Transcript Impact Of The Crisis On The Financial Systems in AFR

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
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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
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Se
yc
h
N
ig
er
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ia
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am
N
So
ut
h
M
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au
rit
iu
s
M
Ke
ny
a
ha
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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.