VZCZCXRO1771
PP RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHLO #1886/01 2251613
ZNR UUUUU ZZH
P 131613Z AUG 09
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 3164
INFO RUEHZO/AFRICAN UNION COLLECTIVE PRIORITY
RUEHUJA/AMEMBASSY ABUJA PRIORITY 0630
RUEHFN/AMEMBASSY FREETOWN PRIORITY 0200
RUEHKM/AMEMBASSY KAMPALA PRIORITY 0198
RUEHLS/AMEMBASSY LUSAKA PRIORITY 0114
RUEHMR/AMEMBASSY MASERU PRIORITY 0048
RUEHNR/AMEMBASSY NAIROBI PRIORITY 0476
RUEHSA/AMEMBASSY PRETORIA PRIORITY 0744
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS SECTION 01 OF 04 LONDON 001886 
 
SIPDIS 
 
DEPARTMENT FOR AF/EPS 
 
E.O. 12958: N/A 
TAGS: EAID ECON EFIN KE LT NI SF UG UK XA ZA
SUBJECT: VIEWS ON SUB-SAHARAN AFRICA FROM LONDON-BASED 
EXPERTS 
 
LONDON 00001886  001.2 OF 004 
 
 
 
¶1.  (SBU) Summary.  London-based bank and development 
analysts are seeing positive signs emerging in sub-Saharan 
Africa's (SSA's) economies, after months of negative news, 
but remain cautious in their near-term outlook for the 
region.  While prospects for the global economy are improving 
and there is some renewed investor interest in SSA, private 
sector analysts note that the economic situation in the 
region remains volatile and could worsen, rather than 
improve, in the coming months.  There is evidence that 
foreign direct investment (FDI) and remittances are now 
weakening, and analysts note that the region remains highly 
vulnerable to decreases in NGO assistance and foreign bank 
lending.  Private sector analysts assess a deterioration in 
FDI and cross-border bank lending would have a 
disproportionately negative impact on long-term growth, and 
cite potential cuts in public funding for education and 
infrastructure programs as particularly harmful to SSA's 
long-term economic prospects.  End Summary. 
 
Crisis in the Region Still Unfolding 
------------------------------------ 
 
¶2.  (SBU) Econoff met with London-based bank analysts and 
think tank researchers during the period from mid-July 
through early August 2009 to discuss the impact of the 
economic crisis on SSA and their assessment of the region's 
key vulnerabilities in the months ahead.  Bank analysts at 
HSBC and Goldman Sachs have been monitoring the situation in 
SSA closely for their international investors, while 
researchers at the Overseas Development Institute (ODI), a 
leading British think tank, are tracking the impact of the 
crisis on African countries' poverty and development. 
 
¶3.  (SBU) Experts agreed that the economic downturn began to 
noticeably affect SSA during the fourth quarter of 2008, 
dispelling hopes that Africa's lack of exposure to the global 
subprime market would spare it from the financial crisis. 
HSBC sub-Saharan equity analysts Marcel Mball-Ekobena and 
Umulingua Karangwa told Econoff that while leaders in SSA 
"were in denial in 2008," the banks knew there was a problem 
on the horizon. By the first quarter of 2009 data showed the 
recession had already affected trade and portfolio investment 
in the region.  The IMF estimates SSA experienced portfolio 
outflows of nearly $20 billion in late 2008 and no growth in 
the volume of exports. 
 
¶4.  (SBU) While bank and development analysts have begun to 
see positive signs emerging, they remain extremely cautious 
in their near-term outlook and told Econoff that the 
situation is volatile and could worsen in the coming months. 
Javier Perez de Azpillaga, Director of Economic Research at 
Goldman Sachs, noted that while there has been an uptick in 
the global economy, it is unclear whether it will be 
sustained; moreover, improvements to the global economy have 
not yet been transmitted to SSA.  Similarly HSBC analysts 
told Econoff that portfolio investor interest in SSA is 
picking up, but has not materialized into new investments. 
 
¶5.  (SBU) Perez de Azpillaga, whose research concentrates on 
South Africa, forecasts a protracted recovery, or "wide 
U-shape," for the country which he sees as a bellwether for 
the region.  He expects there will be some improvement in the 
second half of 2009, but performance will remain below 
potential through at least 2010.  He cautioned, however, that 
it is possible that any correction may not hold and added 
that Goldman has been expecting an improvement in South 
Africa's economy since May, but the data continue to be 
depressed. While some lag between the global economy and 
South Africa is to be expected, he told Econoff that if the 
data does not improve by September, Goldman analysts will be 
worried because it will indicate that their analysis is 
"missing something." 
 
Trade and Portfolio Investment Hit First 
---------------------------------------- 
 
¶6.  (SBU) Analysts agreed that the first effects of the 
global downturn on SSA came through the trade and portfolio 
investment channels.  The downturn in trade affected 
 
LONDON 00001886  002.2 OF 004 
 
 
virtually all the countries in the region, but some 
countries, such as Nigeria and Zambia, were particularly 
vulnerable due to their disproportionate reliance on raw 
material exports and commodity prices.  While Goldman Sachs' 
Perez de Azpillaga noted ongoing problems with trade 
financing, he and HSBC analysts were fairly upbeat on the 
near-term prospects for recovery in these channels.  They 
assess an uptick in global demand and commodity prices should 
have a positive effect on the region this year, 
 
¶7.  (SBU) Like trade, portfolio investment flows to the 
region also suffered a significant decline early on.  HSBC 
analysts explained that foreign investors, who had put 
capital primarily into banking, telecommunications, cement, 
and brewing companies, withdrew large amounts of funding when 
the crisis hit.  Both HSBC analysts and Isabella Massa, a 
research fellow at ODI, said that their research showed that 
Nigeria, where HSBC estimates banking makes up about 80 
percent of the stock market, and Kenya were the most affected 
by foreign redemptions.  According to HSBC analysts, IPOs in 
most SSA countries, "virtually stopped." 
 
¶8.  (SBU) While banking contacts told Econoff that they are 
seeing renewed interest in SSA from investors, they cautioned 
that this has not yet translated into anything tangible. 
Perez de Azpillaga told Econoff that SSA markets continue to 
be affected by a "return to vanilla products," whereby 
investors are willing to accept lower returns in exchange for 
lower risk.  In South Africa, Perez de Azpillaga explained, 
there have been some positive private capital inflows in 
recent months, but not enough to offset the outflows.  Massa 
told Econoff that ODI assesses that in the coming months 
those countries with a still high degree of foreign presence 
in the market, such as Kenya and Zambia, will be the most 
vulnerable to a further drop in portfolio investment. 
 
FDI and Remittances Weakening 
----------------------------- 
 
¶9.  (SBU) London-based analysts are seeing the first signs of 
problems with FDI in some SSA countries.  HSBC contacts told 
Econoff that FDI is slowing, and pointed to a recent IMF 
study that estimates FDI in SSA will drop by roughly 18 
percent in 2009.  ODI's Massa told Econoff that Zambia has 
experienced a holding back and scaling down on investment 
projects, especially in the mining sector.  In Nigeria, 
evidence indicates that most of the proposed new investments 
have been stopped and investors have adopted a "wait and 
see," approach.  According to Massa, ODI's economic modeling 
completed this spring found that a 10 percent drop in FDI 
inflows would lead to a 0.5 percent decrease in SSA's income 
per capita over the long-term. 
 
¶10. (SBU) Remittance inflows, typically more resilient than 
other forms of private capital flows, are also declining, 
according to analysts.  Massa told Econoff that ODI research 
found that Lesotho, Sierra Leone, and Kenya are being 
disproportionately affected due to their reliance on these 
funds.  Backing up these findings, the World Bank in April 
forecast that worker remittances to SSA would fall by between 
4.4 percent and 7.9 percent in 2009. 
 
Growing Concern over Aid and Cross-Border Lending 
--------------------------------------------- ---- 
 
¶11. (SBU) So far there has been little evidence of a pullout 
of official aid, but both bank and development analysts 
expressed concern about decreases in NGO assistance to the 
region.  According to Massa, ODI research does not have hard 
data that NGO's are cutting assistance, but they have 
anecdotal information that this is occurring.  She added that 
while the global focus has been on official aid commitments, 
development experts with whom she has spoken are much more 
concerned about a drop in NGO support.  HSBC analysts also 
pointed to decreased NGO aid as the key problem, but added 
that they believe even official aid may be at risk, as there 
is a big difference between committing funds and sending 
funds. 
 
¶12. (SBU) Similarly, while there has been no evidence of a 
 
LONDON 00001886  003.2 OF 004 
 
 
contraction in international bank lending to SSA, analysts 
see some countries in the region as vulnerable should 
foreign-owned banks withdraw capital from, or close 
subsidiaries to make up for domestic losses.  British and 
French banks are the largest foreign players in the region, 
according to Massa, making up 27 percent and 17 percent of 
the foreign bank market, respectively.  South African banks 
are the largest regional players, and Goldman's Perez de 
Azpillaga told Econoff that these banks are reducing domestic 
credit availability by setting more demanding terms, such as 
higher collateral, and are less willing to lend regionally. 
He added, however, that this is more the result of risk 
aversion, than protectionism. According to Massa, Uganda and 
Kenya would be most affected by a contraction in cross-border 
lending, as they have the highest share of foreign owned 
banks.  She added that the think tank's modeling shows a 10 
percent decrease in cross-border lending would affect 
long-term SSA growth by about 0.7 percent annually. 
 
Focus on South Africa 
--------------------- 
 
¶13. (SBU) Analysts at HSBC and Goldman Sachs have been 
closely tracking economic developments in South Africa, the 
region's largest economy.  Contacts at both institutions told 
Econoff that the explosion in house prices and available 
credit in South Africa preceding the economic crisis left its 
domestic banking system very vulnerable.  Perez de Azpillaga 
explained that while no South African banks have failed, they 
have had significant write downs and Goldman Sachs currently 
has a "sell" on them.  He added that he does not believe that 
there are problems with banks' capitalization and does not 
expect there will have to be a bank bailout in the near 
future; however, he cautioned that there is no good data on 
the banks' non-performing loans (NPLs), so it is still 
speculative. 
 
¶14. (SBU) HSBC analysts were slightly more pessimistic about 
South Africa's banking system, noting that they see another 
"cloud forming on the horizon."  According to Mball-Ekobena, 
30-to-40 percent of South African banks' revenues come from 
fees and commissions, with the average South African spending 
about 10 percent of income on bank fees.  With the downturn 
in the housing market and increasing number of NPLs, 
Mball-Ekobena sees a risk that popular anger over the banking 
system's fee structure could fuel civil unrest if changes are 
not made. 
 
¶15. (SBU) Apart from the banking system, Goldman's Perez de 
Azpillaga expressed concern that South Africa's recession and 
rising unemployment would fuel support for populist policies, 
such as greater protectionism, that would be detrimental to 
its long-term economic growth.  His dismissed the idea that 
South Africa would follow the path of Zimbabwe, noting that 
South Africa has stronger institutions and a greater 
tradition of the right of law.  However, analysts from both 
HSBC and Goldman Sachs see problems in South Africa creating 
systemic risk in the rest of the region. 
 
Potential Long-Term Effects 
--------------------------- 
 
¶16. (SBU) ODI's modeling shows that of all private capital 
flows, FDI and cross-border lending have the greatest impact 
on the region's long-term growth. Should these flows 
experience a significant slowdown in the coming months, the 
impact would be far more detrimental to SSA than the downturn 
in trade and portfolio investment has been, according to 
Massa.  Massa also expressed concern that the economic crisis 
will result in African governments' inability to provide 
adequate social safety nets and will push more Africans into 
poverty, reversing gains made in education and health.  In 
particular, she sees lack of investment in education as 
creating long-term problems for regional growth. 
 
¶17. (SBU) HSBC analysts, too, noted that a reduced ability of 
African governments to fund infrastructure programs will have 
long-term implications.  They told Econoff that most SSA 
governments are now scaling back infrastructure projects, and 
"spending is down to a trickle."  Should the situation 
 
LONDON 00001886  004.2 OF 004 
 
 
continue, they are concerned that low investment will impact 
electricity and roads, creating a negative cycle whereby poor 
infrastructure reduces the attractiveness of the area to 
foreign investors. On the positive side, they noted that 
there are very few real "emerging markets" left in the world, 
so investors will eventually return to SSA.  Africa's 
comparative advantage is that its one of the few areas in the 
world that still has a largely untapped market and 
significant natural resources. 
 
 
 
 
 
 
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