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Africa: Least integrated but worst hit by the crisis

Submitted by Shanta on Mon, 2009-04-20 09:33

Even though it is the least integrated with the global economy, Africa may be the worst hit region by the global economic crisis. Each of the four channels through which the crisis is affecting Africa has a particularly nefarious impact. 

  • Private capital flows, which in 2007 had surged to $53 billion—for the first time exceeding foreign aid to the continent—are declining.  Since last year, African stock markets have fallen by an average of 40 percent, with some such as Nigeria's falling by over 60 percent.  Ghana and Kenya have postponed sovereign bond offerings worth over $800 million, delaying the construction of toll-roads and gas pipelines.  The Democratic Republic of Congo has lowered its expected foreign direct investment by $1.8 billion. These flows were financing much-needed infrastructure and commodity-based investments. More importantly, the surge in capital inflows had raised expectations that African economies had “turned the corner”—only to have those expectations deflated for reasons that are not remotely the fault of Africans.
  • Remittances, which had peaked at about $20 billion a year in 2008, are expected to decline by 4.4 percent this year.  Typically, remittances are counter-cyclical: when your family is having difficulties, you send them more money. But this time the crisis is in the remittance-sending countries. Over 77 percent of Africa's remittances come from the U.S.

A fiscal stimulus for Africa?

Submitted by Shanta on Mon, 2009-03-09 10:42

There is no question that the global financial and economic crisis is affecting Africa’s economic performance. The IMF’s World Economic Outlook forecasts a GDP growth rate for Africa of 3.5 percent, which is 1.6 percentage points lower than the previous forecast, and 1.9 percentage points below the 2008 growth rate. The growth forecast for primary commodity exporters is even lower; Angola, for instance, is projecting nominal GDP to be 17 percent lower in 2009 compared to 2008.  A growth slowdown in Africa can have serious long-term consequences.
In light of these developments and evidence, and given that the United States, Western Europe and China are all considering a major fiscal expansion (of the order of trillions of dollars), a natural question to ask is: “Should African countries also introduce a fiscal stimulus?” 

The answer is: “It depends.”

Financial Market Turmoil and Africa

Submitted by Shanta on Mon, 2008-09-29 09:56

My colleagues and I are trying to think through the implications for Africa of the recent turmoil in global financial markets. Here are four propositions.

1. African banking systems are unlikely to experience the turbulence of the U.S. banking system.  African banks retain loans they originate on their balance sheets, the interbank market is small, and the market for securitized or derivative instruments is either small or nonexistent.  Even though some African countries’ banking systems have significant foreign ownership, the parent banks are typically not in the U.S.  Furthermore, the foreign ownership share in the largest economies, Nigeria and South Africa, is less than five percent (compared with a developing-country average of 40 percent).