“Africa has come as a positive surprise” – Nouriel Roubini

Nouriel Roubini has become a superstar economist, one of the world’s foremost economic commentators and analysts. An American of Iranian Jewish parentage, he was born in Turkey and grew up in italy. 

He was one of the few who foresaw the bubble building in the US property market and the subprime problem. He is fast thinking, fast talking and fast living. Once he talks economics, he hardly pauses for breath. He was part of the group of investors and influencers on Invest Africa’s whistle-stop tour of Africa. African Business met him in Brazzaville to get his thoughts on African economies in the global context and how policy makers should react to current economic trends.

AB: Is Africa an emerging or a frontier market, and is this distinction important?
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.

Regarding the countries you visited, did you find the macroeconomic fundamentals sound, and benchmarking against international standards is wrong, given the nature of these economies?
It’s a complicated thing because in many African countries, of course, the deficits either on the fiscal side or on the current account side are financed by concessional loans that are at low interest rates from, say, multilateral development banks and there’s an element of grants, like aid and so on.

There are countries around with very large current account and fiscal deficits but net of the aid and grants, of course, the deficit is much smaller. So there’s this dependence on official money, but official money is less volatile than private money.

All in all, I think that over the last 20 years, the macro framework for many of these frontier economies has improved. These countries are more stable: because of better economic policies, they have smaller deficits, they’ve more independent monetary policies and they’ve lowered their rates of inflation.

So the macro aspect has improved but there is still a huge amount of differentiation between countries. Even a country which by many standard is successful, like Ghana, has had instances of twin deficits, excessive fiscal deficits. I think just the other day the Central Bank of Ghana was forced to raise the policy rates to a high of 18%, which is pretty high.

What are the global trends that these countries should be on the lookout for?
The global issues that matter for African frontier are the same ones that matter for emerging markets. One is whether China is going to have a soft or a hard landing. A very soft landing means staying afloat and growing robustly.

The other trend is whether the commodity supercycle is over or not and, if so, for which commodities is it over?
Another issue is the spillover from the Eurozone and whether this risk has diminished. Many exports out of Africa are still going to Europe and therefore European economic growth weaknesses have affected their exports. There is still the issue of how fast the US is going to taper then exit QE and exit zero-policy rates and how fast it’s going to normalise policy rates. These are some of the global factors: China, Europe, US and global risk aversion, which matter for an emerging market and for frontier economies.