Is Africa Back?

During his recent visit to Sub-Saharan Africa, IMF chief Dominique Strauss-Kahn penned a piece Africa is Back which exudes optimism of an economically brighter sound future for the region, which has been emerging from recession.  Kahn stopped by South Africa, Kenya and Zambia where he met members from the business, political and academic communities to evaluate the effects of the global financial crisis on the continent. Kahn stressed that sound economic policies adopted by African nations, including countercyclical monetary and fiscal policies have helped them buffer the effects of the crisis and it is these policies that will ensure stronger growth in the future. Stable domestic governance will underscore the African growth trajectory.  He argued that unlike other crises this time Africa’s recovery is not lagging global recovery but is occurring almost at the same pace.

The African subcontinent did feel the effects of the global slowdown through reduced capital inflows, lower commodity prices and lower aid levels. The isolation of some African markets helped insulate them at least from the financial linkages and the IMF itself stepped back in extending loans to several countries to avoid fiscal contractions.   With the improvement in global trade, increase in commodity prices and a return of risk appetite, SSA countries are on sounder footing now.  The picture though still seems mixed, as we argued in the Q1 RGE outlook for the region. Despite an interest in investing in African countries, transaction costs for investing in all but the most open economies remain high, a fact that may deter investors from the forthcoming sovereign bond issues.  Yet, with the region’s clear need for infrastructure spending, channeling global funds and optimizing local ones could provide some significant opportunities. 

His stops highlight several different themes in the country and highlight countries with good policy frameworks that the IMF is trying to reinforce. South Africa, which is Africa’s largest and most open economy, underwent its first (albeit modest) recession in almost two decades in 2009.  Its recovery has been export demand driven. Domestic demand is still weak with unemployment affecting one in every four South Africans. South Africa will post a modest recovery in 2010 as it gains from the global recovery and foreign inflows from the World Cup it is scheduled to host later this year. Its fiscal and monetary authorities have policy credibility and even a change in government has prompted little change in policies.

Expansionary monetary and fiscal policy along with a recovery in agricultural commodities exports will enable Kenya to register stronger growth in 2010. Kenya’s strong growth momentum of almost 6% was derailed by the violence that broke out after the country’s disputed December 2007 elections. Growth subsequently recovered, but political strains remain and could derail growth. A referendum on the draft constitution should be held this year. In 2009, Kenya had to draw a US$203 million loan from the IMF to help offset the reduction in inflows from tourism and exports. Given the past electoral violence, there is a risk of instability and the coalition government remains vulnerable, potentially reducing its ability to continue to implement reforms needed to attract foreign investment. However, its bond issue should be viewed positively by investors, and new issuance is expected on the equity markets.

Commodity dependent countries, like Zambia suffered greatly in the crisis. The Zambian economy’s collapse was concurrent with the collapse in its copper export prices. Copper makes up two-thirds of exports and an even larger portion of government revenues. After reaping the benefits of the 2003- mid 2008 commodity boom Zambia had to spend its savings to shore up its economy and defend its currency as export revenues shrunk. Failure to diversify its economy has left it particularly vulnerable to the fall in global demand. A pick up in commodity prices has helped Zambia back in its growth trajectory. Other commodity exporters like Nigeria continue to have vulnerable financial systems where reluctance to realize loan losses could weigh on credit and economic growth, despite an improvement.

African economies were battered but not bruised by the global slowdown and will make a modest rebound in 2010. The continent has been receiving excessive support from China. In November 2009, China pledged US$10 billion in low-cost loans to Africa over the next three years, extending the loans and investment it has made in the region in recent years. Other investors are interested in the regions public  and private markets. Now the challenge will be continuing to develop sound policy frameworks, attracting foreign direct investment and channeling funds to productivity enhancing infrastructure.

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