Economy

Global financial crisis like Fall of Berlin Wall

  13 May 2009 4:00am
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The Chairman and Co-founder of Data Bank Financial Services, Mr. Ken Ofori-Atta has compared the global financial crisis to the Fall of the Berlin Wall.“At the beginning of the crises, most countries in Africa felt sufficiently delinked and surmised they were likely to escape appreciable damage to their economies.”Mr. Ofori-Atta was speaking at the British Council - Concern Universal Management Forum supported by Joy FM.His presentation has been published below in full:British Council - Concern Universal Management Forum How the Global Financial Crises Impact on Businesses in Ghana Ken Ofori-Atta Databank Financial Services Ltd Mr. Chairman His Excellency the High Commission Nicholas Westcott, Distinguished Panelists and Visitors affiliated with Concern UniversalCountry Director of the British Council - Moses Anibaba, Ladies and Gentlemen It is a real honor to have this opportunity given by the British Council to be on this distinguished panel, to engage our young professionals and to discuss the financial markets´ equivalent of the fall of the Berlin Wall and its impact on our economy. I thank Moses and his team for making this possible; and sincere gratitude to Universal Concern for electing to come to Ghana at this time.So how has the global financial crises impacted Ghana and on the micro side, our businesses? At the beginning of the crises, most countries in Africa felt sufficiently delinked and surmised they were likely to escape appreciable damage to their economies.After all, we were not part of the binge in credit in the US market; with their US $1.8 trillion of Subprime mortgages in a mortgage industry of over US$12 trillion and consumers carrying over US$800 billion of credit. Our banks had little or no "toxic assets". Africa was enjoying reasonable political and economic stability while FDI was also increasing.This head- in- the- sand paralysis continued until the fateful day of September 15, 2008, when Lehman Brothers, a Wall Street firm, was allowed to collapse (a tragedy, I might add).It seemed that the sluice gates had been left open, creating what Greenspan described as a "credit Tsunami": The stock markets crashed, leading to massive wealth destruction. There was credit contraction, pure play investment banks literally vanished, banks were impaired, assets liquidated and confidence in the global financial markets was at its nadir.The West, however, rallied and have, with breathtaking speed instituted in a sense, economic recovery and structural adjustment programs i.e. a fiscal stimulus packages (a la Breton Woods for Africa). Western Governments have essentially done three things for their economies:
  • Created money to combat the credit contraction
  • Recapitalized the banks and spurred banks to lend to each other and to businesses and consumers;
  • Writing off/down the accumulated debt to deleverage the financial markets and thus sanitize the "toxic" assets i.e. mortgages and their derivative securities.
    • In addition, in the recent G20 meeting, there was a consensus on avoiding beggar-thy-neighbor policies and a strong stance against protectionism. A trillion dollar vote for the IMF/World Bank to facilitate trade credit and other liquidity interventions for emerging markets and member countries was also approved.However Africa and Ghana for that matter has been caught in the "back draft". Credit lines are frozen, trade finance is dried up, loans are being called in, foreign exchange is hard to come by, the currency markets have become less stable, inflationary pressures are increasing, the capital markets have taken a beating and FDI has slowed down.After all the hard work, Africa once again is at the crossroad for a reversal of the impressive economic gains achieved in the past decade. In Ghana in the past three years (i.e. 2006-2008) exports have increased from $3.7 billion to $5.3 billion while remittances, including NGO transfers have increased from $5.8 billion to $8.7 billion.The number of Banks has increased to 26 with shareholder funds now over GHC 1 billion, with total assets of GHC 11 billion, credit to the private sector over this period has increased from GHC 1.2 billion to GHC 4.9 billion! Ghana, as you know has maintained a GDP growth rate of approximately 6% over the past few years with a historic 7.3% growth last year in 2008.Let us not for once delude ourselves into belittling the disciplined role played by our regulators: the Insurance Commission, the Securities & Exchange Commission, the Ghana Stock Exchange and most importantly the Bank of Ghana. It is through their firm and prudent supervision of the financial industry that the impact of the global financial crises has been so muted. So we thank them for this foundation of a sound financial sector.If there is one lesson we have learnt from the global financial crises it is captured in Greenspan´s mea culpa to Congress in October last year "I made a mistake in presuming that lenders themselves were more capable than regulators of protecting their finances"....I still do not understand exactly how it happened". I believe our regulators did better than Greenspan.We as a nation, professionals, business colleagues, and academics, should be careful as we turn "inflation targeting" into a whipping boy; proclaiming its epitaph. These are not natural times and we are going to require a combination of both monetary and fiscal instruments to build a relatively sound economic base. How do we implement policies that will propel growth, create jobs and keep us on track with our Millennium Development Goals? And still guard against inflation?Unfortunately the current situation is inimical to the average business person: inflation is climbing, the currency has weakened, our foreign exchange reserves have dwindled, government revenues are behind targets, and banks are being tentative about lending and getting into the old ways of buying Treasury Bills. Banks are unfortunately potentially setting themselves and the economy up for an adverse feedback loop, which contracts the economy, reduces demand for loans and thus compromising the financial industry. It becomes self reinforcing and unleashes a vicious circle.So these are issues that our private sector, after 7 sound years, is having to deal with again. In reality they are problems that predated the current financial crises. We shouldn´t be immobilized as in my view there exists unique opportunities to make a transformational shift in our economy, even in these times. Almost every cardinal principle in the market driven economy has been demystified by the current global financial crises. Financial market it seems after all do not tend towards equilibrium and periphery countries such as Ghana faced with this contagion should seize the opportunity.So I ask the question of us Ghanaians UBI Estes....... Genesis 3: 9, God´s question to Adam and Eve in the Garden of Eden. This is not because we have eaten from the tree of knowledge or that God did not know where we were. It is asking us to be introspective, to be truthful to seize this moment in our nakedness to work together as a country and to ensure that at these times, we protect our businesses, our millennium development goals, and move the `bottom billion´ up the ladder.So what do we need? We have to manage inflation and we have to grow.




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