The supply of new lending has slowed to a near standstill in oil-producing African countries already struggling to find a way out of recession, adding a looming credit crunch to the region’s troubles.
Across sub-Saharan Africa, private lending growth has fallen from a high of 15 per cent in 2014, before oil prices crashed, to an estimated 7 per cent this year, according to the Overseas Development Institute, as the first chart shows.
Oil exporters, grappling with their failure to diversify their economies when times were better, are the worst hit. There, lending growth has fallen to an estimated 0.5 per cent, according to the ODI. Almost no new lending is taking place in countries including Nigeria, Angola, Cameroon and Equatorial Guinea.
This is a big setback for those looking to escape the vicious cycle of oil dependence by building up other sectors.
“The domination of the financial sector by oil companies intensifies the problem because its lending follows the ‘boom and bust’ cycle,” says Judith Tyson, research fellow at ODI. As loans to the oil sector go bad, banks are less willing or able to lend elsewhere.
Nigeria, Africa’s top oil producer and formerly its largest economy, is among the worst affected. Hit by low oil prices, rolling blackouts, a dollar shortage and erratic policymaking, investors have fled. The economy is in steep recession, contracting by 2 per cent between April and June alone.
“How an economy responds to a growth slowdown is a function of what investments it made yesterday. Those investments become the buffer in difficult times,” Babatunde Fashola, Nigeria’s minister of power, works and housing, told EM Squared in an interview.
“If we have that infrastructure gap, which clearly is there, the productivity you want to see will not be as competitive as an environment whose infrastructure is clearly ahead of ours,” he said.
Closing infrastructure gaps across Africa will require investment of $93bn a year for the next decade according to the African Development Bank. That will be doubly hard to achieve if lenders are unwilling to come to the table.
To complicate any recovery further, the fall in credit growth across the region has been accompanied by a slump in savings deposits, adding to the pressure on lenders.
Households are withdrawing savings to cover day-to-day expenses while big extractive companies are drawing down cash reserves. Savings rates, which were contracting by 3.5 to 5 per cent between 2011 and 2014, will fall 18 per cent in 2016, according to the ODI.
The steep rise in non-performing loans in the extractives sector, in particular, is weighing on banks’ balance sheets.
The credit crunch’s bite will not be as bad everywhere, however. The rise of NPLs has been much less marked among banks in oil-importing countries.
Oil importers such as Ethiopia, Kenya, Mozambique, Rwanda and Tanzania have maintained stronger lending growth — and, with the exception of Mozambique, robust GDP growth — compared with their oil-rich neighbours. Oil-importing countries are still expanding credit at a steady clip, albeit from a low base.
Where the credit crunch is hitting hardest, however, central banks have few tools at their disposal. Loosening monetary policy could help, says Ms Tyson at the ODI. But because the credit crunch is fundamentally a crisis of solvency, such measures would have limited impact.
Rather, this could be the moment for governments and development banks to shine by extending credit and providing first-loss guarantees to shoo investors into productive projects. With interest rates in many western economies close to or below zero, yield-starved investors should be open to opportunities with the right enticements.
More sophisticated economies such as Nigeria’s should also implement anti-cyclical capital standards as soon as possible to make sure banks have a better buffer. “Better late than never,” Ms Tyson says.
Bankers, for their part, expect a rebound. “The fact that we have seen subdued private sector credit extension in most key African economies over the past years is perhaps the best indicator that private sector credit growth is about to recover,” says Razia Khan, Standard Chartered’s chief Africa economist.
“There might be a longer lag at play in Nigeria [but] the expectation is that, even there, credit growth will eventually recover,” she says.
Adrienne Klasa is editor of This is Africa, an FT publication.
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