African economies more resilient to the global crisis?
"They are in a better position to absorb shocks"
When several US investment houses collapsed last September, unleashing a chain of crashes in major markets around the world, brokers at Kenya’s Nairobi Stock Exchange anxiously watched the listings on their own boards. As feared, Nairobi share values did drop and by late October were down 18 per cent from the start of the year. But that decline was far less steep than those in New York, London, Tokyo and other global financial centres.
The limited impact prompted Nairobi Stock Exchange Chairman James Wangunyu to explain that “the low level of development of our market and its minor presence in the global context has ensured that Kenya does not suffer a direct contagion effect.” But about the wider economy Mr. Wangunyu was less optimistic: “Kenya is part of an increasingly integrated global economy and the effects of the financial system turmoil in the United States and Europe is bound to have an effect, albeit a lagged one.”
For some Kenyans, there has been no lag at all. In the wake of political violence at the start of the year, Esther Kangogo has been struggling to recover from the damage to her Rift Valley home. For months, a daughter working in Texas regularly sent her money to help. But now, with harder economic times in the US, Ms. Kangogo told the UK’s Financial Times, her daughter “can’t afford to send money back home.”
As economic growth slows worldwide and with some major industrial economies in recession, it has become clearer that the repercussions of the global financial crisis will be felt throughout Africa’s “real economy” — beyond the narrow realm of stock trading. Dwindling financial remittances from Africans working abroad, lower world prices for Africa’s exports, scarcer and more costly commercial credit and less generous flows of foreign aid will inevitably dampen productive activity across the continent.
African ministers of finance and planning, meeting in Tunis in November, 2008, warned that the global downturn “constitutes a major setback at a time when African economies were turning the corner.” The impact of the global financial crisis, in combination with high food prices, volatile oil markets and the repercussions of climate change will worsen conditions for millions of poor Africans. “We are facing a human as well as financial crisis.”
Flexibility and growth
While serious, Africa’s current economic situation is not as dire as it once might have been. Seven consecutive years of relatively high growth have allowed a number of countries to build up their monetary reserves and improve external financial balances, providing a cushion against short-term difficulties. In addition, economic reforms to enhance the productivity and efficiency of Africa’s farms, factories and markets have made its economies more resilient, notes Louis Kasekende, chief economist of the African Development Bank. “African economies have become more flexible than in the past,” Mr. Kasekende argues, “and are in a better position than before to absorb shocks.”
The International Monetary Fund (IMF) predicts that economic growth in all regions will slow markedly. But Africa’s performance will still be relatively strong, with 5.2 per cent average growth in gross domestic product (GDP) projected for 2008 and 4.7 per cent for 2009. That compares favourably not only to the hard-hit industrialized economies, but also to the growth rates of some other developing regions, such as Latin America and the Caribbean (see graph).
One reason the global turmoil will have a less severe impact in Africa is that capital controls, good banking supervision and strong financial regulation have kept the continent’s banks focused on domestic deposits and relatively secure investments. They therefore had little exposure to the sub-prime mortgages and other dubious loans that brought down banks in the US and Europe.
For many poorer African countries in particular, extensive debt write-offs in recent years have contributed to stronger balance sheets. The continent’s total official debt fell to $144.5 bn in 2007 (from $205.7 bn in 1999). Because these countries now do not have to spend nearly as much on servicing foreign debt, they have more left for strengthening social services and productive capacities.
Another factor is that Africa’s economies are somewhat less dependent than before on external markets and financing. Previously, says Razia Khan, the head of Africa research for the UK’s Standard Chartered bank, slowing world growth brought comparable slowdowns in African economies, mainly by weakening sales of the primary commodities that Africa exports. But now “we have noted that [Africa’s] growth is also fed by domestic consumption.” Luc Rigouzzo, director-general of Proparco, the investment arm of France’s aid agency, agrees, adding that rising domestic consumption has been driven by an increasingly urbanized population.