who do not
qualify for market interest rates owing to various risks factors such as income
level, size of the down payment made, credit history and employment status. (Fiakpa,
L. et al; 2008).
As
the defaults in sub-prime US mortgage mounted, institutions had a rethink on
their attitudes to risks and suddenly became scared of losing money.
Banks became unwilling to lend to each other for fear of not getting
their money back. The panic spread to shares and finally from financial markets
to hit the wider economy.
But the damage had been done and the global economy has taken a beating,
the extent of which is yet to be determined.
In Nigeria, it first came by a meltdown of the capital market, but as
price depreciation continued unabated, the authorities decided to have a second
look at the market. The market fundamentals were strong, what could therefore
be wrong with the market? Questions were asked.
Secondly, dwindling petroleum prices means a severe
reduction in foreign exchange earnings, which in our case, affected the economy
severely as the nation depends so much on the petroleum sector.
Deriving from the above, is the deficit in Federal Government budget narrowing
down to State and Local Government allocation, there is also loss of jobs and a
slow down in fight against poverty.
Thus, as Komolafe Babajide (2008:6) rightly puts it, the tragedy of the
US economy soon became a global nightmare US investors in a bid to save some of
their investment at home started calling home their foreign investments
including those in Nigeria. This gave rise to a glut of shares in the market,
which promoted the sharp depreciation of share prices. The impact of this on
the Nigerian stock exchange has been quite severe as the market capitalization
tumbled more than 30 percent within the period (vanguard 2008:8).
Contrary to earlier claims that the Nigerian economy is insulated, the
crisis soon infected the entire capital market. This was due to the decision of
foreign investors to pull out their funds from the market leaving it saturated with stocks. The problem
thus spans from the indications that a sustained investment in stocks is needed
to rally investor confidence. Unfortunately, almost one month after the
Nigerian stock market prices took a nose-dive and three weeks after the US
economy posted their signs that a recession was imminent, there hasn’t been a
coherent effort on the part of the organized private sector especially in
Nigeria to salvage what is left of the economy.
This study is therefore out to investigate this global economic meltdown
or downturn as it impacts on the Nigerian Economy. The basis of the study is on
various sectors of our economy and because the Nigerian economy is mostly and
hugely dependent on oil prices, the ongoing projects in Nigeria’s oil and gas
industry is dependent on foreign financing. This then implies that some key
sectors of the economy may suffer a set back and our oil and gas sector may not
be spared. Independent Daily (2009:43) captured it more vividly by saying that
the crux of the project’s down turn was due to step up security concerns arising from the activities of militants operating in
the Niger Delta region.
Economic meltdown may also attack a nation’s bureaucratic sector. Hence,
the decision making machineries have come to agree indeed that there is a huge
complex theory threatening their propaganda instinct. Financial meltdown can
also take a steep price of consequence on the entire population. This is
revealed in financial vanguard (2009:26) that because of high energy costs,
consumers have reduced their gasoline consumption at the fastest rate since the
oil shock of the 1970’s as prices peaked, oil consumption in Nigeria dropped by
12% in July to its lowest level since the return of democracy (Oti, B. 2008).
The big question then was why did a domestic problem in faraway USA become so
profound as to take a toll on the Nigeria people?
I personally, felt it is just one the negative consequences of
globalization: as well as the evil side of capitalism as many authors have come
to discover. The researcher also finds out that though not surprisingly that a
complete new approach may prove to be a more viable solution to the current
economic nightmare. The reason being that, in spite of various governments’
concerted efforts in re-aligning the economy, not much has been seen of the
impact of the government’s bailout packages and nationalization policies. It is
therefore not surprising as it is only a repeat of the 1930’s global depression
method of correction......
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Item Type: Postgraduate Material | Attribute: 82 pages | Chapters: 1-5
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