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Sub-Saharan African Financial Systems and The Global Financial Crisis Impact, Risks, and Policy Priorities Regional Economic Outlook April 24, 2009 Paulo Drummond, Inutu Lukonga, and Jerome Vacher with contributions from Yanliang Miao, Gustavo Ramirez, Subramanian Sriram, and Jahanara Zaman 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. 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 Messages Financial 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) Bank assets/GDP Credit/ GDP Financial development Sub-Saharan Africa South Africa M2/GDP Frontier Markets Financially Developing 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 120 Selected Africa : Stock Market Index (Jan.1, 2008 =100) 110 100 90 80 70 South Africa 60 50 Nigeria Botswana Kenya 40 30 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 Pressures on Currency Markets Selected Africa : Exchange Rate (Jan.1, 2008 =100; National currency per U.S.dollars) 170 160 South Africa Mauritius Uganda Ghana Kenya Nigeria Zambia 150 140 130 120 110 100 90 80 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 Less Access to Global Markets Sub-Saharan Africa: Issuance of International Bonds, 2004-08 (millions of U.S. dollars ) 2004 Total Gabon Ghana Nigeria Seychelles South Africa 1,697 0 0 0 0 1,697 2005 2,681 0 0 0 0 2,681 2006 4,899 0 0 0 200 4,699 Source: IMF, 2009, Global Financial Stability Review (April). 2007 2008 12,319 1,000 950 525 30 9,814 1,533 0 0 0 0 1,533 Increasing Spreads Emerging Markets CDS and EMBI Spreads (Basis points) 900 900 Sovereign CDS Spreads EMBI Bond Spreads 800 800 South Africa 700 Brazil 600 South Africa 700 Global Mexico 600 Brazil South Korea 500 400 Mexico 500 Turkey Turkey 400 300 Source: Bloomberg. Feb-09 Jan-09 Nov-08 Oct-08 Aug-08 Jul-08 May-08 Apr-08 Feb-08 Feb-09 Jan-09 Nov-08 Oct-08 Aug-08 Jul-08 May-08 100 Apr-08 0 Feb-08 200 Jan-08 100 Jan-08 300 200 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 Risk Sub-Saharan Africa: Nonperforming Loans, 2004 and 2007 (Percent of gross loans) 35 Emerging and Frontier Market Countries 30 2004 2007 25 20 15 10 5 So ut h Af ri ca s Se yc he lle er ia N ig ia N am ib au rit iu s M ny a Ke G ha na sw an a Bo t Av er ag e 0 10 -30 -366 -40 An Bu C g en rk B ola in e tra a ni lA F n fri C Bu as ca am ru o n e nd C R ro i on ep o go u n , D C C blic C em om ha on . o d Eq Cgo, Re ros ua ô R p. o to te ep f ria d'I . o l G vo f ui ire Er nea E itr G thio ea am G pi bi ab a G a, on ui ne G Th a- uin e B e Le issaa so u M ad Lib tho ag er a ia Sã M sca al r o aw To m M i é an R Nigali d wa er Pr n Si S ínc da er en ip ra e e Sw L e g a az on l ila e Tond go sw ap ana e Ve rd e G ha na M Ken oz am ya bi qu e N am ib ia N ig Se eri yc a So hell es ut h Af r Ta ica nz an ia U ga nd a Za m bi a C Bo t Rollover Risks Sub-Saharan Africa: Net Claims of BIS Reporting Banks, End-September 2008 (Percent of GDP) Emerging and Frontier Market Countries 10 381 0 0 -10 -10 -20 -20 -30 -74 -40 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. Risk of Contagion by Deleveraging Three main risks Parent 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 factors Subsidiaries 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 Ratios Sub-Saharan Africa: Regulatory Capital, 2004 and 2007 (Percent of risk-weighted assets ) 25 Emerging and Frontier Market Countries 2004 2007 20 15 10 5 a m bi Za nz an ia Ta Af ri ca s el le Se yc h N ig er ia ia ib qu e am N So ut h M oz am bi au rit iu s M Ke ny a ha na G an a sw Bo t Av er a ge 0 Risk of Credit Retrenchment SSA Bank Credit to the Private Sector and Deposits (Change from 2004 to 2007, percentage points of GDP) Credit to the private sector 15 -15 10 5 0 -10 -5 0 5 10 15 -5 -10 -15 Deposits Sources: IMF, International Financial Statistics, and World Economic Outlook. Foreign Assets Provide Some Cushion Total Foreign Assets and Foreign Liabilities of Deposit Money Banks in African Region, 2005-2008 (Billions of US$) 120 100 Foreign assets Foreign liabilities 80 60 Net foreign assets 40 Sep-08 May-08 Jan-08 Sep-07 May-07 Jan-07 Sep-06 May-06 Jan-06 Sep-05 May-05 0 Jan-05 20 Policy priority, short-term: Minimize contagion Preventive 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.