How will the Global Financial Crisis Effect Africa; a blessing in disguise?
Africa in Business
By Scherzando Karasu
“They say that when America sneezes, Europe Catches a Cold, Asia develops Pneumonia and Africa’s Tuberculosis gets worse. This is what we are beginning to see”.
Raila Odinga, Prime Minister of Kenya 8th of October 2008
Despite all of this apocalyptic doom and gloom, the Economist’s World growth league table for 2009 is predicting that Sub-Saharan Africa (SSA) will perform better than other emerging markets. Fully 15 of the top 20 top-performing economies in 2009 are in this region, led by Malawi and Angola and indeed several African Nations will buck the global trend and experience a pick-up in real GDP growth.
Whilst the impact of the global financial crisis will undoubtedly be severe for Africa, the true picture as to how and why Africa will be affected is a complex one that bears closer analysis.
African governments have made strides in achieving stability with half the African countries now boasting single-digit inflation and fiscal deficits below 5%, ensuring that they are far more resilient to exogenous shocks than before. And many Africa countries have experienced a decade of economic growth, (see table) that has lifted millions out of poverty and democracy has continued apace spreading farther and faster than ever before.
Removed from the eye of the financial hurricane the recession has though begun to damage the continent. Less than a year ago, the International Monetary Fund’s (IMF) forecast for SSA was for economic growth of 6.7% in 2009. It’s most recent projection was sharply lower at between 3% and 3.5%.
The silver-lining for Africa is its limited exposure to the credit crisis. Paradoxically its relative poverty will help to protect it. African Banks have little exposure to the toxic financial assets at the heart of the financial chaos that has destroyed confidence in borrowing and lending across the World.
African commodities have enjoyed an historic five-year boom in which energy prices soared 320%, metals and mineral prices rose by nearly 300% and food prices were up by 138%. Commodity producers will now have to contend with sharply lower prices. In December the World Bank Predicted that food prices would fall by 26% between 2008 and 2010, oil prices by 25% and metals by 32%.
Addressing African Union delegates in Addis Ababa, Takotoshi Kato, the IMF’s deputy managing director, said: “commodity prices had dropped more sharply than anticipated, external funding pressure had surfaced, and the risk appetite amongst foreign investors had deteriorated.” In 2007, commodities, dominated by oil and metals, accounted for over 80% of African exports.
The second impact likely to be experienced is with worker’s remittances. Africa depends less on remittances than Latin America and Asia, although they have increased steadily since 2007. When $19bn (£13bn) was sent home by Africans, more than double the level of three years previously. Given that three quarters of African remittances come from Western Europe and America, which are already in recession. Further job cuts here are likely to have knock-on effects to migrants overseas.
Donors may even scale up commitments in a bid to reaffirm their commitment to the Paris declaration that aid should be; predictable, transparent and in line with policy priorities. Such a cynical move though by Western governments may indeed look incongruous at a time when the international community is finding hundreds of billions of dollars to save its own skin. Aid flows are a relatively small share of their overall budgets and aid is normally set some years in advance so any cuts are unlikely to be felt until 2012 and beyond.
The other casualty will be foreign direct investment (FDI). The recession will mean cuts in private sector capital inflows. This had been growing rapidly, linked mainly to the extraction of commodities. More than $30bn poured into Africa in 2007 but the decline in commodity prices will make investing look hazardous and foreign firms with declining profits and difficult credit markets are likely to have less stomach for new projects. Tony Hawkins professor of Economics at the University of Zimbabwe estimates that inflows could fall by a third. While the IMF believes that the tightening in global credit markets will make it more difficult for African firms to access trade finance.
South Africa (SA) is likely to be most heavily affected by this and as the biggest engine for growth -generating nearly half of Africa’s GDP- SA is the only nation on the continent that is truly integrated into world financial markets, (accounting as it does for over 90% of the total capital inflows). As South African businesses are heavily invested across the continent SA’S economic contraction estimated at 1.8% in the last quarter of 2008 and predicted to shrink by 0.6% in 2009, will certainly have detrimental effects on the Continent at large. The consensus is that governments will find it harder to borrow money to finance much-needed infrastructure or to fund short term deficits but the Africa zone is unlikely to experience the same degrees of economic retreat as will be experienced in either, The European Union, America and Asia.
But given the variety of economic modalities from country to country, many African nations shall face a set of very different growth factors giving rise to a range of economic performances across the continent in 2009. (See table)
(Source: Business Monitor International)
The oil and base metal commodity producing countries look set to suffer most readily from the global contraction whereas other countries are better placed for growth with some of them looking at growth rates above 3%. And not all commodity prices have suffered to the same degree. Gold and some soft commodities such as coffee and cocoa have been performing relatively well, Tanzania, Cote d’Ivoire and Uganda being good examples. So it is necessary to differentiate between regions and individual economies in assessing the overall impact and what emerges is a far more nuanced picture.
No country will remain unscathed by the global downturn. The severity of which remains to be seen and the recession in much of the industrialised countries will continue to present a serious gauntlet to macroeconomic stability, throwing up difficulties for domestic and foreign business across all regions. No less an important a factor is the role of China and India, notwithstanding the recently discredited, “decoupling theory”, (whereby growth spearheaded in Asia would replace the demand lost by the downturn in the West).
Investments and trade from these two countries have increased markedly in Africa. With 13% of Africa’s exports now going to, “Chindia” -the majority being oil- Despite the much discussed fear of a neo-colonialism, Asian FDI is estimated to make up less than 10% of Africa’s inward investment. So even if the effect of the recession in these countries is severe they are unlikely to provide a cushion to Africa in the short term. The longer term outlook though is more encouraging. With China’s sprint to urbanisation continuing to fuel resource demand. Continued strong growth averaging 6% may allow commodity prices to survive slow growth in America and the rest of the World.
Africa is certain to be a long term beneficiary of this trend and will continue to absorb vast amounts of investment. Burkina Faso, for example will have eight new gold mines in the next three years and Zambia’s mine output is headed towards a record high. Although most African countries are not on track to meet the Millennium Development Goals, Africa had made steady progress over the last decade, building the foundations for higher growth and poverty reduction. This more optimistic picture is now being undermined by factors outside its control. While the initial effects of the financial crisis were slow to materialize in Africa, the impact is now becoming clear.
It is sweeping away firms, mines, jobs, revenues, and livelihoods; it is in short a full blown development crisis. For the first time in a decade there will be zero growth per capita. This note provides evidence of the effects, and suggests action needed. For Africa no less than elsewhere time is of essence; decisive remedial action is needed now. The growth outlook has deteriorated severely. Macroeconomic balances have worsened, with many countries facing widening current account and budget deficits. The crisis is reducing trade, the mainstay of recent strong growth in Africa. The expected shortfall in export revenues amounts to USD251 billion in 2009 and USD277 billion in 2010 for the continent as whole, with oil exporters suffering the largest losses.
In addition to exports, capital inflows are also declining, including worker remittances and tourism receipts. The stocks of foreign reserves are running dangerously low, with some countries down to only a few weeks of import cover (for example, the DRC). This severely jeopardizes the capacity to import even basic commodities such as food, medical supplies, and agricultural inputs.
The poor are the most affected. The private sector has been affected by shortage of liquidity in international markets, with adverse impact on trade and investment. International banks have failed to issue lines of credit or even confirm pre-committed ones. Projects have been delayed, and some have already been cancelled.
African governments have undertaken measures to minimize the impacts of the crisis. These include: setting up special monitoring units, providing fiscal stimulus packages, revising budget expenditures, targeting assistance on key sectors, strengthening the regulation of the banking sector and markets, expansionary monetary policy, and foreign exchange controls to protect the exchange rate.
The key concern is the deceleration of growth, which will disproportionately affect the poor. It is critically important to preserve the foundations of growth erected through steady policy reforms and improvements in the investment climate; this will allow the continent to resume growth after the crisis. To achieve this goal, it is critical to sustain adequate levels of investment, especially in infrastructure. Previous commitments to increase aid to Africa must be delivered quickly: speed of access is vital. But that alone will not be enough if Africa is to be able to restore a level of growth sufficient to reduce the levels of poverty. New and additional resources must be unlocked. Africa must be part of the global response to the crisis.
June 2009
By Scherzando Karasu
“They say that when America sneezes, Europe Catches a Cold, Asia develops Pneumonia and Africa’s Tuberculosis gets worse. This is what we are beginning to see”.
Raila Odinga, Prime Minister of Kenya 8th of October 2008
The former United Nations Secretary General Kofi Annan has said that Africa was facing the equivalent of a “Tsunami” and Dominic Strauss Kahn of head of the International Monetary Fund, told a conference in Dar-es-Salaam Tanzania on March 17th, “The crisis has turned worse than even our relatively pessimistic forecast”.
So what is really going on here?
Whilst the impact of the global financial crisis will undoubtedly be severe for Africa, the true picture as to how and why Africa will be affected is a complex one that bears closer analysis.
The critical juncture the continent finds itself at may present a rare opportunity to spur African leadership and a collective political purpose that may benefit African growth and development.
- Given the economic contagion that has engulfed the world our questions are these?
- What is the extent of the impact of the global economic crisis on Africa?
- What strategies do African nations need to adopt to ride-out the crisis?
- How will African nations sustain future growth?
African governments have made strides in achieving stability with half the African countries now boasting single-digit inflation and fiscal deficits below 5%, ensuring that they are far more resilient to exogenous shocks than before. And many Africa countries have experienced a decade of economic growth, (see table) that has lifted millions out of poverty and democracy has continued apace spreading farther and faster than ever before.
The silver-lining for Africa is its limited exposure to the credit crisis. Paradoxically its relative poverty will help to protect it. African Banks have little exposure to the toxic financial assets at the heart of the financial chaos that has destroyed confidence in borrowing and lending across the World.
Domestic and regional trade has been also strong in recent years. Beginning to equal the share of GDP achieved by foreign trade and a large share of the region’s economy is now in agriculture for domestic markets, which is much less vulnerable to an international downturn.
So what will be the effects of this downturn on Africa?
The dwindling demand for industrial commodities is driven by slackening demand, particularly from China. China’s manufacturing industry has been consuming African raw materials in rapacious quantities. Given globalised linkages, Chinese manufacture largely is exported to the West so recession there will reduce demand for African raw materials.
African commodities have enjoyed an historic five-year boom in which energy prices soared 320%, metals and mineral prices rose by nearly 300% and food prices were up by 138%. Commodity producers will now have to contend with sharply lower prices. In December the World Bank Predicted that food prices would fall by 26% between 2008 and 2010, oil prices by 25% and metals by 32%.
For African countries, reliant on oils, metals, minerals and agriculture; this spells economic hardship and there have been instances of mining operation shut-downs in Botswana, Mozambique and the copper-belt region of Zambia.
Addressing African Union delegates in Addis Ababa, Takotoshi Kato, the IMF’s deputy managing director, said: “commodity prices had dropped more sharply than anticipated, external funding pressure had surfaced, and the risk appetite amongst foreign investors had deteriorated.” In 2007, commodities, dominated by oil and metals, accounted for over 80% of African exports.
The result will mean lower growth for oil exporters like Nigeria, Angola, Sudan and Equatorial Guinea and metal exporters; like South Africa, Botswana, The Democratic Republic of Congo, Mozambique and Zambia. Not all Africa’s growth in recent years has been driven by commodity prices though and domestic consumption has been a larger driver of growth than even the recent commodity bonanza.
Despite the gloom, the drop in oil and food prices has actually bought relief too many countries that have to import these commodities. And this will help those countries that have balance of payment accounts under stress and hence a reversal of the present trend when it comes to winners and losers on the continent.
The second impact likely to be experienced is with worker’s remittances. Africa depends less on remittances than Latin America and Asia, although they have increased steadily since 2007. When $19bn (£13bn) was sent home by Africans, more than double the level of three years previously. Given that three quarters of African remittances come from Western Europe and America, which are already in recession. Further job cuts here are likely to have knock-on effects to migrants overseas.
The third important factor may be a reduction in foreign aid; US President Barrack Obama has already back-tracked from his election-era promise to double the U.S. aid budget as a direct consequence of the crisis. Hard-pressed Western governments that have had to bail out their banks may now be reluctant to meet their aid commitments.
Aid flows to Africa amount to some $40bn per year and are pro-cyclical in two ways; donors tend to reduce aid flows in times of recession and aid tends to be cut back when recipient countries are in economic (and political) peril, a self fulfilling prophesy. How much the recession will impact on Africa’s receipt of aid is political guess-work. There is a though a danger that the G8 will not honour its commitment to double the aid flow to Africa by 2010 as pledged to at the Gleneagles Summit in 2005.
The IMF Director, Dominique Strauss Kahn has said “At a time when the international community is finding hundreds of billions of dollars for crisis resolution, I cannot accept that we will not be able to find hundreds of millions for low income countries” and has insisted that donors should make good on their aid promised to developing nations in spite of the current turmoil. Western Governments, ultimately responsible for collapse of the Western model in its own heartland, may be reluctant to renege on these promises.
Donors may even scale up commitments in a bid to reaffirm their commitment to the Paris declaration that aid should be; predictable, transparent and in line with policy priorities. Such a cynical move though by Western governments may indeed look incongruous at a time when the international community is finding hundreds of billions of dollars to save its own skin. Aid flows are a relatively small share of their overall budgets and aid is normally set some years in advance so any cuts are unlikely to be felt until 2012 and beyond.
The other casualty will be foreign direct investment (FDI). The recession will mean cuts in private sector capital inflows. This had been growing rapidly, linked mainly to the extraction of commodities. More than $30bn poured into Africa in 2007 but the decline in commodity prices will make investing look hazardous and foreign firms with declining profits and difficult credit markets are likely to have less stomach for new projects. Tony Hawkins professor of Economics at the University of Zimbabwe estimates that inflows could fall by a third. While the IMF believes that the tightening in global credit markets will make it more difficult for African firms to access trade finance.
South Africa (SA) is likely to be most heavily affected by this and as the biggest engine for growth -generating nearly half of Africa’s GDP- SA is the only nation on the continent that is truly integrated into world financial markets, (accounting as it does for over 90% of the total capital inflows). As South African businesses are heavily invested across the continent SA’S economic contraction estimated at 1.8% in the last quarter of 2008 and predicted to shrink by 0.6% in 2009, will certainly have detrimental effects on the Continent at large. The consensus is that governments will find it harder to borrow money to finance much-needed infrastructure or to fund short term deficits but the Africa zone is unlikely to experience the same degrees of economic retreat as will be experienced in either, The European Union, America and Asia.
A tale of two continents?
So whilst the global recession will leave its mark on the Africa the continent, as gigantic and heterogeneous as it is, there will be a diversity of performances across the different regions. Commodity dependent countries like, Nigeria, South Africa, The Democratic Republic of Congo and Angola will suffer disproportionately and the growth dynamic in these markets will impact heavily on Africa’s overall growth.
But given the variety of economic modalities from country to country, many African nations shall face a set of very different growth factors giving rise to a range of economic performances across the continent in 2009. (See table)
The oil and base metal commodity producing countries look set to suffer most readily from the global contraction whereas other countries are better placed for growth with some of them looking at growth rates above 3%. And not all commodity prices have suffered to the same degree. Gold and some soft commodities such as coffee and cocoa have been performing relatively well, Tanzania, Cote d’Ivoire and Uganda being good examples. So it is necessary to differentiate between regions and individual economies in assessing the overall impact and what emerges is a far more nuanced picture.
No country will remain unscathed by the global downturn. The severity of which remains to be seen and the recession in much of the industrialised countries will continue to present a serious gauntlet to macroeconomic stability, throwing up difficulties for domestic and foreign business across all regions. No less an important a factor is the role of China and India, notwithstanding the recently discredited, “decoupling theory”, (whereby growth spearheaded in Asia would replace the demand lost by the downturn in the West).
Investments and trade from these two countries have increased markedly in Africa. With 13% of Africa’s exports now going to, “Chindia” -the majority being oil- Despite the much discussed fear of a neo-colonialism, Asian FDI is estimated to make up less than 10% of Africa’s inward investment. So even if the effect of the recession in these countries is severe they are unlikely to provide a cushion to Africa in the short term. The longer term outlook though is more encouraging. With China’s sprint to urbanisation continuing to fuel resource demand. Continued strong growth averaging 6% may allow commodity prices to survive slow growth in America and the rest of the World.
Africa is certain to be a long term beneficiary of this trend and will continue to absorb vast amounts of investment. Burkina Faso, for example will have eight new gold mines in the next three years and Zambia’s mine output is headed towards a record high. Although most African countries are not on track to meet the Millennium Development Goals, Africa had made steady progress over the last decade, building the foundations for higher growth and poverty reduction. This more optimistic picture is now being undermined by factors outside its control. While the initial effects of the financial crisis were slow to materialize in Africa, the impact is now becoming clear.
It is sweeping away firms, mines, jobs, revenues, and livelihoods; it is in short a full blown development crisis. For the first time in a decade there will be zero growth per capita. This note provides evidence of the effects, and suggests action needed. For Africa no less than elsewhere time is of essence; decisive remedial action is needed now. The growth outlook has deteriorated severely. Macroeconomic balances have worsened, with many countries facing widening current account and budget deficits. The crisis is reducing trade, the mainstay of recent strong growth in Africa. The expected shortfall in export revenues amounts to USD251 billion in 2009 and USD277 billion in 2010 for the continent as whole, with oil exporters suffering the largest losses.
In addition to exports, capital inflows are also declining, including worker remittances and tourism receipts. The stocks of foreign reserves are running dangerously low, with some countries down to only a few weeks of import cover (for example, the DRC). This severely jeopardizes the capacity to import even basic commodities such as food, medical supplies, and agricultural inputs.
The poor are the most affected. The private sector has been affected by shortage of liquidity in international markets, with adverse impact on trade and investment. International banks have failed to issue lines of credit or even confirm pre-committed ones. Projects have been delayed, and some have already been cancelled.
African governments have undertaken measures to minimize the impacts of the crisis. These include: setting up special monitoring units, providing fiscal stimulus packages, revising budget expenditures, targeting assistance on key sectors, strengthening the regulation of the banking sector and markets, expansionary monetary policy, and foreign exchange controls to protect the exchange rate.
The key concern is the deceleration of growth, which will disproportionately affect the poor. It is critically important to preserve the foundations of growth erected through steady policy reforms and improvements in the investment climate; this will allow the continent to resume growth after the crisis. To achieve this goal, it is critical to sustain adequate levels of investment, especially in infrastructure. Previous commitments to increase aid to Africa must be delivered quickly: speed of access is vital. But that alone will not be enough if Africa is to be able to restore a level of growth sufficient to reduce the levels of poverty. New and additional resources must be unlocked. Africa must be part of the global response to the crisis.
June 2009
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