Monday, November 3, 2008
Africa's economy - ECO
The global crisis hits Africa’s economy but not as badly, yet, as elsewhere AT FIRST relatively shielded from the turmoil in global markets, sub-Saharan Africa is starting to feel some pain. Worst affected is South Africa, the region’s largest economy, because it is most tightly linked to the outside world. The rand has been in free fall, losing about 30% of its value against the dollar since the beginning of September; the local stockmarket is also grim, with falls in line with those in New York and London. Yet South Africa’s economy, together with the rest of the region’s, may yet prove more resilient than most, once the dust settles. The rand has often been volatile: it took severe knocks in the mid- and late 1990s, then again in 2001. The latest dive has several causes. It has followed the currencies in Europe, its main trading partner, against the dollar. In addition, the rand’s performance remains closely tied to commodities such as platinum and coal, whose prices have fallen on the back of global recession fears. Even gold, usually a refuge, has not been doing that well. Cash-strapped foreign investors have been selling their South African portfolio assets, hurting both the currency and the stockmarket. So far this year, foreigners have sold a net 48 billion rand ($6.1 billion) of local stocks, compared with a net buy of 62 billion rand this time a year ago. Yet South Africa still looks in fair shape. Capital controls, financial-sector regulation and good banking supervision have shielded local banks from the risk of bankruptcy and cash crunch that have gripped Europe, America and Asia. Though ordinary South Africans are feeling the pinch of higher interest rates, with repossession of cars and houses on the rise, local banks seem healthy enough still to be lending. Commodities make up a good chunk of exports, but mining accounts for only 5% of the country’s diverse economy. Consumer borrowing and spending have slowed due to high interest rates, but public investment in infrastructure should sustain some economic growth. Iraj Abedian, a local economist, reckons that the economy will expand by about 3% this year, and between 2.7% and 3.3% next year. This is slower than in the past few years, but not dismally so. As growth slows and oil prices slump, annual inflation, which reached 13.6% in August, is expected to ease back to its 3-6% target towards the end of next year. Unfortunately, the current account deficit has ballooned to an expected 7.6% of GDP this year; South Africa has relied on foreign money to finance the gap. Even when the global cash squeeze eases, there will be less liquidity than in the past few years. Interest rates will probably need to stay high to keep foreign money coming. Foreign money will need reassurance anyway. Jacob Zuma, South Africa’s likely next president, and other leaders of his ruling African National Congress (ANC) have been telling investors that economic policy would not change drastically. But many businessmen worry that the next government may pander a bit more to its trade unions and communist allies. There has been little sign of a shift. In his mid-term budget speech on October 21st, Trevor Manuel, the finance minister, said that the budget, still expected to be in surplus this year, would run a modest deficit of 1.6% of GDP next year, due to the slowdown and some extra spending to soften the blow. The central bank’s governor has also said that inflation targeting should be maintained. So no signs of recklessness. But investors will watch closely to see what happens after the election next year. In any case, current economic conditions will reduce the elbow room for any government keen to veer left. More pain further north So far, most of the rest of sub-Saharan Africa seems to have avoided contagion, but the real economy is likely to suffer. Most African stockmarkets are tiny and illiquid, except for Johannesburg’s much bigger exchange, and to some extent Nairobi and Lagos, where foreign involvement is relatively small. Local banks have fewer links with the rest of the world, consumer credit is sparse and derivatives rare. Still, Nigeria’s and Kenya’s stockmarkets have been hit. But, though foreign portfolio investors taking their money out did not help, this year’s poor performance of the stockmarket in Lagos, Nigeria’s commercial capital, was caused mainly by local factors and predates the global crisis. In March the authorities pressed local banks to limit lending to local retail investors keen to join the stockmarket frenzy, which started to fizzle as a result. But plunging commodity prices and reduced foreign demand will hurt quite a few African economies; foreign investment, remittances and foreign aid will all shrink. The diving oil price will hit producers such as Nigeria, though the region’s many oil importers are sighing with relief. Nigeria’s naira has held up well but other currencies have been weaker. As copper prices have tumbled, Zambia’s has fallen by 24% against the dollar since August. Other domestic factors, such as Kenya’s political fragility following post-election violence earlier this year, have also hurt local currencies, with latest inflation up to 15% and food prices rising even faster. Sub-Saharan Africa depends less on commodities than it used to. Its economies have grown faster on the back of rising private consumption by a burgeoning middle class. Slower world growth may dim its prospects and test its improved fiscal discipline. But the IMF forecasts that sub-Saharan Africa will still expand by 5.9% this year and 6.2% next, after 6.7% in 2007—far perkier than the 3% expected worldwide.