African Business : Is Africa an emerging or a frontier market, and is this distinction important?
Roubini : Africa is frontier rather than emerging. I would make a difference between those economies that are emerging markets and those that are frontier and I would say in sub-Saharan Africa, other than maybe Nigeria and South Africa, which I would consider as being emerging, the others are more frontier economies by the standard of how people define different types of economies.
Does that mean they’re decoupled from the rest of the world?
There is partial decoupling – I would say it’s not full. The kind of pressure that you saw last year, and even recently in emerging markets, has affected to a smaller measure emerging markets or frontier economies in the region because they have less capital mobility, there is less portfolio investment – either in equity markets or bond markets by foreign investors – so there have been pressures but they’ve been modest.
The currency has fallen slightly in places like Nigeria but we didn’t see the kind of massive outflows that you see in some of the bigger emerging markets because it’s still more of a frontier economy scenario. The one country in which the financial flows should have been stronger is South Africa, where portfolio investments into financial current accounts are much larger and therefore outflows of bonds or equities has a bigger effect on currency, bond market, equity prices.
We have seen, in recent years, about a dozen countries in the region issue bonds in foreign currency. Therefore as investors move out, spreads can be pushed upward. However, even during the latest episodes of emerging market turmoil, spreads in sub-Saharan Africa have moved less than those of other emerging markets that are paradoxically deeper given they are in general more liquid markets.
Do you think countries like Nigeria and South Africa should be defending their currencies and propping them up?
Not necessarily. If there are currency pressures, this can be due either to global factors such as a slowdown in China, falling commodity prices, tapering and tightening in the US; or it could be due to poor economic policies that are more internal.
If the currency pressure is due to global shocks, then maybe it’s debatable how much you want to resist it, especially if you do have a current account deficit like South Africa.
But do you let the currency fall gradually – an orderly fall is part of the adjustment process – or risk letting the currency go into free-fall – which will be risky?
I would not use the reserves to prop up the currency. If you want really to slow down the rate of currency depreciation, probably tighter monetary policy is the more appropriate response rather than wasting precious reserves to try to prop it.
But in a country like South Africa where growth is already very low, excessive monetary tightening is probably undesirable.
To add to the problem, interest rates generally in Africa are already extremely high, which makes life very difficult for SMEs and those who want to invest. Yes, access to finance is an issue throughout the continent especially for SMEs. Larger corporates have access to international capital markets.
These high interest rates reflect higher inflation but they also reflect some risk and they reflect a not-very-well-developed banking system and capital market so the cost of financing tends to be high, especially for small and medium-sized enterprises throughout the region. - in African Business
Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
