How Resilient Are Sub-Saharan Countries to External Shocks? ChristopherLegilishoandWalterPacheco

Foreword In2015,theMilkenInstituteandtheInternationalFinanceCorporation(IFC)partneredwiththeGeorgeWashingtonUniversitySchoolofBusinesstolaunchtheIFC-MilkenInstituteCapitalMarketsProgram.Thiseffortseekstohelpsupportthenextgenerationofinternationalcapital-marketsleaders.Theeight-monthprogramtrainsmid-careerprofessionalsfromfinancialandregulatoryinstitutionsacrossdevelopingandemergingeconomies,providingthemwithtechnicalexpertiseandhands-onexposureincapital-marketdevelopment.TheIFC-MilkenInstituteFellowsbenefitfromafullsemesterofaccreditedcoursework,aweeklylectureseriesbyfinancialmarketspractitioners,andfour-monthworkplacementsinhigh-caliberfinancialinstitutionsacrosstheUS.FellowsremainconnectedtheIFC-MilkenInstituteFellows&AlumniNetworkthroughouttheirprofessionalcareers.

OurthreeinstitutionsprovidemultipleplatformsfortheIFC-MilkenInstituteFellowstogainprivate-sectorinsights,exploredomesticpolicyquestions,and,mostofall,exchangeexperienceswiththeirinternationalpeers.Assuch,wearedelightedtopublishtheworkoftwomembersofourinauguralclass,ChristopherLegilishofromKenyaandWalterPachecofromAngola,asaMilkenInstitutewhitepaper.

Aspartoftheprogram’sfall2016coursework,theclassonFinancialCrisesandGlobalizationexploredtheimportanceofimprovingtheresilienceoftheirdomesticfinancialmarketstointernationalshocks.

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Thisclassfocusedinpartonrecognizingconditionsinfinancialmarketsthatcanpropagatedamagingandcostlycrises,betheydebtcrises,foreignexchangecrises,bankingcrises,orcombinationsthereof.Suchcrisesareprevalentinbothadvancedandemergingmarketeconomies,butwhentheyoccurtheyaremuchhardertodealwithinthelatterduetoshallowfinancialmarkets,lowerincomes,andinstitutionalweaknesses.Hence,thefocusofthecoursewasontheenablersoffinancialdistress,thewaysinwhichgovernmentshavedealtwiththeminselectedcases,andmostimportantlyhowtorecognizeanddealearlywithincipientcrises.

Intheirpaperforthisclass,LegilishoandPachecoadaptedtheframeworkpresentedtotheclassbyaprominentguestspeaker,Dr.LilianaRojas-Suarez.InanessaypublishedbytheCenterforGlobalDevelopment,wheresheisaSeniorFellow(“EmergingMarketMacroeconomicResiliencetoExternalShocks:TodayversusPre-GlobalCrisis,”Feb.2015),Rojas-Suarezexaminedthefactorsthatcanimprovetheresilienceofcountriestofinancialshocks.Theseshocksmightbeexogenous,suchasthe“suddenstops”tocapitalflowsdescribedbyGuillermoCalvo,ortheycouldbecausedbydomesticfactors,suchasadeterioratingexchangerateoranincreasinglevelofnon-performingloansinthebankingsector.LegilishoandPachecoadaptthisframeworkandapplyittoasampleofcountriesfromsub-SaharanAfrica.

AdaptingRojas-Suarez’smethodology,theauthorsshowwhichcountriesaremostandleastvulnerabletoshocks,basedoneconomiccircumstancesandpublicpoliciesofnationalandinternationalmacroeconomicmanagement.Theyfindthatallcountriesareatrisktosomeextentorother;however,economicpreparednessisingoodpartrelatedtostrongeconomicmanagement–asseeninthevariablesshowntoimprovefinancialresilience.

Inshort,thepaperboilsdowntoconstraintsoneffectivepolicymaking.Thelowertheaffordabilityandavailabilityofexternalfinance,andthelessmarginthereisforcountercyclicalfiscalandmonetarypolicy,themorehamstrungdomesticpolicymakersareintermsoftakingimpactfulmeasureswhencrisishits.Betterinformedpolicymakers,backedbythesupportandadviceofpeersintheirgovernmentsandacrosscountries,canmoreeffectivelyworkwithintheseconstraintswherenecessary,andhelpalleviatethemwherepossible.

ThisisoneoftheaimsoftheIFC-MICapitalMarketsProgram:weareworkingtoensurethatfuturecapital-marketsexpertsandleaders–LegilishoandPachecoamongthem–canrelyontheirnetworksandontheirstrongunderstandingofcapitalmarketstoenactsmartpolicywhentheircountriesneeditmost.CaroleBiau,Director,IFC-MilkenInstituteCapitalMarketsProgram

DannyLeipziger,ProfessorofInternationalBusinessandInternationalAffairs,theGeorgeWashingtonUniversitySchoolofBusiness

Disclaimer:ThisworkispublishedasaMilkenInstituteWhitePaper,inrelationtotheIFC-MilkenInstituteCapitalMarketsProgram.TheopinionsexpressedandargumentsemployedhereindonotnecessarilyreflecttheofficialviewsoftheMilkenInstitute,theInternationalFinanceCorporation,orthegovernmentsofKenyaandAngola.

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Introduction Growthinmostemergingeconomiesdidnottakeashardahitasexpectedduringthegreatrecessionof2008.However,inlightofmorerecenteconomicturmoilinthesemarkets,manybelievethatemerginganddevelopingeconomiesarebeingstruckbya“thirdwave”oftheglobalfinancialcrisis.Aspolicymakersinthesecountries,howdoweforestallthiswaveandensurethat,ifithits,oureconomieswillberesilienttotheshocks?

Lookingbackto2008,Rojas-Suarez(2015)demonstratedthatinitialconditionsinemergingmarketsbeforethecrisiscouldgreatlyexplaintheirresilience.AsaKenyancentralbankerandanAngolanstockexchangedirector,wedecidedtochecktowhatextentthesefindingsappliedtosub-SaharanAfrica.Thispaperanalyzeshowresilientasampleof13sub-SaharanAfricancountriesaretoanexternalshock.

Weconsidertwodimensionsofresilience,asidentifiedbyRojas-Suarez.First,onethatreflectsvulnerabilitytocapitaloutflowswhenhitbyashock:Whatisthecostandaccessibilityofexternalfinance,andhoweasilycancountriesfulfilltheirobligationstowardsforeigncreditors?Second,ameasurethatreflectstheeconomy’sabilitytorespondtothatshock:Howeffectivelycanthecountryimplementcountercyclicalfiscalandmonetarypoliciestosteerbackoncourse?

Forbothdimensions,wecontrastthemostrecentavailablevalues(2014)tothestateofplayinthepre-crisisperiod(2007).Finally,wecalculateanoverallindicatortoassesswhetherthecountriesinoursamplearemoreresilientnowthantheywerein2007.Theimplicationsforusaspolicymakersareworthpayingattentionto.

Macroeconomic Resilience: Cost and Availability of External Finance Toassessthecostandaccessibilityofexternalfinanceinoursampleofsub-SaharanAfricancountries,weconsidertheratiosof:acountry’scurrentaccountbalancetoGDP;externaldebttoGDP;andexternalshort-termdebttoreserves.ThecurrentaccountbalanceasaratioofGDPThisratiorepresentsacountry’sexternalfundingneeds.Largecurrentaccountdeficitsneedtobefinancedbynetcapitalinflowsorbytheutilizationofinternationalreserves.Acomparisonofcountries’currentaccountbalancesin2007and2014suggeststhatthisratiohasdecreasedovertheperiod,andthusthatcountries’externalfinancingneedshaveincreased.

Duringtheperiodofhighcommoditypricesin2007,resource-intensivecountriessuchasNigeria,AngolaandtheDemocraticRepublicoftheCongo(DRC)enjoyedcurrentaccountsurpluses,withexportrevenuesexceedingspendingonimports.However,duetothelackofreforms(especiallytotheexchange-rateregime)toprotectgainsduringtheperiodsofhighcommodityprices,thesecountriesbecameveryexposed.Ascommoditypricesdeclinedinthesecondhalfof2014,thevalueofexportsdroppedandcurrentaccountbalancesworsened.Currentaccountsalsodeterioratedeveninnon-resource-intensivecountries,astheslowdownintheChineseeconomyandtherealappreciationof

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domesticcurrenciesreduceddemandforthesecountries’exportsandmadetheirimportsmorecostly.Whilewedidnotincludedatabeyond2014(seeFigure1),thistrendhascontinued.FIGURE1:CurrentaccounttoGDPratio,2007vs.2014

Source:WorldBankdatabankdatabank.worldbank.org/data/reports.aspx?source=world-development-indicatorsandIMFdatabaseimf.org/data

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ExternaldebtasaratioofGDPAsdiscussedabove,currentaccountdeficitstendtobefinancedbynetcapitalflowsorinternationalreserves.Overthelastdecade,highcommoditypricesandrobusteconomicgrowthattractedforeigncapitaltoAfrica.Moreover,lowandnegativereturnsinmuchoftherestoftheworldhaveledinvestorstodemandhigh-yieldinstruments.Totapintothisrisingdemandandinterest,Africancountrieshaveincreasinglyaccessedinternationalcapitalmarketsandsince2010theyhaveissuedapproximatelyUSD22billioninEurobonds(IMF,2016).

Highlevelsofforeigndebtcanhoweverbeunsustainable,ascountriesmaynothavetheliquidityinhard-currencytomeettheirobligationswithforeigncreditors.Forthisreason,weusetheratioofexternaldebttoGDPasanindicatorforsolvency:itmeasuresacountry’soverallcapacitytomeetitsexternalobligations.

InFigure2below,countriesabovethe45-degreelinehaveseenindebtednessdeclinesincetheglobalfinancialcrisis.Forcountriesbelowtheline,externalindebtednesshasrisenandithasthereforebecomemoredifficulttomeetexternalobligations.

ThisdataindicatesthatwiththeexceptionofNigeria,externalindebtednesshasincreasedsince2007inresource-intensivecountriessuchasAngola,MozambiqueandZambia.Thissuggeststhattheircurrentaccountdeficitswerefinancedbynetcapitalflows.Indebtednesshasalsoriseninlessresource-intensivecountriesthatarerelativelyopentocapitalflows,suchasKenya,Uganda,RwandaandSouthAfrica.Thisisconsistentwiththeviewthatforeigninvestorshadinterestinhigh-yieldinstrumentsinthecontinent.TheratioofexternaldebttoGDPonlyimprovedconsiderablyforDRCovertheperiod,duetoadebt-reliefprogramimplementedbytheIMFandtheWorldBank(IMF,2010).FIGURE2:ExternaldebttoGDPratio,2007vs.2014

Source:Worldbankdatabankdatabank.worldbank.org/data/reports.aspx?source=world-development-indicatorsandIMFdatabaseimf.org/data

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Externalshort-termdebtasaratioofreservesThetworatiosdiscussedabovemeasurethesustainabilityofcountries’externaldebtstock.However,theydonotcaptureacriticaldimensionofallfinancialcrises:timing.Toreflectthis,weturntothedegreeofconcentrationofthedebtstockintheshort-term.

SincedevelopingcountriessofarhaveloweraccesstocapitalmarketsthanOECDcountries,theyarelessabletorollovertheissueddebtandthusmustmakesuretohaveenoughliquiditytofulfilltheirobligations.Asmoredebtisconcentratedintheshort-term,moreresourcesareproportionallyneededfordebtservice.

Theratioofshort-termexternaldebttogrossinternationalreservesmeasuresthedegreeofliquidityconstraintsfacedbytheseyoungcapitalmarkets.InFigure3below,countriesbelowthe45-degreelinehavesufferedincreasedmacroeconomicvulnerabilitytoanexternalshockbetween2007and2014.Consistentwithourearlieranalysis,countrieswithrelativelyhighflowsofcapital—suchasKenya,UgandaandespeciallySouthAfrica–appearmorevulnerabletotheseliquidityconstraints.Ontheotherhand,countrieswithlowerlevelsofcapitalmovements,suchasAngola,Mozambique,Zambia,MalawiandtheGambia,havebecomelessexposedoverthetimeperiod.

FIGURE3:Externalshort-termdebttoreservesratio,2007vs.2014

Source:WorldBankdatabankdatabank.worldbank.org/data/reports.aspx?source=world-development-indicatorsandIMFdatabaseimf.org/data

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Macroeconomic Resilience: Ability to Respond to a Crisis Toassesstheabilityofoursampleofsub-SaharanAfricancountriestorespondtoexternalshocks,weconsiderthesefactors:theirfiscalbalanceasaratioofGDP;governmentdebtinproportiontoGDP;deviationintheinflationratefromthe10-yearaverage;andameasureoffinancialfragility. RatiooffiscalbalancetoGDPCountrieswithstrongfiscalaccountsbeforeanexternalshock(wherebytaxrevenuesarehigherthanlevelsofgovernmentspending)areonabetterfootingtoundertakecountercyclicalpoliciesthanthosewithlargefiscaldeficits.Thisratioisparticularlyrelevantfordevelopingeconomies,whichhavefeweroptionsforplacinggovernmentdebtindomesticcapitalmarketsinordertoraisefinancing.In2007mostcountriesinoursamplehadfiscaldeficitsofupto4%ofGDP(seeFigure4below).TheonlyoutliersareAngola(aresource-intensivecountrywithaveryhighfiscalsurplusatthetime)andtheSeychelles(withaparticularlyhighdeficitof10%).Overall,theprevalenceoffiscaldeficitssuggeststhattherewerelowlevelsoffiscaldisciplineamongmajorityofthecountriessampled.

By2014andalthoughtheSeychelleshadcutitsdeficitbacksignificantly,thesituationhadworsenedfortherestoftheregionwithmostcountriesrunningfiscaldeficitsat5%orcloseto10%.Lowcommoditypricescontributedtothisdeteriorationamongresource-intensivecountries,asinmostcasesthesegovernments’revenueswereheavilydependentontaxationofthenaturalresourcesector.FiscalbalancesthusplungedinAngola,Nigeria,SouthAfricaandZambia.Meanwhilenon-resource-intensivecountrieswerehitbyotherfactorssuchasterroristattacksinKenyaandseveredroughtinMozambique.FIGURE4:FiscalbalanceasaratioofGDP,2007vs.2014

Source:WorldBankdatabankdatabank.worldbank.org/data/reports.aspx?source=world-development-indicatorsandIMFdatabaseimf.org/data

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RatioofcentralgovernmentdebttoGDPTheratioofgovernmentdebttoGDPisaninversemeasureofdebtsustainability.Asalonger-termstockmeasurethatisfrequentlyunderinternationalscrutiny,itdiffersfromthefiscalbalanceweinvestigatedabove.Indeed,evencountriesthatareinfiscalsurpluswhentheyarehitbyacontractionaryexternalshockmightbeconstrainedintheiruseofexpansionary(countercyclical)fiscalpolicy,forfearofworseningtheiroveralldebtstock.Foremergingeconomies,aratioofcentralgovernmentdebttoGDPof50%iswidelyregardedasbeingsustainable.

Countriesbelowthe45-degreelineinFigure5below–theGambia,Mozambique,SouthAfrica,Kenya,Malawi,AngolaandUganda–increasedtheirratioofcentralgovernmentdebttoGDPbetween2007and2014.Takingintoaccountthehigheconomicgrowthratesduringthisperiod,thisincreaseindicatesthatthedebtstock(numerator)wasincreasingatafasterpacethaneconomicactivity(denominator)–andthusthatfiscaldisciplinewasgenerallylaxdespitebeinginfavorableeconomicconditions.

Oftotalcentralgovernmentdebtin2014acrossthesample,externaldebtmadeupa65.73%share.Thisfurthersuggeststhatalargeproportionofthedebtstockwaseitherownedbyforeigninvestors,denominatedinhard-currency,orboth.Thiscanbeparticularlyriskyincountrieswithshallowcapitalmarkets,asdiscussedinsectionsA(a)andA(b)above.

FIGURE5:CentralgovernmentdebtasaratioofGDP,2007vs.2014

Source:WorldBankdatabankdatabank.worldbank.org/data/reports.aspx?source=world-development-indicatorsandIMFdatabaseimf.org/data

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Deviationfrom10-yearinflationaveragerateThe1990swerecharacterizedasaperiodofveryhighinflationrates.From2000onwards,theaverageinflationratehasbeendeclining.Duringthelast10years,averageinflationforthecountriesinthissamplewas9.74%,withaminimumof-2.74%(Seychellesin2010)andamaximumof43.54%(Angolain2006).Thus,unlikesituationsexperiencedinJapanandmuchofEuropeinrecentdecades,theinflationaryrisktendstobehigherthanthedeflationaryone.

Tocapturethisinflationaryrisk,welookatpositivedeviationsininflationwhencomparedtothe10-yearmean.Ahigherriskofinflation,especiallyifaneconomyisfacinginflationarypressuresatthetimeofanexternalshock,wouldconstraintheimplementationofcountercyclicalmonetarypolicy(asexpandingthemoneysupplytolowertheinterestratewouldofcoursenaturallypushinflationevenhigher).

Ourdatasuggeststhatthenumberofsub-SaharanAfricancountrieswithinflationratesbelowthe10-yearaveragehasincreased(seeFigure6).Moreover,in2014deviationsfromtheaveragetendedtobesmaller:thehighestinflationratein2007(forDRC)significantlyexceededthehighestratein2014(forEthiopia).FIGURE6:Deviationfrom10-yearinflationaveragerate,2007vs.2014

Source:WorldBankdatabankdatabank.worldbank.org/data/reports.aspx?source=world-development-indicatorsandIMFdatabaseimf.org/data

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FinancialfragilityWeusedRojas-Suarez’s(2015)approachtocalculateameasureoffinancialfragility.Thismeasureisdesignedtocapturetheexistenceofacreditboomorabustandgiveitanegativevalue,asillustratedintheequationbelow.

Bothunsustainableexcessivecreditgrowthandthelackofittendtoimpairtheeffectivenessofmonetarypolicy.Inthecaseofacreditboomforinstance,anexternalshockcouldincreasethelevelsofnon-performingloans,therebyexposingthevulnerabilitiesofthefinancialsystem.Inbothcasesmonetaryauthoritieswouldhavelimitedinstrumentstousetocounterbalancethenegativeeffectsoftheshock:anexpansionarystancecouldfurtherincreasedebttounsustainablelevels;whileacontractionarystancecouldincreasedefaultrates.

Note: RC = real credit

Thismethodologydefinesthatacreditboomorbustishappeningwhentheactualvalueisoutsideofabandforwhichthethresholdsareobtainedbymultiplyingthestandarddeviationofrealcreditgrowthforthelast10yearsby+/-1.5.Ifrealcreditgrowth(ΔRC)isoutsidethisband(whetherinaboomorbustsituation,orbeloworabovethesethresholds),themeasureoffinancialfragilityisnegative.AsFigure7illustrates,halfofthecountrieswithinthesamplewereinavulnerablepositionin2007.Amongthese,theresource-intensivecountriessuchasAngola,Nigeria,DRCandZambiawerefacingaperiodofcreditboom.By2014,therehadbeenaconsiderablereversalinthisindicator.However,foreconomiessubjecttoaboom-and-bustcyclethebustmayjusthavebeenaroundthecorner.FIGURE7:Financialfragility,2007vs.2014

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Source:WorldBankdatabankdatabank.worldbank.org/data/reports.aspx?source=world-development-indicatorsandIMFdatabaseimf.org/data

Putting It All Together: An Overall Indicator of Resilience Theassessmentsabovecanhelpustellhowaptoureconomiesaretofacetighterfinancialconditions;theycanalsotellushowmuchroomformaneuverourmonetaryandfiscalauthoritieshave,iftheyhopetorespondtoexternalshocksrapidlyandeffectively.Whatdoesthissayabouttheoverallresilienceofsub-SaharanAfricancountriestoday?Howshouldwe,representativesofthoseauthoritiesandparticipantsinourlocalfinancialmarkets,expecttoperformwhenthenextexternalshockhits?

Toanswerthisquestion,wefollowRojas-Suarez’smethodologytocompileanoverallresilienceindicator,thegeometricaverageofallvariablesexaminedabove.Wefirststandardizethesevariablesandgivethemdifferentweights.Ourfirstsetofindicators(measuringcostandavailabilityofexternalfinance)isgivena15%weight.Thisisquiteahighweight,toreflecttheshallowdomesticcapitalmarketsandlimitedaccesstoexternalfinanceofthecountriesinthesample.Indeedformostsub-SaharanAfricancountriestoday,availabilityofforeigncapitalstilltendstobeanexogenousfactor.Thisisbecausethesecountriesarelessabletoattractforeigncapitalthroughshort-termmeasures(byincreasing,forexample,interestrates).Thehigherweightpenalizescountriesthatdidnotmanagetheirexternalexposureaccordingly.

Oursecondsetofindicators(reflectingabilitytorespondtocrisis,inparticularbyimplementingeffectivecountercyclicalmonetaryandfiscalpolicies)isgivena30%weight.Thisstronglypenalizeslackoffiscaldiscipline,whichhasledtohigherlevelsofdebt-to-GDPratiosdespiteaperiodofrapideconomicgrowth.Tomakethingsworse,thislaxityhasalsopromotedanincreaseinexternaldebt,thusexposingcountriestointernationalcapital-marketsentiments(theveryconditionforwhichrapidpolicyresponsivenessiskey).

Ouroverallindicatorofresiliencegivesvaluesrangingbetween-2and+2,butcouldbehigherorlowerthanthis.Ahighvalueisagoodsignindicatingthatacountryisresilientandalowvalueisbadsignindicatingthatacountryislessresilientandatriskoffacingcrisisetc.

Thisindicatorsuggeststhattheregionislessresilientin2014thanithadbeeninthepre-crisisperiodof2007(seeFigure8andrankingtablebelow).Outof13countries,onlythreeexperiencedanincreasein

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theresilienceindicator:Ethiopia,ZambiaandtheSeychelles,thankstoaprocessoffiscalconsolidationandarelativeimprovementinindicatorsofaccesstoforeignfinancing.MeanwhilealthoughtheresilienceindicatorfortheDRCalsosignificantlyimproved,thiswasmainlyduetoitsdebtreliefprogram.AngolaandNigeria,themainoilproducersoftheregion,havefortheirpartmaintainedtheirlevelsofresiliencebetween2007and2014.Sincebothcountrieshavehoweverbeenseverelyaffectedbythecommodityslumpthathascontinuedthrough2015and2016,theirresilienceindicatorsmaywellhavedeterioratedsince.

Insum,thisresilienceindicatorcouldserveasagoodwarningsignalforpolicymakerssuchasourselves,toalertuswhenoureconomiesbecomevulnerabletoexternalshocks.Inmanycasesandprovidedsufficienthumancapitalexistsintherelevantgovernmentbodies,meaningfulpreemptivemeasurescanbeimplementedtoimprovefiscaldisciplineandraisetheavailabilityofexternalfinancing.FIGURE8:Overallfinancialresilience,2007vs.2014

Source:WorldBankdatabankdatabank.worldbank.org/data/reports.aspx?source=world-development-indicatorsandIMFdatabaseimf.org/dataandbasedonRojas-Suarezmethodology.

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TABLE1:CountryResilienceRanking(2007ascomparedwith2014)

Country ValueofIndicator CountryRanking ValueofIndicator CountryRankingAngola 1.00 2 0.24 2

Congo,Dem.Rep. -1.05 12 0.21 3Ethiopia -0.37 11 -0.20 7Gambia -0.23 9 -0.57 12Kenya -0.05 6 -0.37 10Malawi -0.30 10 -1.15 13

Mozambique -0.13 7 -0.37 9Nigeria 1.17 1 0.61 1Rwanda 0.23 4 0.19 4Seychelles -1.55 13 -0.49 11SouthAfrica 0.20 5 -0.26 8Uganda 0.43 3 -0.04 6Zambia -0.16 8 -0.00 5

Conclusions and Recommendations In2014,sub-SaharanAfricancountriesinoursamplewerelessresilienttosustaininganexternalshockthantheywerein2007.Thistrendhasverylikelycontinuedtodate.Thankstohigherresiliencein2007,thenegativeeffectsofthe2008crisiswerelessevidentinthesecountries.Inthelastsevenyearshowever,veryfeweffortshavebeenmadetoreformandconsolidatepolicies.Thelackoffiscaldisciplineandovervaluedcurrencieshasledtohigherlevelsofdebt(bothinternalandexternal),andtoseverecurrent-accountdeficits.

Thesefactorshavereducedtheresilienceofthecountrieswithinthesamplebyhamperingtheabilityofeconomiestofacetightfinancialconditionsandbylimitingtheresponsesourpolicymakerscantakewhencrisishits.Thesecountriesarenowmorevulnerabletoexternalshock,whichmaywellbetriggeredbyasuddenincreaseintheinterestratesintheUnitedStates,orbyafurtherslowdownoftheChineseeconomy.Eitherofthesetriggerswoulddecreasethedemandforcommodities,leadingtoafurtherdeclineinworldprices.InsomeAfricancountriesthiscouldinduceareversalincapitalflows,whichcouldbesystemicallyproblematicifthosecountriesholdrelativelyhighlevelsofexternaldebt.Giventhisscenario,wecannotsitonthesidelines.Thereareseveralcleareffortswhichpolicymakers,businesses,andmultilateralinstitutionscanpursuetogether,toincreasetheresilienceofoureconomies,especiallyinAfrica:

! Fosteringregionalintegrationanddeepeningintra-regionaltradewouldcreatepositiveeconomiccorrelationbetweenresourceandnon-resource-intensivecountries,thushavingastabilizingeffectacrosscountries.

! Governments,businessesandmultilateralscouldworktogethertofosterbothforeignanddomesticinvestmentinexportingsectorsthatcanleveragecollectivegrowth,suchasfertilizingindustriesorenergyproductionandcross-bordertransportation.ForeigndirectinvestmentshouldalsobedirectedatclosingtheinfrastructuregapinAfrica.

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! Debtreliefprogramsshouldgohand-in-handwithsustainable,long-termfiscalconsolidationprograms.

! Oncetheyhavecreatedmore‘breathingroom’forfiscalandmonetarypolicy,policymakerscannottakeforgrantedthatsuchpolicieswillalwaysbeimplementedinatimelyandeffectivemanner.Thisrequiresthedevelopmentofqualityinstitutionsandofrobusthumancapital.Beyondplayingacountercyclicalrole,soundfiscalandmonetarypolicieswouldalsohelptoboostproductivity,increasecompetitioninmarkets,andfacilitateinvestmentsinhumancapitalandindisruptivetechnologiesthatultimatelycreateresilienteconomies.

! Sub-SaharanAfricancountriescouldworkwitheachotherandwithmultilateralinstitutionstocreateplatformsanddeviserisk-sharingmechanismsthatwouldallowcentralbankstotradecurrencyswapsamongthemselves.Thiswouldreducetheliquidityconstraintsofsomecountries,whilereducingtherisksanduncertainties(ormistrust)acrossall.

! AfricancountriesshouldlooktoAsia(andnotChinaalone)forexport-marketgrowthopportunities.TherisingconsumptionandgrowingAfricandiasporainAsiaisanopportunityforAfricanexports,especiallyhighervalue-addedproducts.

! Finally,stepsshouldbemadetoeliminatefixedexchangerateregimes.

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References Rojas-Suarez,Liliana,“RatingBanksinEmergingMarkets:WhatCreditRatingAgenciesShouldLearnFromFinancialIndicators,”WorkingPaper01-6(May,2001),InstituteforInternationalEconomics.

Rojas-Suarez,Liliana,“EmergingMarketMacroeconomicResiliencetoExternalShocks:TodayVersusPre-GlobalCrisis,”CenterforGlobalDevelopmentEssay,Feb.2015.

InternationalMonetaryFund(IMF)PressRelease:“IMFandWorldBankAnnounceUS$12.3billioninDebtRelieffortheDemocraticRepublicoftheCongo”(July,2010).[ONLINE]Availableat:imf.org/external/np/sec/pr/2010/pr10274.htm.[Accessed22October2016].

InternationalMonetaryFund(IMF),WorldEconomicandFinancialSurveys,“RegionalEconomicoutlook:Sub-SaharanAfricaMultispeedGrowth,”(October,2016),Washington,D.C.

InternationalMonetaryFund(IMF)Data.[ONLINE]Availableat:imf.org/data.[Accessed20October2016].

WorldBankDatabank|WorldDevelopmentIndicators[ONLINE]Availableat:databank.worldbank.org/data/reports.aspx?source=world-development-indicators.[Accessed23October2016].

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About the Authors ChristopherLemeinLegilishostartedhiscareeratDyerandBlair,Kenya'slargestinvestmentbank.HehassincebeenresponsiblefordevelopingandmonitoringKenya'sdomesticborrowingprogramwithintheCentralBankofKenya.AspartoftheIFC-MilkenInstituteCapitalMarketsProgram,inspring2017ChristopherundertookhisworkplacementinNewYorkCitywithGeorgeWeissMulti-StrategyAdvisers.

WalterDaCruzPachecostartedasanFX-DerivativessalespersonandjoinedAngola'sCapitalMarketsCommissionin2013,asHeadofMarketDevelopment.InOctober2016andwhileparticipatingintheIFC-MilkenInstituteCapitalMarketsProgram,WalterwasaskedtodirectthenewlyestablishedAngolanStockExchange.AspartoftheIFC-MilkenInstituteCapitalMarketsProgram,inspring2017WalterundertookhisworkplacementinNewYorkCitywithMillenniumManagement.

About the Capital Markets Program TheIFC-MilkenInstituteCapitalMarketsProgramatTheGeorgeWashingtonUniversitywascreatedexclusivelyformid-careerprofessionalswithapassionforlocalcapital-marketdevelopmentinemergingeconomies.Drawingondecadesofknowledgeandexperiencefromscholars,policymakersandmarketpractitioners,theprogramincludesfourmonthsofcourseworkatGWinthefall,andfourmonthsofworkplacementinleadingU.S.publicandprivateinstitutionsinthespring.Thisissupplementedbyuniquehands-onlearningresources—includingtheIFC'sproprietarycasestudiesandtheIFC-MISpeakerSeries—whicharecustomizedforpolicymakinginemerging-marketcontexts.Byactivelyparticipatingintheprogramandstayingconnectedtoitsalumninetworkoncetheyhavereturnedhome,theIFC-MIFellowsareplantingtheseedsforrobustcapitalmarketsandahealthybusinessenvironmentintheyoungestandfastest-growingpartsoftheworld.

©2017MilkenInstituteThisworkismadeavailableunderthetermsoftheCreativeCommonsAttribution-NonCommercial-NoDerivs3.0UnportedLicense,availableatcreativecommons.org/licenses/by-nc-nd/3.0/