Friday, 7 March 2008

Africa as the barometer of crises

Many Western banks have had large losses on their loan portfolios in recent months, following defaults by lenders on high-risk debt in the United States. There was conjecture that the financial problems would lead to a worldwide recession. A direct route for reaching a recession goes: banks make losses --> they stop lending --> people can't buy goods on credit any longer --> companies don't earn much and go bankrupt --> people lose their jobs --> people spend even less --> the economy spirals downwards.

Well, it could happen, but then it might not. Banks might contract their loans, without the effect on spending being so large that there is a self-sustaining spiralling collapse. At a world level, there is talk of decoupling, whereby countries are becoming increasingly independent of what happens in the United States. Previously, it was said that if the US had a recession, then the rest of the world would follow, again through demand collapse because the United States is such an important consumer of world goods. Today, with the rise of Asia, it may be thought that other regions of the world may replace some of the US demand.

At the time, I thought that a world recession was unlikely because of an analysis of decoupling applied to Africa. The demand for African goods is global, with America, China, and Europe all making claims on the raw minerals in the continent. At the same time, Sub-Saharan Africa's stock markets are comparatively insulated from worldwide financial turmoil because their low trading volumes and small size mean that they are unlikely to be causes of panic for global investors withdrawing their funds to safe havens. South Africa is an exception.

So SSA's stock markets, at times of global financial turmoil, can be better measures of the current and future robustness of the world economy than major Western stock markets. They were much more stable, and were turning out fairly unchanged performances. It seemed unlikely that the world would hit recession at the time because of the Western bank losses, and so it has proved.

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