Direct and indirect foreign investors fled from Africa as the credit crisis sparked a flight to safety, or at least familiarity, but Ayo Salami, manager of the Duet Victoire Africa Index fund believes domestic demand can step in to underpin growth.

African governments have been hit hard by a withdrawal of investor money from the continent and need to make sure they remember reforms and avoid high inflation in their attempts to protect their economies, says Razia Khan, head of Africa research at Standard Chartered Bank in London.

Africa gets 3 percent of the world’s cross-border flows, but BIS end-2008 data shows the region suffered the world’s largest decline in cross-border financing due to the global financial crisis, Khan told a breakfast audience of politicians, bankers, investors and journalists in London today.

Africa needs the economic environment that will lure investors back in, she says.

“Financial markets in Africa have not shown signs yet of a significant recovery. “Maybe there is going to be some longer-term support for commodity prices, but governments have to guard against a deterioration of the fundamentals that have been in place to support growth,” she says.

Across sub-Saharan Africa, South Africa will withstand the global recession better than other countries, she adds.

“African growth is still likely to be positive, but macro-economic stability is more of a risk in some countries than in others.”

Few investors dispute the view that Nigeria’s banks look
cheap at the moment, with most of the major players trading at a
discount to book value and with earnings multiples way below
consumer stocks such as Guinness Nigeria.
 
Nor is anybody arguing against the long-term logic of the
financial sector’s potential growth in an oil-rich country of
140 million people but only 23 million bank accounts.
 
A new central bank head with a background in risk management
is also making all the right noises about improving the sector’s
notoriously murky financial disclosure - part of the reason the
shares crashed so spectacularly in the latter half of 2008.
 
Furthermore, Lamido Sanusi’s stated desire to relax limits
on foreign ownership has breathed new life into the view that
another wave of consolidation, this time involving major global
players, sits around the corner.
 
Does all this sound - like so many other Nigerian promises of easy money - too good to be true,
or are its banks set on a long-term trajectory that will ultimately see them realise the dream of making Lagos a financial hub to rival Johannesburg?

South African President Jacob Zuma has a tough balancing act to perform as he begins his term in office.

 On the one hand, Zuma is anxious to assure investors that there will be continuity in the economic policies that have secured the country’s status as the regional powerhouse.

On the other, he has to address the increasingly vocal demands of his allies in the labour movement, whose support propelled him first to the leadership of the ruling ANC and then to the country’s top government job after April 22 elections.

But what the unions want - increased social spending to cushion their members against the ravages to the global recession that has now also landed in South Africa - would mean veering away from the prudent fiscal stance that has ironically cushioned the country from the worst of the world crisis.

Investors are also keen to see whether Zuma bows to pressure not to renew the contract of central bank Governor Tito Mboweni, loved by financial markets but vilified by unions that say a pre-occupation with inflation targeting has seen the Reserve Bank maintain a tight monetary policy at the expense of economic growth, impoverishing millions.

Can Zuma please one side without alienating the other? And if it comes down to choice, will the President opt to sacrifice his alliance with the Left to maintain South Africa’s international standing? How essential is union support for his success as President and can the ANC stay in power without it?

Recent events in South Africa have sent some conflicting signals to investors about sovereign risks. On the one hand there was some regulatory flip-flopping over the Vodacom listing given objections from the union organisation COSATU, which raised questions about the influence of unions in Jacob Zuma’s administration. On the other hand the sovereign issuing some $1.5 billion was highly successful and oversubscribed.

With Zuma recently elected on a platform of change for his domestic audience and continuation of old policies when speaking to investors, there is a raft of new ministers and new ministries and quite a bit of policy uncertainty. No foreign investor will deny South Africa’s need to address serious social problems of inequality, housing, jobs and education through a more developmental state agenda.

However investors I speak to simply want to see that this is not at the expense of the productive sectors of the economy. This agenda will naturally involve the ANC’s allies: COSATU and SACP (communist party).  As such, the process of governing will be a noisy affair for investors. I put the Vodacom incident down to such noise.

However I believe the new Zuma administration will find itself heavily constrained by the need to raise funds for its agenda and so keep investors onside as the government’s borrowing requirement balloons. Add state owned enterprises engaging in very necessary investment, and a current account deficit and you arrive at a funding requirement north of  500 billion rand for the next two years.

This will act as a strong rationalising influence though a backup overdraft in the form of an IMF flexible credit lending facility would be a benefit.  It also should not be forgotten that there is still a strong business influence in the cabinet and the ANC from the likes of Cyril Ramaphosa and Tokyo Sexwale.  Most investors buy the case of policy not shifting sharply to the left, though a lot of questions have been planted in the minds of investors.

Keeping the different factions in his cabinet in line will be key for Zuma’s success, especially with two new hurdles looming: the Bharti/MTN and the Xstrata/Anglo American mergers. Both are sensitive and likely to be jumped on by unions.  The inflation-targeting debate is also being reopened locally — a topic foreign investors love to discuss.

It is now up to Zuma and his team to deliver on prudent macro-policy as well as his developmental state priorities in order to sustain the current goodwill from investors.  It is still early days for his administration. We hope not to be disappointed — for South Africa’s sake as much as anyone elses.

Peter Attard Montalto is emerging market economist at Nomura International.

Thousands of South Africans danced, cheered and sang hymns to celebrate President Jacob Zuma’s swearing in. Zuma, they said, as a man of the people, would give them houses and electricity, fight AIDS and crime, and ensure prosperity even as South Africa is on the brink of its first recession in 17 years.

But appointments to key ministries have raised questions over how well the new government will function.

Economic policy is seen intact after largely expected changes at finance-related ministries, but appointments to some other key sectors, including mining, energy and telecommunications left more doubts.

Siphiwe Nyanda, the newly appointed minister of communications, has been a military man, yet outside the African National Congress (ANC) and defence he is something of a mystery. He now takes over communications, a crucial ministry with oversight of Telkom, Africa’s biggest telecoms firm.

Dipuo Peters qualified in social work, but has been chosen to lead the energy ministry and help tackle the country’s power shortages that have led to a five-day shutdown of South Africa’s mining industry and crippled the country’s investor-friendly image.

“It appears this is South Africa’s tradition to appoint a minister who has no technical qualifications whatsoever,” said independent analyst Andrew Kenny.

Barbara Hogan, who has led the health ministry for the past six months, has been moved to oversee the public enterprise department, also in charge of sorting out structural problems at state-owned utility Eskom, which now supplies some 95 percent of the country’s power.

Analysts welcomed the split of the energy and mining ministry into two entities, saying it would allow for better focus on the challenges at hand, especially in view of the economic slowdown. They say that while political motives could have motivated individual appointments, the eventual success of each entity will depend on the ministers’ leadership skills and ability to appoint the right people around them.

Zuma appointed Susan Shabangu, who has only held deputy ministerial positions before, as mining minister in the world’s top source of platinum and No. 3 gold producer. She came to prominence as deputy security minister last year when she advised police dealing with criminals: “You must kill the bastards if they threaten you or the community. You must not worry about the regulations.”

Some say it is too soon to speculate on how the ministers will do. The ministers need to be given the benefit of the doubt for now, they say. The first 100 days in office may indicate whether or not they will push for change and deliver on the promises made. What do you expect?

If Nigerian banks appear to have suffered disproportionately in the global financial crisis, maybe they have Heathrow Terminal 5 to blame.

Nigerian banks were advertising their services on billboards in Terminal 5 last year, and travelling investors felt it showed the banks were rashly trying to keep up with international investment banks in aiming for a global profile, causing many to sell, a banker specialising in Africa told journalists this morning over breakfast.

"Those adverts were a sign to sell Nigerian banks," Luca del Conte, executive director in treasury and capital markets at Medicapital Bank said.

"We have about 100 institutional investors, and of 50 funds that we speak to actively, more than half mentioned this.  Once capital markets started shaking, funds did not ask any more questions, they just sold."

Medicapital says the banking sector represents over 60 percent of market capitalisation on the Nigerian Stock Exchange, but daily volumes on the exchange have dwindled to $10-15 million a day, suffering also from a fall in the oil price, compared with $100 million a year ago.

The overthrow of Madagascar’s leader may have had nothing to do with events elsewhere in Africa, but after four violent changes of power within eight months the question is bound to arise as to whether the continent is returning to old ways.

Three years without coups between 2005 and last year had appeared to some, including foreign investors, to have indicated a fundamental change from the first turbulent decades after independence. This spate of violent overthrows could now be another reason for investors to tread more warily again, particularly as Africa feels the impact of the global financial crisis.

“Although I don’t think these instances of instability in Africa are related to each other or part of a pattern, I think there’s no doubt external constituents and businesspeople around the world will assume there is a pattern,” said Tom Cargill, Africa Programme Coordinator at London thinktank Chatham House.

The fact that coup makers have succeeded without being forced to step down or even face major censure could also embolden those who might be tempted to take power in bigger countries, where falling growth is encouraging disaffection.

“Look at … other African countries, so-called pivotal states: Nigeria is in a terrible state, so is Egypt, so is Kenya, all these so-called big countries,” said Hussein Solomon, a political science professor at the University of Pretoria.

Although there can be a tendency to group very diverse African states together, the picture is far from uniform - Ghana’s presidential election two months ago was one of Africa’s closest, but avoided major violence, reassuring investors despite an acute fiscal crisis.

But social pressures are growing across Africa as a result of the world economic crisis.

The dramatic U-turn by rich countries as they bail out or buy up failing industries is also prompting a reassessment of the model sold to Africa by Western donors since the Cold War — a combination of market capitalism and multiparty democracy.

Cargill said factors were both the financial crisis and the rise of one-party state China, an increasingly important source of investment and trade for Africa.

“I think in future the whole idea of the democratic capitalist system will be tested and questioned, and there will be some who take advantage of its being questioned for their own private ends to launch their own bids for power,” he said.

That debate is already taking place at the African Union, whose rules ban unconstitutional seizures of power but whose chairman for the next year, Libya’s Muammar Gaddafi, opposes what he says are foreign democratic structures imposed on Africa.

The AU has told Madagascar that any seizure of power by unconstitutional means would be considered a coup d’etat, punishable by AU sanctions or suspension.

But that sits uneasily with Gaddafi’s rebuke last week of Mauritania’s first democratically elected leader, largely confined to his village after being deposed in a coup last year.

“He must accept the fact,” said Gaddafi, who seized power in 1969 “He is not the first head of state to be overthrown.”

Is Africa returning to the old ways or did it never really leave them behind? Will a reassessment of the financial model pushed by Western donors also mean a new look at the multiparty democracy?

Good news and bad news for Africa from the latest take on global risks from the World Economic Forum. Not much danger for most of the continent, it says, from an asset bubble burst. That’s the good. The bad, of course, is that this is because there are not many financial assets to bubble. In fact, it deems the overall exposure even to economic risks is small because African economies are not particularly tied in to global markets.

Actually, the report shows that there are two Africas. Mapped by their susceptibility for economic and asset bubble trouble, most African countries are bunched together in a low risk range. But another, smaller cluster, including Nigeria and South Africa, finds itself in much more peril and shares space on the WEF risk map with Western and Eastern Europe.

Good news, in a contradictory sort of way.

Kenyan President Mwai Kibaki’s New Year address had a sobering message; east Africa’s biggest economy should brace for a tough year because of the global financial crisis.

It was not the most encouraging message after a year that had few silver linings for the country of 36 million, still recovering from a bout of post-election violence early last year.

But the global crisis has strained even some of the world’s most advanced economies as well as many across Africa and Kibaki was not about to shield Kenyans from reality. He even cancelled the traditional New Year’s Eve state ball that is held in his official residence in Mombasa, on the steamy Indian Ocean coast.

Government minsters and officials, used to ushering in the New Year with a waltz with their spouses at the party, had to quickly make new plans for the occasion.

Indeed, redrawing plans, revising growth numbers and tightening belts is a routine which Kenyan officials are used to by now. Last week, the economic secretary in the ministry of finance told Reuters that growth estimates for 2008 had been lowered to less than 3.5-4 percent, down from an earlier forecast of 4.5-6 percent.

In the same week, the government stated its intention to declare a national emergency over a drought that has left about 10 million facing starvation.

In the trendy parts of Nairobi, all seems to be fine.

Young urban professionals still flock the numerous malls and coffee houses for a bit of shopping and animated catch-ups over drinks.

But underneath the calm, most have had to tighten their belts. A newspaper cartoonist depicted how hard times were forcing a rethink of cultural norms. Families were dispensing with the tradition of sharing a meal with visitors by asking them to carry their own food.

What expectations do you have for Kenya in 2009? How is the global crisis being felt elsewhere in Africa?