Muna Wahome
4 October 2008
interview
Nairobi — Q How is the economic downturn likely to affect Kenya and Africa in general?
A. The direct impact of the financial crisis on Kenya and African economies in general has been muted so far.
During the recent commodity boom, some of our countries have managed to accumulate reserves, and have strengthened the external sector and government balance sheets.
Nevertheless, in the non-bank financial sector, sustained financial market turbulence abroad is likely to affect our portfolio values through equity prices for international stock.
Rising risk aversion may also limit capital flows to our markets.
These developments coming on the heels of the upsurge in food and fuel prices pose serious challenges for these economies.
Beyond financial markets, a significant economic downturn due to the current tight constraint on lending and consumption that the crisis has created in advanced economies, will eventually lead to reduced international demand for our exports and will, therefore, constrain real economic expansion in our countries, resulting in lower growth rates.
Our economies will feel the impact through reduced trade, foreign direct investments, aid, and remittances.
While growth in sub-Saharan Africa over 2008-09 is still projected to be at around six per cent, led by oil exporters, strengthened non-fuel exports, strong investments and implementation of sound policies and structural reforms, vigilance is necessary.
There is need to remain alert in safeguarding growth, because recession in advanced economies will surely have an adverse effect on growth in large Asian economies such as China - and it is the growing demand from these large economies which has driven aggregate global demand and supported the growth of our exports in recent years.
These adverse implications will only be mitigated to the extent that demand in emerging markets remains solid.
In our countries, sustained strong economic performance will be needed to substantially reduce poverty and achieve the Millennium Development Goals.
Strong growth will, therefore, require a focus on productive investments alongside maintaining macroeconomic stability.Q. Kenyans living in the US are largely low-cadre workers. Where does this leave them and how are they faring? A. The job market in the US is a very difficult one at this time. Many companies are laying off workers.
African workers are, therefore, equally vulnerable. For those able to retain their jobs, rising inflation (particularly from fuel), constrained credit and pressure on mortgages are all straining the purchasing power of take-home pay and limiting the amount of money that can be sent back home as remittances.
Q. In your opinion, can the US recover quickly enough? What are the determinants?
A. For the US to recover, it must resolve the fundamental cause of the crisis, and not just address the symptoms.
The crisis stems from the mortgage market, where sub-optimal mortgage loans were transformed into assets, which (by extension), were also sub-optimal (though they were not rated as such - having equivalent ratings to Treasury Bills).
Because of this, subsequently distressed mortgage loans have translated into distressed assets (via securitisation) held by a multitude of financial institutions.
The only way to curb the crisis conclusively, therefore, is for the US Government to intervene at the source and back-stop all the distressed mortgages, so that value is restored to the assets that are linked to these mortgages.
In this way, the asset base of banks and non-bank financial institutions will be protected, business lending will resume and households will once again have the equity in their houses restored so that it serves as a basis for long-term financial transactions.
How quickly the US recovers will be determined by how soon the US Government decides to take these necessary actions to restore normality to the mortgage sector and to financial transactions in that country.
The longer the US government waits, however, the more costly it becomes to rectify the problem.
Q. Allan Greenspan - was he all that he was fabled to be if this is the aftermath of his long reign at the Fed?
A. The deregulation of the US financial and housing sectors that created the conditions that led to this crisis, happened during Alan Greenspan's watch. For this reason, there are some analysts who blame him for the current crisis.
That said, however, there are also those who point out that had he remained as head of the Fed, he probably would have been more aware of the extent of the risk in mortgage-linked assets since it happened on his watch, and would have taken sizable, decisive action very early on to nip the sub-prime mortgage default problem in the bud before it spread.
There are still others who feel that regardless of who is at the helm of the Fed, the sub-prime problem represented a mis-pricing of risk and, therefore, a market correction was inevitable at some point; to correct the pricing so that it reflects actual risk levels.
Unfortunately, the woes of Wall Street have brought greater havoc to the Main Street and threaten to engulf the whole global economy.
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