MAY 2012 Launching the NEDBANK-NEPAD Networking Forum was the first invitee and speaker, Lesetja Kganyago, Deputy Governor of the South African Reserve Bank, on the inaugural topic the Euro zone crisis and its implications for Africa. This Forum was launched at NEDBANK headquarters in Sandton, Johannesburg. Euro-zone crisis and its implications for business in Africa and Africa s outlook in 2012 Waking a dying global recession Written by Watson Hamunakwadi, NEPAD Business Foundation The Euro-zone crisis - which refers to the fiscal and monetary distress being experienced in the European Union (EU) prominently highlighted in Portugal, Italy, Ireland, Greece and Spain - is one of the most challenging events that Africa has faced in the aftermath of the most recent global recession. The crisis is centred on the global capital market s inability to purchase long term EU sovereign bonds (refinancing maturities) on the basis of an expectation of reduced creditworthiness, implying expectations of increased default probability for some members of the EU. In January 2012, the US based credit rating agency, Standard & Poor, lowered the long-term ratings on Cyprus, Italy, Portugal and Spain by two notches; lowered the long-term ratings on Austria, France, Malta, the Slovak Republic, and Slovenia, by one notch; and affirmed the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands. Prior to this, due to large appetite and uptake of sovereign bond investments in the EU from 2002 to 2008 by foreign investors, EU governments grew their budget deficit to high ratios in relation to GDP while current account deficits continued to grow. This had the effect of growing African exports to the EU and attracting capital inflows. As a result of the global recession, re-financing EU sovereign debt has become difficult. Equally impaired is the ability of government to utilise monetary (increasing money supply) or fiscal measures (expanding budget deficit) to address domestic economic distress. Most Euro area countries have NEDBANK NEPAD BUSINESS FORUM / MAY 2012 1
MAY 2012 Launching the NEDBANK-NEPAD Networking Forum was the first invitee and speaker, Lesetja Kganyago, Deputy Governor of the South African Reserve Bank, on the inaugural topic the Euro zone crisis and its implications for Africa. This Forum was launched at NEDBANK headquarters in Sandton, Johannesburg. Euro-zone crisis and its implications for business in Africa and Africa s outlook in 2012 Waking a dying global recession Written by Watson Hamunakwadi, NEPAD Business Foundation The Euro-zone crisis - which refers to the fiscal and monetary distress being experienced in the European Union (EU) prominently highlighted in Portugal, Italy, Ireland, Greece and Spain - is one of the most challenging events that Africa has faced in the aftermath of the most recent global recession. The crisis is centred on the global capital market s inability to purchase long term EU sovereign bonds (refinancing maturities) on the basis of an expectation of reduced creditworthiness, implying expectations of increased default probability for some members of the EU. In January 2012, the US based credit rating agency, Standard & Poor, lowered the long-term ratings on Cyprus, Italy, Portugal and Spain by two notches; lowered the long-term ratings on Austria, France, Malta, the Slovak Republic, and Slovenia, by one notch; and affirmed the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands. Prior to this, due to large appetite and uptake of sovereign bond investments in the EU from 2002 to 2008 by foreign investors, EU governments grew their budget deficit to high ratios in relation to GDP while current account deficits continued to grow. This had the effect of growing African exports to the EU and attracting capital inflows. As a result of the global recession, re-financing EU sovereign debt has become difficult. Equally impaired is the ability of government to utilise monetary (increasing money supply) or fiscal measures (expanding budget deficit) to address domestic economic distress. Most Euro area countries have NEDBANK NEPAD BUSINESS FORUM / MAY 2012 1
debt to GDP ratios in excess of 60% and this includes stronger anchor countries such as Germany and France, with Greece close to 200%, Portugal at 105% and Italy at more than 120%. In the case of Greece, Ireland, Italy, Portugal and Spain, the fiscal situation is also reflected in higher borrowing costs that has made any fiscal stimulus a non-option for policy makers 1. 1 Lesetja Kganyago, NEDBANK-NEPAD Networking Forum speech on the Euro-zone crisis and implications for Africa, 17 April 2012 Africa and the EU crisis Africa relies largely on three trading blocs - North America, European Union and China. However, proportions of exports from Sub Saharan Africa to EU have reduced from 36 per cent in 2005 to 26 per cent in 2011. Owing largely to slower growth in the EU, export growth from the Sub-Saharan economies declined from an annual average of 7.0 per cent between 2000 and 2007 to only 1.4 per cent between 2008 and 2010 representing a significant slow-down. Much of this deceleration came from slower growth in Europe. Speaking at the NEDBANK - NEPAD Networking Forum, Deputy Reserve Bank Governor of South Africa, Lesetja Kganyago emphasised that exports from Africa to the EU remain strongly biased towards minerals, crude oil and natural gas mainly from Nigeria (and the North African economies of Algeria and Libya) as well as other commodities from countries like South Africa and Botswana. He stated that over the longer term, demand for, and exports of, commodities will remain strong. Based on its current and projected demand for these commodities, China will remain a critical consumer of African exports. According to Kganyago, African economies have benefited from stronger commodity prices and greater foreign direct investment. These gains were constrained by currency appreciation in some instances and, more importantly, by rising food prices. Africa gained when commodity prices rose which boosted export earnings but simultaneously, oil imports fuelled rises in food prices through higher domestic energy prices. This effect was muted by appreciating domestic currencies as prices of other commodities exported, rose. The impact of the Euro zone crisis on growth for African economies so far has been fairly limited. The IMF forecasts 2 Sub-Saharan Africa (SSA) to grow by 5.5 per cent in 2012 (compared with 4.9 per cent in 2011) and further by 5.3 per cent in 2013. This projection, which is forecasted lower in 2013, is partially due to slowed or stalled growth being experienced in the Europe. 2 IMF Regional Economic Outlook 2011 Trade dependence of low-income countries on selected European countries LIC exports to: Greece Spain, Italy, Germany, France, Total euro zone EU27 Portugal United Kingdom exports (% of total trade) (% of GDP) Burkina Faso 0.03 0.24 5.57 5.87 9.11 14.60 Burundi 0.05 1.00 16.16 17.62 31.00 17.10 Cambodia 0.07 2.74 7.25 11.90 16.68 49.28 Ethiopia 0.32 2.73 15.69 25.60 29.47 8.53 Kenya 0.03 1.39 12.96 13.06 23.92 16.46 Kyrgyz Republic 0.00 0.07 1.04 1.47 2.76 28.11 Madagascar 0.18 6.64 49.15 56.01 60.08 10.80 Malawi 0.72 2.82 11.41 28.59 36.75 20.85 Mali 0.06 6.16 1.74 7.66 8.47 20.87 Mozambique 0.18 6.30 1.09 61.73 62.38 22.91 Nepal 0.03 1.52 7.84 8.52 11.11 5.31 Niger 0.12 4.37 10.28 15.76 15.94 8.71 Rwanda 0.00 1.21 7.24 17.42 22.89 3.56 Tanzania 0.08 2.60 4.73 11.63 12.81 17.01 Uganda 0.32 6.77 10.13 26.05 30.95 6.77 Zimbabwe 0.04 3.61 4.92 7.94 11.24 42.80 Sources: World Bank s WDI, UN COMTRADE database (accessed October 2011). 2 NEDBANK NEPAD BUSINESS FORUM / MAY 2012
Foreign direct investment (FDI) flows from the European Union (EU-27) to Sub-Saharan Africa fell to EUR 11.5 billion in 2010, from EUR 13.1 billion in 2009. However, the majority of these flows of FDI are going to South Africa. For continental Africa, FDI inflows reached Euro 21.3 billion in 2010. While this figure constituted only 5.3 per cent of total EU FDI flows for 2010, the proportion of EU FDI flowing to Africa has increased considerably from 1.3 per cent in 2007. Positive long-term growth prospects in Africa should attract higher levels of FDI in the future. Credit default swap prices Reflecting on South Africa, Kganyago stated that policy discourse during the crisis centred on the need for a fiscal stimulus response to the fall in foreign demand and slowing domestic economy. South Africa loosened its fiscal policy in order to support growth and finance expansive capital investment projects. This counter-cyclical measure, together with an equally coherent monetary policy regime of flat and lower interest rates maintained demand while domestic production could not keep up. This resulted in a current account deficit. Banking and the Euro zone crisis Speaking at the NEDBANK-NEPAD Forum Mfundo Nkuhlu, Managing Executive for Nedbank Corporates, indicated that banks have felt real economic contraction across the board with exports not being able to recover to pre-recession levels. Despite downward pressures from the Euro zone crisis, however, he added that South Africa was buoyed by characteristically strong corporate balance sheets which are not excessively leveraged. These balance sheets are seen as overly conservative during economic upswings but serve as cash hedges in economic contractions. Dropping capacity utilisation has meant fewer corporate expansion plans leading to reduced credit extension to single digit levels. The decline in credit extension to single digit levels however, viewed against inflation, is still good. Euro area long term interest rate chart African economic outlook in the wake of the Euro zone The rising prices for Credit Default Swaps (insurance against government bond defaults) on European Union sovereign bonds and higher sovereign bond yields generally indicate that the Euro-area is unable to stimulate its domestic economies, in the short term. This is due to higher borrowing costs, leading to further declines and lower appetites for Africa s exports to the region. NEDBANK NEPAD BUSINESS FORUM / MAY 2012 3
Of importance to Africa are emerging macroeconomic policies (austerity) which will affect capital flows, particularly increasing volatility and allocations. Compounded with the excessively high debt levels to GDP being experienced in the Euro area which is already triggering unconventional policy responses, Africa faces potent risks of even more credit contraction, sales of assets, and likely stronger real economy effects. A severe worsening in the growth prospects for Europe would result in a fall in the demand for exports from around the world and especially for Africa. Africa s intra-african trade is only 10%, which implies relatively high dependency on outside trade and concentration risk for exports. An African response to an apparent challenge As many other experts and scholars have stressed, Kganyago reiterated that African economies need to strengthen the domestic and regional basis for growth. To effect this, African countries must look into firstly strengthening the capacity of value addition processes on the continent to ensure higher value exports, and secondly improving regional infrastructure, systems and governance required to promote intra-african trade. This approach has the potential to diversify away from an over-concentration on EU export markets and its inherent over-exposures to credit risks in the long term. Commodity export dependency is likely to be a thorn in the foot for Africa in the medium to long term. However, evidently reviewing the disproportionate economic gains within Africa experienced in the wake of the crisis, some worrying trends emerge. Export basket differentials, linked to relative weights of commodities versus value added products and, effects of food and oil imports, raise new questions of long term planning which must be addressed. Countries with more exports of value added products and less food and oil imports had less volatile economic stability. Lower commodity prices will likely lead to negative economic shocks, while the inability to sustain domestic food production will threaten economic growth and increase inflationary pressures. Diversifying export baskets should form an important longterm aspect of most countries economic development plans. Africa has to continue to expand and re-direct exports towards faster growing regions. This can be done by strengthening regional and continental commercial and trade agreements, developing cross-border infrastructure and strengthening macroeconomic policies. Attracting foreign direct investment and making better and greater use of imported technology and skills is also critical to long-term growth as this has the potential to increase overall productivity at similar capital levels. Reiterating these points, Stanley Subramoney, NBF Chairman, pointed out that employing technology, boosting skills and diversifying markets will undoubtedly set Africa up for sustained growth. Dealing with policy and non-policy barriers to trade presents an opportunity for enhanced intra-african trade. An ideological shift, towards greater endogenous growth is required for Africa, while addressing the current policy challenges. The NEDBANK - NEPAD Networking Forum is a thought leadership platform covering business dynamics in South Africa and Africa. This Forum, held quarterly for 2012, invites industry and market leaders and authorities to discuss African emerging and long term business perspectives. The Forum covers economics, politics, investments - African and globally, emerging markets and policy, with a view to develop leading business intelligence for stakeholders assisting directly in the investment decision making process. The atmosphere allows participants to relate closely with each other and the presenters. Reports to the events are published by NEDBANK - NEPAD reflecting views and analysis of subject matter. The Forum reflects a partnership between the NEDBANK Group and NEPAD Business Foundation. Contact and author: Watson Hamunakwadi NEPAD Business Foundation Tel: +27 87 310 1899 Email: Watson.hamunakwadi@thenbf.co.za 4 NEDBANK NEPAD BUSINESS FORUM / MAY 2012
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