Shockwatch report: sub-Saharan Africa’s economic downturn and its impact on financial development

The current economic climate is causing a slowdown in financial development in sub-Saharan Africa. Credit is contracting, savings have declined, cross-border capital is less available and more costly, while indicators of financial soundness have deteriorated.

There have also been failures in governance of private and public institutions, including corruption and fraud that have deepened these problems. These have also undermined the public trust that is essential for long-term formal financial development.

The Stimulus Our Economy Needs

Future policymakers might choose to consider some additional tools that have been employed by other central banks,” Federal Reserve Board Chair Janet Yellen said in a widely watched speech in Jackson Hole, Wyoming, on Friday. She was referring to a number of possible monetary steps to help the economy, including potentially the much-debated notion of “helicopter money.” So what is helicopter money? It’s a basic, important policy concept with a truly awful name.

The term essentially refers to a fiscal stimulus that is explicitly funded by newly created money from the central bank, a permanent new injection of funds directly into immediate government spending. Now, the idea that governments, with or without the help of central banks, should spend substantial resources on creating jobs, both directly and through private sector incentives, is widely accepted among economists across the political spectrum. However, calling what might be a perfectly justified period of direct cooperation between the fiscal and monetary authorities during a period of acute economic weakness “helicopter money,” as proponents of the policy have done, almost certainly dooms it to failure.

India’s ‘Rexit’: central bank uncertainty raises risk

Key messages

• India is a significant player in the global financial system, given its large and liquid markets. It is a concern at the present moment of global uncertainty because its macroeconomic policy leadership is in transition.

• Outgoing Reserve Bank of India (RBI) Governor Rajan had started to address key challenges, such as inflation and non-performing loans in the Indian banking system. But there is more to do.

Access to finance, post-Brexit

Key messages

• Although financial stress remains contained, several developing country external debt-to-reserve ratios are rising, which could make access to finance prohibitively expensive.
• Divergent borrowing costs are notable. Although developed country bond yields are low, or, increasingly, negative, developing economies have seen rate rises.
• The G20 should ensure improved access to finance for developing countries, including to IMF facilities, given the multiple economic shocks they face.

Steel and sea issues dominate U.S.-China dialogue

The recent Strategic and Economic Dialogue highlighted the importance of steel production and the South China Sea in U.S.-China relations.

Between 6-7 June, the U.S. and China were engaged in the 8th Strategic and Economic Dialogue (S&ED). The meeting, established by President Obama and former Chinese president Hu Jintao in 2009, has notoriously failed to result in agreements. As a consequence, the forum is widely considered consultative, at best.

No, Paris Will Never Be the New London

As  the U.K. referendum on whether to remain in or leave the European Union draws nearer, politicians and bankers from other European cities are circling the prospective carcass of London’s financial center like vultures above a stranded, parched wayfarer.

Back in February, Emmanuel Macron, the French economy minister, said Paris would “roll out the red carpet” for U.K. bankers should the country vote for Brexit — and on Wednesday kicked off a new campaign to tout the French capital as a center of global finance. In May, Martin Shanahan of Ireland’s Industrial Development Agency said Brexit would help his quest to attract 10,000 financial services jobs to Dublin. Not to be outdone, Hubertus Väth, the managing director of Frankfurt Main Finance, has said his city, too,is ready for an influx of bankers from London. And similar noises have been emanating from Luxembourg, Amsterdam, Munich, Stockholm, and other European financial centers in the weeks leading up to the vote.

The hidden heist – offshore plunder is hurting Africa

Forget the UK’s phoney political war over the offshore fund created by Prime Minister David Cameron’s late father. This is a Panama Papers sideshow that is diverting attention from a heist that is siphoning billions of dollars out of the world’s poorest countries in Africa, reinforcing poverty, undermining growth and facilitating corruption on an industrial scale.

Over the past fifteen years, Africa’s vast natural resource wealth has acted as a magnet for foreign investment. Much of that investment has been channelled through offshore centres, with the British Virgin Islands (BVI) the circuit of choice. Fortunes have been made. Elites have been enriched. But the minerals boom has done little to improve the lives of ordinary people.

Britain’s Empire of Tax Evasion

There is a temptation, when looking at the astonishing “Panama Papers,” to start by searching for politicians from your own country who are implicated. If you are British and approach the documents in this way, you’ll find slim pickings in the information released so far.

WHY THE EU'S MARKET MATTERS TO BRITAIN

Brexit would free Britain to sign bilateral free trade agreements with the ‘BRICS’ emerging economies, the Anglosphere and Japan without having to reach a consensus with 27 other EU member-states. The rest of the world is growing faster than the EU, and it offers opportunities that would make up for any forgone trade with Europe. This means that Brexit would boost the economy in the long term, especially if you throw in some deregulation to boot.

China in the Caucasus: For Armenia, Azerbaijan, and Georgia, China is an important investor and possible regional stabilizer.

Armenian President Serzh Sargsyan (L) shakes hands with Chinese President Xi Jinping during a signing ceremony in the Great Hall of the People in Beijing (March 25, 2015)

Image Credit: REUTERS/Feng Li/Pool

On his first visit to Beijing, then-Armenian defense minister Vazgen Sargsyan is said to have thrown the hosts into a state of mild confusion when he remarked that (paraphrased) “as we say in Armenia, together with the Chinese there is more than a billion of us.” Jokes and linguistic barriers aside, the comment reflected the main motivating factor behind Armenia’s outreach to China. When dealing with larger and often hostile neighbors, it is only natural for small countries to seek out support or, as a paper published by the Armenian government’s think tank put it, a “special partnership,” externally.

China explores its monetary easing toolkit

The People’s Bank of China (PBoC) has flooded China’s financial system with record amounts of cash this past week to pre-empt the annual liquidity crunch ahead of the Lunar New Year in early February. The central bank is cautiously refraining from cutting interest rates or the reserve requirement ratio (RRR), as it fears that the traditional monetary easing tools may send the already weakening renminbi down even further.

The People’s Bank of China (PBoC) pumped a net RMB 690 billion into China’s banking system this past week through open market operations, marking the largest single-week injection on record. The move brought the net cash injections this month to RMB 1.9 trillion, including RMB 1.235 trillion via reverse purchase agreements (repos) and RMB 612.5 billion through medium-term loans.

French companies join European push to rejoin Iran market after sanctions

Wrapping up his four-day trip to Italy and France, Iranian President Hassan Rouhani on Thursday added French automaker PSA Peugeot Citroën and aircraft giant Airbus to a growing profile of European companies seeking to return to Iran.

Iranian President Hassan Rouhani in Paris on Thursday as part of a European trip to drum up business deals. (Pool photo by Michel Euler/via AP)

The quick bids for footholds in Iran — less than two weeks after international sanctions were rolled back — reflect the eagerness in Europe to tap into the large Iranian consumer market and get a head start on potential rivals from the United States and elsewhere.

Without Reform from Beijing, ‘The World Will Endure More China Scares’

On Jan. 21, billionaire investor George Soros said he was betting against Asian currencies, telling Bloomberg Television that “A hard landing is practically unavoidable” in China. The Chinese currency has dropped 5.7 percent since August, when the central bank allowed it to depreciate. “I’m not expecting it,” he added. “I’m observing it.” Though Soros didn’t specifically mention the renminbi, China’s currency, ruling Communist Party mouthpiece People’s Daily attacked him in a Jan. 26 article for suggesting he might short the renminbi, comparing such a move to “declaring war on China’s currency.” In this ChinaFile conversation, experts discussion if Soros may be right.

How the internationalisation of China’s currency could offset the global trade slowdown

The  start of 2016 has seen a tumultuous start for the global financial system. Oil prices have descended below $30 a barrel and economic developments in China have brought episodes of volatility - trading in the Shanghai Composite Index was halted twice in the first week of the year due to sharp selling.

While the slowdown in China has understandably made the markets nervous, it’s worth pointing out that with an estimated $4 trillion in foreign exchange reserves, the opening up of the Chinese financial system and the internationalisation of the renminbi (RMB) are likely to have a significant impact on the global economy.

CAN THE EUROZONE SHAKE OFF THE GLOBAL GLOOM?

The global economy has shifted from being the potential saviour of the eurozone economy to an additional source of uncertainty for it.

The outlook for the global economy is worsening quickly, raising question marks over the eurozone’s recovery. Will consumption and investment rise by enough to offset the likely weakening of eurozone exports, or will the recovery peter out? What does the deteriorating global environment mean for the ECB’s attempts to raise inflation and to ward off threats to the debt sustainability across the eurozone? The currency union is at no risk of falling back into recession in 2016, but last year might turn out to have been as good as it’s going to get.

EUROPEAN COMPETITIVENESS, REVISITED

Competitiveness is a nebulous concept, too vague to guide policy. The focus should be on productivity, and how to raise it in an imperfect world which suffers from a lack of demand.

HAS THE EURO BEEN A FAILURE?

November’s conference, which brought together 50 leading economists, considered whether the euro was a failure. A host of questions were debated. How should the euro be judged? Purely by the fact that it has survived? Or by the fact that is has become a significant international reserve currency? Or by comparing what its proponents said it would do for Europe with what had actually happened? Had the euro helped Europe to address the economic and political challenges facing it? Or had it made it harder to address those challenges, while also creating new ones? Could a dismantling of the eurozone open the way for economic recovery and an easing of political tensions? Or would it unleash unmanageable economic and political instability?

South Europe's debt about to explode

The fall of Coelho's conservative forces in Portugal and the preparation for a left-wing coalition government has not been received with enthusiasm in Berlin and Brussels. Not only for political and ideological reasons, but mainly for the fact that after Greece, Portugal is expected to put in question austerity politics in the European South.

Gain or more pain in Spain?

In a new CER policy brief, 'Gain or more pain in Spain?' Simon Tilford demonstrates why Spain is no poster child for fiscal austerity and structural reforms. Tilford shows that Spain’s growth performance is less impressive than it appears at first sight. The level of economic activity remains highly depressed compared to pre-crisis levels (see Chart 1). He highlights that:

Global slowdown: The eurozone to reap what it has sown?

The slowdown in emerging markets leaves the eurozone even more reliant on exports to the US and UK to compensate for its feeble domestic economy. 

The eurozone is banking on a weak euro and strong global growth to boost exports and inflation and offset the weakness of domestic demand. How likely is this? China might yet avoid a recession, but there is no doubt that it is set for a period of much slower growth. At the same time, pretty much every emerging market is weakening, partly because of their dependence on China, and partly because of sluggish productivity growth. The US Federal Reserve’s decision not to increase official interest rates is welcome: a rise would have prompted further capital outflows from emerging markets. But there is no doubt that the global economy is labouring, and that this poses a threat to the eurozone’s anaemic recovery.