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Q&A - Eurasia Group on crisis impact in southern Africa
19 Dec 2008 17:33:00 GMT
 Source: Reuters
LONDON, Dec 19 (Reuters) - African countries are likely to suffer from the global financial crisis as a result of tumbling prices for commodity exports and diminishing investment.

Mike Davies of the New York-based consultancy Eurasia Group answered Reuters' questions in an e-mail interview on the economic and political risk impact the crisis might have in southern Africa.

Davies covers South Africa and other countries in southern Africa for Eurasia Group.

Q - Which countries in southern Africa will face the greatest increase in political risk as a result of the global economic slowdown and why?

A - Like the majority of countries in sub-Saharan Africa, the countries in southern Africa (apart from South Africa), are less integrated in global financial markets than many other regions. However, they are not immune to the negative impact of the crisis. All countries in the region will suffer due to falling exports, remittance flows, foreign direct investment and international aid, but those countries that are reliant on commodity exports are likely to bear the brunt of the global slowdown. Rising unemployment and slowing GDP will increase pressure on governments and likely lead to increased political risk. Zambia is among the most vulnerable, though its political institutions are better equipped to withstand the shock than some other resource-rich countries on the continent.

2009 will see a number of elections in southern Africa, with general elections in Botswana, Malawi, Mozambique, Namibia and South Africa. It is also likely that a presidential election will be held in Angola. Opposition parties will look to capitalise on the various government response to the global economic slowdown. Populist promises made during election campaigns could also raise political risk.

Q - Investors had cited an improvement in governance, political and economic openness as reasons for taking a more positive attitude to Africa generally in recent years. What prospect is there that such changes could be reversed?

A - Many of the institutional reforms have been made over several years and are unlikely to be reversed. In fact, due to economic pressures and the prospect of lost investment, countries in the region may have to push ahead with reforms to make themselves more competitive and to attract investment.

Q - How dramatic do you expect the decline of Asian investment in southern Africa to be and what impact is that likely to have?

A - Asian, particularly Chinese and Indian, investment in Africa has been one of the key stories over the past couple of years. China's outbound investments are expected to slow in 2009, but a huge drop off is not likely as China seems willing to continue pursuing investments and in fact seize on fresh opportunities during the global slowdown. China's national oil companies are also being encouraged to purchase upstream assets, while China's nuclear expansion will mean that southern Africa's uranium deposits will continue to be of significant interest. Indian companies are facing major problems raising funds and indications are that both domestic and outward investment plans are on hold. This will clearly affect southern Africa, although if consumer demand in the region is stronger than India, where it is slowing considerably, diversification to Africa might be seen as a good hedging strategy.

Q - Is a shift in diplomatic orientation towards Asia likely to continue or might countries in the region feel better off looking back towards traditional donors?

A - Given that the economic picture in the US, UK and Europe is even gloomier than Asia, there seems little reason why those countries that have turned to Asian countries for investment and aid will shift focus now. African countries will continue to allow themselves to be courted by both Western and Asian countries.

Q - How much better might the region's countries be placed to weather a downturn hitting prices for their export commodities as a result of debt relief in recent years?

A - Those 15 or so countries that have received debt relief will be in a far stronger position to weather the impact of lower commodity prices. Money previously required for interest payments can now be directed to other programs. However, many countries remain vulnerable despite debt relief and still require budget support from foreign donors; Mozambique and Tanzania, for example, still rely on donors for over 40% of their annual budgets. A lack of economic diversification leaves economies exposed to the commodity cycle.

Q - How exposed will South Africa be to the downturn?

A - South Africa's banking sector has been relatively unaffected by the recent global financial crisis, but the large current account deficit means that it is exposed. South Africa's economic growth is expected to suffer in response to poorer conditions in its main trading partners: the US, Japan, the UK, Germany, and other EU countries. Growth has averaged 5 percent since 2003, but the treasury has revised its forecast for 2009 to percent. Costs of the government's major infrastructure development program will rise due to the depreciation of the rand and widening credit spreads. Although mining only accounts directly for around 6 percent of GDP, it remains a key source of export revenue, so the fall in commodity prices, particularly platinum, will still have a major impact.

Q - The ANC still looks set to remain dominant after next year's election, but how much do you believe its support will be eroded by the breakaway group and other opposition parties. Will any loss of parliamentary support be significant enough to have an impact on government or policy?

A - Without any decent polling figures since the formation of the Congress of the People (COPE), it is difficult to assess the electoral prospects of the new party. However it seems likely that through a combination of attracting support away from the ANC and opposition parties, COPE should be able to win at least 10 percent of the votes. Although this will not threaten the ANC's position as the ruling party, it is likely to bring the ANC below the two-thirds majority required in parliament to pass constitutional amendments. It is also possible that the ANC might lose control of one or two of the provinces. In 2004 the ANC won outright control of seven of nine provinces, with KwaZulu-Natal and the Western Cape being the exceptions. So the new party could have a significant impact at both a national and provincial level. Furthermore, at a local government level the new party is likely to make incumbents more responsive to the needs of their constituents.

Q - What expectations do you have of any shift in policy under the next South African government? Could the breakaway party push the ANC further left? What about economic decline?

A - The likely direction of economic policy following the 2009 election has provoked intense debate. The view that a sharp leftward shift is likely relies on an oversimplification of the balance of power within the ANC and between the ANC and its alliance partners, the Congress of South Africa Trade Unions (Cosatu) and the South African Communist Party (SACP). It also ignores the shift to the left that the ANC has already made. Important changes will be made though. The ANC has already indicated that education, health, crime, job creation and rural development will be priorities. Changes to the structure of government are also expected. The creation of COPE by a number of centrists and modernizers will weaken this grouping in the ANC, but Thabo Mbeki's resignation has also opened the space for silenced ANC leaders to re-emerge and the remaining centrists are unlikely to allow the ANC to be captured by the radical left. The economic situation will limit the space that a new government has to deviate from current economic policies as investors will punish any poor decision. But job losses and a failure to address key issues such as health, education and crime will increase tension between the government and unions.

Q - What about Zimbabwe? Will the global turmoil mean so many other problems take precedence that Zimbabwe is sidelined as an issue. Will it push Zimbabwe closer to meltdown?

A - There is no doubt that international leaders having to devote attention to addressing the fallout of the financial crisis has meant that an issue like Zimbabwe have fallen off the agenda somewhat. However, NGOs and groups such as The Elders, who were recently refused entry into Zimbabwe, and the recent cholera emergency has ensured that Zimbabwe still gets headlines. The cholera crisis, which has extended into neighbouring South Africa, has also forced the South African government to give Zimbabwe more attention. Given that around half of Zimbabwe's export revenues come from mining, the global slowdown will have a considerable impact on its economy. Lower mining revenues could actually be the catalyst that forces the ZANU-PF elite to meaningful negotiations as it will cut off a key source of foreign exchange that has supported them despite the economic collapse.


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