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. Sub-Saharan.

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.

Sub-Saharan African Financial Systems and The Global Financial Crisis

Impact, Risks, and Policy Priorities

Regional Economic OutlookApril 24, 2009

Paulo Drummond, Inutu Lukonga, and Jerome Vacherwith contributions from Yanliang Miao, Gustavo Ramirez, Subramanian Sriram,

and Jahanara Zaman

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 MessagesFinancial 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)

Sub-Saharan Africa

South Africa

Frontier Markets

FinanciallyDeveloping

Bank assets/GDP

Financialdevelopment

M2/GDP

Credit/GDP

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

30

40

50

60

70

80

90

100

110

120

Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09

South Africa

Nigeria

Botswana

Kenya

Selected Africa : Stock Market Index (Jan.1, 2008 =100)

Pressures on Currency MarketsSelected Africa : Exchange Rate

(Jan.1, 2008 =100; National currency per U.S.dollars)

80

90

100

110

120

130

140

150

160

170

Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09

South AfricaMauritiusUgandaGhanaKenyaNigeriaZambia

Less Access to Global Markets

2004 2005 2006 2007 2008

Total 1,697 2,681 4,899 12,319 1,533Gabon 0 0 0 1,000 0Ghana 0 0 0 950 0Nigeria 0 0 0 525 0Seychelles 0 0 200 30 0South Africa 1,697 2,681 4,699 9,814 1,533

Source: IMF, 2009, Global Financial Stability Review (April).

Sub-Saharan Africa: Issuance of International Bonds, 2004-08

(millions of U.S. dollars )

Increasing SpreadsEmerging Markets CDS and EMBI Spreads

(Basis points)

Source: Bloomberg.

0

100

200

300

400

500

600

700

800

900

Jan

-08

Fe

b-0

8

Ap

r-0

8

Ma

y-08

Jul-

08

Au

g-0

8

Oct

-08

No

v-0

8

Jan

-09

Fe

b-0

9

South Africa

Brazil

Mexico

South Korea

Turkey

Sovereign CDS Spreads

100

200

300

400

500

600

700

800

900

Jan

-08

Fe

b-0

8

Ap

r-0

8

Ma

y-08

Jul-

08

Au

g-0

8

Oct

-08

No

v-0

8

Jan

-09

Fe

b-0

9

South Africa

Global

Brazil

Mexico

Turkey

EMBI Bond Spreads

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 RiskSub-Saharan Africa: Nonperforming Loans, 2004 and 2007

(Percent of gross loans)

Emerging and Frontier Market Countries

0

5

10

15

20

25

30

35

2004

2007

Rollover RisksSub-Saharan Africa: Net Claims of BIS Reporting Banks,

End-September 2008(Percent of GDP)

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.

-40

-30

-20

-10

0

10

Botsw

ana

Cape

Verde

Ghana

Kenya

Moz

ambiq

ue

Namibi

a

Nigeria

Seych

elles

South

Afri

ca

Tanza

nia

Ugand

a

Zambia

Emerging and Frontier Market Countries

-366-74

-40

-30

-20

-10

0

10

Angola

Benin

Burkin

a Fas

o

Burun

di

Camer

oon

Centra

l Afri

can

Repub

licCha

d

Comor

os

Congo

, Dem

. Rep

. of

Congo

, Rep

. of

Côte

d'Ivo

ire

Equat

orial

Guin

ea

Eritre

a

Ethiop

ia

Gabon

Gambia

, The

Guinea

Guinea

-Biss

au

Leso

tho

Liber

ia

Mad

agas

car

Mala

wiM

ali

Niger

Rwanda

São T

omé

and

Príncip

e

Seneg

al

Sierra

Leo

ne

Swazila

ndTog

o

381

Risk of Contagion by Deleveraging

Three main risksParent 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 factorsSubsidiaries 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 RatiosSub-Saharan Africa: Regulatory Capital, 2004 and 2007

(Percent of risk-weighted assets )

Emerging and Frontier Market Countries

0

5

10

15

20

25

2004

2007

Risk of Credit Retrenchment

-15

-10

-5

0

5

10

15

-15 -10 -5 0 5 10 15

Deposits

Cre

dit

to t

he

priv

ate

sec

tor

SSA Bank Credit to the Private Sector and Deposits(Change from 2004 to 2007, percentage points of GDP)

Sources: IMF, International Financial Statistics, and World Economic Outlook.

Foreign Assets ProvideSome Cushion

0

20

40

60

80

100

120

Jan

-05

Ma

y-05

Se

p-0

5

Jan

-06

Ma

y-06

Se

p-0

6

Jan

-07

Ma

y-07

Se

p-0

7

Jan

-08

Ma

y-08

Se

p-0

8

Foreign assets

Foreign liabilities

Net foreign assets

Total Foreign Assets and Foreign Liabilities of Deposit Money Banks in African Region, 2005-2008

(Billions of US$)

Policy priority, short-term:Minimize contagionPreventive

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.