/ 16 March 2009

Africa slides with the rest

the mining sector is halting investments and shedding jobs. Photo: Oupa Nkosi
the mining sector is halting investments and shedding jobs. Photo: Oupa Nkosi

Although African banks have not yet needed to be bailed out and the continent’s financial institutions are largely in good shape, Africa is feeling the global economic crisis in every-thing from slowing investment activity to vanishing export markets for its commodities.

Last week the International Monetary Fund (IMF) revised its GDP forecast for sub-Saharan Africa down to 3.25%.

The new IMF report was released ahead of an IMF conference in Dar es Salaam to discuss the role the IMF and the World Bank should play in mitigating the impact of the economic crisis. It said the drop was caused by the global slump in commodity prices and the credit squeeze. Last year the IMF forecast GDP growth in 2009 for sub-Saharan Africa of 6.7%.

According to a new report by South Africa’s Industrial Development Corporation (IDC) the financial fallout could include a liquidity threat for African central banks, as well as falling investment from countries such as China, which has injected billions into the continent in recent years.

The report warns that, although African countries have a low level of integration into the global financial system, the global retreat from risk has serious implications for the continent. Africa is reliant on foreign direct investment inflows, portfolio investment inflows and investments in equities, as well as crucial remittances from the African diaspora.

But extreme risk aversion and serious credit tightening have seen portfolio flows into developing countries dry up and lending reduced.

Despite African financial institutions’ lack of exposure to toxic global assets, the trend towards risk aversion and institutional deleveraging leaves the continent’s financial markets vulnerable.

As inter-bank lending dries up around the world, African banks could come under substantial pressure should the economic slowdown intensify. Lending by African commercial banks has expanded rapidly in countries such as Nigeria, Ghana and Kenya in recent years. This has exposed many to a ”potential escalation of non-performing assets should borrowers face difficulties in servicing their debt”, says the IDC report.

This could jeopardise the solvency of individual banks and potentially lead to banking crises in individual countries.

”The mere possibility of such an adverse scenario materialising begs concern over the ability of most African central banks to provide guarantees to depositors, to intervene in individual financial institutions through bail-outs and other restructuring efforts, or to rely on external assistance through regional or multilateral institutions for the purpose of containing an unfolding crisis,” warns the report.

Many development finance institutions may play a pivotal role in credit access, but save for a handful, including the Development Bank of South Africa and the Botswana Development Bank, most have only limited financing capacity, the report says.

Meanwhile, the reliance of many African countries on advanced economies as key markets for their exports is being reflected in worsening trade balances and weakening currencies.

In addition, prices for commodities, which made up 78% of Africa’s exports in 2007, have suffered. Soft commodities such as coffee and cocoa — Ethiopia’s main exports — have fallen 20% since July 2008.

And there is more bad news in the mining and minerals sector, another hefty contributor to African GDP. Most mining majors are curtailing expenditure, halting capital investments and shedding jobs. ”The most significant challenge facing mining executives is to secure the future of their corporate entities by curtailing production levels, mothballing capital expansion projects and containing costs,” says Frost & Sullivan metals and mining analyst Wonder Nyanjowa.

He points to Anglo American Corporation’s raft of measures to secure the future of the organisation, which includes halving capital expenditures to $4.5-billion, shedding 19 000 jobs, dropping share buy-back schemes and not declaring a dividend for the first time in 80 years.

The collapse of merger and acquisitions deals, with players citing deteriorating market conditions and funding uncertainties, have a further impact on the crisis on the continent, he says.

”Resource-rich economies will need to expect the contraction in mining’s contribution to GDP to continue unabated. Job losses will be widespread while revenue inflows into state coffers will decline sharply,” says Nyanjowa.