growth. however, as interest rates started to rise in the us due to inflation concerns, this cycle came to an end and the demand for houses started to decline. this resulted in sharp falls in home prices and as a result, many owners / borrowers have become unable to service their mortgage loans. the excess liquidity has been slowly drying up and the levels of equity extraction available from home purchases is coming down – leaving less money for consumer spending. this has started causing problems for the us economy in the form of foreclosures, job losses, loss of consumer confidence and reduced consumer spending and the fears of a slowdown, if not outright recession. this is what has become known as the sub - prime crisis. the sub prime crisis has also had a “ contagion effect ” and we have already started to see huge write - offs by banks business in the us as well as the uk, where housing prices during last five years have also risen very rapidly, creating a potential effect such as in the us. this is expected to have global effects since the us consumer demand amounts to more than 40 percent of the total oecd demand, and to 18 percent of world demand. unlike the asian financial crisis approximately 10 years ago, the current events triggered off by the us sub - prime market has not sent global markets and currencies into a tailspin. indications are that, fundamentally, the global economy has firm foundations, although there is still the possibility that the turmoil may have some long - term impact due to the domino effect of reduced economic activity in the world ’ s largest economy, the us. initially, as was the case with the asian crisis, as the problem exacerbated over the last couple of months, large institutional investors appeared to shed both developed and emerging - market equities and foreign exchange markets witnessed a significant increase in volatility, and emerging - market spreads rose significantly between late july and mid - august, as losses related to sub prime mortgages prompted investors to shed riskier assets, and the spread, or extra yield, investors demand to own emerging - market dollar bonds instead of u. s. treasury securities widened according to jpmorgan chase & co.'s embi index. interestingly, however, unlike the previous global financial crisis, the rise in emerging - market debt spreads was not as pronounced or as sustained as that of credit markets in developed economies. what does all this mean for east africa? there appear to be two broad

schools of thought. substantial impact some think it will reduce the flow of capital coming to the emerging as well as “ pre - emerging ” markets as ours is characterized. in this regard in east africa, we have experienced significant interest and flows into our markets of late. there has been a large increase in the number of foreigners participating in our market, as international investors across the globe have searched for higher yielding assets, including ours. therefore, some consider that as a region, we are vulnerable to any increase in global risk aversion stemming from the sub prime crisis. proponents of this view suggest that when investors get scared, they sell their riskiest assets ( among them investments in emerging and pre - emerging markets ) in search of safe havens, as they reassess their appetite for risky assets. it is therefore felt that now, with the sub - prime crisis, this interest will dry up. little or no impact the other thought school is of the opinion that our economies appear resilient, and will weather the ongoing market correction in the industrialized world. it has also been speculated that lower demand for products in the developed world would be balanced by increased demand in developing countries. in fact, some analysts have started to talk about a new " flight to quality " idea – that buying securities in an emerging market could be an appealing opportunity when there is turmoil in the developed markets. in other words, emerging markets have started to resemble a safe haven! given these observed phenomena, a school of thought is becoming convinced that economies in the rest of the world have become “ de - coupled ” from the us. in this view, it is claimed that, even if the us economy slows, the rest of the world, particularly the fastgrowing emerging markets of china and india, will not. this view appears to be supported by the international monetary fund ( imf ), which in its most recent world economic outlook publication, released in september, stated that “ … world growth is expected to slow but remain solid, supported by the strong momentum of the main emerging markets, china, india and russia, which together accounted for one - half of global growth over the past year ". others suspect this latest burst of enthusiasm is nothing more than a whim that will disappear when confidence in us and european markets returns. still others see it as the beginning of a new speculative bubble. nonetheless, investors'new - found confidence in emerging markets does reflect one reality, namely that many emerging economies are in far