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From Africa Recovery, Vol.12#2 (November 1998), page 16 (part of special feature on Asia and Africa)

Africa tenses for Asian aftershocks

Global financial crisis hitting African growth, exports and investment flows

By Ernest Harsch

The shock waves of the economic crisis that began a year ago in Asia -- and are now threatening a global recession -- have been taking a while to reach most countries in Africa, a continent not yet well integrated into global financial markets. But several African countries already have been hit by the immediate impact of the crisis, and many others are beginning to feel its more indirect effects, mainly through lower world commodity prices and shrinking export markets, along with reduced investment and other financial flows.

Ironically, because of the sharp economic slowdown elsewhere, the International Monetary Fund (IMF) predicts that Africa will be in the unprecedented position of experiencing more rapid economic growth this year than any other region, at around 3.7 per cent. But this is lower than it would otherwise have been. Mr. Alan Gelb, the World Bank's chief economist for Africa, told Africa Recovery that the Asian events were responsible for reducing the overall growth rate in Africa by about 1 percentage point this year, mainly through their role in dragging down world trade and growth. This conforms with the revisions in the IMF's projections for African growth, which are now a percentage point lower than its projection of 4.6 per cent earlier in the year.

Since May, the South African economy -- the largest on the continent -- has slowed down drastically, partially as a result of the Asian convulsions, South African Reserve Bank Governor C.L. Stals told shareholders in late August. He observed that "it is extremely difficult for any one of the smaller countries of the world to protect itself unilaterally against the vicissitudes of the evolving integrated world financial market system."

While most poorer African economies are less directly exposed than South Africa to unstable equity and financial markets, they nevertheless have been hit by other effects of the mounting global economic crisis. Already, exports to Asia of timber from Cameroon and Gabon and paper from Swaziland have plummeted, leading to retrenchments and plant shutdowns. The privatization of a Zambian copper mine fell through with the collapse of Asian financing commitments and the decline in the world copper price. Egypt's plans to issue its first Eurobond were postponed because of the volatility of international capital markets. Several countries that depend heavily on exports of oil, diamonds and other minerals have had to drastically cut their budgets because of the sharp drop in sales.

"At the turn of the century, Africa is the most vulnerable of the continents to exogenous and persistent shocks," Mr. Befekadu Degefe, a senior economist at the UN Economic Commission for Africa (ECA), noted in July in a paper on the impact of the Asian crisis. Since then, as the turbulence has spread well beyond Asia, assessments of the world economy have grown ever more sombre. US President Bill Clinton, on 14 September, described the global economic instability as "the biggest financial challenge facing the world in a half-century," one which threatens "emerging economies from Latin America to South Africa."

From boom to bust

For a number of years, Asian economies were the fastest growing in the world. Development experts held up the "Asian model" of export-led growth, high levels of foreign investment, rising per capita incomes and highly competitive manufacturing industries, as examples for other developing regions to emulate.

The direct impact of this growth was felt far beyond the region itself. By the early 1990s, a few developing Asian countries began to provide substantial new sources of foreign investment for Africa, while industrialized Japan emerged as the biggest single donor internationally, and one of the top donors to Africa (see page 26). Perhaps most significantly, Asia, with its robust demand for industrial raw materials and other primary commodities, became an increasingly important market for African exports. According to figures from the UN Conference on Trade and Development (UNCTAD), between 1980 and 1994 African exports of agricultural materials to Asia grew by an annual average of 13.8 per cent, and of ores and metals by more than 16 per cent, many times higher than the overall growth in Africa's exports of those commodities (2.1 per cent and -3.1 per cent, respectively). By 1997, some 20 per cent of Africa's total agricultural exports and 13 per cent of its mining product exports were going to Asia.

The financial crisis that began to sweep Southeast Asia over the last half of 1997 saw the value of national currencies plummet, many businesses go bankrupt, banks left holding insolvent loans and foreign equity investors rapidly shifting out of the region: from a net inflow of $97.1 bn to Asia's emerging markets in 1996, the net outflow reached $12 bn in 1997 (with no net inflows predicted this year). The overall growth rate for the four worst-affected Southeast Asian countries was cut in half in 1997 and plunged to -10 per cent this year. Some other developing countries in Asia continued to have relatively high growth rates in 1997, and China reached 8.8 per cent, but virtually all exhibited some slowing down, a trend that has worsened in 1998. Japan, which has extensive trade and financial ties with both East and Southeast Asia, saw its growth fall to below 1 per cent in 1997, from 3.9 per cent the year before, and according to October IMF forecasts, will crash to -2.5 per cent this year.

Shrinking Asian markets

In Africa, those few countries that traded most extensively with Asia felt the initial, direct impact of this crisis. Cameroon's state-owned timber exporting company, which sold 60 per cent of its logs to Asia, began confronting a slowdown in sales in December 1997; by July-August 1998, as unsold stocks mounted, it stopped purchasing more timber from domestic logging companies, leading to widespread layoffs of both loggers and transporters. Swaziland's Usutu Pulp Company, one of the four largest companies in the country, was forced to shut down in February and March because of a sharp decline in orders from Asia, which previously had taken about 90 per cent of Usutu's woodpulp production.

Botswana, which long has boasted budget surpluses thanks to its lucrative diamond exports, is now facing a budget deficit for the first time in 16 years. Mr. Louis Nchindo, managing director of Debswana, the joint venture between the Botswana government and the South African-based De Beers diamond multinational, attributes this drop to declining diamond sales in Asia, especially Japan, the world's second largest consumer of diamonds. "Events in Japan are very serious," Mr. Nchindo says. According to the Botswana Stockbroker newsletter, total revenue for the 1998/99 fiscal year, originally projected at 3.5 bn pula ($820 mn), will fall short by 1 bn pula. Although the Botswana government has substantial savings and can easily cover a short-term budget deficit, overall economic growth is nevertheless expected to fall, from 7 per cent in 1997 to 6 per cent this year.

Even African countries that do not export much directly to Asia have run into the problem of shrinking markets. Because economic growth in the European Union is projected to be about 0.5 per cent lower than initially anticipated because of the Asian economic crisis, North African manufacturers have found that European demand for their exports has been dampened. Tunisia, for instance, is expecting significantly weaker sales of its main exports: textiles and mechanical and electrical products.

Dim prospects for commodity prices

Partly due to the shrinkage of Asian markets, world primary commodity prices have suffered a year-long decline. Although the World Bank predicts that commodity prices probably will not fall much further, it does not see the prospects for a significant price recovery as very good. According to current Bank projections, it may take two years for non-oil commodity prices, which have fallen by 17.8 per cent from their 1995 levels, to begin to rise again.

For African economies, so heavily dependent on primary commodity exports, this is sobering news. As IMF Deputy Managing Director Alassane Ouattara, from Côte d'Ivoire, noted at a May 1998 seminar in Morocco on the Asian crisis, the decline in commodity prices will "affect growth and investment -- even slowing progress in poverty reduction -- especially in some African countries."

However, points out Mr. Gelb, the World Bank Africa economist, this impact is "very differentiated country-by-country, given the composition of exports." While African oil exporters have been hit very heavily, he says, exporters of cocoa, coffee and other beverage crops have been "doing quite well."

With the world price of oil falling during the first half of 1998 some 30 per cent below its level a year earlier, UNCTAD estimates that Angola and Nigeria have lost a quarter of their anticipated total export earnings, while Algeria, Cameroon and Gabon also have lost significant portions (see table, page 17). Lower oil prices, meanwhile, are good news for Africa's poorer economies, which now have to pay less for oil imports.

Gold, aluminium and other mineral prices have likewise slipped, while copper's price fell by 30 per cent between the first half of 1997 and the first half of 1998. This has struck Zambia at a particularly delicate moment, as it tries to attract investors for its large copper mines; in January, a Canadian company pulled out of a deal to buy the Chambishi copper mine near Kitwe. Copper demand remains strong in Europe and the US, notes the World Bank, "but weak markets in Asia have put downward pressure on prices."

The world price of cotton reached a five-year low in May, partly due to the shrinkage of East Asian markets, but also because of China's emergence as a major cotton exporter, adding to the accumulation of world stocks. All African cotton producers have been affected, but this development has been especially discouraging for several francophone West African countries that have made major efforts in recent years to boost output. Burkina Faso, for example, nearly tripled its production of cotton between 1993 and 1997, but its actual earnings from cotton have lagged.

So far, beverage crop producers have not been seriously affected, with prices for cocoa and robusta coffee increasing over 1997 and 1998. Ironically, this is partly because of the civil unrest in Indonesia, a major producer of those two commodities. Similarly, palm oil prices have been higher in 1998, boosted by declines in production in both Indonesia and Malaysia.

Stiffer competition lies ahead

As Asian economies recover, their markets also will grow once again, giving a lift to commodity markets. This may take several years, however, and it remains unclear whether the "Asian tigers" will be able to resume their previous very high growth rates. Recovery, in any case, is likely to pose anew the problem for Africa of greater competition from Asian exports.

Because many Asian currencies have depreciated in value as a result of the financial crisis, their exports to the world market have become much cheaper in foreign currency terms, making them more competitive with countries whose currencies have not been devalued. If such enhanced competition is combined with an overall slowdown in world trade, Mr. Gelb believes that it could pose a significant problem for Africa, threatening the slight increase over the last few years in the continent's share of the world market.

At a conference held in Abidjan, Côte d'Ivoire, in late September assessing the impact of the Asian crisis, experts from the ECA, UNCTAD, World Bank, and UN Industrial Development Organization (UNIDO) concluded that African producers of textiles, cocoa, rubber and palm oil would be most at risk from such Asian competition.

UNCTAD believes that the greatest competition will come from Asian primary commodities, in part because Indonesia, Malaysia and Thailand are major world producers of rubber, palm oil, copper, wood, cocoa and other such products. But manufactures are also threatened.

Mauritius, one of sub-Saharan Africa's two main textile exporters (along with Kenya), has made significant gains in productivity and efficiency since the early 1990s through its export processing zones, with employment in its textiles, clothing and jewelry industries picking up markedly in 1997, after a three-year slump. In part, this was because Mauritian manufacturers were able to take advantage of cheaper Asian raw materials for their textile industries. But in the longer run, direct competition from China and Southeast Asia will intensify, making it harder for Mauritius to keep up.

This pressure also will be felt in African domestic markets, argues Prof. Paul Collier, Director of the Centre for the Study of African Economies at the University of Oxford. "As manufacturing globalizes and as Asian producers penetrate African markets, Africa could even lose the little manufacturing industry which it has," he wrote in a study early this year. "The recent currency crisis in Southeast Asia, for example, will result in substantially cheaper Asian manufactured exports to Africa."

New pressure on aid?

Greater competition may also come for limited aid resources. In some of the reports on the unfolding Asian crisis published in the African press, commentators noted the huge sums -- around $125 bn -- lent to Indonesia and other stricken economies in an effort to prevent their complete financial collapse. They wondered whether this might lead to a reduction in aid for Africa.

So far, development experts point out, the bulk of the financing provided to Asia -- or currently contemplated to help shore up the Brazilian economy -- has not come from concessional funds, so there has been little immediate depletion of the kind of development assistance that Africa normally receives. However, some add, the atmosphere of crisis, at a time of ongoing budgetary restraint in the main donor countries, does not make it any easier for Africa to prevent a further slippage in overall aid flows. Between 1994 and 1996, total net disbursements of official development assistance to sub-Saharan Africa fell by nearly 18 per cent, from $20.9 bn to $17.2 bn, and initial estimates indicate a continued decline in 1997 and 1998.

As countries such as Indonesia -- with some 100 million people suddenly thrown below the poverty line -- become newly eligible for concessional assistance, it will become even harder for Africa to maintain its share of overall aid disbursements, some analysts note. However, responds Mr. Gelb, while it is true "a few countries might drop into the concessional aid basket, other countries, like China, are being phased out."

Some investors flee

One of the chief features of the Asian calamity was the panic that gripped foreign investors, contributing to capital flight and a steep fall in share prices across the region. Since such portfolio investments are highly mobile, the "contagion" effect was soon felt in stock markets far from Asia. As UNCTAD notes, institutional investors tend to treat all "emerging markets" (in the developing countries and the former Soviet bloc) as a single category, so that expectations of losses in one market can quickly spread to others, regardless of local economic performance.

South Africa, which has the largest and most active stock market on the African continent, did not initially fall victim to the panic. The South African economy displayed numerous signs of recovery during the first four months of 1998, and foreign investors poured R16.3 bn into South African bonds. But already jittery because of the Asian crisis, investors began to stampede out of South Africa in May following rumours about the dismissal of the Reserve Bank governor and an impending devaluation of the rand (both incorrect). Over the next three months they reduced their bond holdings by R12.4 bn. By end-September average prices on the Johannesburg Stock Exchange were down more than 39 per cent from the end of 1997, the exchange rate of the rand had depreciated sharply and economic growth slowed to a virtual standstill. The fall of the rand, in turn, contributed to currency depreciations and other financial turbulence in several neighbouring countries, such as Namibia.

African stocks still attractive

While a few of Africa's other larger stock markets also experienced steep dips (in some cases because of local economic or political factors), a number of the continent's smaller markets continued to perform well. Of the 11 African stock exchanges tracked by the World Bank's International Finance Corporation (IFC), four showed a rise in average prices through September, in a few cases dramatically (see graph, page 18). In August, Flemings Research, a London-based market analysis firm, reported that African stock markets, as a group, outperformed the IFC's overall index of emerging markets by 9 per cent since the beginning of 1998. If South Africa were excluded, the figure would go up to 18 per cent.

It is unclear whether such buoyancy will continue. Some analysts believe that investors disillusioned with Asian markets may look with even greater interest at the new opportunities offered in Africa. Although international portfolio flows to Africa are small by global standards -- just $2.6 bn in 1997, or 6.4 per cent of the total to all developing countries -- they nevertheless have been growing rapidly; before 1992 there were no such flows to sub-Saharan countries other than South Africa. But other experts feel that many investors will become more wary of emerging markets in general. In any case, some add, Africa's stock markets are likely to be influenced more by local conditions, especially political stability and economic policy performance, than by external capital swings.

More significant for Africa are inflows of foreign direct investment, which, according to IMF figures, reached $7.7 bn in 1997, up from $5.3 bn the year before and from a meagre annual average of $1.1 bn during 1984-89. By their nature, such investments are less volatile than those in equity markets, and therefore more immune to the kind of sudden panics that hit Asia or the Johannesburg Stock Exchange.

Asia's crisis, however, may be felt here as well. Since the early 1990s, several Asian countries have emerged as major investors in Africa, with companies from the Republic of Korea investing $214 mn in various African ventures between 1992 and 1995, and Malaysian firms putting in $126 mn from 1992 through 1996. Officials of the Korean enterprise Daewoo have assured that its planned investment of $500 mn in Morocco over the next five years will not be affected by the Asian crisis. But it is likely that other planned projects will be scaled back, postponed or scrapped.

Longer-term trends in commodity prices also may be a factor, notes Mr. Gelb. Since the bulk of foreign investment in Africa is concentrated in oil, mining and other extractive industries, how those commodities fare on the world market will have an important influence on investors' decision-making.

Enhancing competitiveness

So will overall competitiveness. "The nature of the problem in Africa is a little different from the one that has emerged in Asia," says Mr. Gelb. "In one sense, you could say that African countries have not been lucky enough to be in the position to have the kind of crisis that East Asia has had, because they've not been able to attract capital on the scale East Asia has been able to." While ensuring adequate regulatory mechanisms to guard against some of the negative effects of large capital flows, it is important for Africa to look hard at the factors which inhibit the competitiveness of its economies, especially at a time of increased trade competition. "If Africa cannot expand or maintain its share of world trade," argues Mr. Gelb, "I think it will be very difficult for it to develop."

Along similar lines, Ugandan President Yoweri Museveni told a conference of Southern African leaders held in Namibia in July, that Africa must develop competitive industries able to produce cheap and high-quality goods. Because of Africa's small national markets, he said, one way to do so would be to first develop stronger regional markets within Africa, to achieve larger scales of production. "You cannot compete globally," he said, "if you do not strengthen yourself first."

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