Africa and the international economic crisis

Until the end of 2008 it was thought that Africa could escape completely the effects of the worldwide recession. The key argument put forward was that the African financial sector is little affected by toxic assets, as in many states – particularly South Africa – lending business is restricted by law to the domestic market.
Kaberuka Donald – ADB president (The African bank says that the projected growth rate of three per cent could be too optimistic for 2009)
Kaberuka Donald – ADB president (The African bank says that the projected growth rate of three per cent could be too optimistic for 2009)

Until the end of 2008 it was thought that Africa could escape completely the effects of the worldwide recession. The key argument put forward was that the African financial sector is little affected by toxic assets, as in many states – particularly South Africa – lending business is restricted by law to the domestic market.

In addition, the continent lacked sufficient integration into world trade. And what was not there could not cause any problems – or so it was thought at the time.

Now, though, the international economic crisis is also having a marked effect on the countries of sub-Saharan Africa.

The IMF, for instance, predicts a sharp deterioration in growth in Africa, scaling its forecasts for the continent as a whole down from the previous six to seven per cent to around three per cent.

The African Development Bank, the continent’s biggest development institution, suggested that even growth rates of three per cent could be too optimistic for 2009.

These average figures are deceptive, however, as Africa is in every respect a continent of extremes. It makes little sense to lump all 53 states together in one pot – the economic and political conditions are simply too varied, their raw materials deposits likewise.

After all, in the majority of states the wealth of raw material resources continues to be the biggest driver of economic growth above the long-term average – and it is often associated with a shift away from the socialist dictatorships so discredited across the world towards structures characterised by a market-economy authority – along the lines of China and Singapore – or even democratic systems. One very positive example is Equatorial Guinea, the “Qatar of west Africa”, which has just signed one of the biggest gas deals of the last few years with E.ON and is on the way to becoming a world-leading producer of oil and gas.

To focus solely on raw materials deposits, though, would be to narrow the perspective.

That is because what many African nations lack in the way of natural resources is more than compensated by ambitious visions and viable future concepts.

A good example of this is Rwanda which, despite a lack of natural resources and the genocide that took place in 1994 and destroyed the entire economic foundations of the country, has worked its way up to become the premier model country.

The key to its success is its positioning as the “hub” to east Africa – a positioning that, unlike raw materials deposits, can go on being exploited in the long term.

The result is that growth rates for 2009 are predicted to be a respectable 5.6 per cent there.

A change of thinking towards more sustainability is also evident in the problem area of development aid. More than two billion dollars have been poured into Africa over the last 50 years. Seldom, however, have these funds delivered a genuine economic upturn.

It is now clear to almost everyone that grants and donations that are not tied to milestones are no substitute for market economy structures – indeed, they can even hinder and destroy them.

What is now needed is to draw up concrete plans for how clearly defined and time-limited grants can gradually wean states away from development aid.

The much lower growth prospects should not, therefore, be seen as purely negative. Rather, they can deliver the stimulus needed for regional national economies to seek out their own ways of cushioning the effects of the downturn and coming out of the crisis as one of the major potential winners. 

A first key step for some nations is to strengthen their export trade. Asian states are ready and willing partners in trade, often because of their own hunger for raw materials.

Two weeks ago, for instance, the Chinese Import and Export Bank (Exim Bank) granted Rwanda and Tanzania interest-free loans in excess of one hundred million euros with the aim of cranking up trade between the countries. Raw materials-rich Congo has for years already been receiving many billions from the Middle Kingdom.

It is equally vital to build up national financial systems and develop the banking and insurance sector further.

With most national capital markets being too small, there is an increasing willingness in west and east Africa to develop common rules for the scope and supervision of regional financial markets. Potential investors need not come just from the western world – Africa, too, has capital export countries whose surpluses could be channelled into the region.

Private equity investors also play a major role, however, as they are not reliant on already functioning capital markets but can instead invest their equity capital in building up and expanding financial markets and the domestic economy.

Our concerns, then, must not be for Africa. Rather, the western world must consider whether it is about to miss one of the most important and lasting trends politically and economically of the next ten to twenty years.

Many Arab and Asian states are now associating Africa not with hunger, war and poverty, but with resources, markets and opportunities. For Africa there is no conceivable future other than as a strong economic area.

This continent is simply too rich  – in people, creativity, intellect and resources – to think anything different. And, not least, some of our most urgent problems will be determined in Africa: from the energy crisis – gas from Libya and Equatorial
Guinea can be a genuine alternative to gas from Russia – to the question of whether our western political and value system will still have global relevance in 25 years’ time.

Author:  Christian  Angermayer  is  a  member  of the board of German asset management  company  Altira  Group. 

Altira´s  fund ADC African Development Corporation has focused on direct investments in Sub-Saharan Africa and has already  invested  in  two Rwandian companies: BRD and SIMTEL. Christian is also a member of the Presidential Advisory Council.

“This article has first been published in Financial Times Germany on August 19th 2009”

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