Africa’s Panoramic View Distortions

Sub-Saharan stock markets got little lift from the IMF’s latest regional GDP growth forecast which kept the 5 percent expectation for another year while cautioning about commodity, Eurozone and pan-Africa banking group risks. Through May Kenya and Nigeria climbed double-digits and Botswana, Ghana, Mauritius and Zimbabwe were flat or negative. The report hailed “new resilience” driven by underlying youthful demographics, urbanization and technology absorption across the spectrum of oil and agricultural exporters and fragile and low-income states. Government debt ratios are down to an average 40 percent of output after relief awards, and capital investment and private credit are at the 20 percent bar. Food and fuel inflation peaked last year and area CPI is again under 10 percent. Budget deficits for energy importers are at 3 percent of GDP and banks outside Nigeria and South Africa have been “insulated” from crisis-related credit and capital flow reversal. According to recent estimates almost half the continent still lives in poverty defined at $1.25 per day in 2005 prices, and it lags on meeting the mid-decade Millennium Development Goals. Further European trade and financial deterioration could knock 0.5 percent off growth and sub-regional spillover would be particularly felt in the South African Customs Union and elsewhere. A petroleum price shock could reverberate to both the East and West alongside “homegrown” ethnic, political and climatic ones and exchange rate and monetary policy must be prepared to quickly respond, the Fund believes. From a regulatory standpoint, 15 countries received overall passing grades on Basel Core Principle assessments but cross-border banking networks have expanded beyond oversight reach and are a “contagion channel.” Since 2009 frontier markets have suffered portfolio outflows which as in Zambia’s case sparked a credit crunch when foreign investors exited local bonds. Nigeria alone experienced a full-fledged banking crash from a combination of domestic and overseas borrowing as 40 percent of the system was declared insolvent with NPLs at one-third the total. The central bank intervened to support institutions and sack management and a central asset-disposal agency was established which has issued bonds on its own behalf.

European groups account for 90 percent of BIS-reported liabilities, with a large affiliate presence by UK, French and Portuguese providers dating from the colonial era. They rely overwhelmingly on domestic retail deposits although project funding has been reduced under parent guidance. South Africa is an exception in depending on wholesale lines but they come from contractual savings pools at home. Capital, liquidity and profitability score well but stress in multi-country operations like Stanbic, Ecobank and Bank of Africa could spread in the absence of tighter disclosure and supervision as together they control one-third of deposits in a dozen locations for sweeping vistas.