The Global Financial Crisis: Impacts on Growth and Development African Countries

1
The Global Financial Crisis Impacts on Growth
and Development African Countries

• Presentation to INWENT
• By
• Mr. Kasekende
• Chief Economist,
• African Development Bank
• Tunis, 6 December 2008

2
Impact of the Financial Crisis on Africa

• Main Message
• Africa is feeling the impacts of the crisis
• Short run impact-less development finance
• Medium term impact - global economic slow down
  will reduce commodity prices and demand for
  African exports
• Countries may need to boost domestic demand to
  maintain economies on an upward growth trajectory

3
Economic Performance up to 2007 robust and strong
Export growth (high commodity prices) and rising
investment main drivers
Since 2002 Africa growing in tandem with global
economic growth
4
Growing Integration of Africa into the global
economy

• Decoupling more limited than previously thought
• private capital flows rising
• The share of trade in GDP increasing
• Regional debt markets are expanding
• More investors interested in African equities

Source IIF 2008
5
Impact of the Crisis on banking though small,
African capital markets are growing

• Although African banks do not have complex
  derivative instruments nor rely excessively on
  foreign borrowing
• High levels of foreign ownership indicates
  potential contagion channel
• Small market size implies that even limited
  withdrawals could be significant
• Lending by foreign banks to African private banks
  is declining (e.g. in some countries have banks
  seen lines of credit shrink)

6
Impact of the Crisis Stock Markets Affected

7
Impact of the Crisis Currencies affected

8
Impact on Commodity Prices
9
Impact on Trade Global Trade volumes falling
The Baltic dry Index sharply fell over the last
six month, reaching an all-time low in December,
from a peak in mid-May
African exports set to grow only by 4.8 in 2009
compared with 26.9 in 2008Also, trade
financing being affected
Source IIF Capital Markets Monitor, Dec. 2008
10
Growth forecast being revised downwards
Deterioration of African Growth

• November Assumptions
• Lower foreign demand from the rest of the world
  (drop by 0.41 in 2008 and 0.58 in 2009)
• Higher inflation in the rest of the world (boost
  by 1.09 in 2008 and 0.27 in 2009)
• Oil prices are assumed higher in 2008, by
  10US/bbl and lower in 2009, by 9US/bbl.

Inflationary Pressure
11
Some Country Examples Egypt

• The stock price index CASE 30 more than halved
  since the global financial crisis unfolded it
  fell by 57 from 31 July-2 Dec. 2008.
• The Crisis is now affecting growth performance
  and undermining growth outlook growth
  projections revised growth from 7.2 to around 6
  in 2008 and 6 in 2009.
• Job creation slowed down 180.000 jobs created in
  3Q 2008 compared to 200,000same period in 2007
• The Suez Canal revenue was US467.5 mil in
  October, down from 469.6 million in September.
  The lowest monthly revenue since April 2008.

12
Some Country Examples Egypt

• Tourism booking indicators for winter season are
  down by 40 percent compared to the same period of
  last year.
• Trade affected Government reported a US2.2bn
  loss in exports and a fall in imports by 4.3
  billion, which is synonymous a sharp decline in
  the trade balance deficit.
• But inflation pressure receding and banking
  sector been insulated thanks to the very low
  loan-to-deposit ratio and a small total mortgage
  exposure
• Government announced a fiscal stimulus package,
  including new investments worth about USD 1.2
  billion.

13
Some Country Examples South Africa

• According to the SARB, South African financial
  sector remains broadly robust and stable.
• The banking system is not dependent on foreign
  lines of credit
• The Central Bank has not yet has to make any
  special liquidity provision
• The domestic interbank market remains fully
  functional
• But the South Africas JSE All Share Index has
  fallen by about 28 from end of July to 2
  December 2008
• Similarly, the Rand has depreciated against US
  by 28 from 31 July 2008 to 2 December 2008.
• High structural current account deficit compared
  with most other emerging economies (-7.3 of GDP
  in 2007 -7.7 in 2008) financed mainly by
  potentially volatile portfolio inflows

14
Some Country Examples South Africa contd

• 3Q 3008 GDP growth was 2.9, down from 2Q GDP
  growth of 4.4. Growth for 2008 forecast at 3.8,
  against 5.1 in 2007.
• Risk of inflation
• The mining sector already adversely affected by
  contraction of metal demand due to economic
  downturn in developed and emerging market.
• Manufacturing, which makes up 16 of the economy,
  contracted for a sixth straight month in October.
• Due to credit squeeze, new vehicle sales in
  October fell to their worst level of 2008 and 31
  percent down on the same month in 2007
• Significant potential job losses

15
Some Country Examples Kenya

• The stock market has experienced some volatility
  since June 2008
• The Kenyan shilling depreciated by about 17
  between 31 July to 2 December 2008.
• GDP growth set to soften considerably from 7 in
  2007 to 4 in 2008
• Inflationary pressures remain significant month
  on month overall inflation rate rose from 28.4
  in October 2008 to 29.4 in November

16
Some Country Examples Kenya

• The Crisis having a negative effect on two of
  Kenya's key foreign-exchange earners the tourism
  and horticulture sectors
• Kenya has experienced growth on the domestic bond
  market, whose turnover has increased from Kshs
  34.1 billion in 2004 to 84.9 billion in 2007.
• However, the global financial crisis makes it
  difficult for the government to implement its
  plan to float a US500 million infrastructure
  Eurobond.

17
Some Country Examples Nigeria

• The Nigeria Stock Exchange (NSE) has suffered a
  major setback, with the all-share index declining
  45.3 from March 5, 2008
• Decline in the price of oil is creating
  challenges for public finance
• Government expects oil production to drop from
  2.45 million barrels a day in 2008 to 2.29
  million barrels in 2009
• Crude accounts for 80 of government revenue and
  90 of exports.
• The central bank is restricting the sale of USD
  to preserve foreign-currency reserves amid
  dwindling export earnings
• International hedge funds managers have already
  taken as much as USD 10 billion out of the
  country
• Nigerian banks are seeing their credit lines
  shrink rapidly (e.g., letters of credit)
• Fund-raising for new initiatives such as the
  Nigeria Infrastructure Fund are facing
  difficulties

18
Policy Responses

• Domestic sources to boost economic growth
• Sustain macroeconomic reforms to make our
  economies more resilient
• Strengthen domestic resource mobilisation to
  support domestic investment as external support
  weakens
• Begin thinking now about appropriate
  macroeconomic responses
• Deepen integration to boost domestic market
• (invest in infrastructure) economic and financial
  reforms