1. 4/2/2009
The Impact of the Global and
Economic Crisis on Southern Africa
Agricultural Trade Forum
16th Public Policy Dialogue
Keith Jefferis Windhoek, March 24, 2009
Structure of Presentation
The Global Financial and Economic Crisis
Origins of the crisis
Unfolding of the crisis
Impact of the Crisis on Developing Countries
Implications for SADC Economies
Exports
Balance of payments & financing
Fiscal position
The Bright Side!
Policy Implications
1

2. 4/2/2009
Global Financial & Economic Crisis
Global Growth Slowdown
IMF Growth Forecasts, 2009 World economy now in deep
(July 2008 & Jan 2009) recession
9 Global growth forecasts for
8
7
2009 revised down from
6 3.9% to 0.5% (IMF)
5 Developed country growth
4 forecasts slashed to -2.0%
%
3
2 Emerging / developing faster
1 growth at 3.3%, but still
0 affected
-1 Trend of downward revision
-2
-3
of forecasts not yet over
IMF forecasts the most
optimistic, e.g. JP Morgan
-2.6% for 2009
2

3. 4/2/2009
Global Growth Slowdown
8 Depths of recession –
Annualised real GDP growth, qoq
6
4Q2008 and 1Q2009
Now widely acknowledged to
4 be worst recession since
2 1930s
0 Stronger growth in emerging
markets, but still big drop
-2
Weak recovery projected
-4 towards end of 2009
-6 Sluggish but positive growth in
Source: JP Morgan
-8 2010
Robust world growth (>3%)
only likely in 2011
World Developed Emerging markets
Global Growth Slowdown - Advanced
economies
4 Four quarters of negative
Annualised real GDP growth, qoq
2 growth, with total decline
0
in GDP of:
-2
-4 USA – 3.4%
-6 Euro zone – 3.7%
-8 Japan – 8.3%
-10
Even when recovery starts,
-12
-14
there will be a long
-16
Source: JP Morgan
“catching up” process
2008-9 recession likely to
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
be deeper than slowdowns
USA Euro Japan of 2001, 1991 & 1981
3

4. 4/2/2009
Origins of the Crisis
The global financial economic crisis has its
origin in three interconnected areas:
Financial Sector Issues
Global macroeconomic imbalances
Commodity Prices
Financial sector
Sub-prime mortgage lending
New models of financial behaviour (originate-to-
distribute -> off balance sheet)
Complex new financial instruments (CDOs)
Misaligned incentives (selling of loans not
repayments; determination of bonuses)
Credit explosion
Lax monetary policy
Asset price bubbles (housing, equities)
Defective risk assessment (rating agencies)
Weak regulation
4

5. 4/2/2009
Global imbalances
Mismatch between surplus Two sides of the same coin
and deficit nations Capital outflows from surplus
X–M=S-I nations financed deficits in
low-savings nations,
Surplus nations: contributed to low interest
high savings (> investment) rates and credit expansion
= current account surpluses e.g. China, oil exporters
capital exports to RoW buying US T-bills and bonds
Fx reserve accumulation Exchange rate inflexibility :
Deficit nations: Asian currencies (managed)
undervalued
low savings (< investment)
US dollar overvalued
= current account deficits
EUR-USD rate bears burden
capital imports from RoW of adjustment
debt accumulation
Commodity price bubble
Commodity prices at Accentuated global
historically high levels by imbalances, e.g. raised
2007/early-2008: savings by commodity
Oil exporters
Metals
Foodstuffs
Structural change effects –
e.g. Rapid growth and
infrastructure investment in
China
Long growth upswing
Credit-induced spending
Supply inelasticity
5

6. 4/2/2009
How the crisis unfolded - 1
Financial Sector
Sub-prime defaults, triggered defaults on wide
range of financial instruments
Risk exposure and risk mis-pricing apparent
Credit ratings inaccurate
Uncertainty in markets
Inter-linkages between institutions amplified
problems
Credit crunch, collapse of financial institutions,
rescues, de-capitalisation
How the crisis unfolded - 2
Global imbalances
Rising savings in deficit nations:
rebuilding HH and corporate balance sheets
reduced consumption, lower demand
Desire to accumulate reserves
perceived as economic strength
but we can’t all run surpluses!
Imbalances will have to be unwound:
exchange rate misalignments must be corrected (but flight
to quality has led to strengthening dollar);
needs rising consumption in high savings nations
6

7. 4/2/2009
How the crisis unfolded - 3
Commodity Prices
Rising inflation
Declining real income in oil-consuming countries,
hence reduced real expenditure
E.g. on automobiles
Tighter monetary policy (higher interest rates
exacerbated credit problems)
Impact of the Crisis
Systemic Cross- Growth &
Three phases banking border trade
Financial crisis crisis financial effects
(systemic) flows
International Advanced I III
financial flows/risk countries
aversion Emerging II III
Economic crisis markets
(collapse in real Less- II III
growth rates, trade developed
countries
flows)
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8. 4/2/2009
Financial Contagion - Markets
Aversion to emerging market IIF estimates net private capital
(EM) risk + liquidity calls flows to EMs to fall sharply
Capital flow reversals as foreign $930bn in 2007
investors withdraw $467 bn in 2008
Falling equity markets $165 bn in 2009
Pressure on exchange rates EMs that used commercial finance
(weaker) to fund CADs esp. vulnerable
Rollover risks for existing In Africa, small but growing
borrowers (corporate and Ghana & Kenya
sovereign) postponed planned international
Higher cost of funds (EM bond offerings
spreads) SA, Nigeria
Trade finance scarce external financing for companies,
Inflows of FDI much reduced banks scarce & expensive (higher
interest rates)
Financial Contagion – Other Flows
Of particular Greater reliance on
importance to LDCs MFIs
ODA flows under IMF
pressure World Bank
Donor country budgets IFC
under pressure
Commitments to increase AfDB
ODA now doubtful
Remittances falling
sharply
Falling employment and
real incomes in advanced
economies
8

9. 4/2/2009
Trade & Growth Effects
Reduced prices and World trade expected
volumes for major to decline in 2009
commodity exports First time since 1982
Major ToT deterioration Largest fall for 80 years
for commodity exporters 2008Q4 saw major falls
(reduced real incomes) in exports in many
General reduction in countries
trade flows worldwide Compounded by drying
up of trade finance
Risk of protectionism &
slow progress on DDA
negotiations
Minerals prices way down....
Copper ($/tonne) Nickel ($/tonne)
$10,000 $60,000
$9,000
$8,000 $50,000
$7,000 $40,000
$6,000
$5,000 $30,000
$4,000
$3,000 $20,000
$2,000 $10,000
$1,000
$0 $0
Source: LME Source: LME
9

10. 4/2/2009
Trade & Growth Effects - Africa
SS Africa growth forecast to remain
positive in 2009 (IMF 3.5%) Real GDP Growth (IMF)
but much reduced from 2007 levels 10
Changing employment patterns
8
from dynamic export sectors to lower
productivity sectors 6
reversal of urban-rural migration
Higher poverty due to: 4
%
reduced employment 2
lower wages
0
lower remittances
Concern about fragile states (Zim, -2
DRC, Burundi, Guinea-Bissau, Liberia)
-4
Reduced availability of finance will
inhibit investment in infrastructure & 2007 2008 2009 2010
human capital
SS Africa Developing
Advanced
Global Growth Slowdown – Key risks &
uncertainties
Depth and duration of Impact on international
recession trade
- how long and how Reversion to
deep? protectionism?
V-shape or L-shape? Prospects for DDA?
Shape of Financial Macroeconomic Impact
Sector Monetary expansion ->
Institutions? inflation
Regulation? Fiscal stability & future
Public/private taxes
ownership? Exchange rate
realignment
Unemployment
10

11. 4/2/2009
Implications for SADC Economies
Impact on SADC Economies
Domestic financial sector Fiscal balance
Limited impact, at least Revenue slowdown
initially Higher spending
Trade Larger deficits
Impact of global GDP
recession and ending of Growth slowdown very
commodity price boom
likely
Export slowdown
Protectionism?
External balance (BoP) Positives
Inflation
Wider CAD
Power supplies
Financing constraints
Oil imports
11

12. 4/2/2009
SADC Economies – GDP per capita,
2006
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Export Slowdown
Main impact on mineral Slow recovery forecast
producers in commodities markets,
Huge declines in: but no return to 2007/8
Oil prices (-70%) peaks
Base metal prices E.g. Stanchart f’casts
(copper, -70%; nickel, - 2009 avg. vs. end-2008
80%) Nickel +0%
Diamond sales volumes, Copper +18%
to a lesser extent prices Oil +56%
Lower than 2008 avg
prices
12

13. 4/2/2009
Export Slowdown
Mineral Exporters
Country Commodity % of exports
Angola Oil, diamonds 99%
Botswana Diamonds, copper, nickel 90%
Congo DR Diamonds, oil 64%
Mozambique Aluminium, gas 74%
Namibia Diamonds, copper, uranium 59%
South Africa Gold, platinum, coal <50%
Zambia Copper, cobalt 77%
Other Exports
Tourism Motor vehicles (SA)
Slowdown in long-haul sharp fall in new
tourism due to vehicle sales due to
recession credit crunch
Mauritius, Seychelles Other exports also
most dependent impacted, but less so
Also Botswana, SA, Food, clothing
Zambia, Namibia,
Mozambique, Tanzania Being more diversified
helps, but a matter of
degree
13

14. 4/2/2009
Current Account Deficit (2009)
20
10
0
% of GDP
-10
-20
-30
-40
Source: IMF Regional Economic Outlook for Sub-Saharan Africa, Oct 2008
Financing of Current Account
Short-term portfolio flows (MICs) Donor funds & concessionary
Tightening of credit markets and borrowing (LICs)
“flight to quality” has hit Fiscal pressures in donor countries
emerging markets Limited IMF and World Bank
Higher cost of funds (risk funds
premium)
Remittances (Lesotho,
FDI (all ex. Zimbabwe) Madagascar, Malawi,
Credit crunch Zimbabwe)
Project viability (esp. minerals) Rising unemployment in
Reduced inflows, esp. in natural developed countries
resource sectors Reduced remittance flows
expected in 2009
FX reserves
Cannot provide prolonged
financing of deficits
14

15. 4/2/2009
Foreign Reserves, 2008
Botswana approx. 25 months
10
9
8
Months of import cover
7
6
5
4
3
2
1
0
Source: IMF Regional Economic Outlook for Sub-Saharan Africa, Oct 2008
Fiscal Balance (2007)
Angola Initial fiscal
Botswana
DRC
position
Lesotho reasonable:
Madagascar
Malawi
Several
Mauritius countries with
Mozambique surpluses
Namibia
Seychelles Deficits mostly
South Africa manageable
Swaziland
Tanzania
Benefits of
Zambia ongoing fiscal
-10 -5 0 5 10 15 reforms
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16. 4/2/2009
Fiscal Balance & Financing
Lower revenues likely due to Deficit financing may be a
reduced trade and growth problem
Higher spending, e.g. social Access to international capital
safety nets markets (eurobond issues)
limited
Vulnerabilities:
Domestic financing capacity –
Commodity-revenue varies from country to country
dependence
Banks – depends on many
Donor dependence other factors
Existing budget deficits Bond markets - generally
High debts underdeveloped – but now
SACU revenues may be a good time to
develop
Danger of crowding out of
private sector
Donor dependence
Donor funds of great importance to low-income
SADC countries:
Malawi, Lesotho, Mozambique, Madagascar, Zambia,
Tanzania
Funding of budget, BoP, crucial for development
projects
Previous commitments to increase donor funding
now questionable
Need for donor funding rising
Need for effective lobbying to – at a minimum –
preserve donor funding levels
16

17. 4/2/2009
Role of MFIs
MFIs have a crucial role Under-funded; need for
given adverse markets recapitalisation
Source of concessional G20 Agreement to
finance for LICs increase IMF funding
Less risk-averse than Still issues over “voice”
banks and US veto
WB & AfDB for Conditionality issues – esp.
infrastructure finance, but in the context of
slow exogenous shocks
IMF more flexible and can
provide budget and BoP
support
Exogenous shocks facility
Summary of negative impacts
Slower / negative GDP Uncertainty over depth
growth and duration of crisis
Reduced investment Risks mostly on the
Increased current downside
account deficits;
financing constraints
Exchange rate weakness
Fiscal deficits; financing
constraints
Rising unemployment &
poverty
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18. 4/2/2009
The Bright Side
Financial Sectors
Mostly untouched by first Vulnerability - protracted
round of crisis: downturn elevates risk:
commercial banks sound falling incomes, borrowers
much improved regulation less able to service debts
and supervision sectoral concentration of
limited cross-border bank portfolios
banking linkages market volatility if banks
limited exposure to have lent for investment in
complex financial products stock markets
deposit-funded lending withdrawal of funds from
parent banks
money markets functioning
normally equity markets following
global trends
18

19. 4/2/2009
Inflation Forecasts
35 Inflation will
30 fall due to:
25
Source: IMF REO for SSA (October
2008)
Lower oil
prices
20
Lower food
%
15 prices
10 Sharply
5
declining
global
0 inflation
Will lead to
lower interest
2008 2009
rates
Electricity
70,000 Reserve margin rapidly
60,000 eroded
50,000 Eskom now expects no
40,000 growth in demand in
30,000 2008-2009
MW
20,000 New capacity of
10,000 40000MW needed over
0 next decade (almost
-10,000 doubling)
-20,000 Slowdown provides
-30,000 breathing space
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
But commercial financial
Reserve Net capacity Peak Demand
markets currently closed
19

20. 4/2/2009
Import Bills
Lower commodity prices: Net food importers also
All except Angola & DRC aided by lower world
net oil importers food prices
Fuel approx 20% of
total imports on average
Will help CAD
Mainly oil, but also other
commodity-related
imports (e.g. steel)
Summary of Country Impacts
ANG BWA DRC LES MAD MAL MAU MOZ NAM SEY SA SWZ TAN ZAM ZIM
Exports
Minerals XX XX XX X XX X XX
Tourism X X XX X X XX X X X
Finance
CAD XX XX X X XX XX X X XX X
FDI X X X X X X X X X X X X X X
Remittan- X X X X
ces
Donors X X X X
Reserves X X X X X X X
Positives
Inflation
Power
Oil
Imports
20

21. 4/2/2009
Summary of Impacts
All countries will be hit, but impact will vary from
country to country, depending on:
trade structure, fx reserves, fiscal position
Impact less if:
sound policies in place
good reserves & low debt
more diversified
Vulnerability from previous high inflation and
CADs
Most vulnerable are mineral exporters with high
dependence on foreign capital
Policy Responses - 1
Internationally, lobby for:
No protectionism!
Resume DDA
Additional resources for IMF/WB, that can be
disbursed quickly and flexibly
Preservation of donor funding commitments
Fair treatment for migrant workers
21

22. 4/2/2009
Policy Responses - 2
Domestically:
Exchange rate flexibility – to support adjustment
Use monetary policy to support growth when inflation is low
Fiscal policy – can be expansionary s.t. sustainability
constraints
Ensure quality of government budgeting & spending
Renewed focus on financial sector supervision & regulation
– banks & non-banks
Need for high quality, timely economic and financial data
Contingency planning & monitoring of evolving conditions
Sustain reforms
Thank You
22