By Dr. Suleiman Walhad
March 22nd, 2023
Would there be an impact of the current financial crisis in the United States and Europe on the region? It appears far fetched and unlikely, but one cannot really be sure of this, for the world of today, is interconnected and pain in one region , like the body of a human being, is felt, one way or another, in other regions of the world. What happened to Silicon Valley Bank, a regional bank far in the west of the United States was soon after felt far in the east of the country, as Signature Bank, another regional bank, also failed there. Soon after it crossed the ocean to Europe and caused headaches for the traditional Swiss bankers as Credit Suisse turned upside down with its belly up. It had to be rescued by its rival Swiss bank, Union Bank of Switzerland (UBS).
The 2008 financial crisis took place in an environment where interest rates were low, but this one is the total opposite. Central banks have been raising interest rates over the past year, to remove the large money supply in the markets, which resulted from the COVID-19 pandemic. Did they cause this financial collapse? They could have triggered it for banks borrow from each other and all live off loans which they either lend or borrow. When interest rates are hiked, as has been the case, recently, banks would have to pay more interest for their borrowings. Soon they are faced with situations where they are unable to meet their obligations and hence the news, which is almost instant these days, appears, in the market and those who entrusted their funds and deposits with the bank make a run for their funds, before they lose it all. Here is where a run on the banks occur as happened on Silicon Valley Bank and on Signature Bank and Credit Suisse. They had to be rescued by forces beyond them, usually on the urging of the central banks which caused the problem, in the first place, through interest rate hikes.
Those in the banking and finance business are sceptical that the failure of one or two institutions and rescue of one or two can stem the tide. It is, they say, unlikely, for banks and finance house usually collapse once every decade and especially over the past half a century. The current collapse was long overdue, they say. And economists also note that banking failures usually presage recessions, whose impact on this one, no one knows. But it would be severe as the war in Europe drags on and a lot of resources are devoted to it.
And when there is recession, unemployment rises, and housing and real estate sales fall and banking failures continue. Two of the major engines of world economies are the United States and Europe and when they sneeze, others would cough and there is, where the Horn of Africa States, and for that matter, the rest of the continent of Africa comes in. The SVB was a major investor in various sectors of African economies which included among others, investments in renewable energy, fintech, and healthcare. They provided funds for startups and emerging technologies in the continent. Now that, it is no longer in the market, how these projects, it was involved in, would shape up, remains unclear.
The world Bank recently provided some information on the continent wherein it noted that Africa’s youth unemployment stood at some 22.8% in 2020. The tech industry was one of the key industries that had the potential to absorb many of this youthful population but the failure of the Silicon Valley Bank, now does not forebode well for this unemployed population. Other sectors of the economies of the continent and of the Horn of Africa States, may be affected by a general collapse of international banking systems and would, therefore, need the continent and the Horn of Africa States region, more specifically, to prepare for the challenges ahead. Cooperation of the regional and continental banking systems, could be a way out to reduce the impact of international banking failures, in other parts of the world.
Africa and the Horn of Africa States region cannot afford to leave everything to chance. The impact of bank failures in the rest of the world usually have double the effect on the continent as opposed to the rest of the world. The continent does not own a solid manufacturing base. Its economies are mostly based on raw material extraction and on subsistence agriculture (farming, livestock and fishing). The service industries, which includes the banking and finance sectors are not as developed as those in other parts of the world, and therefore, can collapse or get seriously damaged. It is where the need for collaboration of the central banks, the investment and commercial banks of the region, and of the continent becomes necessary, at least to slow down and moderate the impact of foreign bank failures.
As keepers of liquidity and hence stability, banks and financial corporations are essential for the continent and the region, and there would be need for them to chart their own collective paths in the future.