“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.

During your Africa trip, were you reminded of any particular region 15 or 20 years ago?
Yes, some of the frontier economies that are now opening up more to trade, to foreign direct investments and to capital flows look like what emerging markets were in the early 1990s after the emerging market crisis.

The Latin America of the ’80s saw the beginning of a re-flow of capital to the emerging markets but they were still at the early stages of economic development and still had structural and macro issues to fix. So, yes, 20 years ago, most of the frontier looked like what today’s emerging markets were.

There are still, in this part of the world, countries that are extremely poor. There is a very wide distribution of experiences, so we cannot lump together a continent of 54 countries. Some of them are on the virtuous cycle of better institutions, better governance, better macro, better investment in human and physical capital, better political and social stability, stronger growth and rising per capita income.

But there are other countries that are still experiencing sectarian and religious cleavages and strife, corruption, poor institutions, poor governance, less investment in human capital, poor healthcare infrastructure, slower growth, low per capita income and are still in a trap of poverty and diseases. As you know, it’s not a uniform continent.

When you talk about structural deficits, which ones in particular do you mean?
I would say that for all these countries to grow faster, they have to have more investments in different types of capital: one is institutional capital. This involves sound government, rule of law, transparency, reduction in corruption and so on. Another is infrastructure capital; while it is very important ,of course, it’s not sufficient by itself to generate growth. You need human capital, education, skills, training and so on.

You need physical capital invested into by the private or public, or private and public partnerships. You need to use natural resources, like minerals, agriculture and other capital productively as well and make sure that you don’t get too little diversification. You have to diversify the economy and you also need a fair distribution of the benefits coming from these natural resources otherwise you generate a conflict.

And, finally, financial capital is critical as well. You need access to credit, to banking, especially for small and medium-sized enterprises, for households, microfinance and so on, so you need lots of different types of capital and together, if you have more of them over time and you invest into them, then you get better economic performance.

This was your first trip to Nigeria. What were your impressions?
I had low expectations because usually what you read in the US press about Nigeria is only bad news, violence, terrorism, lots of other bad stuff. I was actually positively surprised. You have a country that has one tenth of the power capacity of South Africa, one quarter or one fifth of the infrastructure of South Africa, and while South Africa is growing barely at 2%-2.5%, Nigeria is growing at around 7% or so.

Of course it’s an unfair comparison because South Africa is a middle-income country while Nigeria has a low per capita income, so usually low per capita income countries grow faster because there is a catch-up of growth. Nigeria has oil and gas and a lot of energy that helps its growth. Since they are doing so well with such little power and infrastructure, some people say that Nigeria could grow by 10% by making the right investment in infrastructure.

What was the highlight of your trip so far, other than the nightlife? 
These are societies which are becoming urbanised. These are thriving urban environments where you have good restaurants, good clubs, music venues. You go to a club and hear the same kind of electronic dance music, top 40, that you hear in Ibiza.

And any surprises?
The surprises have been on the upside rather than on the downside. Of course there are tons of challenges in each of these countries but there’s an element of vibrancy that you see both in economies that are wealthier like South Africa or Nigeria but even in a place like Congo.

There is a long list of things that have to be improved in each one of these economies and you cannot take economic success in the future for granted.

I think sometimes there is a little bit of an excess of saying Africa is rising, everything is going well, but that depends on having good sound institutions, good policies, good leaders in the private and public sectors to make them work.

There’s always a risk of slippages and things turning wrong, so I would say one should not take the current success for granted, but overall the surprises have been on the positive.

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