By Patrick Kagenda
As world central banks of the rich economies bail out their ailing financial institutions, experts predict that poor economies like Africa could take the bigger punch. Seeking to forge a common understanding and response for Africa, the Standard Bank Group organised a conference on the global financial crisis at the Kampala Serena Hotel. The Standard Bank Group Chief Economist, Mr Goolam Ballim and its Head of African Research Desk, Ms Yvonne Mhango gave an overview. Mr Ballim had a question and answer session with the audience of economists, bankers, politicians and journalists. The Independent’s Patrick Kagenda reports.
What effect does injecting funds into sinking financial institutions have on the global financial scene?
The injection of funds into the sinking financial institutions seems to have worked. They seem to have imparted a degree of promise to the equity markets and even to the credit markets and currencies seem to be less volatile. There is some recovery in local African currencies in your market premised on the stabilization endeavor in the United States. However over a two year horizon, the dollar is more likely to go from the Euro/Dollar 1.20 and back to Euro/dollar 1.60 and the reason is; on a relative basis the US offers more promise in terms of relative policy rescue. The US is being quicker than the rest of the world, from a relative growth perspective, the massive injection of rescue and support by the US authority will mean that the US is going to suffer, but it will emerge first in terms of real growth prop up. In Europe for instance and the United Kingdom there will be more debt relief because they have been more orthodox, particularly the European Central Bank (ECB) in not lowering interest rates. On a five year basis on a fundamental basis and on a deeper basis African currencies are more prone to meekness than strength.
Central banks around the world have tended to be more selfish than have a unified approach to the financial crisis. Is there any coming together?
There will be a blended approach; I think it will not be possible to create a federation of a single policy. The ECB has highlighted how its single interest rate for example cannot be ideal in a multi-speed region. There will always be room for allowing local conditions, idiosyncratics of local markets and room for policy to clearly take into account local spaces, and local comparative advantages. It’s quite clear that over the last 30 years or so from trade and financial flow point of view, the world has become genuinely increasingly webbed from a financial and trade point of view. What has become clear is that some large banks in some parts of the world will create liquidity and a risk environment that permeates almost every corner of the globe. What is going to come out of this is in the global fora, be it G7 the World Bank, or IMF gatherings. Those entities will have to expand to incorporate contribution, participation and dialogue with the emerging world, so that policy responses are more cohesive, more coherent and integrated. From a financial services point of view, ideas such as those will become the kind of thinking that permeates not just accounting practices or capital management practices but also similar types of structures that are imposed on the world for financial markets.
What are the likely second round effects of the bail outs?
The ramifications of this are the slow rise in fiscal deficits among major countries. It effectively means there is a shift in resources away from households and household pockets towards the state for the state to expand on these toxic assets particularly in the US. It reduces the capacity of households to spend, because of the fiscal’s high demand for revenue. It places a general downward bargain on households to spend. Household spending is the dominant driver of an economy. It contributes to reduce the strength in world economy.
What could increased regulation lead to?
Deregulating stands that have been pursued among advanced economies or liberalizing approach is perfectly correct. You must create markets and allow markets and the pricing of those markets to be the arbiter of the exchange. Because prices in credit markets, prices in the stock exchange will determine where capital must flow and where it must not flow. The problem is not that markets are bad. The problem in the current environment is that markets failed because people lied. When I say people lied, it alludes to the way the failures in a market based economy, at least as regards to the crisis, result. In America you have what is called liar loans. This is not an exaggeration, you could go into a mortgage agency or a bank and you could apply for a mortgage without evidence or proof of income.
So the consumer comes in and lies about his income. And now I take that pool of mortgages and I put it together into a basket or an investment product, and then I say to you buy. But you say how do I know the quality of these assets; I go to the credit rating agencies and they say they can be divided into three tranches, you have 100 pieces of stock, you will sell at 95% triple A rating, quality assets good guarantee may be 3% is triple B and may be 1% is really low quality triple B minus asset.
The world and investors trusted the rating agencies in terms of the symbol that they impressed and imposed on those assets the problem is the rating agency, the methodology that they used was incorrect. It went the wrong way the mortgage became unaffordable they started to default. So you could say the rating agencies lied. So it is not that markets don’t work, its markets mis-price, markets misunderstood and markets do from time to time fail. So again the challenge will be to not go to some regime-authority introduced price controls or mechanisms where the market doesn’t clearly reflect price, but just simply to introduce rules where there is thorough oversight, proper whole some governance and liability where the CEO`s of banks are accountable. Accountability will be a significant element of control in how financial services and a bit of research in the business framework are shaped.
How has the US government been able to bail out banks?
America has got a current account deficit of around 4% of GDP. From a fiscal point of view let’s say the general shortage shots to 7% of GDP. It now effectively means that they need more savings from foreigners to be sent to their economy to be able to spend, as consumption or under debt or whatever the expenditure profile looks like. So quite simply the US has become even more dependent on those countries that have excess surplus savings, and that is Asia. So they are going to be dependent on Asia continuing to buy American assets, American treasuries or American stock market assets and we know that the sovereign right funds not lately but in the earlier part of the downturn in the stock market Japanese repurchased American banks. So they will continue to buy and invest in American assets which stock may really be spread but mostly US treasuries. That’s why the world calls it a very powerful dependency relationship which is fragile. And this is why people are worried. If suddenly Asia decided to stop sending money to the US, stop investing in assets, stop investment flows, suddenly the US current account deficit can continue. They don’t have the savings any more. It would mean that American consumer’s investment entities and the US government would have less funding to spend and could mean that the US economy would have to contract. And the consequences are going to be a more severe and protracted US recession. It is one of the key global imbalances that we have been talking about for the last couple of years; that dependency by America on Asia for its savings because of America’s aggressive and liberal overspending. America needs to gradually unwind the current economy deficit.
What assets should Africans hold onto to survive?
Hold onto your stocks. Cash is not trash in this environment. There is a security, there is capital preservation in investing in the deposit markets, yields that are favourable in the interest rates that are relatively high compared to the more equilibrium levels that we’ve seen over the last couple of years. I’ve always had a preference for gold. It’s my view to store value, remember money takes a step initially from a store of value to a medium of exchange and a unit of account. As a medium of exchange there’s depreciation but in the fast principle of the store of value it’s tangible, it’s not free as money.
Crisis is function of’creative self-destruction’ and ‘aggressive risk-taking’
Crisis has led to increased nationalization e.g. when Manchester United (sponsored by AIG) next plays New Castle United (which is sponsored by Northern Rock Bank) it will be the US government team playing against the UK government team.
Crisis will impact growth, inflation, monetary policy and exchange rates, capital inflows
Uganda has highest core inflation rate in EAC region
There is opportunity in the market; though there has been so much destruction in value. Stock markets have declined substantially but there are forms of substance that will prove durable. I think there is potential for capital outflows but as things stabilise, more money found on the world will be looking at Africa. And there is a potential in due course where they will say these are bargains that we can acquire.
There has been a united approach in other parts of the world. What have African central banks done?
I think around the continent reaction has been mixed and patchy. Many have approached this with the views that this was a developed world problem and requires intervention by the developed world authorities and we in Africa are immune to it. I understand several central bank officials were invited to this event but they are not here. This implies a good sign but I think that the gravity of the impact has placed some scare on some local markets and we’ve seen emergency meetings of central banks in the East African region in the last couple of days. We have seen interventions in Nigeria where the central bank is trying to provide liquidity oxygen to the markets. It has not been as reactive in some parts of the continent as it has been reactive than pre-emptive.
Why is it that financial problems in America and Europe are called recession, depression etc but if they happen in Zimbabwe, it is called mismanagement?
Inter-regional growth on the continent has not shaped up as lively as it should be. The continent only trades US$13 out of every $100 of total trade. The other US$ 87 is traded between Africa and the rest of the world. We sometimes don’t enhance or place stiff emphasis on the need that when partner countries show, in their governance structures, more firm commitment to sound policy choices that buttress wealth; that neighbours do very, very well. South Africa has certainly been harmed as a consequence of the destruction of GDP in Zimbabwe. The rest of the continent has been harmed because we know that for every 1% of growth in South Africa, sub-Saharan Africa benefits by half percent of additional growth. We are tied to each other.