The 2008 Financial crisis and the attendant Eurozone crisis are reshaping the future of global finance. But what are the implications of this for Africans?
Why have financial institutions rushed to the aid of Greece, yet African countries such as Malawi been forced to plead for support from the IMF, as Magnus Taylor here writes? Will African countries be neglected and vulnerable now that the crisis turns global?
Insulated, at first
Initially, Africa suffered as a direct result of the 2008 crisis. Sectors such as mining, tourism and manufacturing saw decline, as did flows of foreign direct investment. However, the African Development Bank (AFDB) argues that the continent’s banking sector was insulated due to strict exchange control regulation and the existence of very few of the off-balance-sheet assets that caused the crisis (more on these later). There was though evidence of contagion in declining stock values and capital outflows, and pricing and access problems for international loans and sovereign debts. The AFDB recommended that African countries pursue growth over crisis response strategies, persevere with financial market reform, and rebalance sources of global and domestic income in favour of disengaging from the global economy. Developed economies were asked to honour the pledges made to assist Africa by mobilising capital and the purchase of its exports.
African economies rebounded in 2009 with the continent experiencing some of the highest global growth and investment return rates, in part due to the arrival of speculative capital in search of the next hot destination. However, such statistics are controversial as data from the continent is still uneven in quality (despite improvements).
Africa, however, remains a continent dependent on external players for the source of its growth, and so remains increasingly vulnerable to the vagaries of an interconnected global financial system. These are, at present, characterised by falling commodity prices, slowing capital, schizophrenic hot money flows, and exchange rate volatility. Not a good mix.
The outlook for Africa has therefore worsened since the crisis spilled over into EU Sovereign Debt Markets in 2011. Human development and poverty reduction data show deterioration, as developed countries have failed to come up with the amounts pledged at Gleneagles in 2005. Though the World Bank committed $11.5bn in 2010 to help African economies compensate for the effects of the crisis, economic growth has generally slowed (on average from 5 to 3.4 percent.) Political and environmental factors such as the Arab Spring in North Africa, and the recent food insecurity in East Africa, may account for some of this decline, but the standard macroeconomic pressures cited above remain important.
So, how does global macroeconomics affect African countries in practice? It is worth looking over the architecture of the financial system and the origin of the crisis to understand how this contagion works.
The modern financial system and its capital flows are interconnected across geographical and temporal boundaries, and this means small, open economies are particularly vulnerable. The crisis has therefore affected African countries due to the symbiotic nature of global trade and capital flows. Current account deficits in balance of payments can result in full-scale currency crises such as those witnessed in Asia in 1997-1998 and the Russian default of 1998. This poses a danger not only for such troubled countries, but also for their creditors and asset-owners.
The financial crisis of 2007 to 2012 therefore has the potential to affect African countries, despite having originated in the sale of complex financial assets called credit derivatives. These derivatives were essentially low-quality mortgages dressed up as high-quality assets that were sold on, promising regular and reasonable rates of interests, whilst discharging the risk by spreading it between banks. The troubles began when the risky consumers defaulted on their home loans, the banks then had to write down the losses related to the credit derivative structures they had bought from each other. The collapse of Lehman Brothers in September of 2008 proved to be the precipitating event of the banking crisis. The financial system depends on the health of the banking system, so the crisis soon became a global economic one as the interconnectivity of the banking system spread the contagion throughout the world.
As if the financial crisis was not painful enough, the related EU sovereign-debt crisis is potentially even more dangerous. The prospective outcomes of a full-blown Greek currency crisis are frightening because it forms part of the political and monetary union of the Eurozone. This affects all countries in the global market in unexpected and serious ways.
The Greek crisis has revealed the illusion of democracy in the Eurozone, with major decisions of sovereign states being deferred to Brussels and Germany. As South African commentator Barney Mthombothi here notes, Africans should beware the perils of political and economic union, and the impact of not living within one’s means.
Africans contemplating the Greek crisis should also resist the temptation of schadenfreude as we see the Portuguese return, cap in hand, to a blinged up Luanda, and postcolonial relations shift with the resurgent role of China in Africa. Chinese and other BRICS’ growth rates have also slowed, and rather problematically, the amount of euros held in reserve by the Chinese remains undisclosed. Even though Africa is relatively disembedded from global capital markets, with the exception of Johannesburg’s powerful and sophisticated stock exchange, Africa is particularly vulnerable to aberrations in the global capital market. We may yet discover that a Rising Africa was dangerously dependent on richer countries being able to afford our abundant raw materials.
Bail me out?
Countries that need to can borrow money either by issuing sovereign bonds in the market or, if they happen (like Malawi) to be broke, by applying for direct aid from a financial institution such as the IMF or World Bank. Either way, these loans need to be paid back, and often with conditionalities. Greece has, to date, been assisted with two bail-outs in order to avoid a formal default on its debts, with austerity plans imposed as a condition. The austerity conditions have been unpopular with its citizens. The wisdom of such bail-outs has been questioned by Greece’s more economically robust neighbours (required to foot the bill), and also by Africans who have wondered why the IMF’s resources should be so readily deployed in a relatively wealthy country. What about us?
While the situation in Malawi certainly deserves empathy and attention it is not a comparable international problem with comparable international consequences. If Lehman Brothers proved too big to fail, an EU state also fits these criteria. The Malawian bailout at $157m is also pocket change in comparison to Greece’s aid of over $200bn and the several hundreds of billions of dollars that have been extended in the US, UK and Eurozone.
IMF chief Christine Lagarde says she feels sorrier for poor Africans in Niger, than for the Greeks who must now pay up. She will have to think of a better justification than that for the road the fund has set Europe on. The situation it is now in remains a lose-lose one for Africans: austerity has, and will continue to, slow growth and restrict capital. Yet, abandoning the medicine of austerity would not provide a solution to the problems of European economies. It is extraordinarily difficult to say which strategy African economies should pursue in the current environment. The world waits on Europe with baited breath, hoping other markets will not be taken down with it, an event which could result in a global financial market meltdown. Unfortunately for us, everything (including Africa) is now connected.
Desné Masie is a journalist and academic. She is a former senior editor for the Financial Mail in South Africa, and is currently studying towards a PhD in finance at the University of Edinburgh Business School.