An update on 'Africa rising'
Address by Mr Daniel Mminele,
Deputy Governor of the South African Reserve Bank,
at the Institute of International Finance
Africa Financial Summit
Johannesburg
30 September 2016
1. Introduction
Good morning, ladies and gentlemen
It is a pleasure for me to address you today, some five years since the inaugural
Africa Financial Summit that was held in Cape Town in 2012. At that time, George
Abed1 noted the great progress that African countries had realised in stabilising their
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economies a particularly remarkable achievement during a period of
unprecedented global financial turbulence. However, he also cautioned that the
prospects for continued growth in sub-Saharan Africa (SSA) were contingent on
greater economic diversification and on reducing dependence on commodity exports
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an issue to which I will return later in my address.
I see from the programme that yesterday you have covered much ground regarding
the economic and financial issues currently facing Africa. There is no doubt that the
economic environment has changed drastically since 2012. Indeed, the challenges
are presently somewhat greater and more complex. Today, I will touch on this
changing economic landscape, focusing on digital finance and financial inclusion as
1
George Abed is the former Senior Counsellor and Director for Africa and the Middle East at the
Institute of International Finance.
well as the financial regulatory environment. Each one of these is important in the
African growth context.
2. A pause in the 'Africa rising' narrative?
Beset by war, corruption, bad governance as well as poor macroeconomic policies,
Africa was labelled 'the hopeless continent' in 2000. Some 10 years later, this
narrative changed to a more inspiring one, of 'Africa rising', facilitated by the
commodities boom, growing manufacturing and services sectors, a rapidly growing
middle class, improved health prospects for many Africans, and a new-found passion
for technology. With a stable economic outlook, foreign investment also increased.
This was all the result of most African economies putting in place good governance
frameworks as well as sound macroeconomic and market-orientated policies which
spurred growth, trade, and investment.
The Global Financial Crisis, which caused turmoil in both advanced and emerging
economies, did not affect SSA quite as severely. In part, limited financial integration
with international capital markets and an inward focus of African banks had shielded
the region. So instead, SSA flourished, ranking second behind emerging and
developing Asia in terms of growth. Easy monetary policy in the advanced
economies, the search for yield as well as excess liquidity in global financial markets
benefitted Africa, and 'frontier markets' became the new buzzword and investment
destinations of choice.
However, there has been a notable economic turnaround since 2014, coinciding with
the period when crude oil prices and commodity prices lost significant ground.
Furthermore, as soon as it became clear that the Federal Reserve would begin to
normalise monetary policy, international investors and creditors started to withdraw
capital. African countries heavily reliant on commodity revenues were negatively
affected, their position exacerbated by a failure to build fiscal buffers during the good
times, combined with a significant pickup in foreign currency-denominated sovereign
bond issuance by African countries during the boom years. Consequently, the overall
fiscal balance for SSA moved from an average surplus of 1,7 per cent of GDP2 in
2004-08 to a deficit of 4,9 per cent in 2016. Government debt accelerated markedly
over this period, for example from 28 per cent of GDP to around 70 per cent in
Angola and from 30 to 50 per cent of GDP in South Africa. Foreign exchange
reserves have been run down in some countries and inflows of foreign direct
SSA's
investment declined in the region as a whole. In addition, current account
deficit increased from an average of 2,1 per cent of GDP in 2004-08 to 5,9 per cent
in 2015; it is expected to widen further, to levels above 6 per cent, this year. The
most pronounced shifts could be observed in the oil-exporting countries where the
average balance moved from a surplus of 13,1 per cent of GDP to a deficit of 3,9 per
cent over the same period.3
Thus, 2014 marked the end of the 'Goldilocks years' for Africa. SSA growth dropped
from 6,8 per cent in 2004-08 to 3,4 per cent in 2015, and, according to the
International Monetary Fund (IMF), it is set to decelerate further this year, to around
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1,6 per cent the weakest growth rate since the early 1990s, undershooting global
growth for the first time since 2000. Also according to the IMF, per capita income in
SSA is anticipated to fall this year for the first time since 1994.
Much of the more recent slowdown in SSA can be attributed to developments in the
two largest economies, Nigeria and South Africa, which account for more than half of
SSA growth. To put this into context: the IMF projects that Nigeria, which had been
growing by 10 per cent in the 2000s, will contract by 1,8 per cent this year while
South Africa will barely grow at 0,1 per cent in 2016. I should, however, mention that
the most recent forecast of the South African Reserve Bank (SARB) has lifted the
projection for economic growth in the country to 0,4 per cent in 2016. McKinsey
highlights that, for the African continent, economic deterioration emanates from two
distinct groups: the North African countries affected by the Arab Spring, and the oil
exporters (which include Nigeria) affected by the sharp decline in oil prices.
of Africa's combined GDP.
Together, these two groups account for nearly three-fifths
2
gross domestic product
3
Various issues of the sub-Saharan Africa Regional Economic Outlook of the International Monetary
Fund
The real annual GDP of the Arab Spring countries declined by 4,8 per cent in 2010-
15, and that of the oil exporters by 3,3 per cent.4
Many parts of SSA have witnessed a turnaround, but this is not true of the entire
region. We need to recognise the increasingly important role that East Africa is
playing in driving growth, as it benefits from cheap oil, slowing inflation, lower interest
rates, and an improved regulatory regime with increased investment in key sectors
such as transport and telecommunications.
Nonetheless, some believe that the 'Africa rising' story was directly related to
China's success
elevated commodity prices underpinned by and its many years of
double-digit growth rates. It is postulated in some quarters that the rebalancing of
economy away from investment to
China's focus more on domestic consumption
would give rise to a slowing in the Chinese economy, spilling over to commodity
prices and negatively affecting commodity-producing countries in Africa. But this is
only part of the story; the global economic recovery has not been particularly robust
and the slowdown is also not unique to SSA. Emerging markets in general have
slowed, with a few key economies having entered recession.
the deceleration in Africa's growth trajectory is
It is imperative to ensure that indeed
temporary. For this reason, countries on the continent must ensure that there is strict
fiscal discipline, that market-friendly policies are implemented (such as flexible
exchange rates), and that the strides made in strengthening institutions are
maintained and further entrenched. To reiterate what George Abed said in 2012:
revenue bases must be broadened, and Africa needs to continue improving the
basics, including infrastructure development.
remarks
On this note, it was heartening to note German Chancellor Angela Merkel's
a few weeks ago, made on the sidelines of the G-205 Summit in China, that, during
Germany's
presidency of the G-20 in 2017, there will be a focus on Africa,
4
Lions on the move II: realizing the potential of Africa's
economies, McKinsey & Company,
September 2016.
5
Group of Twenty (Finance Ministers and Central Bank Governors)
particularly pertaining to investment in infrastructure and direct investment in the
continent.
It has been said many times before: it would be difficult to ignore the potential that
this continent has to offer in terms of its fast-growing young population which is more
Africa's
educated and wealthier than ever. According to the United Nations (UN),
population is expected to rise from the current 1,2 billion people to 2,5 billion in 2050.
Granted, such population growth can be to the detriment of the continent if there are
no new jobs, but a recent report by McKinsey shows that job creation is outpacing
labour force growth at 3,8 per cent a year versus 2,8 per cent.6 Africa is also the
world's
fastest-urbanising region; its household consumption is expected to grow at
3,8 per cent a year between now and 2025 to reach US$2,1 trillion that year. Africa
could double its manufacturing output from the current US$500 billion to almost
US$1 trillion in 2025, largely based on African companies meeting domestic
natural resources remain in
demand. We should also remember that Africa's
abundance and that the continent is more peaceful and democratic than it was a
decade ago. Indeed, in terms of projected growth rates for 2016, of the 10 fastest-
World Bank ease of doing
growing economies in the world, 3 are from Africa.7 The
business report further shows that, despite the economic turnaround, 5 of the 10
fastest reformers are African.8
In addition, regional integration remains a priority for Africa over the long term. In this
respect, Agenda 2063 sets out the vision for this path, recognising that with deeper
regional integration come larger markets, greater industrialization and productivity,
as well as greater talent mobility. Investment in infrastructure means less congestion
along regional corridors and the facilitation of trade by cutting barriers such as time
and costs. The African Regional Integration Index9 was launched earlier this year for
the purpose of measuring and providing an assessment of developments across the
continent to identify gaps in terms of integration. The average Regional Economic
6
the potential of Africa's
Lions on the move II: realizing economies, McKinsey & Company,
September 2016.
7
These are Ivory Coast (8,5 per cent), Tanzania (6,9 per cent), and Senegal (6,6 per cent).
8
The
'Business in Africa, making Africa work', Economist, 16 April 2016
9
Africa Regional Integration Index Report 2016 by the United Nations Economic Commission for
Africa, African Union and African Development Bank.
Community (REC) scores are around 0,47 on a scale of 0 (low) to 1 (high). Overall,
the index shows that integration in the region could significantly progress, with the
East African Community the top performer (0,54) followed closely by SADC10
(0,531). It is interesting to note that the highest scores are on trade integration while
the lowest scores are on financial and macroeconomic integration.
The African Central Bank (ACB)11, one of the three financial institutions of the
African Union, is due to be set up by 2028, after the achievement of certain
milestones, including the establishment of an African Common Market as well as an
Economic and Monetary Union that would include Continental Fiscal and Banking
Unions. All these milestones (including the establishment of the ACB) are envisaged
to be achieved between 2029 and 2034. Given the tight timelines, it is doubtful
whether the establishment of the ACB is still within schedule. It may therefore be
useful to pause at this juncture and take stock in order to assess where the continent
finds itself in its economic and financial integration journey in relation to set goals.
The focus should first be on pursuing integration within regions before accelerating
integration across the continent.
3. Digital finance and financial inclusion
Globalisation and the information technology (IT) revolution provide unprecedented
opportunities for countries and regions to make significant advances in reducing
poverty and improving incomes, which in turn could underpin the desired economic
and social transformations. As the G20 High Level Principles for Digital Financial
Inclusion pointed out, one can no longer talk about growth without reference to the
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Fourth Industrial Revolution and digital finance a powerful and effective tool of
expanding access beyond financial services to other sectors, holding enormous
opportunities for the expansion of basic services and enhancing financial inclusion.
10
Southern African Development Community
11
The African Central Bank (ACB) was agreed upon in the 1991 Abuja Treaty. Once fully
implemented via Pan-African Parliament legislation, the ACB will be the sole issuer of the African
Single Currency, it will become the banker of the African Government, it will become the banker to
Africa's private and public banking institutions, it will regulate and supervise the African banking
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industry, and it will set the official interest and exchange rates all in conjunction with the African
Government's administration.
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These are powerful engines for job creation in developing countries and they have
an increasingly important role to play in promoting the development of small
businesses. Indeed, this was a key topic at the most recent World Economic Forum
on Africa, held in Kigali during May 2016. The World Bank highlighted digital finance
as an area which can contribute to achieving the goal of universal access to financial
services by 2020. The G-20 also recognised the potential role that digital finance can
play and released the G-20 high-level principles for digital financial inclusion during
its Hangzhou Leaders' Summit in September
2016. Countries were encouraged to
consider these principles as a basis for the development of country action plans to
leverage the huge potential offered by digital technologies. The promotion of digital
financial services would contribute towards the growth of inclusive economies.
At this stage, allow me to hone in on financial inclusion as it relates to the sphere of
digital finance. As has recently been reported by the G-20 through the work done by
-
the Global Partnership for Financial Inclusion, 2 billion adults globally the majority
-
of whom are women do not have access to formal financial services and are thus
excluded from opportunities to improve their lives. In SSA, the percentage of the
population with an account at a financial institution is just above 30 per cent,
compared with almost 50 per cent in emerging Asia and almost 70 per cent in East
Asia. Only about 23 per cent of small and medium enterprises in Africa have access
to formal financing.12 The SADC Financial Inclusion Strategy Workshop Report13,
developed by the FinMark Trust and presented to stakeholders in February 2016,
notes that financial inclusion in the SADC region is relatively low and varies widely
across countries. A number of supply barriers have been identified, which include a
lack of incentives and appropriate delivery channels that constrain financial
institutions in providing and extending financial products and services to unserved
and underserved segments of the population. On the demand side, barriers include
administrative, systemic as well as attitudinal challenges, many of which are more
pronounced among certain groups, such as the youth and women. These barriers
12
World Bank (http://datatopics.worldbank.org/financialinclusion/region/sub-saharan-africa)
13
FinMark Trust
(http://www.finmark.org.za/wp-content/uploads/2016/03/Rep_SADC-FinancialInclusion-Strategy-Workshop_Feb2016.pdf)
undermine or downright prohibit the ability to access and use financial products and
services.
Thus, much remains to be done in furthering financial inclusion, as the financial
markets in many African countries continue to lack depth and therefore offer limited
financing opportunities to small- and medium-sized enterprises, and to the
population at large. It is widely acknowledged that there are limited financial avenues
for basic services such as savings and making payments. For example, by paying
wages and transfers digitally, instead of in cash, governments and the private sector
can play a pivotal role in increasing financial inclusion. While there is wide
recognition on the continent of the growing importance of mobile money accounts
and digital technology in the financial sector, this potential needs to be leveraged
much more. However, we also need to keep in mind that there is a key trade-off
between inclusion and maintaining the integrity of the financial system; a balanced
regulatory and supervisory approach is therefore required in considering the Fourth
Industrial Revolution.14
The breakthrough innovation brought on by crypto-currencies and block chain
technology, amongst others, will continue to bring about significant and wide-ranging
changes to society and the broader economy, and is very likely to have a positive
spillover effect on the financial services sector and markets in the African continent.
Many financial institutions have already experienced cyber attacks, including banks,
insurers, and even central banks. Central banks have to be vigilant in assessing
potential systemic risks and enhancing the financial system's resilience to cyber-
threats. Reported attacks, such as those on the Society for Worldwide Interbank
Financial Telecommunication (SWIFT)15, the financial messaging network that
underpins most international money transfers, have the potential to paralyse global
trade and finance. It is no surprise that cybersecurity has in the recent past moved
swiftly up the list of priority issues in a number of countries as regulatory authorities
14
Wolrd Bank Global Findex Database 2014, Measuring Financial Inclusion around the World.
15
There have been three successful attacks on banks using the SWIFT money transfer network. The
latest of these affected an Ecuadorian bank on 12-22 January 2015. During this period, at least 12
fraudulent transfer requests instructed Wells Fargo to send US$12 million belonging to Ecuador's
Banco del Austro to accounts in Dubai, Hong Kong, and the United States. Wells Fargo complied with
these requests.
seek to address cybersecurity threats and enhance cyber-resilience. It is therefore
very important to strengthen international cooperation and peer exchange of
information in this area. In this regard, the SARB hosted its first cybersecurity
with the theme of 'Collaboration for building
conference last month, cyber-resilience'.
4. The rise in African cross-border banks and financial regulatory impacts
on Africa
As I come to the end of my remarks, I would like to briefly touch on the rapid growth
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in recent years of African cross-border banks, or pan-African banks (PABs) a
further testimony to the 'Africa rising' theme.
PABs are improving competition, especially in host countries with small markets,
driving innovation and bringing new opportunities for diversification for the home
countries. But with rapid growth come a number of responsibilities, such as
maintaining financial stability and ensuring adequate cooperation and resolution
strategies among home and host financial supervisors16. The rising trend of cross-
border banking in Africa is an opportunity to further strengthen regional financial
integration. In this regard, the work of the Association of African Central Banks under
the auspices of the Community of African Banking Supervisors (CABS) is an
important initiative to consider the potential macro financial spillovers across
countries. Implementing regulatory coordination measures on financial integration
and access will have substantial benefits in promoting growth on the continent.
The global regulatory reforms agreed to in the aftermath of the Global Financial
Crisis have been vast, complex, and ground-breaking in many aspects, requiring
effective coordination among many stakeholders. Many of the 'fault lines' that had
contributed to the Crisis have been addressed, but the full, consistent, and timely
-
implementation ensuring a level playing field and addressing the major unintended
-
consequences of the reforms remains an ongoing challenge.
16
The report on Pan-African Banks-Opportunities and Challenges for Cross-Border Oversight, IMF,
January 12, 2015.
One of these unintended consequences is related to the effects arising from the
global reforms addressing the problem of 'too big to fail' (TBTF). South Africa directly
experienced such changes in business models recently when Barclays announced
its intention to reduce its 62 per cent share in Barclays Africa Group Limited (BAGL),
a material subsidiary publically listed in South Africa which includes Absa, one of the
largest South African banks. Barclays' intention to reduce its controlling stake in
BAGL was mainly informed by global regulatory pressures to meet additional G-
SIB17 requirements. The objective of addressing the problem of TBTF was thus
achieved, but in so doing other adverse and unintended effects were introduced.
Significant strategic changes by G-SIBs, as well as the fact that these changes are
at times made in reaction to regulatory changes rather than necessarily on business
considerations, can lead to increased market uncertainty and short-term volatility.
A fallout from the international reforms has been the effect of the decline in
correspondent banking relationships (CBRs) on the operations of banks on the
African continent. Some G-SIBs have either restricted or exited CBRs in more than
10 African markets. A recent report of the Working Group on Correspondent Banking
18
of the Committee on Payment and Market Infrastructures acknowledges that the
issues surrounding the withdrawal from CBRs are very complex and that costs
related to anti-money laundering and combating the financing of terrorism
(AML/CFT) compliance are only one of the elements that have to be considered in
order to understand recent trends. The report states that it is difficult to disentangle
the effects of de-risking from other causes, including declining economic activity,
external shocks, and the consolidation of the banking system. In Africa, the most
pronounced declines in CBRs occurred in Northern Africa and partly in Southern
Africa; other regions experienced substantial increases.
Markets in all jurisdictions must have access to a well-functioning global financial
system in order to develop and prosper, but de-risking can create financial exclusion
and has the potential to drive certain payment flows underground, which can set the
17
global systemically important bank
18
Correspondent banking, Committee on Payment and Market Infrastructures, Bank for International
Settlements, July 2016.
goal of creating an open and global integrated financial system at risk. In this regard,
the efforts of the Financial Stability Board and its outreach programme through the
six Regional Consultative Groups (RCGs)19 to better understand and address the
reasons behind the decline in CBRs, as well as the global trend of de-globalising and
de-risking, are to be welcomed. The RCG for SSA, which will be held in Cape Town
on 25-26 October, will focus on CBRs and the effects of the reforms.
5. Conclusion
In conclusion: while the growth paths in Africa may have diverged, the potential that
this continent has is tremendous and outpaces that of any other region in the world.
But this potential needs to be harnessed. Integration needs to be deepened,
infrastructure improved, and productivity lifted.
The long-term fundamentals remain strong, and while regional integration may not
be proceeding at the speed hoped for, this is not necessarily a bad thing, but rather
an opportunity to take stock, readjust plans where necessary and implement them
with renewed vigour. In this regard, the Fourth Industrial Revolution promises
significant benefits, if harnessed correctly.
While some have suggested that the 'Africa rising' narrative may have been
exaggerated and are starting to question it, to me it looks more like a pause, and we
should not allow the current headwinds to detract from the vast potential and
opportunities that the African continent continues to offer.
Thank you.
19
The Financial Stability Board (FSB) has six Regional Consultative Groups (RCGs), established
under the FSB Charter to bring together the financial authorities from the FSB member (24) and
nonmember (41) countries to exchange views on the vulnerabilities affecting financial systems and
initiatives to promote financial stability. The FSB RCG for sub-Saharan Africa is co-chaired by
Governor Emefiele of the Central Bank of Nigeria and Governor Kganyago of the South African
Reserve Bank.