Opinion

The Great Debate

Africa and the global economic crisis

April 1, 2009

- Jorge Maia is head of Research and Information for Industrial Development Corporation of South Africa, established in 1940 to promote economic growth and industrial development. The opinions expressed are his own –

Serious shockwaves are hitting Africa’s shores as the global economic crisis unfolds.

The extent and depth of the damage is extremely difficult to assess or project, but it is clear that the pattern of financial flows associated with investment, lending and trading activity has been dramatically altered, with detrimental economic and social implications for the continent at large. The adverse impact has been gradually spreading from a regional perspective – a serious setback to Africa’s recent growth performance, which had averaged 6 percent a year from 2003 to 2008.

The effects will vary widely, depending on each country’s integration within the global financial system, its dependency on exports and tourism receipts, official development assistance and remittances from African citizens working overseas, among other factors.

Access to trade credit lines used to finance imports and investments is under threat due to the global credit crunch, while portfolio flows have been reversed and remain weak due to institutional deleveraging, pessimistic investor sentiment or extreme risk aversion.

Foreign direct investment flows are also expected to contract, although the rather long lead-time of typical projects could imply that some of the capital may have already been committed. The African banking sector is feeling the freeze in interbank lending worldwide from a funding standpoint, and may come under substantial pressure through its customer base should the economic slowdown intensify on the home front.

Where capital is still available, its cost is likely to have risen substantially, with implications for the viability of projects and for the debt repayment obligations of African countries. Such adverse trends are not only impacting negatively on capital inflows and national balances of payments, but also are resulting in greater volatility in foreign exchange markets.

The productive sectors of Africa’s economies are being progressively affected by a fast deteriorating global environment as demand weakens, unfavourable terms of trade develop, corporate earnings decline, investment activity slows down and jobs are shed. As elsewhere in the globe, this has led to continuous downward revisions in economic growth projections. For instance, the latest IMF forecast of 3.4 percent growth for the African continent in 2009 is now considered optimistic by the IMF’s own leadership.

The African economies that will contain the adversity are likely to be those that remain highly vigilant in managing the downside potential, those that are in a position to adopt counter-cyclical measures and that make an effort to seek new opportunities and competitive gains. However, liquidity or fiscal constraints are likely to prevent the majority of African countries from adopting economic stimulus packages. In order to preserve productive capacity, it is absolutely essential that a concerted effort be made to sustain private sector access to credit, including development funding.

Major crises bring to the fore not only comparative weaknesses but also comparative strengths. Thus, economies that manage downturns more successfully are those that exploit their comparative strengths instead of focusing on their weaknesses. The African continent is richly endowed with commodities and other resources, including an enormous, yet largely unexploited agricultural potential. Forecasts for most commodity prices point, at best, towards a very modest recovery in 2009. However, considering the demand and supply forces at play in the medium- to long-term, commodity prices should resume an upward trend. This will be underpinned by the roll-out of massive stimulus packages focusing on infrastructure investment throughout the globe, by the eventual recovery of the world’s economies and by the resumption of growth in income levels, particularly in emerging regions. After all, the long-term demand for commodities from the fast-growing and very large emerging economies such as China and India has certainly not evaporated.

As credit starts flowing again through the global financial system, several emerging economies are likely to exhibit signs of recovery first, including China, India and Brazil. This should support a recovery in commodity markets and renewed investor interest in Africa for its resource wealth. The challenge remains for African countries to make the most of a future recovery, tirelessly encouraging the beneficiation of their resources instead of continuing to export value-adding opportunities, missing out on massive export earnings potential.

The impact of ongoing international efforts to thaw global credit markets and stimulate economic activity worldwide will, however, take time to bear results. In the meantime, competitive forces scrambling for a diminished global pie will pose unprecedented threats to African enterprises. Such challenges may include aggressive market penetration efforts and even protectionist measures on the part of foreign businesses and governments. African enterprises will have to adopt tough, well-formulated strategic decisions, as their present strategies may not hold them in good stead under rapidly deteriorating market conditions. They should be seriously vigilant, managing downside potential, adopting counter-cyclical measures, including appropriate cost-cutting measures and efficiency improvements, while constantly seeking opportunities for the development of new/niche markets.

African countries that remain committed to sound economic management will tend to restore investor confidence faster and mitigate the impact of the downturn more successfully. The momentum exhibited in improving the investment environment in numerous African countries must be maintained, so as to grow vibrant and competitive business sectors that will create employment and sustain broad-based economic growth. All feasible forms of support should be provided to the private sector at large, so as to sustain its growth potential and developmental impact. This should include strong and concerted governmental opposition to protectionist tendencies emerging globally, and insistence on greater participation in international governance.

On the business front, African enterprises that remain sharply focused on competitiveness improvements should be relatively successful in domestic and/or global markets, stand a better chance of surviving the crisis and should prosper in the long-run.

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In terms of percentage, businesses owned by Africans in Africa in extemely low. The major investments are held by multinational firms that are affected for their centres by the credit crunch. Logically there will be no boom in Africa until the credit flow resumes. Moreover, as african economy is heavily dependent on the exploitation and commercialisation of natural resources is highly risky business to invest in. As the G20 is under way, there is no prospect that Africa will be high in the agenda as world powerful leaders are first acountable to their electorates, which is not the case in most of african countries led by corporate of gangs known abusively as “Elite”. For these corporate gangs, managing economies is not as classical as it is in the Western world. In the Congo for instance, Mr. Kabila has already succeeded to suppress the opposition and the 2011 election is already a done deal. The problem is that there is only one insurance company in Congo “Sonas” (state owned insurance company), which does not guaranty any compensation to any investors whatever the case. These sector, which is vital in boosting economies should have been privatised for the sake of attracting foreign investments and providing assurances that Congo is a safe heaven. But it may take years of democracy trial to get to this point.

 

the world is having its first state of rest in 79 years. pollution emissions must be reaching all time lows. not since the beginning of the industrial revolution has the Earth been able to take a long deep breath of clean, pure air, nourishment for the soul of da planet.

all the business-oriented peoples of the world can concentrate on, is their own petty portfolios and how beautiful life was when their share holdings were up 33% in 2008.

they all want to reboot the economic juggernaut as soon as profitably possible. to continue on their selfish, merry ways of planetary rape, degradation and desecration. can it be possible for Man too, to take a deep breath, feel the power of the great spirit and begin slowly to make some decisions of wisdom for the future of Mankind, & the planet in all of its diversity and wonderment.

what do you, as humans, really want to show your childrens’ children;an unsustainable economic rationale, as outdated as the British Colonisation of the World or do you want to show the little children a flourishing, ALIVE world with all the myriad of Creation in its rightful place.

Now is a time of quiet reflection and repose, a time of goodwill to your fellow human beings and creatures of the wild, a time to address the proper equity of the amazing wealth and plenty of the world, a time to address world hunger and the equitable distribution of the land and the water. these common wealths have to be taken from the hands of the unfathomably, greedy few and given back to the people.

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