Building African Markets, a Means to Encouraging Growth and Countering the Global Financial Crisis

Washington, D.C., October 12, 2008 -- How the current global financial crisis might affect Africa and what countries can do to protect themselves was the focus of a seminar yesterday between African bankers and international investment analysts, held under the auspices of the World Bank-IMF Annual Meetings.

As part of the seminar, some 50 participants packed a small room at World Bank headquarters and engaged in a lively debate about Africa's financial future.

“African policy makers need to be aware that global growth will be a lot slower and that the sort of flows that they've been used to are going to dry up,” warned Stephen Bailey-Smith, head of research at Standard Bank in the UK. He also pointed to the region's high inflation, weaker local currencies and decreasing remittances from the African Diaspora as a result of the global crisis, as exacerbating factors which could make the region more vulnerable.

Sub-Saharan Africa already has seen some effect as a result of the crisis, according to Michael J. Fuchs, lead financial economist in the World Bank's Africa Region. Stock markets in Africa's larger economies – Nigeria, Kenya, and especially South Africa -- are mirroring those of developed markets, and international bond issues that were growing have slowed.

The small size of African markets also means that even limited withdrawals could have significant impact and, although major capital withdrawal from foreign investors is unlikely, as the current crisis deepens, it could have an effect.

According to Fuchs, domestic factors also will play a role in which countries feel the most impact. Effects may be amplified by political uncertainty, overvalued housing markets and explosive credit expansion.

Strengthening African markets and institutions in order to ensure growth will be essential to protecting countries in the current environment.

Dr. David Kihangire, executive director for research at Bank of Uganda in Kampala, urged less panic based on news of the crisis and more regulation of African financial markets. “Going forward, we should look at medium and long-term solutions,” he said. “We should recover monetary policy from the dustbin and put it on the table.”

This was a view echoed by J. Sanpha Koroma, chief executive officer and managing director at Union Trust Bank Limited in Sierra Leone, who felt the challenge for him, and other bankers in Africa, is to convince investors that markets are stable.

Koroma called for a return to simple banking and less focus on complex derivatives.

“Let's come back to conventional banking,” he said. “Standard Bank is making more money in Africa because it is simple banking – lending and foreign exchange.”

U.K.-based Standard Bank is one of Africa's largest banks with offices in 18 countries across the continent.

Participants noted that African markets are at varying levels of development, that debt in the public sector dominates, and that there is a focus on primary markets rather than secondary – leaving many investors with no capacity for emergency exits – and no bond markets exist outside of the West Africa Economic and Monetary Union (WAEMU).

Countering these challenges with a view to boosting invest confidence will require regionalization, enhanced market infrastructure – several countries do not have a market system – better financial data collection and dissemination, and more investment, according to Jennifer Moyo, a consultant working on capital markets strategy at the African Development Bank. “For Africa, it is key that we are able to bring on long term investors – particularly insurance companies and pension funds,” she said.

The World Bank is looking at ways to develop a comprehensive approach to strengthening local markets. Through the ESMID program, a pilot project in East Africa and Nigeria, the Bank is providing technical assistance in all key areas of the market such as regulation, market infrastructure, capacity building (to industry and to the regulator), secondary markets, etc. According to Lead Financial Specialist in the Bank's Africa Region Clemente de Valle, the program puts strong emphasis in supporting viable regional initiatives where there is strong political will to integrate the financial markets.

“It combines the technical assistance to support the creation of an enabling environment,” de Valle said. “With strong support to specific transactions, that could be a catalyst to the development of the markets.”