Fears of financial meltdown in Europe returned with a vengeance on Tuesday triggering a sharp surge in global risk aversion while raising the spectre of a global economic downturn which would undermine Africas tentative recovery.
Global market sentiment took a nosedive as the sudden threat of armed conflict in the Korean peninsula added to fresh fears over eurozone sovereign debt burdens.
The market moves threatened a wave of risk aversion similar to the one in late 2008 that sent emerging markets tumbling.
Experts in Abidjan warned that Africa remained vulnerable to European contagion through financial and economic channels, while others cautioned that the region is also dangerously exposed to an overheating Chinese economy.
I am worried about the prospects for the global economy as a whole, AfDB president Donald Kaberuka told Emerging Markets. You dont have to paint a black swan scenario.
From where I sit now it [Africas recovery] looks sustainable, but perhaps this could be a contradiction in terms.
He warned that heightened volatility in capital flows to emerging markets cast a shadow over Africas investment drive. There is a high risk of volatility. And the volatile part for many of the countries would be investment flows, he said.
Cyrus Ardalan, vice-chairman of Barclays Capital, warned in an interview with Emerging Markets that the turmoil would be protracted: Market fears have shifted from that of eurozone liquidity to fears over the solvency of some European governments. This will not abate anytime soon.
Investors yesterday pulled cash from emerging markets while currencies tumbled and stocks plunged. Kenyas shilling slumped to its weakest level in more than 13 months versus the dollar and South Africas rand also weakened against the greenback.
AfDB chief economist Mthuli Ncube said: The eurozone is what I am most worried about.
He said that private capital flows will be hit, and this will affect onlending to Africa. Western banks cannot be seen to be taking risks so they will reduce their exposures to Africa. The effect of rising bond yields would increase cost of capital for African sovereigns.
[African] credit lines to Western banking sector will be hit significantly. African banks use offshore credit lines in US dollars to match their assets and liabilities to finance trade and project finances.
He also noted that agricultural products will be hit massively in Africa if there is big slowdown in Europe. 30% of African exports are to Europe, and francophone Africa exports will be hit the most.Kaberuka meanwhile expressed concern that Asias largest economies could be overheating, though he added: I think they [the Chinese and Indian authorities] are controlling it.
Africas economic fate depends heavily on emerging market growth, principally in Asia, while official aid flows from Western countries are expected to dwindle as rich countries tighten their belts.
Henri-Bernard Solignac Lecomte, the OECD Development Centres Africa head said strong trade links of African countries with Asia are a double-edged sword. China basically imports unprocessed commodities. Efforts towards diversification that have been led in the late 1990s have floundered. These are new dependency factors, he said.
Despite resilient trade between Africa and Asia throughout the global crisis, African nations have become increasingly exposed to the volatility of commodity prices, said Solignac Lecomte.
This is no good. Clearly some measures will have to be taken to take the best advantage of sub regional markets, such as in East Africa, and move towards export diversification and supply urban domestic markets.
Konrad Reuss, Standard & Poors managing director for sub-Saharan Africa, said: The global recovery is still fragile. We have seen signs of risk aversion. If that trend continues and western countries move away from emerging markets in favor of German bonds for example, then its not without risk for Africa.
But he added: On the other hand, the growth drivers in Africa remain very much intact. As long as China will keep growing that will serve as a bit of a cushion. Chinas strength could offset Europes weakness.
Africas GDP growth is expected to reach an average of 4.5% this year and 5.2% in 2011, after falling to 2.9% last year, according to a joint AfDB- OECD report released Monday.