In September 2008, as Europe and North America stood on the edge of economic decline, many analysts predicted that Sub-Saharan Africa would escape the global recession relatively unscathed.
|Sub-Saharan Africa is likely to experience the impact of the global recession in 2010 [EPA]
The always over-optimistic International Monetary Fund (IMF) was predicting that the Sub-Saharan economy would grow by 6 per cent during 2009, almost identical to the 6.1 per cent it predicted for 2008.
Then in two subsequent forecasts – the latest in January – the IMF changed its tune revising its 2009 growth forecasts to 3.4 per cent, the lowest such growth rate since 2002.
Addressing African Union heads in Addis Ababa, the Ethiopian capital last month, Takatoshi Kato, the IMF's deputy managing director, said: "Commodity prices had dropped more sharply than anticipated, generalised external funding pressures had surfaced, and the risk appetite among foreign investors in Africa had deteriorated."
A top IMF official had conceded that the "decoupling theory" the organisation had promoted over the last 18 months no longer applied.
Decoupling is a theory which assumes that fast-growing Asian economies, spearheaded by China, but also including some African countries, would replace the demand lost by the downturn in North America, Europe and Japan.
Realism sets in
However, composite leading indicators recently published by the Organisation for Economic Co-operation and Development (OECD) showed that in the year to December 2008, there were much steeper declines in demand for China (-14.6 per cent) and Russia (-17.7 per cent).
These were greater than the OECD average (-8.2 per cent) and greater than those for the US (-9.5 per cent) and the eurozone (-8.2 per cent).
Leading indicators are supposed to forecast future growth performance. Their steep deterioration especially in the last three months means that stellar growth in emerging markets would not be sufficient to 'rescue' the rest of the globe.
The most important downside impact has come oil prices, which are down 67 per cent from their mid-2008 peak, and metal and mineral prices, which plummeted 48 per cent from their peak a year ago.
In 2007, primary commodities, dominated by oil and metals, accounted for over 80 per cent of African exports.
Take 40 per cent off the value of exports in 2009 and these slump to around $300bn billion against imports of $400bn.
This would take the current account balance-of-payments deficit to around $100bn.
The result will be slower growth for oil exporters like Nigeria, Angola, Sudan and Equatorial Guinea, and metal exporters, including South Africa, Botswana, the Democratic Republic of Congo, Mozambique and Zambia.
|Metals export industries in Africa will likely suffer slow growth and cutbacks [REUTERS]
This will force African governments to cut spending, raise taxes and borrow more.
After eight years of surplus, Sub-Saharan Africa's balance-of-payments deficit will widen by some 4 percentage points of GDP to nearly 7 per cent of GDP in 2009, the largest such deficit since the mid-1990s.
Exchange rates are also vulnerable currencies like the South African rand and the Nigeria Naira have weakened significantly.
Worst to come
Remittance inflows from Africans working abroad, estimated at some $10bn in 2007 will decline due to rapidly-increasing unemployment and shorter working hours in markets like the UK and EU.
One estimate is that these inflows could fall by a third, while the IMF believes that tightening in global credit markets will hit capital inflows, making it more difficult for African firms to access trade finance.
There is a very real danger that Western governments are taking on massive new debts in an effort to cushion their workforces against recession and will be forced to cut their aid budgets.
However, because aid budgets are normally set some years in advance this effect is unlikely to be felt until 2012 and beyond.
Foreign investment declines
On the capital inflow side, the first effects will be cutbacks in foreign direct investment (FDI) and portfolio investment.
In 2007, Africa received over $60bn in private sector capital inflows, most of it in FDI.
There have already been numerous reports of mining and energy companies trimming their capital budgets and postponing projects, or, in a handful of cases, abandoning them altogether.
As commodity prices for oil, minerals and agricultural produce are forecast by the World Bank to remain well below their recent highs, some of these investments may be delayed for as many as five years.
World Bank economists expect commodity prices to stay comfortably above their lows of the 1980s and early 1990s, but the current investment boom in energy and mining projects will create extra capacity that will now be taken up for some years.
During that "take-up" period commodity prices are likely to remain relatively subdued which is bad news for African exporters. The likely result is a marked slowdown in FDI inflows over the next three years.
Reduced portfolio capital inflows will mainly affect South Africa which accounts for over 90 per cent of the African total.
However, in recent years some African countries – Ghana, Nigeria, Mauritius and Kenya – have been successful in attracting increased portfolio flows through their stock markets.
This trend is likely to reverse over the next year or two reflecting the reduced risk appetite of international investors.
To date, African banks have not been seriously affected by the global credit crunch.
It is very likely that credit portfolios of banks will come under mounting pressure, especially where customers are major exporters of oil or minerals.
At the same time, slower growth in African economies is likely to mean a rise in non-performing bank loans and the tightening of credit terms by risk-averse bankers, acting on instructions from their head offices in Europe, Japan, North America and South Africa.
The net effect will be reduced loan portfolios leading to lower levels of both consumption and investment spending.
Selling African assets
Some foreign-owned banks with operations in Africa will likely have to reduce their support and sell some of their African assets.
It has already been suggested, though not confirmed by the bank itself, that Britain's Barclay's Bank is considering selling its controlling stake in ABSA in South Africa.
How seriously Africa is affected will depend largely on the success or otherwise of current efforts around the globe to bolster banks, cut taxes, step up government spending and reboot domestic economies.
Greater economic nationalism and protectionism may also emerge.
This will hurt African countries that desperately need to penetrate open markets in the mature economies of the OECD area as well as the fast-growing economies of Asia and Eastern Europe.
It is probable too that secondary and tertiary effects of the global recession will take longer to impact on Africa, meaning that the continent's economies will slow down through 2009 and 2010.
They may be able to recover in 2011, if the current recession in the global economy does not degenerate into a 1930s-style depression.
Tony Hawkins is professor of economics at the graduate School of Management at the University of Zimbabwe and writes on African economics and business issues in the Financial Times.