Africa’s financial sector is generally not exposed to the same leveraged credit derivative products that have driven several U.S. and European banks to bankruptcy in recent weeks, Shanta Devarajan said.
"The most damaging effect potentially is on capital flows. You know well that Africa has seen very strong growth in foreign investment, both direct and portfolio investment, in the past six years," he told journalists in Africa via videolink from the bank’s Washington headquarters.
"Now there is a risk that if there is a really difficult financial crisis in the United States and Europe and risk aversion rises, it is possible these capital flows which have fuelled growth in Africa will fall. It will be a very, very serious problem for the continent," he said.
Africa’s growth rate increased to 6.2 percent in 2007 from 3.5 percent in 2000, World Bank figures show, partly due to huge inflows of foreign capital to invest in the continent’s oil, mining and other industries.
According to Bank of America, foreign direct investment to Africa doubled to $315 billion between 2000 and 2006.
"We are in a virtually unprecedented situation in the African continent. Africa’s growth rate is around the same as other developing countries, except for China and India, for the first time in 30 years," Devarajan said.
Strong growth gave Africa an opportunity to reduce poverty, and countries on the continent should take steps to minimise the damage from any fall in flows of foreign capital into African investment programmes, he added.
"There are some investment projects which are not profitable enough, which are not positive enough, which one should perhaps scale back or alter. But at the same time it is necessary to seek other sources of finance, either from other countries or at a domestic level," Devarajan said.
He noted the growing importance to Africa of major emerging markets like China and India, which have both ramped up investments in Africa in recent years, particularly in oil, mining and infrastructure like railways and dams.
But he said the future of those relationships would depend in part on how much these countries themselves were affected by the financial crisis in developed economies.
Western investors have lost their appetite for perceived risk in emerging markets against the backdrop of the deepening credit crunch, with benchmark emerging equities losing almost 47 percent of their value since May.