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).
2. A cutback in foreign capital inflows could seriously affect growth and poverty reduction in Africa. Over the past five years, Africa has seen a substantial surge in foreign capital inflows—foreign direct investment, portfolio investment, and loans (see graph below). A slowdown or reversal of these flows could dampen securities prices in some countries; the stock markets in Nigeria, Kenya and South Africa fell last week. Most countries were using these inflows to finance much-needed infrastructure investment, which may have to be postponed. If the cutback spreads to official development assistance (such as the $40 billion over the next five years that has been promised by the U.S. for HIV/AIDS), the lives of hundreds of millions of Africans, including the two million on AIDS treatment, may be threatened.
3. If the financial market turmoil leads to a recession in the U.S. and elsewhere, commodity prices will likely fall. Food, oil and mineral prices have already begun to fall, although they are still higher than they were in 2006-7. This is good news for importers of these commodities. Even for oil exporters, many of whom have been using a reference price of about $70-80 a barrel in their budgets (and saving the rest), a drop in the price of oil will not be as damaging as it was in past episodes.
4. Of greater concern in Africa is the resurgence of inflation and macroeconomic imbalances in some countries. Ethiopia’s inflation rate is 61 percent, Kenya’s 28 percent, Ghana’s 18 percent and South Africa’s 13.6 percent. Ethiopia’s trade deficit is 30 percent of GDP, Ghana’s current account deficit is 13 percent of GDP, and South Africa’s 8.2 percent of GDP. Although unrelated to the financial market crisis in the U.S. (but closely related to the food and fuel price increases of earlier this year), these developments will require early and decisive actions to avoid the situation getting worse.
I look forward to your comments and suggestions on these propositions.