Global slowdown dampens investor confidence in riskier markets

SOUTH AFRICA stands a serious risk of being sidelined as an investment destination – joining the other “riskier” emerging market countries. But the current African boom in economic growth rates may do a lot to alleviate the symptoms. Said Lizanne Case, business analyst: import export economics at First National Bank: “It is important to mention a few points on the global economy as highly relevant when analysing trade and investment flows in developing or emerging markets.” The current global slowdown – compounded by the US recession and credit crunch – is dampening investor confidence in “riskier” emerging markets, she reckoned. This causing what she described as “a general malaise” in emerging markets. “This has important implications for these markets, especially in Africa, and hence South Africa,” she told FTW. In her broader, continental overview, Case suggested that, in the past, Africa’s growth performance largely followed that of the global economy – although downturns were more pronounced in Africa during global growth slumps. But the relationship changed in 2001/02, when Africa began to outperform the global average, leading analysts to speculate that commodities drove this. The accompanying graphic shows Middle Eastern growth compared to Africa prior to the 1990s. On the graph, Middle Eastern growthspikes were driven by firm oil prices, but Africa experienced downturns during the same period. However, post-2000, Africa’s growth more-or-less mirrors that of Middle East. According to Case, this suggests one-or-all of the following: The rising importance of African oil; Africa coping with oil price strength, suggesting that perhaps the oil price increase has led to gains in other commodity prices, which, in turn, help African oil importers; an improved policy environment in Africa, with reduced fuel subsidies and less fiscal deterioration when there are oil-related shocks. “While it is a bit of an apples and oranges comparison, if we add India into the mix we find that the region has performed exceptionally well over the almost 30-year sample, consistently growing above the world average,” she said. “GDP growth is expected to be 8.4% in 2008. This is significant given that, comparatively speaking, this is off a relatively high base.”