Fears of financial meltdown in Europe returned with a
vengeance on Tuesday triggering a sharp surge in global risk
aversion while raising the spectre of a global economic
downturn which would undermine Africas tentative
Global market sentiment took a nosedive as the sudden threat
of armed conflict in the Korean peninsula added to fresh fears
over eurozone sovereign debt burdens.
The market moves threatened a wave of risk aversion similar
to the one in late 2008 that sent emerging markets
Experts in Abidjan warned that Africa remained vulnerable to
European contagion through financial and economic channels,
while others cautioned that the region is also dangerously
exposed to an overheating Chinese economy.
I am worried about the prospects for the global
economy as a whole, AfDB president Donald Kaberuka told
Emerging Markets. You dont have to paint a
black swan scenario.
From where I sit now it [Africas recovery] looks
sustainable, but perhaps this could be a contradiction in
He warned that heightened volatility in capital flows to
emerging markets cast a shadow over Africas investment
drive. There is a high risk of volatility. And the
volatile part for many of the countries would be investment
flows, he said.
Cyrus Ardalan, vice-chairman of Barclays Capital,
warned in an interview with Emerging Markets that the
turmoil would be protracted: Market fears have shifted
from that of eurozone liquidity to fears over the solvency of
some European governments. This will not abate anytime
Investors yesterday pulled cash from emerging markets while
currencies tumbled and stocks plunged. Kenyas shilling
slumped to its weakest level in more than 13 months versus the
dollar and South Africas rand also weakened against the
AfDB chief economist Mthuli Ncube said: The eurozone
is what I am most worried about.
He said that private capital flows will be hit, and
this will affect onlending to Africa. Western banks cannot be
seen to be taking risks so they will reduce their exposures to
Africa. The effect of rising bond yields would
increase cost of capital for African
[African] credit lines to Western banking sector will
be hit significantly. African banks use offshore credit lines
in US dollars to match their assets and liabilities
to finance trade and project finances.
He also noted that agricultural products will be hit
massively in Africa if there is big slowdown in Europe. 30% of
African exports are to Europe, and francophone Africa exports
will be hit the most.
Kaberuka meanwhile expressed concern that
Asias largest economies could be overheating, though he
added: I think they [the Chinese and Indian authorities]
are controlling it.
Africas economic fate depends heavily on emerging
market growth, principally in Asia, while official aid flows
from Western countries are expected to dwindle as rich
countries tighten their belts.
Henri-Bernard Solignac Lecomte, the OECD Development
Centres Africa head said strong trade links of African
countries with Asia are a double-edged sword. China
basically imports unprocessed commodities. Efforts towards
diversification that have been led in the late 1990s have
floundered. These are new dependency factors, he
Despite resilient trade between Africa and Asia throughout
the global crisis, African nations have become increasingly
exposed to the volatility of commodity prices, said Solignac
This is no good. Clearly some measures will have to be
taken to take the best advantage of sub regional markets, such
as in East Africa, and move towards export diversification and
supply urban domestic markets.
Konrad Reuss, Standard & Poors managing director
for sub-Saharan Africa, said: The global recovery is
still fragile. We have seen signs of risk aversion. If that
trend continues and western countries move away from emerging
markets in favor of German bonds for example, then its
not without risk for Africa.
But he added: On the other hand, the growth drivers in
Africa remain very much intact. As long as China will keep
growing that will serve as a bit of a cushion. Chinas
strength could offset Europes weakness.
Africas GDP growth is expected to reach an average of
4.5% this year and 5.2% in 2011, after falling to 2.9% last
year, according to a joint AfDB- OECD report released