Transcript PPT Presentation

Private Capital Flows to SubSaharan Africa:
Financial Globalization’s Final
Frontier?
John Wakeman-Linn
Based on Chapter 3 of the Spring 2008 Regional
Economic Outlook for Sub-Saharan Africa
Prepared by a team led by John Wakeman-Linn and
composed of Corinne Deléchat, Arto Kovanen, Inutu
Lukonga, Gustavo Ramirez, Judit Vadasz and Smita
Wagh
African Department
International Monetary Fund
Outline of the Presentation
Size and composition of private capital flows to
SSA:
The facts: portfolio flows to some SSA countries are rising
Determinants of private capital flows across countries
Challenges and opportunities from rising private
capital flows
Economic impact of capital flows
Policy challenges
Evidence from case studies
Policy implications and recommendations:
How to manage capital inflows to reap the benefits and avoid
risks and vulnerabilities: Is Africa different?
Private capital flows to SSA have
increased almost five-fold since 2000
For the first time in 2006 they overtook
official aid flows.
Private Capital Inflows
(Billions of U.S. dollars)
60
Loans
Portfolio
FDI
Total
50
40
30
20
10
0
-10
2000
2001
2002
2003
2004
2005
2006
2007
South Africa and Nigeria were the main
recipients of private inflows
Portfolio Inflows to Sub-Saharan Africa
(Percent of total; total inflows: US$58.6 billion)
Distribution of FDI Inflows
(In percent of total inflows)
5.2
34.3
3.8
Angola
Other SubSaharan Africa
Chad
Equatorial 9.1
Guinea
South
Africa
3.3
South
Africa
87.6
Nigeria
29.4
18.2
Uganda
5.8
3.2
Other
Sub-Saharan
Africa
Kenya
0.0
Tanzania
Burkina Faso
Cameroon
Senegal
Uganda
Botswana
Côte d'Ivoire
Nigeria
Mauritius
Niger
Zimbabwe
Zambia
2.5
Seychelles
Togo
Gabon
Kenya
Ghana
South Africa
But portfolio flows to a small group of
other “frontier markets” are also rising
Total Portfolio Inflows
Percent of GDP
2.0
1.5
1.0
0.5
Is Africa reaching emerging market
status?
Abundant global liquidity was in part responsible
for the surge of capital flows to SSA.
But investors also attracted to Africa because of:
improvement in macroeconomic performance
Enhanced democracy and political stability
High expected returns due to appreciating
currencies and positive real interest rate differential
with other regions
Perception that Africa’s performance is de-coupled
from that of other emerging markets
Africa today compares favorably with
the ASEAN economies in the 1980s
Selected Economic Indicators: ASEAN 1980 and Africa 2007
ASEAN
1980
Selected African
Countries
20071
Sub-Saharan
Africa
2007
GDP (growth rate in percent)
7.3
6.4
6.6
Inflation (average in percent)
17.0
7.1
7.9
Financial depth (M2/GDP in percent)
27.2
27.9
52.4
Size of government (expenditure, percent of
GDP)
19.4
22.8
25.1
International reserves (months of imports)
3.6
10.0
5.8
Debt (percent of GDP)
3.4
9.9
23.2
Foreign direct investment ($ billion) 2
2.6
13.0
31.8
Portfolio flows ($ billion) 2
0.2
0.9
18.8
Sources: IMF, International Financial Statistics, African Department database.
1 Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda, and Zambia.
2For sub-Saharan Africa, 2007 data are IMF staff estimates.
Inflows provide tremendous
opportunities, but volatility is a risk
Private capital flows
can be good for
growth – under
certain conditions
Table 3.1. Private Capital Flows'
Volatility, 2000–07
(Capital flows are in percent of GDP)
Mean
But they are volatile
and can suddenly
reverse
Total inflows
FDI
Portfolio
Private debt
4.9
12.7
0.2
0.2
Standard
Deviation
8.7
7.0
0.9
2.8
Source: IMF African Department database.
Volatility
1.8
0.6
3.8
13.0
Reversals of capital inflows have
been modest and temporary:
South Africa: financial markets fell sharply
during the Summer 2007, due to a repricing of
risk and not withdrawal by foreign investors
Zambia: capital flows slowed down in the runup to the December 2006 presidential election
but increased again in 2007.
Kenya: slowdown but no evidence of reversal
of capital flows around the political crisis; the
exchange rate has fully recovered its losses.
The countries that receive the most inflows
are also those better able to reap their
growth benefits
Characteristics that drive capital flows are
also positively associated with improved
productivity and growth, and lower volatility:
macroeconomic performance (all types of flows)
financial market development (porftolio flows)
quality of the business environment (FDI)
capital controls: not significant but may play some
role in maturity composition
Empirical Estimation of the Domestic
Determinants of Private Capital Flows to SSA
Domestic Determinants of Private Capital Inflows to Sub-Saharan African Countries, 2000–06
Variable
Output growth 2
Fiscal balance, excl. grants 2
Securities markets 3
Capital account openness
Business environment
S. Africa and Nigeria dummy
Oil producer dummy
Constant
Adjusted R -squared
Coeff.
Prob.
(1)
0.21 0.01
0.09 0.01
4.04
0.28
0.00
Total Private Capital Inflows 1
Coeff. Prob.
Coeff. Prob.
(2)
(3)
0.23 0.00
0.22
0.00
0.07 0.01
0.05
0.10
0.77 0.00
0.71
0.00
-0.17 0.34
-0.17
0.38
-0.01
0.51
2.42
0.00
0.55
0.85
3.04
0.55
0.27
0.03
Coeff.
Prob.
(4)
0.23 0.00
0.06 0.01
0.66 0.00
-0.12 0.54
-0.00 0.98
2.28 0.05
2.51
0.58
0.07
FDI Inflows 1
Coeff. Prob.
(5)
0.26
0.02
-0.07
-0.03
0.84
0.01
2.58
6.22
0.02
0.00
0.30
Sources: IMF, African Department database; IMF staff estimates.
1
Total private capital inflows comprise FDI, portfolio, and debt inflows. Both explanatory variables have been averaged over 2000–06
and are measured in logarithmic units of their U.S. dollar values. Coefficient estimates (coeff.) and significance levels in percent (prob.)
reported for various specifications.
2
3
2000–06 annual averages. Fiscal balance measured as a percent of GDP.
The index measures the development of countries’ treasury bill, treasury bond, corporate bond, and equity markets. For each market,
the index receives a value of 1 if the market is well developed (otherwise zero). We sum the index values across the four markets for
each country.
Key policy challenges posed by sudden
surges of portfolio flows:
Large inflows complicate policy:
Create real appreciation pressure and
competitiveness concerns
In flexible exchange rate regimes, inflows
cause nominal appreciation or inflation
In fixed exchange rate regimes, inflows
cause increases in monetary aggregates
and thus inflation and real appreciation.
Policy Response Complicated by
uncertainty of the nature of inflows
Uncertainty about whether inflows are
permanent or temporary, and limited
data complicates policy response
If inflows are clearly temporary, sterilized
intervention to prevent inflation and
appreciation is appropriate.
But for long-term flows, such a response
is self-defeating
Evidence from country case studies:
Uganda, Tanzania and Zambia
Experienced large increases in foreign purchases of
domestic securities since 2005-2006
All resorted to sterilized intervention first:
Allowed accumulation of reserves
Led to higher interest rates and attracted more inflows.
Unsterilized intervention was tried next:
Led to money growth in excess of targets, creating inflation.
Evidence from country case studies:
Uganda, Tanzania and Zambia continued
Fiscal restraint can help contain appreciation
but difficult to implement due to commitments
to poverty-reducing expenditures
In Zambia under-execution of the budget helped
Eventually more flexibility in monetary and
exchange rate objectives had to be allowed in
all countries, meaning appreciation, inflation
Ghana: capital controls shape the
composition of capital flows?
Careful sequencing of economic reforms and
capital account liberalization:
Successful macroeconomic stabilization and
reduction of external debt (HIPC/MDRI)
Financial sector reforms
Partial capital account opening (2006)
FDI and portfolio inflows reached about 9
percent of GDP in 2007
But low reserves and a weakening fiscal
performance create vulnerabilities and place a
premium on maintaining macroeconomic
stability and credibility
Implications of permanently higher private
capital flows to SSA: future policy agenda
Macroeconomic management
Adapt monetary and exchange rate policy
response to the nature of capital flows and
authorities’ objectives
Sterilized intervention can help, but only in the
short-term
Persistent inflows will cause real appreciation;
monetary policy cannot prevent that.
Tighter fiscal policy could mitigate aggregate
demand and appreciation pressures, but at the
cost of less spending
Governments will need to accept either carefully
targeted spending cuts or real appreciation
Future policy agenda (ctd)
Capital account policies
More transparency and consistency: exchange
controls in SSA complex and difficult to implement.
Gradual and well-sequenced liberalization strategy
can help limit risks associated with capital inflows
Accelerated liberalization in the face of large
inflows may help their monitoring (e.g. Tanzania);
selective liberalization of outflows may help relieve
inflation and appreciation pressures, but further
work needed on modalities.
Future policy agenda (end)
Financial sector and structural policies:
Better supervision and regulation
Bring capital flows into medium-term debt
sustainability analysis
Government debt issuance strategies can
support development of domestic yield curves
and help broaden the local investor base
Improve institutions: remove structural
impediments to enhanced productivity and
financial intermediation.
Data collection is key
Thank you !