AFRICA IN A CHANGING GLOBAL FINANCING ARCHITECTURE Dr. Vera Songwe - - PowerPoint PPT Presentation

AFRICA IN A CHANGING GLOBAL FINANCING ARCHITECTURE

• Dr. Vera Songwe

UN Under-Secretary General and UNECA Executive Secretary

8 August 2018

Sharm El Sheikh, Egypt

Symposium of the Association of African Central Banks (AACB) for 2018

Drivers of Growth Before the crisis

• High growth averaging 5.7% per annum during 2001-2008
• Low inflation rates between 5% and 10%
• Declining poverty rate since 1990s

Impact of the crisis on African Economies

• Declining trade flows and capital inflows
• Deteriorating foreign exchange reserves
• Increasing deficits in Governments revenues and overall balances
• Large financing gaps for growth drivers

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Africa during the Recent Global Economic Crisis

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Africa recovery from the global economic crisis

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Africa’s Sustained Economic Expansion

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GDP Growth: Africa’s growth record has been significant for the past decade

3.3 5.8 2.9 7.3 3.6 3.7 3.4 2.3 3.7 1 2 3 4 5 6 7 8 2009 2010 2011 2012 2013 2014 2015 2016 2017

Trade : High demand led to favorable terms of trade in Africa

$804 bn $1,000 bn $1,177 bn $1,255 bn $1,242 bn $1,194 bn $944 bn $847 bn $950 bn

• 200,000

400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 2009 2010 2011 2012 2013 2014 2015 2016 2017

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Financial Flows to Africa

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Robust foreign investments and upward trend in remittances

10 20 30 40 50 60 70 80 90 2009 2010 2011 2012 2013 2014 2015 2016 US$ BILLION

FDI Inflow Net ODA Remittances 75% of Africa’s remittances come from US and Europe

Drivers of Growth

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Illicit Financial Flows out of Africa

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• In the last three decades to 2009, Africa has lost close to US$

1.4 trillion.

• Losses through non-trade channels average $27 billion

annually between 2005 and 2014.

• Losses through mis-invoicing averaged $73 billion between

2005 and 2015.

• Uneven geographical distribution of illicit capital flight – West

and Central Africa surpassing the rest of the regions.

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African Banking and Financial Systems

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46.54 9.74 67.04 37.21 8.92

10 20 30 40 50 60 70 80

Market Capitalization (US$ billion, 2017)

Selected African Stock Exchanges Development of African Financial Markets

• Growing financial markets

driven by improved macroeconomic fundamentals, increased political stability, high commodity prices and robust domestic demand.

• Increasing trading volumes and

capitalization in stock markets – highest returns in the world.

• Growing investment rates

supported by strong emerging middle class.

South Africa dominates (total market capitalization of $1,230 billion)

Bond Markets in Africa

• Dominated by short-term government securities with activity focused on domestic

primary market

• Precarious conditions hampering the development and growth of corporate debt

markets – lack of government benchmark

• Ineffective domestic market infrastructure (clearing and settlement systems)
• Very low foreign holdings of domestic debts
• Infrastructure bonds – Kenya, South Africa

Deep and well-functioning domestic debt markets play an important role in financing Africa’s development As such, efforts should aim at addressing the market infrastructure and microstructure problems and attract more investment in domestic bond markets:

• Need for regular and liquid benchmark auctions/issues
• Development of maturity instruments (social security, insurance)
• Remove regulatory costs of corporate issuance
• Facilitate creation of liquid secondary market and transparency
• Promote domestic savings industry

Deep and well-functioning domestic debt markets play an important role in financing Africa’s development As such, efforts should aim at addressing the market infrastructure and microstructure problems and attract more investment in domestic bond markets:

• Need for regular and liquid benchmark auctions/issues
• Development of maturity instruments (social security, insurance)
• Remove regulatory costs of corporate issuance
• Facilitate creation of liquid secondary market and transparency
• Promote domestic savings industry

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The Private Equity Industry

• African private equity industry has been expanding during the past few years

with new funds flowing into the continent

• Traditional barriers such as poorly developed financial markets, political

instability and fragmentation of the economy are being addressed.

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CFTA – An opportunity to improve Regional Markets and Banking Systems

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• Regional integration is vital for Africa - providing benefits and opportunities

for growth, structural transformation and strong and integrated markets

• 44 African countries signed the Agreement establishing the African

Continental Free Trade Area (CFTA) – 4 have ratified it.

• The CFTA – an important step towards boosting intra-African trade and

achieving the SDGs and leaving no one behind (Agenda 2030 and African Union Agenda 2063).

• Long-term gains are estimated at about US$16 billion annually when all

tariffs are eliminated.

• Expected increase in intra-African trade of about 30% will contribute to:
• Structural transformation (incl. increased production/trade of more sophisticated

products with a higher technological content),

• Higher returns on investments (with economies of scale),
• Increased efficiency of domestic firms,
• Employment expansion (incl. for women and youth), especially along road corridors.

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Correspondent Banking in Africa: Selected Correspondent Banks in Selected Countries

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Algeria

• Banque de l’Agriculture et de

Development Rural Egypt

• Bank of Alexandria

Kenya:

• Africa Banking Corporation
• Kenya Commercial Bank
• Stanbic Bank Kenya

Mauritius

• Mauritius Commercial Bank

Morocco

• Banque Marocaine du

Commerce Exterieur SA South Africa

• ABSA Bank
• HBZ Bank
• Standard Bank of South Africa

Tunisia

• Societe Tunisienne de Banque
• Tunis International Bank

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Increased De-risking by Global Banks

• Increasing number of large international banks have reported a decline in

their correspondent banking relationships. More than 70% of banks globally.

• Many global banks are concerned about the risks of money laundering,

terrorist financing, as well as costs related to operations and regulatory requirements.

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Number of active correspondents (2011=100)

Source: Data from SWIFT Watch, Financial Stability Board (FSB)

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Levels of de-risking in Africa have been uneven

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Change in the number of active CBRs has been significant for many African countries. Concerns that de- risking may increase further due to weak Anti-Money Laundering /Counter Terrorist Financing (AML-CTF) infrastructure in some countries. Sudan lost close to 40 percent of its CBRs -highest

• 60.00%
• 40.00%
• 20.00%

0.00% 20.00% 40.00% 60.00%

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cabo Verde CAR Chad Comoros Congo DRC Cote d'Ivoire Djibouti Egypt

• Eq. Guinea

Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar Malawi Mali Mauritania Mauritius Morocco Namibia Niger Nigeria Rwanda Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

Number of active CBRs by jurisdiction (2012-2016 evolution)

Source: Data from SWIFT, Financial Stability Board (FSB)

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Impact of De-risking on African Economies

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Consequences for Local/Regional Banks

• Concentration of

relationships in smaller financial institutions

• Increased costs of funds/

transactions

• Compliance and regulatory

challenges

• Capacity constraints

Economic and Social Impact

• Reduced effectiveness of

domestic banking system

• Affects Financial inclusion
• Trade – lower exports and

imports

• Loss of FDI and remittances

and threats to poverty reduction

• Rise of informal financial

systems and increasing illicit transactions

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Mitigating the Risks and Effects of De-risking

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Halt the Flow of IFFs: Various initiatives Develop compliance and legal entity identifier database platforms Create national and regional credit rating agencies Develop and strengthen effective information-sharing platforms Promote innovation and technology developments – e.g. Fintech and DIGITALID Enhance regulatory and legal frameworks – e.g. enforcement of domestic and international regulations (including AML/CFT) Advocate for more harmonization of regulations across jurisdictions and cross-border banking – e.g. advocacy and support for the CFTA.

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• Comply with FAFT Recomendations: Almost all African

countries are members of subregional FAFT affiliates.

• The Global Forum on Transparency and Exchange of

Information for Tax Purposes (OECD-led with global reach & related Yaoundé Declaration where countries commit to tackle tax-related IFFs related through Exchange of Information (EOI) and improved international tax cooperation.

• Only 27 African countries are members of the Global Forum
• Only 20 have signed the Yaoundé Declaration

Mitigating the Risks and Effects of De-risking: Halting the flow of IFFs: Various initiatives but collective action key

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• the “Big Three” CRAs (Fitch, Moody’s and Standard & Poor’s)

control 96 per cent of the market . Credit spreads demanded by investors show a high correlation with the ratings of the Big three”

• An African CRA will help broaden the scope and coverage of

credit rating, facilitate in-depth country/regional analysis and timely reporting of country ratings.

• It will help Boost investors confidence, deepen local

understanding of the country risks and how best to mitigate those sovereign, credit, market and operational risks. Mitigating the Risks and Effects of De-risking: An African Credit Rating Agency (CRA)

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• An African credit rating agency (ACRA) would take an in-depth

analysis to the transactions and balance-sheet activities of large number of companies across the continent.

• Based on the nature of the market, issuers and investors place a

high value on the reputation and expertise of CRAs. Barriers to entry may act to inhibit further competition.

• Finding the right business model and methodology is a big

question to establish ACRA.

• African central banks need to deliberate on the business model
• f such an agency ensuring its transparency

Mitigating the Risks and Effects of De-risking: An African Credit Rating Agency (CRA)

THANK YOU!

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