Impact of the debt crises on Africa* A presentation at the DSA Annual Conference 2012, London, Nov. 3, 2012

1. Impact of the debt crises on Africa*A presentation at the DSA Annual Conference 2012, London, Nov. 3, 2012 Vinaye Ancharaz International Center for Trade and Sustainable Development (ICTSD) *This presentation is based on a paper written when the author was at the African Development Bank.

2. Outline • Context • Channels of transmission • Trade • Liquidity • Sovereign risk • FDI and remittances • Portfolio flows and market volatility • Policy space

3. Context • Continuing crisis in the euro zone; recession in the US buffeted by improved prospects… and the election campaign. • 2013 forecasts: stagnation in Euro zone; slowdown in the US. Source: IMF(2012)

4. Context/2 • Africa’s growth expected to rebound in 2012 (to 4.5%) and 2013 (to 4.8%), from 3.4% in 2011. • Growth performance even better in SSA. • North Africa expected to post improved growth performance. Source: AfDB et al. (2012)

5. Context/3 • Estimates of aggregate impact • A 1% drop in GDP growth in OECD will: • Wipe about half a p.p. off Africa’s growth; • Reduce Africa’s export earnings by 10%; and • Reduce imports by 2.5% • Impact dampened by increased resilience of African economies (due to better economic governance and the rise of emerging economies) • Silver lining for African economies: Increased appetite for triple A-rated African bonds

6. Channels of transmission: Trade • Trade – most important dimension of impact on African economies. • Slower economic growth in OECD  Lower demand for Africa’s exports • 2008-09 financial crisis: Africa’s total trade contracted 20.6%. • Trade contraction varied across countries and regions according to: • Concentration of export basket • Export market diversification

7. Trade/2 • Africa – least diversified region in terms of market access. • 15 African send half or more of their exports to Europe. • Small island economies, in addition, are highly dependent on European tourists. • US – main market for oil exports from Chad, Gabon, Angola and Nigeria, and for Lesotho’s garments. • Regionally, NA most dependent on European markets. Source: AfDB (2011)

8. Trade/3 • African exports concentrated in a few primary products that are subject to pro-cyclical volatility. • World prices of oil and copper continued to fall in the weeks following the US credit downgrade but there are signs of recovery since July 2012.

9. Trade/4 • Continued decline in prices of key African export products (cotton, cocoa, coffee) • West Africa most exposed to high trade risk due to high export concentration in vulnerable products (cocoa, cotton)

10. Liquidity • Degree of integration of African banks into the European banking system determines exposure to contagion. • Strong presence of European banks in many African countries, notably Mozambique, Madagascar, Botswana, Ghana. • Cumulative effects of yet another financial turmoil on risk appetite and cost of trade finance.

11. Sovereign risk • Three potential sources of sovereign risk: • Contraction in ODA flows • Decline in trade-related tax revenues • Higher cost of borrowing in global credit market

12. Sovereign risk/2 • ODA flows did not decline during the 2008-09 financial crisis, partly buttressed by timely intervention by DFIs. • However, context of current crisis different: • Fiscal austerity in Europe • Elections in US

13. Sovereign risk/3 • Tariff revenue will fall as African trade flows subside. • Swaziland, Lesotho, Uganda, Gambia and Liberia, where trade taxes represent over 40% of current revenue are most vulnerable. • But other countries (Togo, Tanzania, CI, Madagascar, Ethiopia) are also at risk. • Declining demand for commodities can wipe off a significant chunk of government revenue and compromise fiscal – and social – stability. Africa’s oil and mineral exporters (notably, Libya and Angola) most exposed. • Higher borrowing costs for frontier economies • Impact of increased debt service charges on: • Heavily indebted countries (Zimbabwe, CI, Guinea, Cape Verde, Sudan); • Countries where external debt servicing consumes a significant share of government budgets (Liberia, Uganda, Zimbabwe, Sudan)

14. FDI and remittances • Decline in FDI since 2008, expected to continue this year and into 2013. • Africa’s biggest recipients of FDI likely to be the biggest losers: • NA (35%) • Natural-resource-rich countries (Angola, Rep. of Congo, Nigeria, SA) • Emerging economies offer no relief. • Remittances have proved resilient so far (reaching USD40 billion, or 2.6% of GDP, in 2010. • But a deepening of the debt crisis could reduce remittance flows to Africa. • The biggest recipient most vulnerable to a drying up of remittances.

15. Portfolio flows and market volatility • Significant degree of market volatility across Europe and beyond. • Due to their high level of integration, stock markets of SA, Nigeria and Egypt are most exposed to contagion. • Lessons from the 2008-09 financial crisis: • Markets in Nigeria, Egypt and SA plunged more than 50% • Frontier markets experienced sharp reversals in portfolio flows when portfolio investment declined from USD 6.9 billion in 2007 to negative USD 6.2 billion in 2008. • Sharp fluctuations in euro eroding export earnings (e.g., Kenya’s horticulture). • Weakening of the exchange rate worsened by recent speculative attacks, especially in East Africa.

16. Policy space What should African countries do? • Stay the course on reforms… within an inclusive growth framework. • Promote intra-Africa trade: regulatory environment, transport infrastructure, policy impetus. • Boost domestic resource mobilization. • Maximize the unique window of opportunity from natural resources… but seek to diversify both products and markets over the long term.

17. Policy space/2 • Look East? Africa’s growing engagement with emerging economies – a boon or bane?

18. Thank you!vancharaz@ictsd.ch