Africa alone

July 21, 2009

The good news for Africa when the global financial meltdown began was that its financial markets were generally so far behind the rest of the world that groups such as the World Economic Forum reckoned that there was little or no danger. A new paper, posted on the economic research website VoxEU, suggests that that might be a bit too optimistic.

Tilburg University economist and former World Bank official Thorsten Beck — along with the World Bank’s Michael Fuchs and Marilou Uy —  write that despite shallow financial markets, sub-Saharan Africa is unlikely to escape the repercussions of the financial crisis.

Indeed, they argue that the crisis is threatening what little progress has been made to reverse what they call the alarming superficiality of African finance.

African financial systems are small, both in absolute and relative terms . In addition, Africa’s financial systems are characterised by very limited outreach, with less than one in five households having access to any formal banking service. Banking is inefficient and expensive in Africa, as reflected by high interest spreads and margins and high overhead costs. Banking is also very expensive for deposit customers, as reflected by very high minimum balance requirements and annual fees in many African countries. High documentation requirements to open an account – that is, the need to present several documents of identification – also represent significant barriers given that large parts of the population live and work in the informal sector. Similarly, physical access is limited, as the low bank branch and ATM penetration numbers for Africa illustrate.

Perhaps the most worrying aspect of the report for the region, however, is that the authors reckon Africa is more or less on its own when it comes to fixing this.

For better or worse, the future of Africa’s financial systems is closely linked to the development of global finance, as are its real economies. However, it is up to Africa’s financial sector stakeholders – bankers, donors, and policymakers – to guide financial sector reforms in a way that maximises Africa’s opportunities, learning both from their own experience over the past 50 years and the experience in other emerging and developed economies.

The big question is whether such stakeholders will do so.

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A very interesting subject. The uncorrelated ‘Frontier Markets’ Theory has been discredited some. Our Economies have displayed high beta characteristics and I think it is a consequence of the low base effect and the fact that the duration of the SSA upswing was material but was not entrenched. We then witnessed the exit of Fast Money which apparently was prepared to exit at simply any price which crunched a lot of our Stock Market values.

It has transpired that we are far closer interknit with the World. Remittances have overtaken Foreign Aid and that [held up briefly with the rally in the $ now reversed] and may of our Exports [Kenyan Flowers is just one] came under further pressure.

We certainly are now sitting in the very epicentre of the V.

However, I am certain we will rebound and rebound very hard. Africa until the last 10 Years faced an egregiously one sided Demand part of the Equation. Today China [and the China Africa Trade axis is still in a hyper growth phase] is a very Big Player. And they are tapering the V as they take this opportunity to load up on Assets.

However, the real story about Africa is not one of Human Resources but of leveraging the Human Capital. Ten Years ago Kenya had 15,000 Mobile Phones [That is the rear view mirror], today we have 17.6m. Thats an ICT and communications Revolution right there. I feel it will lead a late cycle but powerful convergence and that the likes of many Mobile Phone companies and even Google get it.

I for one remain optimistic notwithstanding the very powerful near term headwinds.

Aly-Khan Satchu
Twitter alykhansatchu

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