By Hinsley Njila for www.chiareport.com ***
Equities in the US are on track for their worse quarter since 2008 even as many investors fear that economic data from China and Europe is pointing toward a global slowdown. My focus in this article is on the current financial nightmare in Europe that is the catalyst of the current bearishness, and more importantly the potential short and long-term consequences to African economies regardless of the fix.
As it stands, far too many European countries are carrying unsustainably high debt as a percent of GDP, especially in foreign currencies, threatening to drag the entire world into another painful recession so close to the great recession of 2008. The following chart, culled from the economist, puts just how much debt as a percent of GDP each of these countries is carrying in perspective.
In good economic times, for a Union like the European Union (EU), strong economies like Germany and France do very well, and weaker economies like Greece, Italy, and Ireland do relatively well as well. However, in bad economic cycles like the one that has been consuming global economies for the last few years, big economies have not done so well and the weaker ones have fallen even harder. These weaker economies have borrowed from across the world essentially to maintain governments’ functionality and provide basic services to their people. In the process, they have exposed global financial powerhouses like Bank of America, BNP Paribas, Soc Gen, etc, etc… and their investors to unusually high risks of insolvency just as their risk of default have increased substantially.
Consequently, as much as governments in Greece, Italy, Ireland and Portugal are within a few weeks of defaulting on their obligations to their investors, institutions like ECB, IMF, Feds have stepped up to enact the necessary emergency measures needed to calm the markets and avoid trillions in potentially devastating financial losses through retirement funds, ETFs, hedge funds and other types of investments.
Just last week, it was reported that the ECB since 2008 has been recapitalizing European banks to the tune of 420 billion Euros, the IMF on its part has been providing more than $400 billion in emergency financial assistance with increased investments from Germany and the BRICS countries, and the Feds through Timothy Geitner are recommending a version of TARP which will allow many banks to take these assets off their balance sheets which will in turn calm investors fears.
Meantime, governments have enacted austerity measures which include deep cuts to social programs like pensions, and tax increases on seaport and airports, electricity bills, bus and train fares.
So what does this all have to do with Africa?
Europe is Africa’s biggest trading and Aid partner. Many of Africa’s commodities are purchased by European countries. Therefore, a recession in the EU will lead to a recession in Africa since these African producers have come to heavily rely on European consumers. EU will likely drag the US into a recession as well, which will in turn drag down China in what has become a hyper-connected world of overdependence.
Secondly, austerity measures in Greece and Italy have already lead to massive demonstrations aimed at urging parliamentarians to reconsider. So from a safely perspective and disruption of services, this is a real concern if you live or have loved ones in these areas.
Additionally, many developmental projects in Africa - roads, food safety and security, education, health - are directly sponsored by European taxpayers through their governments. That the funding of these projects will not be affected as European governments are forced to cut basic services to citizens who will see their standard of living deteriorate is open for debate.
One more real short-term effect is that as taxes increase in Europe hundreds of thousands of Africans who currently reside in Europe will have less discretionary income to spend as remittance, or on shipping goods and providing services and support to institutions in their countries. Many of the developmental gains that have been made by relying on these sources of money could be suddenly slowed or reversed.
African countries, especially those in Central and West Africa whose economies are inextricably tied to the fate of the EU through their fixed currencies with the EURO have to seriously consider what the eventual collapse of the Euro will mean for the CFA zone economies. Already these countries are among the poorest in the world, and lack of any growth in the Eurozone is causing stagnation in their economies as well.
In the next decade, because of rapid increases in Nominal GDP in China, Europe and the US due to increases in money supply and velocity by their respective central banks without corresponding increases in real output, most of us are expecting a hyperinflation environment. Obviously this is an extreme case of what will happen. Hyperinflation will lead to rapid increases in the prices of goods, and savers will suddenly find that their savings are worthless.
***Hinsley Njila is CEO of Realfocus Capital - providing research and advisory services into international markets for clients - governments, families, large corporations and institutional and high-net-worth investors - doing business in Africa, Europe and Middle East.