Recovery from the Global Crisis: Implications for SADC and Development Finance Keith Jefferis May 2010

Remember early 2009 …. World Economy Financial crisis Freezing of credit markets Sudden plunge into deep recession Collapsing commodity prices Concern about prolonged depression Rising unemployment Bank rescues and fiscal injections SADC/SSA No financial crisis, but concern about knock-on effects of global crisis, via Trade Capital/financial flows Risk aversion Macroeconomic concerns Growth slowdown BoP Fiscal problems Poverty

Global growth slowdown... and recovery Depths of recession – 4Q2008 and 1Q2009 Recession was deep, but recovery has been robust Fears of prolonged depression not realise Global growth projected to settle in 3% - 4% range in

Emerging markets leading the recovery Recovery has been driven by emerging markets Faster emergence from recession Higher growth during recovery Less affected by financial crisis and debt problems – more resilience Developed economies – sluggish recovery: Fiscal/debt problems Unemployment Euro-zone crisis

South Africa lagging other EMs, but recovering South Africa’s recession has been comparable in depth to Emerging Markets generally, but: SA lagging general EM recovery SA growth expected to be reasonably robust in 2010, due partly to World Cup effect Growth projected to weaken going into 2011

Signs of recovery... minerals prices CopperNickel

… and oil prices

Economic Developments in Sub- Saharan Africa

SSA Economic Outturn Greater resilience than expected Greater resilience than expected Growth slowdown relatively modest Growth slowdown relatively modest Quick recovery expected Quick recovery expected Macroeconomic stress manageable Macroeconomic stress manageable Greater impact on middle income countries, more integrated into global markets Greater impact on middle income countries, more integrated into global markets Source: IMF REO SSA April 2010

Why such a modest economic impact on SSA? International Quick and robust global recovery in growth, trade & commodity prices SSA growth slowdown driven by reduced demand, not banking crises Emerging market growth -> commodity prices Recovery in financial flows Domestic Prior reforms and restructuring -> many countries started from strong macroeconomic position Prior fiscal reforms enabled fiscal stimulus Appropriate monetary policy response – inflation not a major concern Resilient financial systems Contrast with previous crises

Finance & Capital Markets Central to economic problems in developed markets – and transmission of those problems around the world Central to economic problems in developed markets – and transmission of those problems around the world Credit crunch Credit crunch Risk aversion Risk aversion Market collapses Market collapses Impact short-lived Only small decline in remittance inflows Development assistance: overall flows held up, especially with boost from MFIs Recovery of risk appetite Resurgence of portfolio flows to EMs – low returns in major markets SSA role of FDI – less volatile than short-term flows

But of course there are problems… Fiscal & Debt conditions Fiscal & Debt conditions Limited fiscal space Limited fiscal space Needs to be carefully managed Needs to be carefully managed Partial but not full recovery in global demand Partial but not full recovery in global demand Well below trend Well below trend Employment & Incomes Employment & Incomes Rising unemployment Rising unemployment Household income squeeze Household income squeeze Poverty alleviation/MDGs Poverty alleviation/MDGs Setbacks/delayed achievement Setbacks/delayed achievement Fragile states Fragile states Especially vulnerable Especially vulnerable

Economic Outlook - SADC

Inflation: much reduced, not a major concern, allows monetary policy easing Source: IMF REO for SSA (April 2010) 46%

Real GDP growth – recession mostly avoided in 2009, strong recovery projected for 2010 Source: IMF Regional Economic Outlook, April 2010

Fiscal balance: some large deficits, esp. in SACU, but generally manageable

Current account: some large deficits, and dependence on capital inflows Source: IMF Regional Economic Outlook, April 2010

Reserves: some declines, but still comfortable in most countries Source: IMF Regional Economic Outlook, April 2010

Outlook & risks – world economy More positive than a year ago More positive than a year ago Worst fears of depression appear not to be realised Worst fears of depression appear not to be realised International recovery under way International recovery under way Recovery in financial and commodity markets Recovery in financial and commodity markets BUT volatility and uncertainty still apparent in currencies, commodity markets BUT volatility and uncertainty still apparent in currencies, commodity markets “Double –dip” recession cannot be ruled out “Double –dip” recession cannot be ruled out Medium-term outlook still uncertain End of inventory-driven upturn Duration of impact of fiscal stimulus Consumer confidence Lagging impact of rising unemployment Financial sector uncertainty – re-regulation De-leveraging Rising long-term interest rates & crowding out of private investment

Outlook & risks …. SADC Positive Africa growth should resume pre-crisis trajectory – helped by higher global growth Resource rich – benefit from resumption of commodities boom Focus can now change – from short-term output stabilisation to medium-term development challenges Negative Slow growth in Europe – major export market Global growth – still vulnerable Limited growth of donor resources, especially bilateral Commodity price volatility Slow progress on regional integration Energy shortages

Implications for DFIs Finance is at the centre of attention Finance is at the centre of attention SADC financial systems generally stable SADC financial systems generally stable Recognition that markets and commercial FIs cannot achieve everything Recognition that markets and commercial FIs cannot achieve everything Many African countries still by- passed by commercial flows Many African countries still by- passed by commercial flows Banks still cautious Banks still cautious Recognition that particular development gaps exist – infrastructure, SMMEs, agriculture, unbanked – that may have to be filled by DFIs Recognition that particular development gaps exist – infrastructure, SMMEs, agriculture, unbanked – that may have to be filled by DFIs Scope for more stable view of risk Improving domestic bond markets AfDB – AFMI Government resources constrained More resources from MFIs Opportunities in new technologies & partnerships (MFIs, telcos, donors) Regulation?

Thank You