Friday, October 03, 2008

Two African Countries Feel Relatively Secure Amidst Credit Turmoil

Business Daily Africa
Reuters, Africa

Both Kenya and Nigeria seem confident that they are relatively sheltered from the credit-crisis storm that is affecting the US and other developed economies. Both countries are citing a withdrawal of foreign investments, but do not feel it will have a great effect on their economies.

In Kenya, analysts state that there is weak link to the global credit market and the country is relatively insulated. The banks in Kenya rely on the domestic economy for most of its deposits and lending, and have little investment in the types of securitized instruments that are causing so much trouble for the US. However, though the direct link to the global credit is weak, analysts have pointed to a few segments in the Kenyan economy that may be affected by the crisis.

As consumers in developed countries continue to feel the pressure of the credit crisis and their spending power goes down, they will be less likely to participate in tourism abroad. Tourism is a large part of the Kenyan economy and a big supply of foreign currency reserves. Also, as spending power is reduced it could affect Kenya’s export business. Ultimately, economists say that Kenya’s economic growth will depend on its ability to encourage domestic spending power in the country.

Nigeria, has a similar position as Kenya in that it is largely insulted from the global credit market. Nigeria has also seen foreign investors draw money out of its Nigerian Stock Exchange. However, in the past year Nigeria has aggressively pushed policies to improve its economy’s ability to continue to provide credit for its domestic companies. The banks should have enough assets to withstand the tightening of global markets. Nigerian financial leaders state that Nigerian economy has grow 7% annually and that there is single digit inflation. Overall, Nigerians feel confident in their economic situation.

1) Another large source of money for the Kenyan economy is remittances or when Kenyans abroad send money back home to their families (please see a previous Center blog on Mexican remittances. Will tightening spending power abroad affect peoples’ ability to send remittances back to Kenya or will the desire to provide for family outweigh their lack of spending power?
2) Nigeria’s market is retaining its liquidity and it does not seem to be too worried about foreign investors pulling out of their stock exchange. Recently, however, emerging markets like Nigeria were becoming popular locations for foreign institutional investors. Though Nigeria seems to be on solid economic footing, will the lack of foreign investment slow down their economic growth in the long-run?

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