disclaimer: the views expressed herein are those of the author(s) and should not be attributed to...
TRANSCRIPT
Disclaimer: The views expressed herein are those of the author(s) and should not be attributed to the IMF, its Executive Board, or its management.
Sub-Saharan African Financial Systems and The Global Financial Crisis
Impact, Risks, and Policy Priorities
Regional Economic OutlookApril 24, 2009
Paulo Drummond, Inutu Lukonga, and Jerome Vacherwith contributions from Yanliang Miao, Gustavo Ramirez, Subramanian Sriram,
and Jahanara Zaman
Focus on Financial Systems
How has the global crisis affected financial systems and markets in sub-Saharan Africa?
What risks does the global crisis pose for financial systems in the region?
What can be done to minimize dislocations from the global crisis and to continue developing the region’s financial systems?
Key MessagesFinancial systems in SSA have been quite resilient, but no country is immune.
Spillovers to the real economy will transmit stress to financial systems.
Priorities will need to be reordered to minimize contagion and to strengthen crisis resolution tools.
Governments should continue to push for longer-term reform to reinforce and diversify their financial systems.
Relative Resilience
Limited (though increasing) integration with global financial markets
Minimal exposure to complex financial instruments
Relatively high bank liquidity
Limited reliance on foreign funding
Low leverage in financial institutions
No Country Is Immune, but the Impact Varies
Sub-Saharan Africa: Financial Indicators(Simple averages, 2004-08)
Sub-Saharan Africa
South Africa
Frontier Markets
FinanciallyDeveloping
Bank assets/GDP
Financialdevelopment
M2/GDP
Credit/GDP
Source: IMF, African Department database.
Two Main Channels of Transmission
Lower inflows from abroad: with effects on local debt, equity, and currency markets;
Spillovers into the real economy and weakened banking systems (second round effects): with rising credit risks, pressures on household income, balance sheet effects.
Impact on Financial Markets
Sizable effect on portfolio flows
Pressures in currency markets
Less access to global markets
Less favorable conditions for trade finance
Modest contagion to local subsidiaries of international banks
Tighter credit conditions
Sharp Drop in Stock Markets
30
40
50
60
70
80
90
100
110
120
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09
South Africa
Nigeria
Botswana
Kenya
Selected Africa : Stock Market Index (Jan.1, 2008 =100)
Pressures on Currency MarketsSelected Africa : Exchange Rate
(Jan.1, 2008 =100; National currency per U.S.dollars)
80
90
100
110
120
130
140
150
160
170
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09
South AfricaMauritiusUgandaGhanaKenyaNigeriaZambia
Less Access to Global Markets
2004 2005 2006 2007 2008
Total 1,697 2,681 4,899 12,319 1,533Gabon 0 0 0 1,000 0Ghana 0 0 0 950 0Nigeria 0 0 0 525 0Seychelles 0 0 200 30 0South Africa 1,697 2,681 4,699 9,814 1,533
Source: IMF, 2009, Global Financial Stability Review (April).
Sub-Saharan Africa: Issuance of International Bonds, 2004-08
(millions of U.S. dollars )
Increasing SpreadsEmerging Markets CDS and EMBI Spreads
(Basis points)
Source: Bloomberg.
0
100
200
300
400
500
600
700
800
900
Jan
-08
Fe
b-0
8
Ap
r-0
8
Ma
y-08
Jul-
08
Au
g-0
8
Oct
-08
No
v-0
8
Jan
-09
Fe
b-0
9
South Africa
Brazil
Mexico
South Korea
Turkey
Sovereign CDS Spreads
100
200
300
400
500
600
700
800
900
Jan
-08
Fe
b-0
8
Ap
r-0
8
Ma
y-08
Jul-
08
Au
g-0
8
Oct
-08
No
v-0
8
Jan
-09
Fe
b-0
9
South Africa
Global
Brazil
Mexico
Turkey
EMBI Bond Spreads
Less Favorable Conditions for Financing Trade
Costs (interest costs, confirmation charges) have increased.
Confirmation is not guaranteed.
It generally takes longer to close deals.
In some countries, letters of credit must now be fully cash collateralized (e.g., Nigeria).
But trade has not been disrupted.
Modest Contagion to Local Subsidiaries of Foreign Banks
More cautious lending policies to satisfy regulations and scarce capital in home country.
Little or no dependence on funding from parents,
Stable deposit base
No unusual capital transfers to parents
Tighter Credit Conditions
Lending criteria are stricter
Banks focus on high-quality core clients.
Lending margins have widened
Thin markets: crowding out concerns
Major Risks and Vulnerabilities
Credit risks
Contagion by deleveraging and rollover risks
Credit retrenchment and lower funding
Risk of flow reversals
Credit RiskSub-Saharan Africa: Nonperforming Loans, 2004 and 2007
(Percent of gross loans)
Emerging and Frontier Market Countries
0
5
10
15
20
25
30
35
2004
2007
Rollover RisksSub-Saharan Africa: Net Claims of BIS Reporting Banks,
End-September 2008(Percent of GDP)
Sources: Bank for International Settlements and International Monetary Fund. Note: "Net claims" is defined as BIS reporting banks' claims on minus liabilities to individual countries.
-40
-30
-20
-10
0
10
Botsw
ana
Cape
Verde
Ghana
Kenya
Moz
ambiq
ue
Namibi
a
Nigeria
Seych
elles
South
Afri
ca
Tanza
nia
Ugand
a
Zambia
Emerging and Frontier Market Countries
-366-74
-40
-30
-20
-10
0
10
Angola
Benin
Burkin
a Fas
o
Burun
di
Camer
oon
Centra
l Afri
can
Repub
licCha
d
Comor
os
Congo
, Dem
. Rep
. of
Congo
, Rep
. of
Côte
d'Ivo
ire
Equat
orial
Guin
ea
Eritre
a
Ethiop
ia
Gabon
Gambia
, The
Guinea
Guinea
-Biss
au
Leso
tho
Liber
ia
Mad
agas
car
Mala
wiM
ali
Niger
Rwanda
São T
omé
and
Príncip
e
Seneg
al
Sierra
Leo
ne
Swazila
ndTog
o
381
Risk of Contagion by Deleveraging
Three main risksParent banks might:
be less willing to provide liquidity to their subsidiaries.try to repatriate capital.be unwilling or unable to inject additional needed capital into subsidiaries.
Three mitigating factorsSubsidiaries have been able to raise deposits locally. African bank operations represent a minimal share of parent banks’ assets. There is an increasing amount of capital in the system.
Capital Asset RatiosSub-Saharan Africa: Regulatory Capital, 2004 and 2007
(Percent of risk-weighted assets )
Emerging and Frontier Market Countries
0
5
10
15
20
25
2004
2007
Risk of Credit Retrenchment
-15
-10
-5
0
5
10
15
-15 -10 -5 0 5 10 15
Deposits
Cre
dit
to t
he
priv
ate
sec
tor
SSA Bank Credit to the Private Sector and Deposits(Change from 2004 to 2007, percentage points of GDP)
Sources: IMF, International Financial Statistics, and World Economic Outlook.
Foreign Assets ProvideSome Cushion
0
20
40
60
80
100
120
Jan
-05
Ma
y-05
Se
p-0
5
Jan
-06
Ma
y-06
Se
p-0
6
Jan
-07
Ma
y-07
Se
p-0
7
Jan
-08
Ma
y-08
Se
p-0
8
Foreign assets
Foreign liabilities
Net foreign assets
Total Foreign Assets and Foreign Liabilities of Deposit Money Banks in African Region, 2005-2008
(Billions of US$)
Policy priority, short-term:Minimize contagionPreventive
Intensify surveillance to detect risks. Ensure adequate liquidity.Encourage public confidence in markets and institutions.
Crisis management Establish effective bank resolution mechanisms.Set up procedures for coordinating with other supervisory and monetary authorities.
Policy priority, medium-term: Reinforce financial systems
Strengthen supervision of financial systems and address regulatory gaps.
Address weaknesses in the legal and financial infrastructure
Develop capital markets.