African Economies Face Down European Storms

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As the eurozone crisis rumbles on, African economies are taking a beating through reduced trade and aid. But overall, growth and investment trends are holding steady, and new opportunities opening up

Paralysis in the eurozone is a global problem. As the European Central Bank repeatedly tries to recapitalise the banking system – notably in Italy, Spain, Greece and Ireland – a wider array of countries have been taking note. US president Barack Obama said the crisis was “scaring the world”. A recent HSBC report sees the BRICS entering a worrisome slowdown. G20 members, notably Japan, even sent money to the IMF to protect ‘bystanders’ from the fallout.

Africa may be calling on those funds. Given the isolation of the continent’s banking sector, there was little direct impact from the first-wave crisis at the fall of Lehman Brothers, although intangible effects – in the form of nervy market sentiment – did deter some investors. Such inflows had become lifelines. Liberia and the Democratic Republic of Congo showed the highest exposure to foreign direct investment shocks in 2010, with an FDI inflows to GDP ratio higher than 20 percent, followed by Niger at 17 percent.

The eurozone crisis will affect African countries as a knock-on effect of fiscal consolidation in Europe, which translates into declining demand for African exports of goods and services as well as declining remittances, FDI and aid flows; through financial contagion in the form of spillovers through financial intermediaries and stock markets; and through a drop in the value of currencies pegged to the euro.

“Mozambique, Kenya, Niger, Cape Verde and Cameroon are among the most vulnerable African countries to the eurozone crisis,” says Isabella Massa, an economist at the Overseas Development Institute. “This is due to the fact that these countries are highly dependent on eurozone trade flows. Cape Verde, for example, relies on the EU for over 90 percent of its exports.” Mozambique and Cameroon are highly vulnerable also because of their strong financial linkages with Europe, she adds. European banks represent over half of total bank assets in these countries. “Mozambique is also highly dependent on aid flows from Europe, especially from Portugal. Cameroon and Niger are also likely to feel the effects of the eurozone crisis through a depreciation of the euro to which their currencies are pegged”.

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