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African Economies Face Down European Storms

         Date: 2012-08-09

           Tag: African Economies, African Economies Storms

Summary: 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 u…

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.

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".

The International Labor Organisation is predicting 22 million out of work over the next four years in Europe. This in turn depresses demand for developing countries' exports, as well as potentially reducing remittances.

This concern is relevant for countries such as Gambia and Nigeria which depended on remittances for more than 10 percent of their GDP in 2010, and for which the EU is the main source of those funds. Recent evidence shows that remittances from Nigerians have more than halved in 2011 partly because of the eurozone crisis.

Tourism, an excellent source of foreign exchange with a positive investment-to-employment ratio, is down. Virgin airlines recently scrapped its London-Nairobi route in part due to insufficient demand (although a spate of terror attacks and instability in the region is not helping). Morocco is also suffering, since Western European tourists account for over 70 percent of its annual visitors. Total visits fell 10 percent in the first quarter of the year according to official data (although, again, the Argana terrorist attack in April 2011 contributed to this downturn as well).

While these drops in services are painful, they are not precipitous. Overall, sub-Saharan Africa's trade in services as a percentage of GDP fell from 12.5 percent in 2005 to 11.2 percent in 2010; while international tourism as a percentage of GDP fell from 7.7 to 6.9 over the same period.

Finally, aid flows are in question as European governments struggle with high debts, and public support for foreign assistance potentially wanes. While African governments are keen to re-brand the continent as a self-sustaining powerhouse, aid flows still buttress state finances - especially in smaller states like Burundi, Malawi, and Rwanda.

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