David Malingha Doya
5 October 2008
East Africa could make windfall gains from the current global financial crisis as investors in developed markets look to shift some of their portfolios to safer regions.
Speakers at Uganda's third National competitiveness Forum however, warned that the region's recently acquired attractiveness to investors will only pay off meaningfully if the longstanding problem of inadequate and poor infrastructure is resolved.
For the first time, Africa's economic growth is sustaining an upward trend amid a global economic downturn induced by the financial crisis, high fuel and commodity prices and the immediate impact of measures against climate change.
"In the 1980s, when the world's economic growth was dropping, Africa's dropped even more sharply. When the world's economy took another nosedive in the early 1990s, Africa's dropped to negative growth. However, in the 2000s, when the world economy is going down, growth in Africa is continuing to grow," said Razia Khan, head of research for Standard Chartered Bank, Africa region.
The enduring economic growth in the region is being attributed to improved fiscal policy and a fall in average inflation from an annual 60 per cent in 1994 to less than 10 per cent in 2007.
A boom in commodities from an index of 150 in 1999 to above 350 this year coupled with debt relief that has reduced the ratio of external debt to GDP from an average of 70 per cent in 1994 to about 20 per cent in 2007 both improved economic growth and fuelled interest in the region.
Economists also said that while investors had already realised that return on investments in Africa are among the highest in the world, but the continent is even more attractive now that the financial crisis has become a disincentive to investing in the West.
Data from the International Monetary Fund shows that GDP growth in sub-Saharan Africa is two points above that of the world and one point above the Middle East as of January 2008.
In the 1990s, economic growth in sub-Saharan Africa was moving in reverse at a rate of -2 per cent, while the global economy was progressing at 2 per cent, and the Middle East at above 8 per cent.
At the competitiveness forum, a Finance Ministry event held annually to discuss the country's competitiveness, Ms Khan said that the current global financial crisis has some benefits to Africa, that could help the continent grow at an even faster rate.
She said that investors who have had their fingers burnt in the financial meltdown on Western bourses are either looking for safe havens in less risky instruments there or diverting some of their investments to new and emerging markets like East Africa.
This is on top of capital flows already heading for the continent following the realisation that the return on investment in Africa is highest in the world, and that political risk in former conflict countries such as Rwanda and Angola has reduced significantly.
"The correction to Africa's longstanding undervaluation has only just begun," said Ms Khan.
Sovereign wealth funds controlled by some of the world's rich governments invest most of their money in banks and investment houses in Europe, America and Japan, where they suffered part of the losses. "Sovereign wealth funds are now turning to new frontier markets, particularly Africa," said Ms Khan.
Although extending investment funds to this region means distributing risk in the same direction, economists are optimistic that underdevelopment and wider regulation in African markets could be a safeguard against such dramatic meltdowns on its bourses.
However, governments will have to shape up their infrastructure to position themselves to gain from the financial crisis eroding investments on bourses in the West.
Africa's infrastructural requirements are in the billions of dollars and years in time before it can be enhanced to a level of even competitiveness on the world stage.
In East Africa, some of the outstanding infrastructural problems include an energy deficit, an ancient railway network, inadequate and poorly maintained roads, inadequate harbouring port capacity and under-developed air transport. All these make the region less competitive as they increase the cost of production, economists said.
Although development partners have given grants and loans to help improve infrastructure in the region, the situation is still dire and governments are looking at new ways of funding infrastructural development.
The East African Community council of ministers proposed that governments put money in a pool to fund regional infrastructure projects such as cross-border highways, railway network and civil aviation. The government of Kenya is thinking of issuing an infrastructure bond on the country's local bourse.
Fred Omach Finance Minister State for general duties said, "We understand that infrastructure is the biggest challenge to development, and government allocated Ush1trillion ($615 million) for expansion and maintenance of the road network in this financial year. For energy Bujagali dam is already under construction, and we hope to begin Karuma soon."
Government of Uganda has also started a process of developing a policy for Public Private sector Partnership (PPP), long term agreements between government and private companies to provide pubic services, as an alternative funding avenue for infrastructure projects.
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