Effects Of The Current International Financial Environment 

當(dāng)前的國際金融環(huán)境的影響
 

印度的中央銀行在2008年六月第二次提高利率，要求銀行留出更多的資金作為儲備，降低通脹率至年高位13%。回購利率被提高到百分之8.5和百分之8，現(xiàn)金準(zhǔn)備金率從百分之8.25到百分之8.75。這個(gè)增加是自2000以來最大的，隨后在2008年6月11日上升了四分之一個(gè)百分點(diǎn)。行長Yaga Venugopal Reddy壓力重重，經(jīng)濟(jì)部門在創(chuàng)紀(jì)錄的油價(jià)在2008年六月將上漲至百分之11.05時(shí)，實(shí)行緊縮型貨幣政策的。8

在尼日利亞，通貨膨脹率在2008上升至百分之9.7，這是兩年來的最高。隨著食品成本，增加能量和建筑材料。通貨膨脹率從2008年四月的百分之8.2，國家統(tǒng)計(jì)局，座落于首都阿布賈，在其網(wǎng)站上發(fā)表聲明說。8

財(cái)政和經(jīng)常賬戶余額：9

國際貨幣基金組織的功能和作用，世界銀行和區(qū)域開發(fā)銀行：11

變化的有用的建議：12

結(jié)論：13

目錄14

表中的數(shù)字

圖1 -在印度盧比匯率；來源：世界概況。8

圖2：尼日利亞匯率；來源：世界概況。8

圖3：尼日利亞的通貨膨脹率；來源：國際貨幣基金組織的世界經(jīng)濟(jì)展望2009，9

圖4：印度的通脹率：2009；國際貨幣基金組織的世界經(jīng)濟(jì)展望9

圖5：尼日利亞的經(jīng)常賬戶平衡；CIA世界概況。10

圖6：印度經(jīng)常賬戶平衡；世界概況10
 

India's central bank raised interest rates for the second time in June 2008 and asked lenders to set aside more money as reserves to cool inflation running at a 13% year high. The repurchase rate was lifted to 8.5 percent from 8 percent, and the cash reserve ratio to 8.75 percent from 8.25 percent. The increase was the biggest since 2000 and followed a quarter-point rise on June 11, 2008. Governor Yaga Venugopal Reddy was under pressure from the finance ministry to tighten monetary policy after record oil prices drove inflation to 11.05 percent June 2008. 8

 

In Nigeria, inflation rate rose to 9.7 percent in May 2008, the highest in two years, as the cost of food, energy and building materials increased. Inflation accelerated from 8.2 percent in April 2008, the National Bureau of Statistics, based in the capital Abuja, said in a statement on its Web site. 8

 

Fiscal and current account balance: 9

 

The role and functions of the IMF, the World Bank and regional development banks: 11

 

USEFUL SUGGESTION OF CHANGE: 12#p#分頁標(biāo)題#e#

 

CONCLUSION: 13

 

BIBLIOGRAPHY 14

 

TABLE OF FIGURES

 

Figure 1- Exchange rate in Indian Rupees; Source: CIA World Fact book. 8

 

Figure 2: Nigerian Exchange rate; Source: CIA World Fact book. 8

 

Figure 3: Inflation rate of Nigeria; Source: IMF -2009, World Economic Outlook 9

 

Figure 4: India’s Inflation rate; IMF: 2009 World Economic Outlook 9

 

Figure 5: Nigerian Current Account Balance; CIA World Fact book. 10

 

Figure 6: Indian Current Account Balance; CIA World Fact book 10

 

“With reference to one or two developing or emerging countries of your choice, discuss the effects of the recent and current international financial environment on their economies and suggest changes to that environment which you consider would be beneficial to those countries. Justify your answer and support it with current data”.

 

Introduction:

 

The global financial crisis began in the United States of American when the global credit market came to a standstill in July 2007 (Avgouleas, 2008). [1] Although the crisis brewed for a while, it really started to have its effect on other economies in the middle of the 2008. Around the world, financial institutions collapsed, stock markets fell and governments in wealthy developed nations had to come up with rescue packages to bail out their economies.

 

The reasons for the financial crisis are varied and complex, but largely it can be attributed to a number of factors in both the housing and credit markets. They were the inability of home owners to make regular mortgage payments, poor credit judgements by lenders, speculations and over building during the booming period, risky mortgage products, and high personal and co-operate debt levels, financial innovations that distributed and concealed default risks, central bank regulations and policies (Stiglitz, 2008). [2]

 

However, Avgouleas (2008) specified the causes of the financial crisis as, breakdown in the underwriting standards of the subprime mortgages, flaws of credit rating agencies and other complex structured credit products especially the Collaterized debts obligations (CDOs), risk management weaknesses at some of the large US and European financial institutions. [3]#p#分頁標(biāo)題#e#

 

The global financial crisis in the second half of 2008 was slow to arrive in developing countries due to the fact that banking systems were under-developed and little integrated into the global system, and had limited, if any, exposure to complex financial instruments. Yet as the global crisis deepened and affected the real sectors of developed economies, the downturn had severe implications for poor countries.

 

The world economy is facing the most severe financial crisis since the great depression of the last century. The risk of the global recession has increased radically and instability of commodity prices, which is the mainstay of most developing countries like Nigeria, India and other developing and emerging economies, has increased further. Its impact on Nigeria and India are apparent in the performance of the Nigeria and Indian Stock Exchange, their financial systems as well as in their real sector. If this situation continues to deteriorate, developing countries could be in serious risk. India, like most emerging countries, has so far not been seriously affected by the recent financial turmoil.

 

This essay would examine the effects that recent and current international financial environment have had on the Nigerian and Indian economy in these current decade. It would be highlighting very significant positive and negative effects that the global economic crisis has caused these economies. Furthermore, this essay would also pin point various suggestions that are considered beneficial to the Nigerian and Indian economy.

 

With minimal focus on internal developments in the above stated countries but about the way in which external international finance developments create threats, opportunities, advantages and disadvantages for them. Further diversifying on the developments in exchange rates and exchange rate regimes, relative inflation rates, interest rates, fiscal and current account balances, terms of trade (and fluctuations in commodity prices) , globalisation and changes to international capital flows: private flows like FDI, portfolio flows and short term flows, (trade credit and speculative) as well as remittances. Not forgetting official flows like developments in aid flows and debt relief and sovereign wealth funds.

 

Nigeria, although a developing country, is known as the giant of Africa. The country is endowed with the richness of the natural resource of oil, as well as tin, coal, lead, zinc, cocoa etc. [4] The Indian economy is an open economy, despite the capital account not being fully open. India is also gifted with the world’s largest fishing industry. [5] It is endowed with coal, iron ore, titanium, diamond, oil (which meets about 25% of the country’s demand) and more. [6]

 

Effects of the Financial Crisis on Nigeria and India:

 

FDI

 

Foreign direct inflows haven’t been greatly affected by the financial crisis in Nigeria and India. Irregular FDI inflows are similarly expected to dampen economic activity. According to IMF estimates, FDI inflows share in GDP of developing countries was 5.0% in 2008. Preliminary data for 2009 from UNCTAD indicates that in the most severe period of the downturn, in the first quarter of 2009, global FDI fell by 50% year-on-year, as investors became risk averse and liquidity contracted. [7] In Nigeria, FDI level was quite unstable. It became coherent from 2004, when it kept increasing up until it reached 20,279(million) in 2008 [8] , but in 2009, there were predictions that there would be a slight fall. Relevant figures haven’t yet been published. India had a stable increase in the FDI level looking at figures from 2000, there was a significant increase of almost double when it reached 41,554(million) in 2008. There was a certain amount of FDI investments by Merrill Lynch in various India companies which had a major effect on their future operations. Among them are two major real estate firms of India- 'DLF' & 'Unitech'. The net investments by Merrill Lynch which was wiped out turned out to be about $400 million. FDIs peaked up till the early 2008 in India and then fell, but still remained positive. [9]

 

Capital inflows

 

Capital inflows can be described as access to credit. India has never raised a sovereign bond in global capital markets, so any effect of a credit shortfall will be on the ability of Indian corporate body to access overseas capital and through capital inflows. As the sub prime crisis unfolded, counterparty risk aversion had become acute and had led to financial institutions building up significant liquid assets as precautionary measures, sometimes equivalent to 20-25% of their balance sheets.

 

This had resulted in banks cutting lending and shifting out of exposures to corporate bodies, a reversal of portfolio flows away from emerging markets (including India and Nigeria), and widening spreads on emerging market paper (including Indian and Nigerian paper). These developments slowed down capital inflows into India, with estimates for 2008-09 ranging between $40 and $50 billion. The recent drop in the Indian equity markets, also a reflection of the global rise in risk aversion and reduction in liquidity, had a negative impact on investment and consumption.

 

Remittances- Over 80% of remittances to developing countries come from high income developed countries. Which make remittances a significant source of income which can be vulnerable to economic crisis. As a result of the financial crisis, there was a reduction in the amount of migrants going to developed countries because of the recession. This however had an adverse effect on remittances in both India and Nigeria, reducing the amount of remittances being sent from abroad. On average, Africans in developed countries transfer about $9 billion to Africa yearly. Statistical figures of remittances in Nigeria show a stable trend since 2006 until 2008 when there was an increase in unemployment rate in the countries where the financial crisis started. Dilip Ratha of the World Bank stated that India is the top recipient of remittances. [10] In 2008, India’s remittances flows reached $45 billion, which was 34% higher than the previous year. Although in 2009, remittance flows where predicted to fall, exact research figures for my sample countries haven’t been determined. So, it is quite uncertain to say to what extent the financial crisis has affected the remittance levels in India and Nigeria, although it has been confirmed that there was a fall in 2009.#p#分頁標(biāo)題#e#

 

AID

 

Since the financial crisis, there has been a downturn on the flow of AID because of weak fiscal positions and debt problems. Many developing countries are dependant on foreign aid, which could shrink considerably as donor states experience economic difficulties and budgets are diverted to economic stimulus measures.

 

Commodity price collapse-

 

Oil prices in Nigeria have collapsed since the financial crisis. Oil prices currently hover at a low of $43-$53, about one third of its $150 high price in July 2008. This has had a crunching impact on Nigeria which earns about 90 percent of its income from sales of crude oil. The crude oil price declined precipitously from US$147 per barrel in July 2008 to $47 per barrel in January 2009, leading to a decline in external reserves and hence accruable revenue.

 

Drop in oil revenues mean less revenues for the government. That means less money to build new infrastructure, invest in new oil production and raise our reserves and fall in our external reserves which Nigeria has consistently built up in the last eight years. The immediate impact has been in the steep fall in the value of the Naira against the US dollar as Foreign exchange inflows have dried up.

 

Exchange rate

 

The rupee value against the dollar has weakened since the crisis. This might have been as a result of the once positive foreign inflow of funds being affected negatively. Financial institution investors have reduced globally because of the financial crisis. The US dollar, which has been the world’s reserve currency, has strengthened against the rupee and naira, not because of the strength of the US economy but because of the flight to safety of the global capital. India received $99 billion (approximately 10% of GDP) in net foreign exchange flows in 2007-08. In Nigeria, although exchange rates kept rising since the early 2000s, in 2007, when exchange rates was 127.38, there was an increase which pushed exchange rate up to 142.

 

Figure 1- Exchange rate in Indian Rupees; Source: CIA World Fact book.

 

Figure 2: Nigerian Exchange rate; Source: CIA World Fact book.

 

Interest rate

 

India's central bank raised interest rates for the second time in June 2008 and asked lenders to set aside more money as reserves to cool inflation running at a 13% year high. The repurchase rate was lifted to 8.5 percent from 8 percent, and the cash reserve ratio to 8.75 percent from 8.25 percent. The increase was the biggest since 2000 and followed a quarter-point rise on June 11, 2008. Governor Yaga Venugopal Reddy was under pressure from the finance ministry to tighten monetary policy after record oil prices drove inflation to 11.05 percent June 2008.#p#分頁標(biāo)題#e#

 

In Nigeria, inflation rate rose to 9.7 percent in May 2008, the highest in two years, as the cost of food, energy and building materials increased. Inflation accelerated from 8.2 percent in April 2008, the National Bureau of Statistics, based in the capital Abuja, said in a statement on its Web site.

 

Inflation

 

The effects of inflation on an economy depends solely on the degree of changes of commodity prices as well as the accompanying changes in the terms of trade. In Nigeria, as a result of the boom in commodity prices, inflation rose. Nigeria therefore started to experience 2 digit inflation rates from the later part of 2008. A strong and continuous backward movement in the exchange rates would keep inflation levels high, most especially because Nigeria depends on import rather than exports. Estimated inflation rate reached 12% in 2009 which was more than double 11.6% of 2008 and 5.6% in 2007.

 

In India also, inflation rates have increased. In late 2007, inflation rate reached 6.4%. [11] As at 2008, figures show that the Indian inflation rate was hitting 8.3% and 2009 figures show 8.6% which is making bank restrict loans. [12]

 

Figure 3: Inflation rate of Nigeria; Source: IMF -2009, World Economic Outlook

 

Figure 4: India’s Inflation rate; IMF: 2009 World Economic Outlook

 

Fiscal and current account balance:

 

Fiscal risk is rising for developing countries. The economic slowdown affects budget revenues, putting pressure on government spending. While in developed economies governments have adopted expansionary fiscal policies to help the economy through the slump, developing countries generally cannot afford do so.

 

Balance of payment remained impressive and it increased by 8.2% in the current account surplus and a reduction of about 61.1% in the capital and financial account deficit in 2007. This surplus in the current account was a result of improvements in the international oil markets. The average of Nigerian crude oil, that is, bonny light 370 grew from 66.39usd in 2006 to 74.96 usd. The current account balance fell in 2008 with an 80% decrease.

 

India current accounts, as measured by the sum of the current receipts and current payments, amounted to about 53% of GDP in 2007-2008, which was up from about 19% GDP in the early 2000s. [13] Also, the capital account increased from 12% GDP in the late 1990s to 64% from 2007-2008. India is running a current account deficit which is likely to increase to 3.7% of GDP in 2010 from the 2.6% in 2009, driven largely by the sharp increase in international prices of oil and food commodities. So far India’s CAD has been comfortably financed through capital inflows and FDIs. [14]

 

Figure 5: Nigerian Current Account Balance; CIA World Fact book.#p#分頁標(biāo)題#e#

 

Figure 6: Indian Current Account Balance; CIA World Fact book

 

The role and functions of the IMF, the World Bank and regional development banks:

 

USEFUL SUGGESTION OF CHANGE:

 

My suggestion would be to enforce microeconomic policy suggestions like, countercyclical monetary policy and real exchange rate management including capital controls. Supporting of domestic banks especially for agriculture and small medium enterprises (SMEs), underwriting long term investment lending (which would keep real interest rates low). Increasing of tax pressure, not tax rates but pressure to maintain fiscal balance and reduce public borrowings.

 

Maintaining credit standards especially in times of abundant liquidity and strong economic growth. Easy credit usually reflects underlying problems of principal-agent and moral hazard and is ultimately a cause of financial instability.

 

Improving on transparency. Which is critical for financial supervision and market discipline to be effective. The subprime crisis has shown that ordinary loans can become a major source of risk and uncertainty when securitized into complex, non transparent structured financial products, and when held in varying concentrations by any number of potential investors, including banks off-balance-sheet investment sources. Regulators should ensure that comprehensive information on new products and entities is readily available to allow supervisors and market analysts to understand and monitor the incremental risks to the financial system.

 

Economic fundamentals are very essential. Weak economic fundamentals, such as highly leveraged corporate balance sheets and large current account deficits, led to a loss of confidence in 1997. Strong economic fundamentals in 2007–2008 have enabled Asia to remain relatively resilient in the current turmoil. This should encourage emerging market economies to maintain strong balance sheets, sustainable current account balances, and enough foreign reserves to act as a buffer against shocks.

 

CONCLUSION:

 

In conclusion, this essay has identified how the recent financial crisis has affected the Nigerian and Indian economy.

 

It has caused a reduced investment and capital inflows. It has increased the stock market crisis in the Nigerian stock exchange because reports have shown that the foreign portfolio investors have withdrawn a high amount of investment from the Nigerian capital market.

 

Also, the reduction in the prices of crude oil has affected the amount of foreign exchange coming into the country. As a result of the reduction in funds used for development and infrastructure, there would be a back log in the amount of developments and socioeconomic projects.#p#分頁標(biāo)題#e#

 

In sum, the expected impact of a global credit crunch and slowdown in the US economy on India appears to be relatively small through the trade channel, as exports are diversified; the financial channel effects are likely to be more significant through a reduction in capital inflows — in the event that lower global interest rates do not lead to more credit becoming available and banks continue to pull back lending (to counter illiquidity) and shift out of exposures to corporates — globally and in India — to safer assets.