Africa's banking systems have largely escaped direct contagion from the crises of confidence afflicting those in the developed world. However, Africa faces significant potential fallout from the real-economy impacts of the global disruption.
Financial sector impacts. The direct impact on African banking has so far been limited even in the two largest economies, South Africa and Nigeria. This apparent insulation is explained by African banks' relative lack of integration into the global system:
•Most banks are locally owned, and the parents of the foreign-owned institutions have tended not to be the worst affected.
•The interbank markets are relatively small and local.
•Demand for, and availability of, more sophisticated -- securitzsed or derivative -- financial instruments is limited, and most loans originated by the banks remain on their balance sheets.
•Consequently, African banks hold little in the way of the flawed mortgage-backed assets that have so undermined European and US banking systems:
China role. A crucial question for Africa is the extent to which China's growth impetus will be affected. Sino-African trade has risen more than 62% in the first eight months of this year to 74 billion dollars, although this dollar increase is attributable more to higher commodity prices than higher trade volumes. Many African policymakers believe -- with some justice -- that economic links with China will protect their economies from the worst ravages of the coming global recession. However, recent growth in the trade is not sustainable, as Africa department officials in China's ministry of commerce concede. Commodity price effects. If the slowdown does extend significantly to China, and if the recent falls in international oil and other commodity prices are sustained or extended, the impacts will be differentiated:
•For oil exporters, the terms of trade will deteriorate sharply and growth will slow. However, unless the oil price falls below these countries' budget reference points, serious fiscal or balance of payments problems are unlikely.
•For oil importers, the terms of trade effects will depend on the balance between lower oil and grain prices on the one hand and lower metal and other export prices on the other hand. Consequently, a number of African economies -- especially those with limited foreign-exchange reserves -- may encounter difficulties in sustaining growth anywhere near recent levels over the next few years.
Other channels. There are several other channels through which Africa's growth prospects may be impaired:
•Remittances from diaspora communities, which have become an important source of foreign exchange and household incomes in numerous African countries, will be adversely affected by the slowdown.
•Reductions -- or, worse, reversals -- in private foreign capital inflows, which have been buoyant in recent years, will threaten Africa's current substantial infrastructure development programs, although this may apply less to Chinese-funded projects.
The World Bank warns that if cutbacks spread to foreign aid programs then the quality of life for many Africans, including those on AIDS treatment, is likely to worsen, as is the gap between rich and poor countries in general. Moreover a number of countries face rising inflation and other macroeconomic imbalances, including current account deficits, budgetary strains and reduced employment. While not directly related to the global financial upheavals, the less benign global environment will be unhelpful in addressing these problems.