A healthy banking system is a vital ingredient for inclusive and sustainable growth in any economy. When functioning well, banks mobilise savings and allocate credit to growing sectors, helping to increase productivity.
Sub-Saharan Africa (SSA) hosts 550 million people of working age, but doesn’t have a banking system to match. For example, the latest data from the World Bank shows that the median credit to GDP ratio in SSA’s low and middle income countries was just 25% — 20 percentage points below the global average for countries with similar incomes.
In this edition, we have looked in more detail at trends in pan-African banking in SSA, which have been driven by two primary factors:
Our analysis shows that the potential size of the opportunity for SSA banking could range between $490 and $950 billion of additional credit (at 2016 prices). To fully realise this growth potential, it’s important African regulators get to grips with the key issues affecting SSA, including restricting the increased risk of contagion that this could bring to the region, but also making sure that financial inclusion is accelerated across all sectors of the economy and especially households.
Looking further afield, in the Eurozone we have revised upwards our projection for GDP growth, which we expect to hit about 2% this year – the fastest since 2015. The Eurozone economies are experiencing a synchronised upswing in economic activity with the core and periphery both growing at relatively fast rates. We expect this upswing to continue into the third quarter, particularly for some of the smaller peripheral economies like Malta and Cyprus, who are expected to record bumper years for tourism.
Finally, in the US, the Federal Reserve remains cautious about the pace of economic recovery in the face of relatively subdued inflation. A key risk we are watching are the impending negotiations regarding the federal debt ceiling, which could drag and cause short-term uncertainty. In this month’s edition we have also taken a closer look at how the Fed is thinking of reversing its quantitative easing programme.
PwC's James Loughridge discusses financial development in Sub-Saharan Africa and the role Pan-African banks have to play.
Despite the US economy exiting recession as long ago as mid-2009, the Federal Reserve’s balance sheet remains very large compared to historical levels. In July, the Fed’s balance sheet stood at $4.5 trillion – almost five times bigger than its size before the financial crisis. So how does the Fed plan to normalise monetary policy?
In June, the Federal Open Market Committee (FOMC) amended its ‘policy normalisation principles and plans’ which outlines the process by which its quantitative easing (QE) programme will be rolled back. These guidelines suggest that the normalisation of the interest rate should be well underway before any unwinding of quantitative easing (QE). Specifically, the Fed plans to reduce its balance sheet not by selling assets but rather by not reinvesting proceeds from redemptions of maturing assets, so as to avoid undue disruption to the markets.
At its July meeting, the Federal Reserve said it will start shrinking its balance sheet “relatively soon.” Given the open-ended nature of the Fed’s recent statement, when is this normalisation likely to happen?
Since December 2015, the Fed has raised rates four times, by 100 basis points in total to a target rate of 1.25%. We expect this gradual upward trend to continue, though there may only be one more rate rise this year given core inflation remains below target for now. But the run-down of the stock of QE assets through not investing proceeds from redemptions could start later this year or early in 2018. However, the pace of these moves will remain dependent both on the latest economic data on growth, jobs and inflation, and on political developments over the rest of this year (e.g. in relation to the federal government debt ceiling not being extended as planned, which could cause market instability).
The holiday season is here and for families this often means airports, hotels and hopefully sunshine. But for others, travel and tourism is big business. In 2016, travel and tourism supported 109 million jobs and generated $2.3tn globally1 – this is roughly equivalent to the size of the Indian economy. Tourism is also an important source of tax revenue for central and local governments, particularly given the increased popularity of occupancy taxes.
Despite political instability in numerous parts of the world, the industry’s resilience is apparent as it outpaced global GDP growth for the sixth consecutive year. The latest data shows that tourism’s share of global economic output rose to more than 3% in 2016.
Focusing on the Eurozone, tourism is a disproportionately important industry for its peripheral economies. Given tourism’s growing importance, we analysed the latest tourism data to understand how this could potentially affect the third quarter GDP growth figures for those economies.
Figure 3 shows the level of reliance of the peripheral economies on tourist revenues. Malta leads the pack, with about 13% of its economy directly supported by tourism, Cyprus and Greece follow next. Overall, Mediterranean countries comprise half of the top 10 Eurozone economies reliant on tourism.
Our analysis suggests that the peripheral Eurozone economies will experience a bumper year for tourism this summer. Specifically, using the latest monthly arrivals data, we calculated the year on year change in tourists in the peripheral economies. We then applied this growth rate to the annual number of tourists.
This approach does not fully take into account the highly seasonal patterns in tourism, but is a useful indicator of growth. We found that 4 out of the top 5 tourism reliant economies can expect substantially higher number of tourists in 2017 if current trends continue.
For example, Malta and Cyprus have experienced double-digit growth in tourist arrivals in June (19% and 12% respectively), as compared to 12 months ago - Cyprus is
expected to see an all-time high in the number of tourists visiting this year. Using the same approach, Spain could see its tourist numbers increase by 12%, followed by Portugal and Greece (8% and 7% respectively).
We think low costs across Europe have helped sustain strong tourism numbers, as both inflation and unit labour costs have remained generally low in recent years.
In total, over 350 million international tourists visited the Eurozone in 2015. This represents an increase of 31%, or over 83 million, since 2005. However, in the same period the number of tourists across the world grew by 49%. Despite country specific success stories like Malta and Cyprus, the data suggests that the Eurozone market is relatively saturated, with other destinations like the Far East attracting more visitors.
1 Travel & Tourism, Global Economic Impact & Issues 2017, World Travel & Tourism Council, 2017
Growing a sound financial system is a crucial ingredient for inclusive and sustainable economic development. As the financial system develops, savings are mobilised and allocated to fast growing, credit-hungry sectors of the economy. If this works well, it should boost productivity.
In Sub-Saharan Africa (SSA), however, the financial sector remains relatively small and underdeveloped. Data from the World Bank, for example, shows that the median credit to GDP ratio in SSA’s low and middle income countries was just 25% in 2016. This is about 20 percentage points below the global average for low and middle income countries and comes with a cost. The IMF estimates that the relative financial underdevelopment of SSA costs the region 1.5 percentage points of GDP growth per year1 or approximately $20 billion in 2016 prices.
However, African banks have started to expand their footprint across Sub-Saharan Africa. Figure 4, for example, shows how the number of cross border subsidiaries of African banks has almost tripled since 2002. There are now ten pan-African banks (PABs) with a presence in at least ten SSA countries, and one with a presence in over 30 SSA countries. We think this is driven by two factors:
As mentioned above, the majority of SSA countries have relatively shallow financial systems at present. However, this varies greatly across the region, with total credit ranging from 114% of GDP in Mauritius to 10% in Lesotho. This represents an opportunity for PABs to capitalise on (see Figure 6). Our analysis shows that the potential size of the opportunity for Sub-Saharan Africa could range between $490 and $950 billion of additional credit (in 2016 prices). This depends on whether the SSA economies reach a level of financialisation similar to Mauritius or South Africa.
However, SSA comes with a set of unique challenges. The first priority of regulators should be to improve financial inclusion particularly for the household sector. The IMF’s Financial Access Survey2 shows there are approximately 5 bank accounts for every 10 people in SSA, in comparison to 14 globally.
Cheap and simple technological developments have been critical in helping improve access to financial services. For example, SSA is a world leader in the field of mobile banking. Worldwide 2% of adults have a mobile money account compared to 12% in SSA2. Fintech can also enable SSA to leapfrog stages of financial development.
Also, encouraging the growth of pan-African banks means that the financial cycles and business cycles of the SSA economies will become more integrated. This could mean that shocks are transmitted faster across these economies. So a key challenge that local regulators will have to deal with is facilitating further financial integration while safeguarding against the increasing risk of cross border contagion if financial problems do arise.
In conclusion, SSA has a long way to go to reap the potential benefits of a fully functioning deep credit market. However if regulators, banks and technology companies work together to drive financial inclusion forward then pan African-banking could help businesses and households reap the advantages of a well-functioning credit market.
1 Financial Development in Sub-Saharan Africa, IMF, 2016. 2 Financial Access Survey, IMF, 2015. 2 Global Findex, World Bank, 2014.