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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.

How will the financial crisis affect remittances to Africa?

Submitted by Marilou Uy on Tue, 2008-11-04 11:18

Sub-Saharan Africa received almost $12 billion in remittances in 2007, and that was only the official number. With "informal" flows added the total amount can easily be double that number. Nigeria, Kenya, Sudan, Senegal, Uganda and South Africa received the highest volume of remittances, while in smaller countries such as Lesotho remittances represent up to a quarter of GDP.

Remittance costs are significantly higher for Africa compared to other regions; costs can go up to almost 25% of the amount remitted. Remittances between African countries (from South Africa, for example) are especially expensive. Reducing these costs will mean substantial extra transfers, and this will be a focus of the World Bank’s medium term agenda on the African financial sector. The immediate concern is, however, stability of flows: the recent international credit crisis will lead to a slowdown in remittances. Remittances have generally been counter-cyclical in the past, as they tend to increase when the receiving country experiences adverse events.

But a recession in sending countries could hurt the capacity of migrants to send money home. It is still too early to determine if the latter factor will dominate and cause a decline in the total amount remitted, although there are some disturbing signs. High-frequency data on remittances for African countries are scarce, but available data show that remittances from the US seem to have slowed down in recent months; remittances from other sending countries, however, have not yet been affected.

Since some readers of this blog are senders of remittances, and others recipients, it would be helpful to hear how you see remittances changing  in the current situation.

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).