Africa can weather volatile capital flows and lower oil prices – but persistently high inflation, sagging infrastructure investment, and reduced international aid, threaten medium-term economic growth prospects, economists have warned.
“I am less worried about the short-term financial market activity or African trade or lower commodity prices than I am about inflation [...] and international aid,” Shanta Deverajan, World Bank chief Africa economist, told Emerging Markets this week. Global market contagion on the continent would be “small”.
The continent holds just 1.3% of world stock market capitalisation, 0.2% of debt securities and 0.8% of bank assets, according to the World Bank. Regional banks have few leveraged credit derivative products and only 5% are foreign owned.
As a result, Africa is less vulnerable to an abrupt contraction of portfolio inflows that threatens economic dislocation in Latin America and Asia.
South Africa is most connected to global markets, as highlighted by the volatility on the Johannesburg Stock Exchange in recent weeks and the losses of its heavily traded currency.
The continent’s resurgence has been underpinned by commodity production, infrastructure investment and official aid – rather than the credit expansion seen in other emerging markets such as eastern Europe.
The IMF said on Wednesday that Africa is set to overshoot world growth by expanding 6.1% this year, rising to 6.3% in 2009, from the 30-year high of 7% last year. By contrast, it estimates 2009 global expansion of 3%.
“For the last 30 years, when global growth slows, Africa underperforms. So we are now in a new era,” Razia Khan, Standard Chartered’s chief Africa economist, told Emerging Markets.
Of great concern are stubbornly high food prices and limited global grain supply. Despite falling oil prices, inflation across the region is expected to increase to nearly 12% this year from 7% in 2007, before easing to 9.5%, the IMF predicts. This will erode real income levels and spark social disturbance.
Deverajan urges greater targeted social assistance to the poor in vulnerable food importing countries such as in Gambia, Ghana, Mauritania and Swaziland. He also argued that a devaluation of the fixed exchange rate regime in French West Africa, that is pegged to the euro, should be considered to boost export competitiveness.
Crude oil accounts for more than 50% of Africa’s exports, with Angola and Nigeria the biggest producers. Deverajan warns that foreign investment in energy infrastructure projects, decided on when oil prices were “sky high”, may be scaled down or cancelled.
Robert Leith, Standard Bank’s chief executive of international corporate and investment banking, is more bullish. “Western foreign direct investment in African infrastructure is not that leveraged and is focused on the long-term,” he said.
Africa’s investment fate depends pafrtly on the extent to which China’s export-orientated economy weathers the global slowdown.
While Chinese growth forecasts have been revised downwards, Leith is confident money will continue to flow into Africa due to cash-rich Beijing’s committed drive to sustain the rapid pace of industrialisation.
But to address any investment shortfalls and provide social relief, “aid commitments need to be maintained despite slowing growth in advanced economies”, Deverajan said.