12 Dec Africa and the global economic crisis
State-owned Industrial Development Corporation (“IDC”) today released a report through its Department of Research and Information titled “Africa and the Global Economic Crisis: Opportunities and Challenges” highlighting:
- African GDP growth forecast at 3.4% for 2009
- FDI inflows to Africa increased 16.8% to $62bn in 2008
- Exports fell by 2% in 2008
Africa’s gross domestic product growth is expected to hold up well even as global growth deteriorates, as the structural reforms that many African countries have been implementing over the past few years continue to pay off. This is according to a research paper issued by the Industrial Development Corporation’s Department of Research and Information.
African GDP is forecast to grow at 3.4%in 2009 against GDP growth of 5.2% in 2008 and 6.2% in 2007. This compares favourably with global and emerging market GDP growth forecasts of 0.5% and 3.3% in 2009 respectively.
Domestic reforms have fostered Africa’s robust growth since early in the new millennium. Widespread economic reforms and notable improvements in overall governance have borne fruit and attracted foreign investment, while several long-standing conflicts have come to an end enabling reconstruction in those countries to begin. This has contributed to vastly improved macro-economic management, rising incomes and spending, increased investment in physical and social infrastructure and foreign investment activity in productive sectors. Foreign direct investments flows to Africa in 2008 are estimated to be $61.9 billion, representing a 16.8% increase 2007; well in excess of a 3.6% growth rate of FDI flows to developed economies. Growth has also been substantially supported by the remarkable performances of commodity-rich countries, particularly (but not confined to) the oil producers.
Investment activity is indeed moderating visibly in light of the ongoing economic turmoil, but is expected to recover in the medium-term. Foreign direct investment (FDI) flows into Africa grew strongly in recent years as low interest rates globally encouraged financiers to support the investment plans of those seeking access to natural resources during the commodity “super-cycle. Foreign investors were also undoubtedly attracted by domestic economic reforms and political stability in many African countries.
Unfortunately, with the global financial turmoil, the pattern of financial flows associated with investment, lending and trading activity has been dramatically altered for the time being. Several African stock markets were caught up in the globalised investor retreat, with positions being liquidated strongly in emerging markets. It has been estimated that portfolio flows to Africa have declined sharply as global liquidity tightened, to a mere $5.9 billion in the course of 2008 compared to $15.7 billion in 2007.
Head of Research and Information at IDC, Jorge Maia said: “The impact of a fast deteriorating global economic environment on the productive sectors of Africa’s economies is being transmitted through weaker external demand and lower commodity prices, with serious implications for external trade receipts and investment inflows.” In this regard, the World Bank estimates that Africa’s exports fell by 2% in 2008, with significant drops in certain countries (e.g. a 30% decline in Angola). Furthermore, Africa’s reliance on advanced economies for export has had adverse movements on their trade balances. Largely reflecting such unfavourable terms of trade movements and net portfolio ouflows, the majority of African currencies depreciated by 10% to 28% against the USD in 2008
Said Maia, “Normally, major crises bring to the fore not only comparative weaknesses but also comparative strengths. Thus, economies that successfully weather the downturns are those that exploit their comparative strengths instead of focusing on their weaknesses. Africa richly endowed with commodities that are likely to derive long-run benefits given their finite nature and the anticipated resumption in demand as the world’s population grows and economic performances recover. Therefore, in the long term, global growth will resume and support a recovery of commodity prices and renewed investor interest in Africa for its resource wealth.”
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