The Covid-19 virus has caused a convulsive shock to the global economy. There remains considerable uncertainty around the pathway of the pandemic, the means and speed of any economic recovery and what structural changes – particularly to the globalisation of trade and capital – it will bring in the longer-term.

The pandemic is already radically worsening the economic outlook for Africa, with growth expected to collapse to a negative 1.6% and a real per capita fall of 3.9%, making 2020 the worst year since records began in 1970 for the continent’s economic growth.

Poverty is also expected to increase by 2% of the regional population, with 26 million people falling under the poverty line, erasing five years of progress in poverty reduction. Half of the new poor will live in just five countries: the Democratic Republic of Congo, Ethiopia, Kenya, Nigeria and South Africa – with Nigeria contributing the most with 6.6 million according to unpublished World Bank material.

What does this mean for the banking system?

From the implementation of Basel III to strengthening the capital base of systemically important institutions and lowering the base rate, fortunately, regulation in the region has improved over the last decade.

Policy measures have included lowering the base rate – which has positive effects on aggregate demand and household abilities to service debts – lowering bank cash reserve ratios, government bond buying programmes and debt moratorium for banks.

However, the stability of the banking sector in Africa is threatened by the likelihood that there will be a sharp increase in non-performing loans, from the already high levels of 11% in 2019. Borrowers across sectors and scales of business will be affected, as declines in income and revenue mean that they will be unable to meet their obligations.

Individual institutions also remain vulnerable to failure. For example, microfinance financial institution (MFI) portfolios will come under stress as a result of lending to households with volatile income and no assets, and some may be unable to maintain solvency. Institutions at risk include those with hard-currency, short-term funding or interbank liabilities, or those with high concentrations in sectors particularly affected by the Covid-19 shock.

 

Read the full blog here.

This blog first appeared on the ODI site. 

Author: Judith Tyson, ODI. 

Image courtesy of World Bank Photo Collection via Flickr.

The views are those of the author and not necessarily those of ETTG.