The Global Financial Crisis: Impacts on Growth and Development African Countries Presentation to INWENT By Mr. Kasekende Chief Economist, African Development Bank Tunis, 6 December 2008

Page  2 Impact of the Financial Crisis on Africa Main Message  Africa is feeling the impacts of the crisis  Short run impact-less development finance  Medium term impact - global economic slow down will reduce commodity prices and demand for African exports  Countries may need to boost domestic demand to maintain economies on an upward growth trajectory

Page  3 Economic Performance up to 2007: robust and strong Since 2002 Africa growing in tandem with global economic growth Export growth (high commodity prices) and rising investment main drivers

Page  4 Growing Integration of Africa into the global economy Source: IIF 2008 Decoupling more limited than previously thought: private capital flows rising The share of trade in GDP increasing Regional debt markets are expanding More investors interested in African equities

Page  5 Impact of the Crisis on banking: though small, African capital markets are growing  Although African banks do not have complex derivative instruments nor rely excessively on foreign borrowing  High levels of foreign ownership indicates potential contagion channel  Small market size implies that even limited withdrawals could be significant  Lending by foreign banks to African private banks is declining (e.g. in some countries have banks seen lines of credit shrink)

Page  6 Impact of the Crisis: Stock Markets Affected

Page  7 Impact of the Crisis: Currencies affected

Page  8 Impact on Commodity Prices

Page  9 Impact on Trade: Global Trade volumes falling The Baltic dry Index sharply fell over the last six month, reaching an all- time low in December, from a peak in mid-May African exports set to grow only by 4.8% in 2009 compared with 26.9% in 2008 Also, trade financing being affected Source: IIF Capital Markets Monitor, Dec. 2008

Page  10 Growth forecast being revised downwards November Assumptions: Lower foreign demand from the rest of the world (drop by 0.41% in 2008 and 0.58% in 2009) Higher inflation in the rest of the world (boost by 1.09% in 2008 and 0.27% in 2009) Oil prices are assumed higher in 2008, by 10$US/bbl; and lower in 2009, by 9$US/bbl. Deterioration of African Growth Inflationary Pressure

Page  11 Some Country Examples: Egypt  The stock price index CASE 30 more than halved since the global financial crisis unfolded: it fell by 57% from 31 July-2 Dec  The Crisis is now affecting growth performance and undermining growth outlook: growth projections revised growth from 7.2% to around 6% in 2008 and 6% in  Job creation slowed down: jobs created in 3Q 2008 compared to 200,000same period in 2007  The Suez Canal revenue was US$467.5 mil in October, down from $469.6 million in September. The lowest monthly revenue since April 2008.

Page  12 Some Country Examples: Egypt  Tourism booking indicators for winter season are down by 40 percent compared to the same period of last year.  Trade affected: Government reported a US$2.2bn loss in exports and a fall in imports by $4.3 billion, which is synonymous a sharp decline in the trade balance deficit.  But inflation pressure receding and banking sector been insulated thanks to the very low loan-to-deposit ratio and a small total mortgage exposure  Government announced a fiscal stimulus package, including new investments worth about USD 1.2 billion.

Page  13 Some Country Examples: South Africa  According to the SARB, South African financial sector remains broadly robust and stable. The banking system is not dependent on foreign lines of credit The Central Bank has not yet has to make any special liquidity provision The domestic interbank market remains fully functional  But the South Africa’s JSE All Share Index has fallen by about 28% from end of July to 2 December 2008  Similarly, the Rand has depreciated against US$ by 28% from 31 July 2008 to 2 December  High structural current account deficit compared with most other emerging economies (-7.3% of GDP in 2007; -7.7% in 2008) financed mainly by potentially volatile portfolio inflows

Page  14 Some Country Examples: South Africa cont’d  3Q 3008 GDP growth was 2.9%, down from 2Q GDP growth of 4.4%. Growth for 2008 forecast at 3.8%, against 5.1% in  Risk of inflation  The mining sector already adversely affected by contraction of metal demand due to economic downturn in developed and emerging market.  Manufacturing, which makes up 16% of the economy, contracted for a sixth straight month in October.  Due to credit squeeze, new vehicle sales in October fell to their worst level of 2008 and 31 percent down on the same month in 2007  Significant potential job losses

Page  15 Some Country Examples: Kenya  The stock market has experienced some volatility since June 2008  The Kenyan shilling depreciated by about 17% between 31 July to 2 December  GDP growth set to soften considerably from 7% in 2007 to 4% in 2008  Inflationary pressures remain significant: month on month overall inflation rate rose from 28.4% in October 2008 to 29.4% in November

Page  16 Some Country Examples: Kenya  The Crisis having a negative effect on two of Kenya's key foreign-exchange earners: the tourism and horticulture sectors  Kenya has experienced growth on the domestic bond market, whose turnover has increased from Kshs 34.1 billion in 2004 to 84.9 billion in  However, the global financial crisis makes it difficult for the government to implement its plan to float a US$500 million infrastructure Eurobond.

Page  17 Some Country Examples: Nigeria  The Nigeria Stock Exchange (NSE) has suffered a major setback, with the all-share index declining 45.3% from March 5, 2008  Decline in the price of oil is creating challenges for public finance  Government expects oil production to drop from 2.45 million barrels a day in 2008 to 2.29 million barrels in 2009  Crude accounts for 80% of government revenue and 90% of exports.  The central bank is restricting the sale of USD to preserve foreign- currency reserves amid dwindling export earnings  International hedge funds managers have already taken as much as USD 10 billion out of the country  Nigerian banks are seeing their credit lines shrink rapidly (e.g., letters of credit)  Fund-raising for new initiatives such as the Nigeria Infrastructure Fund are facing difficulties

Page  18 Policy Responses  Domestic sources to boost economic growth –Sustain macroeconomic reforms to make our economies more resilient –Strengthen domestic resource mobilisation to support domestic investment as external support weakens –Begin thinking now about appropriate macroeconomic responses  Deepen integration to boost domestic market –(invest in infrastructure) economic and financial reforms