Sub-Saharan Africa’s “frontier markets”—the likes of Ghana, Kenya, Mauritius, and Zambia—were seemingly the destination of choice for an increasing amount of capital flows before the global financial crisis. Improving economic prospects in these countries was a big factor, but frankly, so too was a global economy awash with liquidity.
Then the crisis hit. And capital—particularly in the form of portfolio flows—was quick to flee these countries as was the case for so many other economies.
Fast forward to 2011. Capital flows are coming back to the frontier, but in dribs and drabs.
Learning from experience
In our recent Regional Economic Outlook we examined the experience of sub-Saharan Africa’s frontier markets, with a view to understanding how they can best make use of these inflow to meet their own development and growth objectives.
Contrary to popular perceptions, bilateral donors and international financial institutions are no longer the main source of funding (including capital flows and transfers) for investment and growth. Most of the six-fold increase in inflows since 2000 came from the private sector—a sharp departure from the previous decade. And this was true for countries other than South Africa and Nigeria, the two largest countries that typically account for 50–60 percent of these flows.
But, then when the crisis hit, the sharp withdrawal of capital from almost all the frontier markets was most evident for fixed-income investments (such as treasury securities) and equities.
And, now, with the increasing attention of investment bank publications on sub-Saharan Africa following the global crisis, some might suggest that investors are putting their money where their mouth is.
But are the good times rolling again? Not so fast…
The evidence so far is rather mixed. Private investors, possibly smarting from financial losses a few years ago, have not rushed in like lemmings. They seem more discerning now, looking more closely at country-specific circumstances. For instance, portfolio flows have picked up in a few of the frontier markets such as Ghana and Mauritius, and, to a lesser degree, Zambia, but have remained flat in most of the other countries.
The sharp decline in yields following monetary policy easing in frontier markets in the wake of the crisis has curbed the appetite of most fixed-income investors in countries such as Kenya and Uganda. That said, foreign direct investment and other equity investment were not hit too badly during the crisis, and seem to be recovering nicely in most countries. Bank credit lines have fully recovered, except for Nigeria, where the vestiges of a domestic banking crisis are still lingering.
Macroeconomic management challenges
The increasing reliance on private external financing poses challenges for macroeconomic management, given the relative size and volatility of these flows.
- First, although net private capital inflows to sub-Saharan Africa constitute only about one tenth of total net private flows to emerging and developing countries, the inflows are large relative to the economic size of the recipient countries.
- Second, the more volatile flows have the potential to cause considerable difficulties in monetary management in sub-Saharan Africa, given shallow financial markets. For instance, in proportion to reserve money, nonresident holdings of government securities have swung from almost nothing to more than 40 percent in some countries.
So what can countries do to manage large inflows should they resume? The IMF has recently developed a framework to help countries manage large capital inflows. The main message is that, while there is no substitute for implementing appropriate macroeconomic policies, countries can choose from a menu of policy options to respond to capital inflows. For example, tightening fiscal policy can reduce inflows that may be attracted to high yields resulting from high fiscal deficits. However, in some cases, it may also be appropriate to consider taxes, certain prudential measures, and capital controls.
To sum up, except for a few countries, the volume of capital inflows in sub-Saharan Africa’s frontier markets has yet to return to the heydays of 2006-08. So the primary interest of most policymakers in the region is how to further induce stable and beneficial private flows—which now exceed official flows—to support investment and growth. But they should stand ready in case sharply rising inflows give rise to macroeconomic management problems.
This post originally appeared at iMFdirect and is reproduced here with permission.
41 Responses to “Capital Flows to the Final Frontier”
You can increase your blog visitors by having a fan page on facebook.~-.,,
wonderful almanac you’ve take in
Have you already setup a fan page on Facebook ?*’`~”
Your blog would increase in ranking if you post more often..;-*~
Very well said, your blog says it all about that particular topic…~-;
Only a few blogger would discuss this topic the way you do.-”‘,’
You are so cool man, the post on your blogs are super great.-””:
You are so cool man, the post on your blogs are super great.-`’;”
RSS Feeds on your blog sometimes does not work…~..
You seem to be very professional in the way you write.;*`-”
I really love the way you discuss this kind of topic.*”;”
I love blogging and i can say that you also love blogging.”-`”
I will invite all my friends to your blog, you really got a great blog.;..**
Have you already setup a fan page on Facebook ?.**::
Your blog would increase in ranking if you post more often.,”`-.
The thing i like about your blog is that you always post direct to the point info.,:,`.
I will invite all my friends to your blog, you really got a great blog.,”.~*
I was also reading a topic like this one from another site.`.~”"
Only a few blogger would discuss this topic the way you do.;`;”~
I think your blog is getting more and more visitors..’.,’
RSS Feeds on your blog sometimes does not work.’-.;*
I was also reading a topic like this one from another site.:`;”*
I always visit your blog everyday to read new topics.”:’-’
Sometimes your blog is loading slowly, better find a better host..-*:~
My friend first found your blog on Google and she referred your blog to me.”;-”:
I see that you are using WordPress on your blog, wordpress is the best.’.-**
I think your blog is getting more and more visitors.~’*,”
Last month, when i visited your blog i got an error on the mysql server of yours.’*~:”
What’s Happening i’m new to this, I stumbled upon this I’ve found It absolutely useful and it has aided me out loads. I hope to contribute & assist other users like its helped me. Good job.
Only a few blogger would discuss this topic the way you do.~*`.-
Last month, when i visited your blog i got an error on the mysql server of yours..,’,;
A blog like yours should be earning much money from adsense..”;*~
Man that was very entertaining and at the same time informative.**~:*
I just love to read new topics from you blog.,-~”~
Your blog never ceases to amaze me, it is very well written and organized.*.-~-
Hi, do you have a facebook fan page for your blog?:”;`”
You can also put a chatbox on your blog for more interactivity among readers.-.,~,
I just put the link of your blog on my Facebook Wall. very nice blog indeed.;.;*`
Your blog has the same post as another author but i like your better.*’-,-
I love to visit your web-blog, the themes are nice.-:*.’
Your blog never ceases to amaze me, it is very well written and organized.*~.,*