Abstract
This study explains the effects of financial crisis on crude oil prices,
stock prices and inflation rates in Nigeria and the global markets.
Data were obtained from major players in the financial and oil sectors
of the economy. They were analyzed using statistical packages. The
results showed that crude oil and stock prices were both increasing
before the crisis and decreased during and after the crisis. It was also
observed that the inflation rate was increasing. It is suggested that,
Nigeria should adopt a sustainable planning framework characterized
by longer- term perspective plan on the annual budget and the
Government should put policy intervention to track certain structural
reforms to mitigate the impact on the real economy which will boost
demand and reduce inflationary pressures.
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
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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.
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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.
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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.
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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.
3. To determine the trend of crude oil prices before and during the
financial crisis.
4. To compare the stock prices before the crisis and during the
financial crisis.
5. To compare the inflation rates before the financial crisis and
during the financial crisis
6. To compare crude oil prices before and during the financial
crisis
7. To correlate crude oil prices, inflation rate and stock prices of
some selected companies in Nigeria.
1.3 SIGNIFICANCE OF THE STUDY
The global financial crisis has come to define the world which we live
in. The crisis was triggered by the sub-prime mortgage crisis in the
US. This has destabilized the financial market of the developed world,
leading to the collapse of notable names in the banking business.
Production in these economies has also been adversely affected,
leading to a decline in output. This work is therefore timely as it will
bring to forefront the pending issues in the Global financial crisis.
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This study addresses the Impact of Global Financial Crises on Crude
Oil Prices, Stock Prices and Inflation Rates in Nigeria Capital Market,
during the Global Financial Crisis of 2008 and to seek ways to
forestall future occurrences, to identify the factors responsible for the
crisis.
1.4 ORGANIZATION OF THE STUDY
This thesis comprises five chapters; chapter one deals with
introduction to the global financial crises in Nigeria. In chapter two
the relevant literature review of global financial crisis with particular
reference to Nigeria are discussed. Chapter three describes the
sources of data, data presentation, data analysis techniques, variables
under study and model formulation while chapter four involves data
analysis, interpretation and hypotheses testing.
Chapter five is concerned with the summary, conclusions and
recommendations on how to deal with global financial crises more
especially with regard to Nigeria.