Whilst few African financial services companies have had direct exposure to the crisis, the secondary impacts are all too clear.
Ernst & Young24 April 2009 03:16
Africa has not escaped the impact of the sub-prime crisis entirely. Although the crisis’ origins lie in the USA, it spread rapidly across the globe, hurting European and then Asian companies along the way. Whilst few African financial services companies have had direct exposure to the crisis, the secondary impacts are all too clear.
First, and most crucially, GDP growth is declining, (South Africa’s GDP in fact contracted in the last quarter of 2008, whilst Nigeria’s growth is expected to slump from 8% in 2008 to 3% in the current year.)
Secondly, the major currencies of southern, eastern and western major countries (South Africa, Kenya and Nigeria) experienced rapid depreciation, as foreigners sought to repatriate funds to their home countries, and collapsing demand for the continent’s mining and manufacturing goods followed. The South African rand depreciated 40% against the US $ in 2008, while the Nigerian naira and Kenyan shilling feel more mildly, shedding 25% and 23% respectively.
In addition, the effect of global liquidity crunch is also felt across the continent through reduced credit availability. Many infrastructure projects are being placed on hold, given the unavailability of finance, and the cost of raising that finance. Again, foreign banks have become far more risk averse then they were 18 months ago, and are not keenly providing funds for (perceived) riskier emerging market countries. Infrastructure projects which were viable with high and rising commodity prices are no longer attractive, and hence many have been shelved, either for lack of funding, or due to the reduced economic rationale.
For all the above reasons, the impact of the crisis is by no means over yet. South African financial services companies reported record low confidence levels in the first quarter of 2009, with expectations that profits and revenue will continue slowing through 2009.
Whilst interest rate cuts may provide some relief, there is no strong evidence that corporates or individuals are taking up credit again. In South Africa, for example, credit growth between January 2008 and 2009 slowed from 28% to 13.2%. Bad debts continued to grow in the 1st quarter, and growing unemployment may yet prove to keep the trend of impaired debts to total advances growing for the foreseeable future.
Having said that, African banks are by no means as badly off as what their global peers are. Most major global banks have reported hefty losses since the middle of July 2008. African banks, by contrast, are reporting lower profits than they were prior to the sub-prime crisis breaking, but profits remain positive.
However, rumours have surfaced in Nigeria about some of the large banks facing liquidity concerns, raising questions about their sustainability, and prompting attempted takeovers. These rumours stem from the Nigerian banking sector taking on large debt exposure in the petroleum import sector, which is unable to repay its debts in the current environment. In addition, Nigerian banks also have exposure to Nigerian stocks, to the tune of N800bn. According to the British edition of Business Monitor, Nigeria’s regulatory authorities are in the process of drafting plans to set up a state controlled fund to buy out bad debts, in a manner not dissimilar to US and European precedents.
In Kenya, liquidity was kept alive by allowing banks to borrow from other banks, using government securities as collateral. This was the first time such trades have occurred in the country, and this has provided liquidity that would otherwise not have been available.’
At a financial services summit recently held in Lagos, Emilio Pera, lead financial services director at Ernst & Young comments, ‘Undoubtedly African banks are facing tougher trading conditions than they were last year this time, despite the recent interest rate relief. This is clearly seen in the pace at which market capitalisation has fallen. But African banks are not faced with such sharp equity valuation downgrades as what some of their global peers are. In the worst case scenario in South Africa, one bank’s market capitalisation fell 39%. Nigeria’s largest bank by market capitalisation, Diamond Bank, had a more dramatic 57% loss in value, but has since recovered from its lowest point.’
He continues, ‘To some extent South African local economic circumstances have played a role in financial services’ market capitalisations falling: high interest rates and consumer price inflation have squeezed disposable income, thereby pushing up bad debts in the case of the banking sector, and causing increased policy lapses in the case of insurers.’
Concludes Pera, ‘Generally, the situation in Africa has been similar across the three main regions (east, south and west), whereby resource price collapses have caused lay-offs and reduced growth prospects. But the response of the regulatory authorities has differed. Whilst South African banks are for the most part well capitalised, Nigerian authorities have intervened directly, by capping interest rates, and may yet purchase bad debts in the industry. The eastern region, which is less resource dependent, has not faced as dramatic an impact on its banking sector as the other regions.‘
Ernst & Young
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