The financial crisis in the United States is spreading rapidly to several parts of the world. What is its impact on Africa and how do African analysts view as its causes and consequences for their countries, the continent, and the world at large? Many are critical of free market fundamentalism which, through structural adjustment programs, wrecked havoc on African economies for the two disastrous 'lost decades' of the 1980s and 1990s when African governments were prevailed upon by the international financial institutions such as the International Monetary Fund and the World Bank (has anybody heard of them in the current American crisis?) and western governments led by the United states to let entire industries and sectors collapse in the almighty name of free enterprise.
African commentators cannot help but note the hypocrisy exhibited by the same governments as they rush to intervene to save their economies through massive interventions that have resulted in nationalizations of huge financial institutions and enterprises. Some hope that this crisis has buried the blind faith in the market that ran amock from the turn of the 1980s with the rise of rightwing governments in the core western countries and accelerated following the end of the Cold War and restored policy alternatives in which the state plays its rightful role in economic development and management. The following commentaries from newspapers in some of Africa's leading economies--Egypt, South Africa, Nigeria, Kenya and Ethiopia--offer a sample of African perspectives. P T. Zeleza, Editor, The Zeleza Post.
THE VIEW FROM EGYPT
Search for Silver Linings By Sherine Abdel-Razek
Egypt is not immune to the global fiscal meltdown. But is it all bad news?
With traders, analysts and investors in the global capital markets holding their breath in anticipation of Congressional approval of the $700 billion bailout plan, economists the world over are busy trying to predict whether the US government's decision to buy up the most toxic loans will be sufficient to disinfect the system.
Initial enthusiasm over the rescue plan was quickly tempered, and after strong rebounds in global markets earlier this week by Tuesday questions began to be asked over whether the plan could really rebuild shattered confidence and the markets once again began to tumble.
Egypt has not escaped the yo-yoing, with the capital market zigzagging its way between steep losses and unprecedented gains for 10 days now. The CASE30 index is currently 13 per cent lower than when Lehman Brothers filed for bankruptcy.
"It has been caused by selling pressure from foreigners fleeing equity markets in search of safer investments such as gold," says Amr El-Alfi, deputy head of research at Commercial International Brokerage Company (CIBC). "They have been followed by Arabs who were already feeling the heat at their own bourses and then by local investors who are mainly driven by psychological factors. They panic and sell."
The market was already reeling from five months of decline in which it lost almost 40 per cent of its value. El-Alfi estimates that the US subprime mortgages and subsequent crises on Wall Street are responsible for at least half of the loss.
While one early reaction of the US authorities to the possibility of a full blown market collapse was to tighten rules on transactions and ban short selling, tightening regulations is not being contemplated in Egypt.
"We don't need more regulations. The investment instruments currently available -- shares, bonds and treasury bills -- are not by nature risky," says El Alfi.
The meltdown has not only reverberated in the capital market. Local banks deposit a high portion of their cash -- some estimate as much as LE114 billion -- with foreign institutions.
"The problem is that while the Central Bank of Egypt [CBE] knows the value of the deposits banks are not obliged to provide the names of the foreign banks in which they have deposited their money," points out Ahmed Kora, former head of Al-Watany Bank of Egypt. "This makes it difficult to assess the scale of the problem and how it will affect the sector."
A Banque Misr official quoted last week in Al-Ahram said that the bank held two million euros of bonds issued in 2001 by Lehman Brothers. While it was reimbursed one million euros after the US lender filed for bankruptcy it has yet to recover the remaining sum, which, he stressed, "represents an insignificant portion of Banque Misr's overall investment portfolio of one billion euros".
So what will happen next? Analysts are divided, the overall picture remaining confused. Many investors are hoping the US bail out will prove a turning point, drawing a line under recent dramatic readjustments. And there is always the possibility that Congress may withhold its support.
"If Congress rejects the plan the US economy will dive into recession and the dollar would lose more ground. The US is the world largest oil importer and on the back of a recession demand for oil will retreat pushing down the price of crude," predicts Magdi Sobhi, senior economist at Al-Ahram Centre for Political and Strategic Studies.
Monette Doss, an analyst at Prime Securities, takes a different perspective. "If it happens, the decline in oil prices will be in our favour even though Egypt is a net exporter of oil."
Doss explains that in the first three quarters of the current fiscal year the value of oil exports increased by 36 per cent compared to a 139 per cent increase in the value of oil imports. Even a decline in the dollar rate, though it might negatively affect Egypt's exports, is not without its advantages, according to Doss.
"Egypt has a ballooning budget deficit which the government puts at LE60 billion. The only way to finance this deficit is to draw on Egypt's foreign reserves which are denominated in dollars. This will increase the demand for dollars and balance the appreciation in the value of the pound."
But what of foreign direct investments (FDIs), on which the government until recently had placed such hopes?
"The US is undergoing a credit crunch and will tighten credit rules which will limit American investments abroad," says Sobhi.
Doss agrees, though she argues that FDIs were expected to decline anyway due to high inflation rates, the large fiscal deficit and social unrest caused by recent government policies.
From Weekly Ahram
[1] September 25 - October 5, 2008
Throwing Good Money After Bad By Anayat Durrani
The only solution that Bush can imagine is to reward the culprits
The US economy took a hard blow as 158-year- old brokerage firm Lehman Brothers filed for bankruptcy, suffering $613 billion in losses. Bank of America purchased financial giant Merrill Lynch and the Federal Reserve was forced to lend $85 billion to keep afloat AIG, the world's largest insurance company. Some have called it the worst financial hit since the Great Depression that began in 1929.
The blame game has begun with Congress, the Federal Reserve, the home-lending industry, banks and even former president Bill Clinton being pointed to as responsible for the financial crisis. Then of course, there is the Bush administration. President George Bush cancelled his trip last week to Alabama and Florida where he was scheduled to attend closed-door fundraisers, choosing instead to remain in Washington to meet with his top economic advisors to monitor the ongoing financial crisis.
"The American people can be sure we will continue to act to strengthen and stabilise our financial markets and improve investor confidence," Bush pontificated, though he surely has no idea how to even begin to do this.
The remarks were the first made by Bush following the intervention by US authorities of AIG. Bush called the actions by his administration and the Fed necessary. "The American people are concerned about the situation in our financial markets and our economy, and I share their concerns," he said. Bush attempted to put investors at ease, noting the government's takeover of mortgage financing monoliths Freddie Mac and Fannie Mae "to help promote market stability and to ensure they continue to play a role in helping our housing market recover."
The Group of Seven industrialised nations pledged Monday international cooperation with the United States to address continuing challenges in the global economy and world markets. "We strongly welcome the extraordinary actions taken by the United States to enhance the stability of financial markets and address credit concerns, especially through its plan to implement a program to remove illiquid assets that are destabilising financial institutions," the G7 finance ministers and central bank governors said in a statement. "We are ready to take whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system," they said.
President Bush asked Congress on Saturday for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis. "It is a big package because it's a big problem," Bush told reporters at a news conference. "The risk of doing nothing far outweighs the risk of the package."
A Treasury statement released Saturday said the programme is structured to "fundamentally and comprehensively address the root cause of our financial system's stresses. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth," the statement said.
The Bush administration's $700 billion proposal to bail out the financial system would be the largest economic intervention by the government since the Great Depression.
"In this crisis the ultimate question is whether the underlying assets would be adequate to cover the current demand for liquidity," said Thomas Saving, director of Texas A&M's Private Enterprise Research Centre. "If so, then time will resolve the problem and the current proposal to acquire some of the illiquid assets will wind up costing very little."
President Bush told Congress that, "the world is watching" and that it should move quickly to open up markets. Congressional leaders endorsed the core of the plan, saying passage could occur this week. They said they wanted the proposal to aid people on Main Street as well as Wall Street.
"The financial crisis can be stemmed by action taken now; certainly, the instability in the financing system can be halted," said Steven Sheffrin, professor of economics at University of California, Davis. "Long-term economic performance, however, will depend on how effectively and efficiently the current remedies work in practice and whether they maintain incentives for economic growth."
Both presidential candidates, particularly the Democrats, have used President Bush, who they partly blame for the financial crisis, to their advantage. However, just how much the current financial crisis can be attributed to the Bush administration remains a subject of debate. "President Bush has very little to do with the financial crisis. It is a product of twenty years of evolution of financial markets stewarded in by both parties and innovations in the financial sector," said Sheffrin. "One other important factor is the US reliance on foreign countries to finance its current account deficit."
Certainly the dangerous reliance on foreign countries to shoulder the US foreign trade deficit makes it vulnerable. But it is hardly fair to blame them for US profligacy, and this passing the buck ignores the glaring fact that the massive expenditures on the wars in Iraq and Afghanistan have been financed purely on the basis of deficit budgeting, i.e., by printing money. As the US economy is increasingly based more on nonproductive activities such as the financial giants AIG et al that are now bankrupt, it hardly seems likely that throwing $700 billion at them while continuing the deficit financing of the wars will do the trick.
And just who will benefit from this $700 billion handout? The very culprits who are using the deregulated complex financial system to their advantage in the first place. The only solution, of course, is a drastic reform of the financial sector and assertion of government authority over the system of looting and leveraging,
Nothing of the sort can be expected from a political process beholden to the very system it would have to tackle head on. At least presidential hopeful Barack Obama is mouthing the right words: "No matter what solution we finally decide on this week, it is absolutely imperative that we get to work immediately on reforming the broken politics and the broken government that allowed this crisis to happen in the first place." Obama blamed lobbyists and special interests for the financial crisis and referred to it as an "ethic of irresponsibility" that has dominated the government. He criticised John McCain, who has favoured deregulation, as part of the problem.
McCain, who over a week ago said the economy was "fundamentally sound", now calls the financial crisis "the greatest crisis since WWII" and blames Senator Obama and the Democratic-led Congress as part of the problem. "At a time of crisis, when leadership is needed, Senator Obama has simply not provided," McCain said. "And the truth is that we don't have time to wait for Senator Obama's input to act." Perhaps his new lease on life, Sarah Palin, will have a magic solution to this latest crisis.
From Weekly Ahram [2] September 25 - October 5, 2008
THE VIEW FROM SOUTH AFRICA
Counting The Costs By Bob Rose
What looks like the death of capitalism is the latest in a decades-old trend
The mantra that led to the market slaughter last week is elegantly encapsulated in this quote from a "leading broker" in the FM in June 1969: "The market is now in orbit, and the force of gravity no longer applies.
While it could easily have been the halcyon view of an investment banker in 2006 or a fat cat estate agent, the unnamed broker was speaking shortly before the JSE plummeted 35% in a single year. In 1969, blue-chips like Liberty fell 75%, Sage plummeted 90% and SA Breweries tumbled 75%.
While some hailed last week's fall on Wall Street and the JSE as the "death of capitalism", it is small comfort for investors to know this nauseating ping-pong of stocks is just another in a decades-old cycle of financial crises.
Last week's market devastation followed the bankruptcy filing of Lehman Brothers. But the spark that started the fire was the feeling of impregnability that led US investment banks to create flawed, "pixie dust" financial instruments that imploded when the security for those bonds turned out to be worthless.
As Wall Street imploded, the lesser might of the SA markets was sucked up in its mayhem. The JSE all share index (Alsi) tumbled 8% in four days - and this despite the fact that our banks have as good as zero exposure to the mortgage-backed securities that created all the fuss.
The JSE's Thursday low of 24 092 was 27% less than its 33 310 high six months before.
Then, after US President George W Bush announced a $700bn fund to bail out undeserving banks by buying their toxic subprime debt, markets took another sickening lurch. On Friday, the New York Stock Exchange vaulted 3,4%, and the JSE's all share soared 5,4%. The trend repeated on Monday, with the Alsi gaining more than 1,9%.
Afrifocus Securities trader Ferdi Heyneke clearly wasn't expressing an unpopular view when he told Bloomberg: "We're drunk with these swings."
The irony that it was government - the nemesis of market fundamentalists - who came riding to the rescue of the besieged capitalist system wasn't lost on commentators. On Monday, after the bailout, the Financial Times' front page blazed the question: "Is the worst over?"
But cynics would note that the FT itself has asked this same question repeatedly over the past year. And things have just gone from bad to worse.
How bad was this crash for SA? "I've never seen a more grave situation," says JSE CEO Russell Loubser, "and I'm not overdramatising things here." The difference this time, he says, was the scale and speed of the crash. "One day Lehman Brothers is there, the next it's not. The same with Merrill Lynch."
In a normal situation, Lloyds TSB's £12bn takeover of HBOS would have been dogged by competition concerns. This time, says Loubser, the authorities said "if that's what's needed, it happens, to hell with competition issues".
Though the common perception is that the market crashes of 1929, 1932 and 1989 happened overnight, this wasn't the case (see table on the right). Probably correctly - given how they created the mess in the first place - it is the US investment banks which have borne the brunt of the meltdown.
Never before has an entire sector been wiped out as rapidly as investment banks were in the past two weeks. First, Lehman collapsed, then Merrill Lynch was sold to Bank of America.
Based on the rise in the price of credit default swaps (insurance that protects buyers against losses in the event of a company collapse), investors were betting the remaining Wall Street investment banks, Morgan Stanley and Goldman Sachs, were next in line.
To pre-empt that, Morgan Stanley and Goldman Sachs this week gave up their status as investment banks by agreeing to become "bank holding companies" - effectively bringing them under the tighter regulatory net of the US Federal Reserve.
But Lehman's collapse had a global impact: banks around the world are still picking out the shrapnel, combing their divisions to assess their overall loss.
So how exposed are the local banks? For the past year, the line from CEOs and regulators is that SA's financial institutions have been impervious to the crisis. But this isn't quite true.
Investment bank Investec, probably the SA firm closest to the global credit storm, wrote down £49m of its assets during its past financial year, partly because of its subprime exposure.
Two weeks ago, Old Mutual CEO Jim Sutcliffe resigned after the life company impaired its US investment by $135m thanks to its exposure to Fannie Mae and Freddie Mac. This came weeks after Old Mutual had to write down $149m of its $20bn US asset portfolio, largely because of its subprime exposure.
Old Mutual was again the worst hit by Lehman and AIG's meltdown. By Monday, its exposure to Lehman Brothers was $55,7m, and $237m to AIG. But in the context of Mutual's assets, even this is minimal.
Old Mutual aside, FM research shows SA banks' exposure to Lehman Brothers and AIG is less than $50m - a fraction of their overall assets. While Investec's share price has lost 32% in a year over worries about its subprime exposure, it is owed a negligible R18m by Lehman. It also has no exposure to AIG.
Earlier this year, banking regulator Errol Kruger did a thorough probe of the potential exposure to the credit crunch, concluding the banks were virtually unaffected by the subprime crisis.
Kruger told the FM that in the wake of last week's mayhem, his department has again scrutinised local banks' exposure. "Our analysis shows that our banks are still not directly affected. We are also nearing completion on looking at securitisation schemes in SA, and nothing untoward has emerged."
But Kruger warns local banks will still feel "second-round effects", affecting their ability to raise cash. "When it comes to foreign loan funding, for example, syndicated loans aren't as prevalent as they used to be, and securitisation has dried up," he says. "Where previously, our banks knew they had the ability to tap into foreign markets for capital, they don't have that certainty anymore."
When it comes to exposure to Lehman, Standard Bank CEO Jacko Maree says: "In these situations, unless you've loaned money to another bank, your exposure is through transactions that aren't settled."
He says local banks have become very concerned with their own internal processes after last week's mayhem. "All the banks are focused on managing liquidity and exposures, so there's not much actual client business being done. With this turmoil, you've always got the risk that somewhere in your trading book, something isn't hedged properly. So the focus is internal," he says.
He points out that the risk of losing money if you make a mistake has increased. "Banks needed to have their documentation right with Lehman. With bank failures, a lot depends on if you have the right collateral in place, otherwise you could lose." The odds of a settlement faux pas aren't as remote as you might think.
Development bank KfW was dubbed "Germany's dumbest bank" this week, after it transferred $425m to Lehman Brothers for a currency swap deal - after Lehman declared bankruptcy. German finance minister Peer Steinbrueck called the waste of taxpayers' money "more astonishing than aggravating".
Maree says "not many international banks are writing big corporate loans at the moment". Absa CEO Steve Booysen agrees: "We have to monitor our counterparty risks very closely."
Nedbank CEO Tom Boardman says the virtual eradication of Wall Street's investment banks is unlikely to have a major impact on local banks. "Foreign banks are no longer lending to each other, so some are struggling overseas. But in SA, all the major banks have exposure to each other rather than foreign banks, so we haven't had a problem with [interbank funding]."
But it could have a bigger impact on the country, as foreign funding dries up. "Until last year, whenever we went out to tender, whether it was for a toll road, or locomotives for Transnet, we were always pitching against banks from the US or Japan. Now, these international banks aren't lending anymore, so I'm not sure SA will be able to get all the funding it needs," says Boardman.
SA banks don't have the balance sheet to finance all the infrastructure investment the country needs. So unless foreign banks can provide some liquidity, SA's growth could take a knock.
But will last week's collapse affect the real economy? Maree believes that this market meltdown will filter down eventually. "In the short term, perhaps it won't. But we've seen a weakening in the rand, and capital is becoming more expensive. So the cost of capital for the likes of Eskom goes higher, and the cost of borrowing increases for everyone."
Ironically, it is exchange controls - the very straitjacket for which policy makers were slammed - that prevented the local banks from getting suckered into mortgage-backed securities.
Says Loubser: "Exchange controls limited SA's exposure to things like collateralised debt obligations, so operationally, we'll be relatively unscathed."
Kruger agrees, pointing out that the conservative approach of regulators meant local banks didn't get up to the same sort of mischief as the US investment banks.
Boardman says because interest rates didn't drop as low in SA as elsewhere in the world, banks weren't forced to chase after profits as aggressively as German banks, for example.
Like it or not, local banks and shares are captive to the winds that blow through the US - and any recovery will take more than a year. "Only time will fix things," says Loubser. "If the US slips into a recession, productivity falls and that affects everyone. When there's such a big ruction, it can't be healed quickly."
Loubser says he doesn't see things picking up before the end of 2009. Also, it may take a while for cash-hungry foreigners to again show an interest in the JSE. By last year, foreigners owned about 40% of the JSE, but many of them have been flogging SA stocks. For the year, foreigners have been net sellers of R15bn worth of SA equities. "If they need cash, they'll sell anything with value," says Loubser.
In this context, value becomes what you can sell an asset for, not what you believe it's worth. Imara SP Reid analyst Warwick Lucas summed it up best: "Valuations are low, but risk levels are high [so] we are far from stampeding bulls."
But what does last week's collapse mean for the world order? New rules, for one thing.
Which isn't necessarily a bad thing, says Absa's Booysen. "Banks need to change their mindset, and use these regulations to protect their balance sheets, rather than referring to them as simply a bureaucratic [system of new rules]."
More importantly, faith in the free market system has been severely dented, provoking a litter of articles bemoaning "the death of capitalism".
Free market theory, after all, would have seen AIG go to the wall. This is pretty much what happened to Lehman Brothers, after the US government refused to provide a guarantee. Yet a few months earlier, it had provided a guarantee to JP Morgan, which allowed it to buy the ailing Bear Sterns.
As Boardman asks, how do you make this judgment call? The answer is simple: the banking system couldn't afford to let AIG fail, but it could let Lehman fold. As the largest holder of credit default swaps (effectively, insurance against company defaults), AIG's collapse could have sparked a domino effect of further banks collapsing.
Banking registrar Kruger, who is attending the International Conference of Banking Supervisors in Brussels, says the bailout was a practical solution. "Theoretically, it wasn't the right thing to do. But practically, the cost of not doing it would have been greater. It wasn't really a regulatory reaction, but a practical solution," he says.
So, while it may be a bridge too far to dub this the "death of capitalism", it did confirm the demise of "raw capitalism" - the god of greed was last week forced to confront its own mortality.
From Financial Mail [3] 26 September 2008
Rand On Edge Of A Rapid Plunge By Mariam Isa
THE rand is showing remarkable resilience in the face of global financial turmoil but is dangerously near the edge of a precipice which if breached, analysts say, could herald a rapid slide towards R9 to the dollar.
Yesterday the local unit weakened 2,4% to R8,27/$ in response to a fresh bout of risk aversion, which wreaked havoc on global shares and hit other emerging market currencies.
But it recovered to R8,20/$ later in the day and steered clear of the $8,36/$ mark tested 10 days ago, a five-year low which is also seen as a key support level by many analysts.
"I've been quite bearish on the rand for some time - I've got a target of R9/$," says Gregor Krall, technical analyst at BoE Private Clients.
"The triggers will be the euro and the pound. When the rand breaks key levels against them, that will be a signal it will weaken broadly," he says.
Technical analysts base their predictions for future price movements on history, rather than "fundamentals" - which mean domestic factors such as growth, inflation, and trade or fiscal deficits. This is probably a good time to look at the rand in that way as its movements are being driven mainly by the global credit crunch, which yesterday prompted the sharpest fall in global shares since the Asian financial crisis in 1997.
To put the rand's woes into context, the British pound fell 2,6% - its biggest one-day fall in 15 years - on news that the British treasury had seized Bradford & Bingley, the UK's biggest mortgage lender. The Turkish lira plunged 3%, while the Brazilian real sank 4,8%.
Nothing dramatic is expected in the near term but, like all emerging market currencies, the rand is hostage to global events - and it is not performing well against its peers.
According to a basket of 18 key emerging market currencies monitored by Bloomberg, the SA unit is ranked 16th in terms of its performance against the dollar, ahead of the South Korean won and Iceland's krona.
In the year to date, it has depreciated 16,5% against the dollar, 18,6% against the euro and 9,3% against the pound.
ETM chief economist George Glynos also sees the R8,36/$ level as a key limit to possible rand losses. "There's not much beyond that until R9/$ ... but we would need to clear R8,36/$ and there's a lot of support there," he said.
News of Finance Minister Trevor Manuel's procedural resignation last week knocked the rand 20c weaker in half an hour, but it rebounded when it became clear that Manuel would stay on after the ouster of former president Thabo Mbeki.
Politics is unlikely to play much of a role in the unit's fortunes in the near term, as President Kgalema Motlanthe has made clear that the economic policies which have won SA credibility in global markets will stay in place.
But there is not much which SA's politicians can do about the global economic slowdown and its negative effect on prices for the minerals which still make up most of the country's exports.
Prices for platinum - which SA leads the world in producing - fell more than 2% yesterday, taking year to date losses to 28%.
Global risk aversion is also mainly to blame for waning foreign appetite for SA assets.
So far this year there has been a net outflow of about R19bn in portfolio investments in local shares and bonds, versus a R60bn inflow over the same period last year.
That means it will be harder to finance the ballooning deficit on SA's current account, its broadest measure of trade.
If the shortfall is not covered by capital flows, it will force the rand to weaken.
Absa Capital has a view which breaks consensus - it says the unit may strengthen in the near term, on reports of deals which may spur large foreign direct investments.
The bank cites speculation that ArcellorMittal is considering raising its stake in its local operation, to the tune of up to $5bn. There are also rumours that SA's main fixed line operator Telkom could sell off more of its stake in Vodacom to its UK partner.
Research head Jeff Gable says Absa Capital had not abandoned its bearish longer term view on the rand, which sees the unit at R8,30/$ in six months and $8,50/$ in a year.
From Business Day [4] September 30, 2008
From Financial Crisis to Anti-capitalist Alternatives, Editorial
In previous issues Amandla! introduced a feature called ‘It's the Economy Stupid, echoing former US President Bill Clinton. We are of the view that coming to terms with the economic situation is crucial to successful political strategy. We also did this in the firm belief that economic turmoil globally and nationally was going to impose itself on the political situation. The current global financial crisis, which has brought the financial system virtually to its knees, is a both cause and symptom of a deeper systemic crisis of capitalism.
Like an overworked cliché, the left has been trumpeting the crisis of capitalism for many years. And like the proverbial Peter who cried wolf, the left's cries can no longer be ignored if the flock is to be saved.
According to respected historian and political economist Robert Brenner the current crisis ‘manifests profound, unresolved problems in the real economy that have been - literally - papered over by debt for decades, as well as a shorter-term financial crunch of a depth unseen since World War II. The combination of the weakness of underlying capital accumulation and the meltdown of the banking system is what's made the downward slide so intractable for policymakers and its potential for disaster so serious.' The articles of both Lee Sustar and Jack Rasmus build on this and go some way to explaining the depth and nature of the crisis.
There has been a degree of complacency amongst policymakers in response to the financial crisis. The sense conveyed is that we in SA are shielded from the crisis as our markets are less exposed to the failing US financial institutions. However, as Patrick Bond points out, this ignores how similar processes of financialisation expose SA to financial bubbles that are likely to puncture with similar results to those seen in the US. All the more so since South Africa not only has an unregulated derivatives market but is offering to make this practice subject to further deregulation under the World Trade Organisation's services agreement GATS.
Equally serious is the dependence of the South African economy on extremely volatile speculative capital to keep the economy afloat. For some years now we have been living beyond our means, where the costs of our imports far out-weigh revenue from exports. We are not earning sufficient foreign currency to pay for these imports, which, in turn, has made us dependent on attracting short-term speculative investment to allow us to continue on this unsustainable path. This has been achieved by having very high real interest rates. But maintaining high interest rates reinforces the process of financialisation as it encourages investment in the financial sector and consequently discourages investment in the real economy, such as in expanding factory production, agriculture, etc. Similarly, it imposes limits on public investment in social spending as government follows the same logic.
All of this is an outcome of an economic policy which removed controls on the financial sector. This process, known as liberalisation, made it easier for investors to take their money in and out of the country and to make greater profits from speculative investment. But it is precisely the policies of liberalisation and deregulation, commonly understood as neo-liberalism, that render the South African economy vulnerable to the global financial crisis. Volatile and unstable markets have been rendered powerful, so powerful that they are able to influence policy and political decision making.
A few years ago reappointed Finance Minister Trevor Manuel angrily ranted against the ‘amorphous markets' that were destabilising the rand. The same ‘amorphous' markets whose interests he has slavishly upheld were responsible for his speedy reappointment as Minister of Finance during the debacle of the mass resignation of Mbeki's ministers.
This brings us full circle: the financial crisis must be understood as an outcome of an ailing capitalism unable to generate profit through investment in the productive sectors of the economy. Policies aimed at resolving the problems of growth are just aggravating the situation, exposing the system to repeated crisis. This will impose itself on the new ANC government. Continuing with the Mbeki-Manuel policies will just make the economy more unstable and redistribution more remote. The cycle that created the tensions in the Alliance will continue, deepening the social crisis and causing political turmoil.
As Emir Sader explains, the current crisis will not bring the system down. At best it will increasingly bring the legitimacy of capitalism into question. Here lies the space for real debate and the need for popular movements to put forward strategic and long-term alternatives as well as concrete proposals for the here and now.
From Amandla Publishers [5] October/November
THE VIEW FROM NIGERIA
Lessons of U.S. Economic Troubles By Ebere Onwudiwe
For about 45 years between 1945 and 1990 the world was immersed in what was euphemistically referred to as the cold war. The titanic ideological battle between the capitalist world led by the United States and the socialist/communist world led by the Soviet Union would cost hundreds of thousands of life around the world, especially in developing countries.
Contemporary events-the precipitous demise of the communist bloc and now the unraveling of capitalism in the United States-teach us that the cold war and its casualties were all for nothing.
The cold war may be dated back to 1917, when the Bolsheviks revolted against the czarist government of Russia and replaced it with communism. The revolution alarmed the business class in Europe, which embraced fascism and Nazism as counterpoints. Benito Mussolini in Italy, Adolph Hitler in Germany and General Francisco Franco in Spain all mobilized popular support with anti-communist rhetoric. They got support from the United States business and government, which bankrolled Mussolini's consolidation of power.
That all changed, of course, when the putrid odor of fascism and Nazism became evident in their pogroms and the axis powers undertook a mission of world conquest. At that point, the rest of the world realized that communism was a lesser evil. In the ensuing World War II, capitalist America and Europe allied with communist Russia to vanquish Hitler, Mussolini and their allies.
The cold war proper kicked in soon after. With fascism and Nazism defeated, the red menace loomed large. The newly independent countries of Africa, Asia, and Latin America replaced Europe as the new theaters of geo-political rivalry. Political skirmishes that might have been readily resolved or doused turned into major conflicts as the superpowers took sides. For the people who were thus sucked into it, the cold war was as hot as hell.
In the end, around 1990, the Soviet Union disintegrated and its erstwhile eastern European "allies" took the opportunity to ditch communism, which was imposed on some of them. Communism crumbled not so much because of external pressures, but because of its internal contradictions. It is an ideology that does not reckon with people's primary motivation for hard work, personal interest and desires. Now, even China, the most populous country in the world and the only surviving "communist" power, is turning to capitalism-and is prospering for that reason. Capitalism remains the indispensable system for wealth creation
Yet, the unraveling of giant corporations in the United States and the government's takeovers and massive infusion of capital is evidence that the rhetoric of unbridled free enterprise has been overdone. In fact, Western European countries-the prototypical capitalist countries, along with the United States-all engage in various degrees of socialist policies.
Adam Smith was only partially right about the invisible hand that guides economic activities. The saint of private enterprise apparently did not anticipate the behemoths that are contemporary global corporations and that the demise of just one of them can wreck the world's economy. He apparently did not anticipate the complexity of capital leveraging, a system of capitalization that allows companies to borrow money in multiples of their worth. He might not have anticipated the contemporary scope of speculative buying, which creates artificial prices and precarious wealth.
Oh, let us not forget corporate greed that even President Bush and John McCain are now condemning, and the pressure on the most sensible managers to go along with short-term money making schemes such as sub-prime lending. This is the practice in the United States of providing mortgage loans to people at initially affordable low rates that would balloon in a few years and become unaffordable.
From Business Day Online [6] September 24, 2008
Nigeria Avoids Global Financial Crisis on Account of Low Foreign Funds
Nigeria's buoyant real economy and strong domestic liquidity will limit the damage caused by hedge funds and portfolio investors pulling money out of the country as the global financial crisis bites, analysts say.
The sheer size of Nigeria's economy means it has been the main beneficiary outside South Africa of a rush to invest in Africa in recent years. Hedge funds and private equity firms from Asia, the United States and Europe have all put money into its equities and bond markets.
That means that, on paper, sub-Saharan Africa's second biggest economy is one of the most vulnerable on the continent as institutional investors around the world struggle with tightening credit lines and become more risk-averse.
"We have certainly moved away from the situation where everyone was scrambling to get something in Nigeria, where everyone needed exposure to Nigeria," said Razia Khan, head of Africa research at Standard Chartered in London.
"There definitely has been evidence in recent weeks that it is not just the case, as we've seen since the start of the credit crisis, that investors are not putting in new money, but they have actually been pulling out," she said.
While some frontier markets might be dealt a heavy blow by significant foreign investor outflows, analysts estimate hedge funds and international portfolio investors account for just 8-10 percent of the liquidity in Nigeria's financial markets.
Its $85 billion stock exchange, one of the best performing emerging markets in the world last year, has suffered in recent months but that has been as much a result of domestic regulatory issues as of the global financial backdrop.
"The impact of foreign investors, as important as they were, is never going to be over-riding. It's a large economy and there is no question that the bulk of the money going into its financial markets was domestic," Khan said.
The United Nations Conference on Trade and Development estimated FDI in Nigeria at $12.5 billion in 2007, down slightly from a record $14 billion the previous year. In 2000, FDI was pegged at just $1.5 billion.
The central bank has moved to ensure that the financial system remains liquid, injecting about 150 billion naira ($1.3 billion) into financial markets two weeks ago and cutting its benchmark interest rate to 9.75 percent from 10.25.
Yields on 91-day Nigerian treasury bills have been broadly stable since late August, dropping slightly to 9.23 percent last week, largely on the back of the liquidity measures.
Nigeria's foreign exchange reserves -- which climbed to $63 billion in mid-September -- are sufficiently large for the central bank to mitigate the impact of the investor outflows by increasing the amount of forex it sells at its auctions.
Big dollar inflows from oil multinationals, which usually sell greenbacks at the end of each month to get naira cash to fund their operations in the world's eighth biggest oil exporter, have also helped support the local currency.
But the risk in the longer term is that Nigeria's commercial banks will find it increasingly difficult to gain access to international credit lines, meaning the sort of relatively cheap financing available a year ago no longer exists.
The country's top banks have been scaling up, tapping international and local markets to raise more than $10 billion in capital last year alone to increase their capacity to lend.
"Nigerian banks have embarked on a massive growth strategy by growing their risk assets," said Bismarck Rewane, chief executive of Lagos-based consultancy Financial Derivatives.
"Nigeria is a trade finance dependent economy. So growing your risk assets, you have to grow your trade finance ... but the Nigerian banks no longer have the (international) credit lines available," he said.
Although that could leave banks struggling to fund some big deals, most analysts say they are well capitalised enough to be able to continue domestic lending operations with little impact.
"There is plenty going on in the real economy to sustain things, even if this sort of financing dries up for a while," Khan said.
"It is not going to be make or break for Nigeria like it might be for other economies almost entirely reliant on foreign inflows."
From Business Day Online [7] September 30, 2008
THE VIEW FROM KENYA
US Crisis Gives Asia A Chance To Tilt The Balance of Power By Ken Kamoche
Karl Marx saw a trajectory. After replacing feudalism, capitalism would in turn be replaced by communism, because capitalism sows the seeds for its own destruction.
It is too early to sound the death knell for capitalism. But the aftermath of the American credit crunch is the death of Wall Street financial wizardry as we know it.
This model, which is taught to knowledge-hungry MBA students around the world, has lost its credibility, in the process casting aspersions on the very moral standing of any form of leadership, financial, economic or otherwise, emanating from the USA.
The idea that markets are free and should be left to their own devices is a dangerous fiction. If that were the case, why is it that the financial markets in America and Europe are now crying out to be rescued?
If it is legitimate and right to bail them out to protect the global economy and ordinary people like you and me, why was it deemed inappropriate not to regulate them systematically in the past and in the process protect us?
The politicos of Washington were in bed with the shakers and movers of Wall Street. The times were good, the party looked like it would never end.
The money-making euphoria that generated enormous tax revenues for the State legitimised the free-market force rhetoric. But the markets were not all that free.
There was a high price to pay, but it was not paid by the banks, certainly not by the investment bank financial wizards.
For the ordinary citizen in Kenya who is wondering what this madness in the West is all about, let's put it in context.
The genesis of the problem goes back to cheap credit, easy money, loose lending standards. For years, Americans have lived on credit. Credit cards, car loans, mortgages, all came cheap and easy.
Banks literally gave money away in the hope that expanded market share and sheer size would guarantee income streams forever.
If you could not pay, no problem, they could always sell the debt to those smart financial engineers in investment banks like Merrill Lynch and Lehman Brothers who could in turn be trusted to work their magic with all types of leveraging deals, reap astronomical bonuses and hey presto, everyone's a winner.
There were some basic problems with this model.
One, there is a limit to how long and how far you can keep recycling debt through speculation and financial wizardry. At some point, someone must ask a simply accounting question, does this thing have any underlying value?
As it turns out, the fancy-sounding credit derivatives to hedge against loan losses were not worth the paper they were printed on.
When borrowers could not make mortgage repayments, which in many cases was inevitable because loans were advanced with little discussion as to how they would be repaid, the banks got jittery.
Suddenly, it became clear that the whole financial industry was just a house of cards.
It was no different from any old discredited pyramid scam you might get sucked into but are too embarrassed to talk about.
The whole concept of investment was turned into a casino-like gamble, and because we live in a boundaryless world, the dubious investments that were sold to high street banks in cities around the world as part of that pyramid scheme have now effectively poisoned the entire global financial order.
Meanwhile, leaders in Washington, London and Frankfurt watched in silence, mesmerised and uncomprehending, trusting the magic of deregulation and free-market forces. American president George W Bush and the small-government-low-regulation Republican brigade in particular have a lot to answer for.
The obsession with the so-called war on terror prevented them from seeing the invisible economic war that was being waged on their citizens by a banking and financial system that continued to ignore basic banking rules.
Greed on the part of the financial wizards, irresponsible lending by banks and poor oversight by the State became Marx's seeds of eventual destruction.
The West failed to learn the lessons of the Asian financial crisis which shook the world in 1997, driven by mindless speculation and fanned by poor regulation and supervision.
The American financial system is bleeding, and will have serious ramifications for the rest of the global economy for years to come.
Not even relatively small players like Kenya will be spared, even though they might imagine the exposure of their financial systems is minimal.
When consumer demand for imports in America and Europe drops, farmers in Africa will suffer, the tourist industry will take a hit, aid and investment will fall.
America cannot do it alone, even with the proposed $700 billion rescue package. Asia is sitting on truckloads of US dollars. China's $1.8 trillion treasure-trove hangs like the sword of Damocles over the US dollar and economy. If China liquidated a substantial amount of its reserves, the green buck would collapse.
Asian countries have a chance to bail America out. After all, the likes of China and India have sustained the American consumer credit binge.
However, they are too shrewd to buy anything from a credit trash can.
But the bigger question is, would America swallow its pride and hand over cherished assets to a communist State? Marx would have said, it is the inevitability of history.
Prof Kamoche is an academic and a writer.
From The Daily Nation [8] September 27, 2008
Raila Warns Of Effects Of US Credit Crisis By Samwel Kumba
The ripple effects of the American credit crisis could spill into Kenya faster than expected, Prime Minister Raila Odinga warned on Friday.
Mr Odinga said Kenya needed more investment and trade to develop its market.
"The Nairobi Stock Exchange (NSE) 20-share index has already dipped to under 5,000 points, an all-time low," said the PM while addressing the Kenya Consultative Group forum.
Difficult times
Mr Odinga, who was speaking at the Kenyatta International Conference Centre, was concerned that the American crisis was unfolding at a time the country was facing difficult times.
His consolation lied in the fact that Kenyans were a resilient people.
"They know where they want to go. Our job as Government is to help them get there. We are aware that without rapid economic growth we shall be unable to make the stride toward a stable and prosperous nation," Mr Odinga told Kenya's development partners.
He encouraged the country's development partners to play a critical role in promoting and financing trade-related activities.
The Wall Street crisis has been termed the worst since markets reopened after the September 11, 2001, terrorist attacks in the US.
There are widespread fears about the US financial system's stability, with Lehman Brothers having filed for bankruptcy and insurer AIG struggling for survival. AIG has, however, been bailed out by the US government.
According to the Wall Street Journal, the crisis led to a broad and steep decline in major indices as investors were worried about the impact of the latest twists in the credit crisis on the economy and the outlook for profits.
The head of Investment at Zimele Asset Management, Mr Isaac Njuguna, said Kenyans should not think they are insulated. Unavoidably, he said, the country is experiencing the ripple effects.
Mr Njuguna said Kenya was part of the global society as it traded with other world players.
"Look at the surging inflation globally, whose effects had devastating effects on the price of commodities in the country. The current crisis has a leaning to the weakening shilling," he said.
Already, the US dollar is exchanging well above the Sh70 mark.
"Kenya being a net importer, we can only pray that issues stabilise sooner than later. Otherwise sooner or later we will be hard hit just as was the case in the skyrocketing oil prices," said Mr Njuguna.
The official said the outcome of goings-on on the global market were unlikely to go down well with most investors, most of whom might start liquidating their shares.
"As the share price moves down, everybody will want to minimise the loss by offloading. That will push the market into more instability for the supply will be far outweighing the demand," he said.
More resilient
Mr Njuguna attributes this to free flow of information.
"Our consolation perhaps is the fact that our banks are stable. We are more resilient in that line than the US," he added.
However, Mr Nguhi Gitau, a research manager at Dry Associates, does not think that the Kenyan stock market will be affected as much.
"Well, people might lose confidence in the stock market but it will be short-lived to spread to Kenya. We are not directly linked with the affected markets," she said.
From The Daily Nation [9] September 19, 2008
THE VIEW FROM ETHIOPIA
More Hands, Lighter Load - Sharing the Economic Crunch
This is not particularly an ideal time for those who are advocating for the magic of the market; that an open and competitive economy yields much more benefit to society than any other social system ever tested in human history. The financial crises that is threatening to rock the western economy (United States and Europe) from its core has become a blow to the free enterprise thinking that has overwhelmed the world over the past two decades.
American politicians across the political divide are now debating whether or not the state should inject 700 billion dollars of tax payers' money into bailing out huge financial institutions, each with assets worth more than a trillion dollars.
They cannot be blamed for this procrastination as this is no small amount. China could easily host another 17 Olympic Games similar to the one it organised in Beijing recently; this amount could keep a tourist in a luxurious seven-star hotel in Dubai for 767,000 days; it could also finance the making of 3,500 brilliant films of the kind James Cameron exemplifies with Titanic; or pay for 3.5 million trips to space with Sir Richard's Atlantis.
No wonder then that at the time of our going to press (late on Friday night), American politicians had not yet reached a decision. Nonetheless, their proposition to let the state intervene in fixing what goes wrong in the economy has lead to what The Economist described as "the black week" for those who promote financial capitalism, such as disciples of Milton Freidman.
For those who believe in the significant role of a state in managing an economy, however, their boat has not been rocked; "Marx was partly right", declares a headline one of the British newspapers last week. It is a week that produced rather tempting evidence in favour of Maynard Keynes, who argued for the state's involvement in righting what is wrong in the market.
Ethiopia's is one such place that seems to propagate Keynes's economic philosophy. It is a country where the ruling elite strongly believe in the dominant role of the state in the economy. Belatedly, it has been advancing the centre-left political agenda of what is now in public discourse, "the creation and promotion of a developmental state", an approach a bit distanced from the leftist inclination its leaders once entertained.
In a nutshell, it sounds like an ideology ingrained in the thinking that the economy, whether left to its own fate or heavily regulated, is not an end on itself. It is a means to bring social wellbeing, helping citizens create the material wealth that could lead to social prosperity. In Ethiopia, it appears to go even further: The national priority is the fight against poverty. In the words of Meles Zenawi, perhaps the chief architect of the peculiar ideology of Revolutionary Democracy, Ethiopia has no worse enemy than poverty.
Thus, what more powerful and effective force than the state machinery that exists in Ethiopia to tackle this scourge? What better instrument than the state to overcome poverty?
These are the questions that form the core of their ideology in relations to the economy.
Long before the United State's government decided to come to rescue the mortgage giants, such as FannieMac and FreddieMac (with combined assets worth 1.8 trillion dollars) - and now AIG (with an asset of one trillion dollars) - the Ethiopian government claimed its dominant place in the economy; this view was reinforced since the early 2000, where its passion for privatization began to subside. It embarked on a reconsolidation of its position in the economy, creating mega state-owned corporations - such as in the housing and railway sectors - and spending billions of dollars in infrastructure building, a move that is now a fiscal nightmare.
The state's unrestrained appetite for fiscal expansion - from a mere one billion dollar Federal budget a decade ago to five billion dollars this year - may have resulted the unprecedented development in roads, bridges, dams and services, as well as urban expansions that the people have witnessed. It could also put the economy on the growth trajectory whereby, admittedly for the first time in the nation's history, there has been consecutive growth in Gross Domestic Products (GDP) for the past five years.
For a non-oil exporting economy, it is a remarkable achievement.
But there is a flipside to this economic tale, as the government has learnt - the hard way, unfortunately. From the beginning, this growth was slowly yielding to inflationary pressure; at a peak of a nearly 30pc headline inflation recorded in July 2008, the painful rise in the cost of living has undermined the government's role and achievements on the economic front.
Inflation in Ethiopia began to rise in late 2005; but became quite alarming when the harvest in December 2006 failed to reflect the historical pattern of a steep decline after marginal rises during earlier months. Contrary to government's claim that crop output for the three years prior to 2007 grew by an average of 23pc, food inflation jumped from an average of five per cent to over 18pc in December 2006 and 41.3pc in July 2008. It seems nothing could stop it raging.
At the beginning, there were different assumptions as to why prices were going up at a time when government was claiming record high grain productivity an assumption that led to the downsizing of international food aid to Ethiopia from 715,000tn in 2003 to 290,000tn three years later: The official estimate may have been inflated; with a population growth of 2.7pc and injections of over a billion Birr into the economy in the form of a food safety net, consumption and demand might have increased; export of grains had increased, thereby benefiting farmers; or monetary expansion as a result of public expenditure, of an average of 60pc since 2003, and credit expansion by over 200pc during the same period could have been the real factors pushing the galloping inflation.
This is not, of course, to overlook the impact of price escalation on goods and services in the international market, whose effect economists describe as "imported inflation." Indeed, the historic high price of oil in the global market has led to a situation where the Ethiopian economy appears to have surrendered to yet another prey, the shrinking foreign exchange reserve the nation has. Ethiopia's balance of payments has now become so low it could probably cannot pay for imports for more than five weeks - the lowest ebb reached since this government assumed power in 1991.
Today, raging inflation at home and a painfully low balance of payments in international trade has shadowed whatever the developmental state claims as economic success stories. It seems that it is now paying for its inaction when the challenge began to manifest itself three years ago. Belatedly, it admitted the depth of the problem and to what extent monetary expansion is the real culprit.
Also, though, it was not seen as bold enough to take painful policy measures, but instead focused its energy in piecemeal approaches. While central banks elsewhere in the world acted, in some places decisively, authorities at the National Bank of Ethiopia (NBE) remained inept in adjusting interest rates on deposit. When they did, one percentage point increase to four per cent was simply not enough to encouraging people to put their money in the banks. On the contrary, this was a period where credit, with real interest rate below zero, grew exponentially; the authorities had failed to reward the vast majority of depositors and awarded awesomely to the few borrowers.
Their monetary policy response was to increase the amount of reserve banks have to keep twice in a year, from 10pc finally to 20pc. It will no doubt take time before the volume of money in the economy starts to expand by less than 20pc, an amount agreed to with the IMF.
Presently, inflation has fuelled yet another monster - economists call it inflationary expectations. It is a phenomenon where consumers believe that prices are sticky, and however expensive they are today, prices are surely cheaper than what they could be tomorrow. It is a panic in the market, sometimes created artificially, that convinces consumers to spend all they have now, instead of waiting. This resulted in a shopping spree, and a lot more money starts to chase too few goods in the market.
Authorities at the Federal Government wanted to break this trend, rightly though. They wanted to send a clear signal to the market that the state has a lot more power and resources to dampen prices; that they cannot compete against it endlessly. It began what would be a series of wheat imports from abroad and distributing it to the market at a heavily subsidized amount of 350 Br per quintal, having itself absorbed the transport cost.
It has two policy objectives: To cushion those urbanities in the fixed income group who are mostly affected by price increases; and to dampen prices. The first shipment of 150,000tn of wheat, bought at a cost of 65 million dollars, has already been distributed in 12 towns, including to residents of Addis Abeba, all within a month. The original plan, however, was that this batch would stretch for three months.
Sadly, not only was it too small a quantity to impact on the market, but also the distribution system was flawed, it seems government has failed to succeed on both policy objectives. Prices are not declining, nor is there enough supply to the market. This is largely due to its distrust of the private sector, and its inflated view of its ability in righting what is wrong with the market.
With a second batch (150,000tn) on its way, now should be time to pause and reflect.
The state is spending taxpayers' money in buying wheat and distributing it at a heavily subsidized amount. Private importers could have been drawn in to do that, provided they were offered incentives in the form of tax breaks, waivers on duty and furnishing of loans. This would create an environment where there is not a lone operator in the market, as is the case now. Competition inevitably ensures abundant supply and brings down prices. There would be no monopoly of the import, wholesale or at retail stages. Competition empowers the consumer, always.
The government would share its burden by focusing on what is rightly its legitimate role - designing and enforcing its policies. It could have let others delve in the nitty-gritty.
In addition to the helpless situation the government inflicted on itself by getting involved in the retail of wheat to the consumer, using the inefficient kebelle system, it has been constrained by the limited foreign exchange reserve it has, as evidenced by the Commercial Bank of Ethiopia's (CBE) struggle to meet its obligations. Allowing private businesses with access to foreign exchange to import as much wheat as they possibly can - through franco valuta - would have helped in the inflation-forex saga of Ethiopia.
But these measures require a government that trusts and believes in a private sector that operates openly and in a competitive manner. Sadly, it seems this is the wrong time to talk of that.
From Addis Fortune [10] September 28, 2008
THE VIEW FROM THE AFRICAN DEVELOPMENT BANK
Bank Crisis Impact Limited In Africa-AfDB Economist By Alistair Thomson
Africa should weather the first round effects of the financial crisis in developed markets but export demand and access to finance could be hit, especially in a prolonged downturn, the African Development Bank said.
The wealthier countries on the poorest continent would be worst hit by the financial crisis because of their exposure to world markets, Louis Kasekende, chief economist at the African Development Bank (AfDB), said in an email interview.
"Africa is unlikely to suffer from the first round effects of the crisis because of its weak integration into the global financial system," said Kasekende.
Some analysts have warned of possible swings in some emerging markets from the financial crisis, especially as failing US banks like Lehman Brothers or other troubled institutions unwind positions in specific markets.
Kasekende said the impact on Africa would be limited in part because it represented such a small share of global markets, with 1.3 per cent of world stock market capitalisation, 0.2 per cent of debt securities and 0.8 percent of bank assets.
Liberalisation
Foreign direct investment, representing four per cent of the world's total, was concentrated in resource-rich countries.
"All these elements suggest that for most African countries the direct turbulence in the US will have a limited impact on the domestic financial markets," Kasekende said. Continued growth in Asian economies would underpin demand for African exports, which increased by 7.9 per cent in 2007, and was helping sustain higher world prices for oil and Africa's other primary commodity exports, said Kasekende, a Ugandan.
Crude oil prices have fallen back from a record high above $147 in July, but bounced back from under $100 last week. At the same time, better policy had improved the business environment [11] said Kasekende, who has published research on financial liberalisation and structural adjustment programmes. "African economies have become more flexible than in the past, and are in a better position than before to absorb shocks. Our estimates thus show that GDP growth in Africa will average about 5.9 per cent over the next two years," he said.
African growth was 5.7 per cent last year, he said.
"However, the recession in developed countries may eventually weaken the demand for African exports, suggesting that the continent may suffer the second round effects of the crisis," he said.
Richer Countries Worse Hit
Kasekende said African countries should prepare for a prolonged downswing in developed markets, and dampened demand.
"African governments should more than ever sustain credible macroeconomic frameworks. In particular, overvaluation of currencies vis-a-vis the US dollar should be avoided."
Kasekende said Africa's wealthier countries would be worst hit by the financial crisis because of their exposure to world markets.
"Most of Africa's middle income countries may be affected. We should expect the capital markets in these economies to exhibit greater volatility and uncertainty. Also, countries relying on portfolio inflows to finance the current account are also vulnerable, as those flows tend to be highly volatile."
"The crisis facing major international financial institutions is likely to reduce their investments in Africa, negatively affecting the availability of financial resources in other sectors as well," Kasekende said.
Fastest growing
But he said the risk of a "sudden reversal of foreign private capital" for African banks was low because most was in the form of direct rather than portfolio investment.
Countries such as Algeria, Angola, Libya and Nigeria, which have established sovereign wealth funds with oil revenues, would be more exposed to market turbulence through their investments in developed countries' financial sectors, he said.
"The services sector is likely to be affected because it is very vulnerable to the slowdown of economic activity and inflation as well as to financial turbulence. Driven by financial services liberalisation, this sector has been one of the fastest growing sectors on the continent," he said.
Other services sectors like tourism also risked being hit by reduced demand as visitors from rich countries rein in their luxury spending due to the downturn, Kasekende said. - Reuters
From The Standard [12] Nairobi, September 30, 2009