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Coping with global financial crisis

By Patrick Kagenda & Agencies

American companies remain bullish

As the American economy struggles to recover from the credit crunch and European economies jostle with rescuing their financial institutions, subsidiary of American companies operating in Uganda are maintaining an upbeat facade, claiming they are not affected by the American economic woes.

Mr. Erick Rakama, Business development manager at DHL an American courier service provider, told The Independent that despite DHL cutting operations in USA, the action will have no effect on DHL Uganda operations. ‘Each country operates autonomously,’ said Rakama.

Ms Poonam, the operations manager at UPS Uganda, another American courier company said the effects are strictly on the American market and not on the local markets like the Ugandan market. “We are not affected at all”, she said.

At AIG Uganda, Alex Wanjohi, AIG Uganda Managing Director said AIG Inc has decided to refocus the company on its core property and casualty insurance businesses which includes AIG Uganda Limited. This means it is business as usual for AIG South African operations where AIG Uganda falls.

“We operate autonomously and throughout the challenges faced by AIG Inc, AIG Uganda’s financial position has not been affected at all,’ he said, ‘We have retained a very strong financial position and we continue to pay claims and write new business as usual’.

The Chief Executive of the Uganda Securities exchange, Mr Simon Rutega, said the lack of confidence in financial markets poses a potential for turmoil.

“In the short run the global credit crunch may not affect Uganda because our securities, our companies and our economies have no direct correlation,”he said, ‘We are not entangled with those markets despite the remittances coming from those economies, however the effect would be in the long run if this problem progresses.’

Uganda exports mainly primary commodities.

He said there could be a reduction in donor aid and support to social services.

“We have also learnt that we have to be careful with these derivatives so, we have to verify whether those instruments are effective or not,” he said.

Experts continue to echo Rutega’s claim that African stock exchanges are insulated from the financial turmoil because of their limited links to the global economy.

“All of Africa represents only one percent of global trade,” Willy Ontsia, head of the Central Africa Stock and Shares Market (BVMAC) in Libreville said;

“If the crisis is short, its impact on Africa and emerging market economies will be relatively weak.”

“But if the crisis is prolonged, that will have an impact on several indicators that affect growth in developing countries,” he said, noting that a global slowdown would affect trade in raw materials — the backbone of many of the continent’s economies.

“Africa is less exposed because of its limited links to the international financial community… but I have reason to worry about the economic effects of the financial crisis on the continent,” said Donald Kaberuka, head of the African Development Bank (ADB).

“It’s the long-term effects that cause us great worry,” he told a press conference in Tunis.

But World Bank President Robert Zoellick last week said that developing nations may be at ‘a tipping point’.

“We have seen the dark side of global connectedness,” he said as the turmoil battered markets from Cairo to Johannesburg, posing risks to foreign investment and trade that could threaten Africa’s recent economic gains.

Some economists insist that the financial crisis will hit poor and rich countries the same “because there is no decoupling between their performances’.

Due to differences in their starting situations, the outcome will be different and growth in developing economies will slow but not so much as in advanced countries as their trade and capital accounts suffer.

Egypt’s main index plunged more than 16 percent at one point last week, mirroring spectacular losses around the world amid worries about European banks and doubts about the 700 billion dollar US bailout package.

The main index in South Africa, the continent’s largest economy, fell by seven percent but stabilised with trading in marginally positive territory.

Other key markets, including oil-exporter Nigeria and Morocco, suffered far less dramatic declines, while some bourses in countries like Ivory Coast have actually posted small gains.

Economies like South Africa, which are more connected to international finance, are more easily affected by the global turmoil, seen in the volatility on the Johannesburg Stock Exchange, said Razia Khan of Standard Charter Bank in London.

“For the rest of Africa, the global financial market rout is likely to mean a rise in risk aversion,” she said, warning that international investors were likely to seek stability rather than the risks posed by emerging markets.

Daniel Makina, a risk management expert at the University of South Africa, said those indirect effects could prove just as damaging for African economies, especially if exports to the rest of the world slow down.

“South Africa does a lot of trade with US and Europe especially,” Makina told AFP. “A recession in the US and Europe will impact on South Africa exports.”

Crude oil accounts for more than 50 percent of Africa’s exports, with Angola and Nigeria the biggest producers, according to the World Bank.

Worries that weak global growth will reduce demand for fuel have already sent oil prices tumbling to eight-month lows.

“All these things have ripple effects that could hurt growth,”Ontsia said. “Our fear is that this crisis will continue.”

  • Due to a general shortage of credit, poor countries will increasingly find it difficult to access finance.
  • Inflation, which is the main problem for the poor, could be reduced.
  • General re-pricing of risk due to the crisis will increase the cost of borrowing
  • Economies that depend on exports will be most impacted, especially due to a softening in commodity prices

 

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