Identifier
Created
Classification
Origin
09LONDON1886
2009-08-13 16:13:00
UNCLASSIFIED
Embassy London
Cable title:  

VIEWS ON SUB-SAHARAN AFRICA FROM LONDON-BASED

Tags:  EAID ECON EFIN KE LT NI SF UG UK XA ZA 
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UNCLAS SECTION 01 OF 04 LONDON 001886 

SIPDIS

DEPARTMENT FOR AF/EPS

E.O. 12958: N/A
TAGS: EAID ECON EFIN KE LT NI SF UG UK XA ZA
SUBJECT: VIEWS ON SUB-SAHARAN AFRICA FROM LONDON-BASED
EXPERTS

LONDON 00001886 001.2 OF 004



UNCLAS SECTION 01 OF 04 LONDON 001886

SIPDIS

DEPARTMENT FOR AF/EPS

E.O. 12958: N/A
TAGS: EAID ECON EFIN KE LT NI SF UG UK XA ZA
SUBJECT: VIEWS ON SUB-SAHARAN AFRICA FROM LONDON-BASED
EXPERTS

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.


5. (SBU) Perez de Azpillaga, whose research concentrates on
South Africa, forecasts a protracted recovery, or "wide
U-shape," for the country which he sees as a bellwether for
the region. He expects there will be some improvement in the
second half of 2009, but performance will remain below
potential through at least 2010. He cautioned, however, that
it is possible that any correction may not hold and added
that Goldman has been expecting an improvement in South
Africa's economy since May, but the data continue to be
depressed. While some lag between the global economy and
South Africa is to be expected, he told Econoff that if the
data does not improve by September, Goldman analysts will be
worried because it will indicate that their analysis is
"missing something."

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.

Focus on South Africa
--------------


13. (SBU) Analysts at HSBC and Goldman Sachs have been
closely tracking economic developments in South Africa, the
region's largest economy. Contacts at both institutions told
Econoff that the explosion in house prices and available
credit in South Africa preceding the economic crisis left its
domestic banking system very vulnerable. Perez de Azpillaga
explained that while no South African banks have failed, they
have had significant write downs and Goldman Sachs currently
has a "sell" on them. He added that he does not believe that
there are problems with banks' capitalization and does not
expect there will have to be a bank bailout in the near
future; however, he cautioned that there is no good data on
the banks' non-performing loans (NPLs),so it is still
speculative.


14. (SBU) HSBC analysts were slightly more pessimistic about
South Africa's banking system, noting that they see another
"cloud forming on the horizon." According to Mball-Ekobena,
30-to-40 percent of South African banks' revenues come from
fees and commissions, with the average South African spending
about 10 percent of income on bank fees. With the downturn
in the housing market and increasing number of NPLs,
Mball-Ekobena sees a risk that popular anger over the banking
system's fee structure could fuel civil unrest if changes are
not made.


15. (SBU) Apart from the banking system, Goldman's Perez de
Azpillaga expressed concern that South Africa's recession and
rising unemployment would fuel support for populist policies,
such as greater protectionism, that would be detrimental to
its long-term economic growth. His dismissed the idea that
South Africa would follow the path of Zimbabwe, noting that
South Africa has stronger institutions and a greater
tradition of the right of law. However, analysts from both
HSBC and Goldman Sachs see problems in South Africa creating
systemic risk in the rest of the region.

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.






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