Selected WikiLeaks extracts detailing the problems sub-saharan Africa faces with the cautiousness of foreign investors due to the economic downturn and persistent instability:
LONDON 00001886 001.2 OF 004 1. (SBU) Summary. London-based bank and development analysts are seeing positive signs emerging in sub-Saharan Africa’s (SSA’s) economies, after months of negative news, but remain cautious in their near-term outlook for the region. While prospects for the global economy are improving and there is some renewed investor interest in SSA, private sector analysts note that the economic situation in the region remains volatile and could worsen, rather than improve, in the coming months. There is evidence that foreign direct investment (FDI) and remittances are now weakening, and analysts note that the region remains highly vulnerable to decreases in NGO assistance and foreign bank lending. Private sector analysts assess a deterioration in FDI and cross-border bank lending would have a disproportionately negative impact on long-term growth, and cite potential cuts in public funding for education and infrastructure programs as particularly harmful to SSA’s long-term economic prospects. End Summary.
Crisis in the Region Still Unfolding ————————————
2. (SBU) Econoff met with London-based bank analysts and think tank researchers during the period from mid-July through early August 2009 to discuss the impact of the economic crisis on SSA and their assessment of the region’s key vulnerabilities in the months ahead. Bank analysts at HSBC and Goldman Sachs have been monitoring the situation in SSA closely for their international investors, while researchers at the Overseas Development Institute (ODI), a leading British think tank, are tracking the impact of the crisis on African countries’ poverty and development.
3. (SBU) Experts agreed that the economic downturn began to noticeably affect SSA during the fourth quarter of 2008, dispelling hopes that Africa’s lack of exposure to the global subprime market would spare it from the financial crisis. HSBC sub-Saharan equity analysts Marcel Mball-Ekobena and Umulingua Karangwa told Econoff that while leaders in SSA “were in denial in 2008,” the banks knew there was a problem on the horizon. By the first quarter of 2009 data showed the recession had already affected trade and portfolio investment in the region. The IMF estimates SSA experienced portfolio outflows of nearly $20 billion in late 2008 and no growth in the volume of exports.
4. (SBU) While bank and development analysts have begun to see positive signs emerging, they remain extremely cautious in their near-term outlook and told Econoff that the situation is volatile and could worsen in the coming months. Javier Perez de Azpillaga, Director of Economic Research at Goldman Sachs, noted that while there has been an uptick in the global economy, it is unclear whether it will be sustained; moreover, improvements to the global economy have not yet been transmitted to SSA. Similarly HSBC analysts told Econoff that portfolio investor interest in SSA is picking up, but has not materialized into new investments.
Trade and Portfolio Investment Hit First —————————————-
6. (SBU) Analysts agreed that the first effects of the global downturn on SSA came through the trade and portfolio investment channels. The downturn in trade affected LONDON 00001886 002.2 OF 004 virtually all the countries in the region, but some countries, such as Nigeria and Zambia, were particularly vulnerable due to their disproportionate reliance on raw material exports and commodity prices. While Goldman Sachs’ Perez de Azpillaga noted ongoing problems with trade financing, he and HSBC analysts were fairly upbeat on the near-term prospects for recovery in these channels. They assess an uptick in global demand and commodity prices should have a positive effect on the region this year,
7. (SBU) Like trade, portfolio investment flows to the region also suffered a significant decline early on. HSBC analysts explained that foreign investors, who had put capital primarily into banking, telecommunications, cement, and brewing companies, withdrew large amounts of funding when the crisis hit. Both HSBC analysts and Isabella Massa, a research fellow at ODI, said that their research showed that Nigeria, where HSBC estimates banking makes up about 80 percent of the stock market, and Kenya were the most affected by foreign redemptions. According to HSBC analysts, IPOs in most SSA countries, “virtually stopped.”
8. (SBU) While banking contacts told Econoff that they are seeing renewed interest in SSA from investors, they cautioned that this has not yet translated into anything tangible. Perez de Azpillaga told Econoff that SSA markets continue to be affected by a “return to vanilla products,” whereby investors are willing to accept lower returns in exchange for lower risk. In South Africa, Perez de Azpillaga explained, there have been some positive private capital inflows in recent months, but not enough to offset the outflows. Massa told Econoff that ODI assesses that in the coming months those countries with a still high degree of foreign presence in the market, such as Kenya and Zambia, will be the most vulnerable to a further drop in portfolio investment.
FDI and Remittances Weakening —————————–
9. (SBU) London-based analysts are seeing the first signs of problems with FDI in some SSA countries. HSBC contacts told Econoff that FDI is slowing, and pointed to a recent IMF study that estimates FDI in SSA will drop by roughly 18 percent in 2009. ODI’s Massa told Econoff that Zambia has experienced a holding back and scaling down on investment projects, especially in the mining sector. In Nigeria, evidence indicates that most of the proposed new investments have been stopped and investors have adopted a “wait and see,” approach. According to Massa, ODI’s economic modeling completed this spring found that a 10 percent drop in FDI inflows would lead to a 0.5 percent decrease in SSA’s income per capita over the long-term.
10. (SBU) Remittance inflows, typically more resilient than other forms of private capital flows, are also declining, according to analysts. Massa told Econoff that ODI research found that Lesotho, Sierra Leone, and Kenya are being disproportionately affected due to their reliance on these funds. Backing up these findings, the World Bank in April forecast that worker remittances to SSA would fall by between 4.4 percent and 7.9 percent in 2009.
Growing Concern over Aid and Cross-Border Lending ——————————————— —-
11. (SBU) So far there has been little evidence of a pullout of official aid, but both bank and development analysts expressed concern about decreases in NGO assistance to the region. According to Massa, ODI research does not have hard data that NGO’s are cutting assistance, but they have anecdotal information that this is occurring. She added that while the global focus has been on official aid commitments, development experts with whom she has spoken are much more concerned about a drop in NGO support. HSBC analysts also pointed to decreased NGO aid as the key problem, but added that they believe even official aid may be at risk, as there is a big difference between committing funds and sending funds.
12. (SBU) Similarly, while there has been no evidence of a LONDON 00001886 003.2 OF 004 contraction in international bank lending to SSA, analysts see some countries in the region as vulnerable should foreign-owned banks withdraw capital from, or close subsidiaries to make up for domestic losses. British and French banks are the largest foreign players in the region, according to Massa, making up 27 percent and 17 percent of the foreign bank market, respectively. South African banks are the largest regional players, and Goldman’s Perez de Azpillaga told Econoff that these banks are reducing domestic credit availability by setting more demanding terms, such as higher collateral, and are less willing to lend regionally. He added, however, that this is more the result of risk aversion, than protectionism. According to Massa, Uganda and Kenya would be most affected by a contraction in cross-border lending, as they have the highest share of foreign owned banks. She added that the think tank’s modeling shows a 10 percent decrease in cross-border lending would affect long-term SSA growth by about 0.7 percent annually.
Potential Long-Term Effects —————————
16. (SBU) ODI’s modeling shows that of all private capital flows, FDI and cross-border lending have the greatest impact on the region’s long-term growth. Should these flows experience a significant slowdown in the coming months, the impact would be far more detrimental to SSA than the downturn in trade and portfolio investment has been, according to Massa. Massa also expressed concern that the economic crisis will result in African governments’ inability to provide adequate social safety nets and will push more Africans into poverty, reversing gains made in education and health. In particular, she sees lack of investment in education as creating long-term problems for regional growth.
17. (SBU) HSBC analysts, too, noted that a reduced ability of African governments to fund infrastructure programs will have long-term implications. They told Econoff that most SSA governments are now scaling back infrastructure projects, and “spending is down to a trickle.” Should the situation LONDON 00001886 004.2 OF 004 continue, they are concerned that low investment will impact electricity and roads, creating a negative cycle whereby poor infrastructure reduces the attractiveness of the area to foreign investors. On the positive side, they noted that there are very few real “emerging markets” left in the world, so investors will eventually return to SSA. Africa’s comparative advantage is that its one of the few areas in the world that still has a largely untapped market and significant natural resources. Visit London’s Classified Website