Friday, February 27, 2009

Africa to benefit from turnaround, says IDC

Hilary Joffe, 16 February 2009

The global crisis has radically altered the outlook for Africa’s economies, and growth forecasts for the continent are likely to be revised further downward, a new report by the Industrial Development Corporation (IDC) says. 

But the IDC, which has approved about $1bn of loans beyond SA’s borders, says demand for Africa’s resources — in the markets that pick up first once the global economy starts to recover — will benefit the continent. 

“A significant part of the growth momentum in Africa in recent years has been driven exactly by the expansion of emerging markets such as China and India; when we start getting a recovery it will be earliest in those markets and Africa will benefit from being a partner in that,” Jorge Maia, the head of the IDC’s research and information department, says.

But Maia cautions that African governments will need to spend this time getting policies right and curbing wasteful public spending, and that international investors will be particularly sensitive if policy responses are inappropriate. 

“The African economies that will contain the adversity of the current downturn are likely to be those that remain highly vigilant in managing the downside potential, those that are in a position to adopt countercyclical measures and that make an effort to seek new opportunities and competitive gains,” the IDC report says.

Commodities account for 78% of Africa’s exports and the continent has grown strongly in recent years as a result of high international commodity prices, as well as domestic political and economic reforms. 

Growth averaged about 6% a year over the period 2003 to last year and this seemed set to continue until the global financial crisis set in. The International Monetary Fund last month forecast that world growth would reach only 0,5% this year, while Africa would grow 3,4%, down from 5,2% last year. The IDC report, however, says this is likely to be revised downwards as the economic environment deteriorates and the effect of the crisis spreads.

Countries dependent on export trade, particularly those such as Angola or Botswana that are highly dependent on a single commodity, are likely to be hit hardest, as will those that are most reliant on capital inflows. 

As a continent, Africa has a low propensity to save and inflows, in the form of foreign direct investment, portfolio investment, remittances from migrant workers and trade credit, are critical for growth and development, the report says . 

Remittances from the African diaspora, for example, have averaged $12bn a year in recent years while foreign direct investment reached almost $62bn last year and some countries tapped international bond markets for the first time. But the world has changed: portfolio flows to Africa are estimated to have declined to $5,9bn last year from $15,7bn in 2007. 

“The weakening or even reversal of these flows, due to institutional deleveraging, pessimistic sentiment and the economic downturn in general, is having a significant impact on emerging markets and other developing economies, including African economies,” the report says. 

The main effect is to delay infrastructure and other large projects, or mak e them more costly.