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Thursday, July 24, 2008

HOW DID THE AFRICAN FINANCIAL SYSTEMS AVOID THE WALL STREET CRUNCH

Dear forum members,
Here is a question posted by Mr. Deo Ruta, a member of this forum. He asks, "HOW DID THE AFRICAN FINANCIAL SYSTEMS AVOID THE WALL STREET CRUNCH?". This topic is open for discussion; we welcome your inputs

23 comments:

Anonymous said...

Dear Forum Members, the reason for my drive to the subject was based on the posted add by Peter on Treasury Bills.

While Networking; i met a gentleman by the name or Richard Rubin, Richard had worked for JP Morgan and varius Large finacial institutions here in Washington and currenly advising some African Gvnts. As we were exchanging ideas, he pointed to me that the credit crunch which is haunting "the wall street" will never affect Majority of African financial systems directly. I asked him why, and his answer was patrly to do with what Peter has posted below............Treasury bills

In his opinion, which mostly i agreed with, was that African Govenments depends much on TB auctions. You will notice that, even the Large economies like USA, Japan etc, the returns from bills are less that 9% but higher than 5%.To my Amazement i found out that our bills return is between 15-20%.For that reason Mr Rubin made his case that, Much of Bank rise their operation capital from govenement papers (Bills &Bonds)he also concluded that our circle of currencis can easily be controlled and tracked down before it evaporate somewhere.(what happen to EPA...not my area of interest)
However; we concluded that, the introduction of foregin funds/banks and other intitutions, will create sophisticated financial structuring which could be expose us to similar situation wall street has face time after time.In a different note, he warned that if we are not capable of controling money that is flown out of country both system will prove failure and continue to criple our economies.

Wadau Mnademaje?

Anonymous said...

I understand the food price and skyrocketing oil price can be used as part of argument, but lets stay focused on how directly One afrected the other...How JP and or Private equities gotta a punch from those " Cheap sysndicated loans" which are now backfiring them!

Ruta D.

fredmboma said...

Mr. Ruta,

Can you elaborate on transfer mechanisms between what happens at Wall Street vs what happens in Africa?

For instance, one can fairly easily trace transfer mechanisms for oil prices, but for a stock exchange where probably very little capital from Africa is invested it kind becomes tricky.

Anonymous said...

Kwanza kabisa labda nitoe shukurani kabisa kwa muanzilishi wa hii blog, i believe your glob will bridge different scholars from different angles of the world.

Pili ningependa kumjibu mdau wa kwanza alisema kwa mshangao why Treasure za BoT zina range between 15 and 20%, the reason behind is inflation. In order to get the real rate you have to minus inflation hapo which is between 7.5to 10%. Then utaona tupo kwenye the same page na nchi za western. Vile vile kumbuka Tanzania government is not a risk free borrower, so lazima uongezee default premium. Combine hizo zote ndio tunapata 20% interest rate.

Tatizo ninaloliona mimi sio 20%, the problem is why Tanzania financial institutions doesn't enjoy this abnormal returns. Why Citi bank, Braclays and other international Banks enjoys this free lunch?

African Financial system is a dead body. There is no liquidity at all except index like JSE. I don't believe the wall street turmoil has any effect in African financial system because most of African (Tanzanian) doesn't invest much on international investment.

Hii turmoil ina affect nchi za middle east, EU, and Asia sababu they invested on US Treasure Bond, Morgage backed security and owning tones of shares of different financial institutions which faced slap on the face.

Serikali zetu zinalia masikini so, i don't believe kama zinaown any kind of security (eurobond) nje ya Tanzania. Vile vile kampuni kama NSSF zime invest 100% in real estate and other unliquidate assets. So i don't see how our financial system get affected due to this turmoil.

The soaring of oil has impact in Africa but much in economy and not in our financial system. However, the effect of commodities suppose to have impacts in our financial systems. Sababu we sell a lot of gold in world market, but we don't own those companies which trade on international stage.

I mean there is no correlations between our financial system and Wall street. Only market ambayo inaathirika na hii nightmare ni FOREX MKT sababu the dollar is still down the toilet, and the correlation between it and crude is almost -1. Who knows where these things will go?
It is the GLOBALIZATION STUPIDY.

You mentioned a little about uncontolled Tanzania Banks, i am so concern about these banks. They are copy cat, they copy everything from their rivails and no one to police them.If they decide to expose themselve in a crazy investments for the sake of increase revenue, then be my guest sababu you will see bank panic which will send our economy down the grave.

There is more to talk i think about DSE. What need to be done to increase global awareness about DSE?

Last most of those so called, Financial advisor wanao zishauri hizi nchi za 3rd world, they're dead wrong, they don't know the damn things. I talk from experience.
Mdau #1

Anonymous said...

Fantastic blog loong overdue !
You can bet your mortgage I will spend hours on it every day.
Thanks alot
Kaima

Anonymous said...

Africa does not have a financial system that can be compared to major/strong financial systems,with the exception of South Africa. To get an accurate picture, break down the topic to specific financial systems in African countries and analyze them accordingly.
The big problem about financial systems is bank failures and stock market crashes.
Banks needs to be regulated and supervised. The participants in the financial markets have overproduced and over consumed derivatives. Greedy and self interests characterized the competition to maximize profits at any cost. Markets collided and institutions and individuals went belly up. RIsk management and bank supervision has never been easier in both weak systems and highly advanced systems.

Anonymous said...

Tazama huko Ulaya, Marekani, na Asia tnaweza kujifunza mengi lakini in terms of capital flow bado tuko nyuma sana sana. IMF na World Bank wanatmaliza na policies zao uchwara. Wao ndio wametuamsha pia. Inamaana kusingekuwa na DSE kama sio wao kutushinikiza. Benki kuu haiwajibiki ipasavyo katika majukumu yake ya monetary policy na wanaohusika na fiscal policy pia wamelale fofo. Hakuna productivity hakuna heavy trading actvity hakuna inventory inayozalishwa pale kwetu.

Mujwahuki said...

Hii ndio blog ya kutukomboa kifikra, angalau tupunguze au tuachane na majungu tujadili 'issues'.

Tatizo la financial system yetu sio Wazungu wala kitu chochote kutoka nje, ila ni sisi wenyewe hatujaweka akili (brain) zetu hapa nyumbani!! Tutalaumu utumwa, ukoloni, ukoloni mamboleo, globalisation, nk nk, bila kurekebisha chochote kama hatujagundua kwamba tatizo ni sisi wenyewe!!

Wataalamu wanasema unapolaumu au kulalamika unampatia huyo mtu mwingine unayemlalamikia mamlaka (control) juu yako, kwa hiyo akiyatumia vibaya hayo mamlaka jilaumu mwenyewe uliyegawa hayo mamlaka. Let's stop whining and start winning!!

Ni dhahiri financial system ambayo inakosa 'domestic brain'itakuwa na udhaifu mkubwa pamoja na 'copy cat' nyingi kama mdau mmoja alivyosema hapo juu, usitegemee 'innovations'!!

Anonymous said...

Peter et All, im very greatful for your positive responses.

Also want to thank you for agreeing in part with some points i raised on the matter and appreciate your broad knowledge that you have so far share to enlight each other.

In a different note,however;i want to respond to Mdau # 1 that, the rates i was refering to were not LOAN interest rates!. These were rates on returns.Since we all agree the circle is too small the only way to encourage high bids on govmnt papers is to rise those interest and it has proved so.

I also differ slightly with you on the point of effects the crunch has caused to Asian and Middle east markets. In fact, it is not what is said, they have only get a "one day hit" but long term effect will be positive ones to them as the US Banks are now shored and flooded with Sovereigh funds from China to Bahrain to Salvage Citi,Morgan Stanley to Merrill Lynch.

When you made a pont that African dont make any foreign investment; have you asked your self why Standard charted is there to compete with Bank ya Posta?......are you telling me that they collect those small deposit and invest in UK or else where and give the later returs to the locals? I think it has much to do with what we cant see ourselves.

On the point of Liquidity, i totally agree with you that, our Giants Insititions have invested heavily on non Liquid Assets. But we should remember that even in USA the rate of Liquidity is not that high to a point that every time there is a shake; the FED rushes to inject extra cash to shore it up money in the circle.

I must say that my reason for the intro was meant to show how "BY CHANCE" we happen to look BRAVE and LUCKY rather than choices that have made to keep us directly safe.

My appreciationg goes to you all and im glad we have rised another subject "LIQUIDITY" may be the Mathermatician Peter can start another Trend on "how we can oparate with less liquid asset in a non credit base economy and yet be succesful"

Thank you
Ruta,D

Anonymous said...

Thanks Ruta, If you real read what i said concern rate, I meant T-bills, T-note and T-bond interest rate and i didnt mean overnight loan rate. I didn't means any loan what ever, any interest rate depends on two things one is premium and second is Inflation. African government are not free risker borrower, that is why there is high premium. You see t-bills from US fed is about 2.5%, the reason behind is fed is free risker borrower, and inflation is lower.
The T-bill return depends on interest rate and other factors, but interest rate is the main factor, and interest rate can be affected by inflation. Nadhani hatukuelewana, lakini nilikuwa najaribu kuelezea kwa nini RETURN ni 15% kwenye Treasure Bond Zetu.

If your looking for the main index like Nikkei au India then you will see there is positive correlation between them and Dow Jones Index or NASDQ index. So, far this index lost about 15% since last year august, now go and look at Nikkei or India index, and you will see all this index didn't get high return as were expected.

When you look at foreign investment you look at huge funds movies from one country to another. For instance if Tanzania teacher fund move about 1 billion USD into money market, then that can have impact. In international investment we exclude small investors because they doesn't make huge effect. So, that is why i excludes people who invest on DPR's in Tanzania bank because it few of them.

There is many ways of increase liquidity in DSE, things like introduction of Options, futures and buying short. However, this things needs high knowledge and financial understanding. But we can still impose them

Let take one mile further, Tanzania we don't have financial system. I do know couple of people works in Banks deals with Forex, but the only thing they do is to buy at SPOT rate. We do have a long way to go before we get there. We need more scholar who knows financial system. So far Tanzania doesn't have those people, it's our responsibility to share knowledge with our fellow Tanzanian.
Mdau #1

Anonymous said...

Mdau # 1. Point accepted and learned!.

Mr Fred Mbona, sorry i skipped your question...but it looks like Mdau # 1 has responded to it while responding to my last posting.

This "libeneke" has to continue at any cost!

Nalitolela, P. S. said...

I was very happy when Deo brought up this topic earlier. When the US Economy started going "South" I was working back home but was following closely what was happening via TV and Internet, and frankly I was fearing the worst for Tanzania, considering how much our economy is linked to the USD. I also had worries that rising interest rates may negatively impact Foreign Direct Investments, especially from N. American companies. (Gold contributes to more than 1/3 of our total exports, and the largest Gold mining company is Canadian)

Now, to answer Deo's question; first of all, with all due respect deo, may i suggest replacing the word "AVOID" by the word "ESCAPE" or "SURVIVE". Because the word avoid makes it sound as though this whole thing was by design (i.e., African countries foresaw what was gonna happen and took steps towards mitigating their financial systems from downfall), something I doubt is true. Now, the question regards African Financial systems as a whole, but I will base my comments solely on Tanzania. Some of the previous posts spoke of rising food and petroleum-product prices. The truth is, when the world's largest economy is shaken, there are ripple effects that are going to be felt is small countries like Tanzania. However, it is my belief that Deo (and please correct me if I am wrong); was asking how did our financial markets survive (so far), i.e. how come none of our banks go belly up, or the stocks-prices on DSE fall?

The biggest problem with the US is that people in the credit market got too greedy. When the government started encouraging banks to enable less qualified individuals to obtain housing, banks took the idea of subprime lending too far. The worse your credit rating is, the risker it is to lend you money, the higher interest rate they can slap on your mortgage. And these high-interest mortgages would be used as collaterals to purchase other derivatives (so called mortgage-backed security, MBS) from other banks, and so on and so forth.
The problem came when people could not afford mortgage payments anymore (partly due to loss of jobs as 1. Corporate America outsources a lot of jobs to "cheaper' Asian countries these days, 2. The Japanese motor industries is totally taking over the US & Canadian markets; forcing GM et al to close down plants).
So mortgage-payments were defaulted; the houses had to foreclosed as a result, real-estate lost value; banks went bankrupt; interest rates went high; people could not borrow and had to sell the shares they held to raise funds, hence stock-prices went down, etc.

Now when it comes to Africa,
1. a lot of our countries' laws do not allow for trading of such risky derivatives. In Tanzania in particular, as pointed out by Mdau #1, we do not even allow some conventional derivatives like European options, let alone exotic types like MBS. Like Deo mentioned, a substantial portion of returns from our financial markets is from T-Bills.
2. Luckily (in Tanzania's case); of the 27 licensed Banks and Non-Banking Financial Inst; only Citibank is American owned; and they lost some money, but so far still holding on.

That's all I have for now in regards to Deo's question. However, I don't mean to be the angel of doom, but ARE WE SURE THE WORST IS OVER?. I mean, the whole of last and this week Fannie Mae and Freddie Mac's failures were all over the business news. The government before said these too banks were too big and would not need rescuing; but the inevitable happened, and yesterday Congress had to authorize a bail-out plan.
IndyMac was not thought to be a collapse risk and was not placed on the FDIC watch list; only for it to end up being the 3rd largest bank in US history to collapse.

So before we give ourselves a pat in the back, let's see how much damage this storm is gonna make in the US, and how much of that effect is gonna indirectly trickle down to Africa.

There is one thing that has risen here amidst these discussions that I would like us to talk about further (as separate topic). It is the issue Mdau #1 raised, in regards to introducing options and other kinds of derivatives to stir up things in the Tanzanian market. I hold the same view, and there are a few people I had discussed this issue with while I was back home.
The second, the overall T-Bill and T-Bond rates in Tanzania have gone down over the last 12 months,

By the way, we are currently in the process of unifying the capital markets within the EA countries, so that is going to stir up things a bit more.

Anonymous said...

How do you compare returns like that?
Returns comparison is a very complex subject be careful with your conclusion and hypothesis.
%10 returns in yen is not the same as 10% returns in dollar based assets.Likewise maafu ya Bingo hata kama return ni 6000% who want those?

Anonymous said...

Peter, I think you touched every angle. I am so please to see there are Tanzanian out there who work hard to introduce derivatives in our financial system.

You first talked about subprime morgage nightmare. I remembered when this crisis started to unfold, majority of the Wall Street Analyst took this nightmare for granted. No one knew this nightmare is here to stay, Analyst even tried to compared this crisis with Saving and Loan Criss. My view is different, the house crisis is not at the bottom yet. However, we can look the house futures at CME (Chicago Marcantale Exchange) and you will see the touch down for house price will be around 2010 before the curve start to go up.

I believe every bank which exposed it self to subprime lending it will pay the price. You think Bair Stains was big to fail? I am looking forward for Citi group second quarter earnings, that can predict either Citi is here to stay or to big to die.

Now tuangalie kidogo kuhusu DSE, i never got opportunity to work in Tanzania, so honest speaking i know little about Tanzania Financial system. However, i got an opportunity to met one of the guy who engineered DSE. From his view it was more political than financial, however that is not the problem. The challange ahead of us is how change DSE to something like JSE?

Peter, you talked about why Tanzanian Bank (local banks)doesn't take advantage of buying Treasure Bond? Honest, there is a few people in Tanzania who knows practical how Treasure works. I got an opportunity one time to met one of the Top CRDB Bank executive, and he didn't know anything about government bond. This is because most of our financial institution operates under taboo theories.

I always asked people why you think CITIBANK is in Tanzania? You think they love us? You think we even qualify to their deposit standards? NO. They enjoy bidding Treasure without many strong competitors and they sell this securities to their citizen who knows about international bonds, which brings high Yield compare to Junk Bond but with less risk.

We need to establish Bond Market, which will provide a capital to most of our companies. At the same time it will produced an opportunity to our citizen who like to invest on less risk investments. This will bridge people with surplas of cash, and corparations which need extra cash to imposing in new investments.

We do have a long way to go, but it is our responsibility to transfer the knowledge we earned in so called first world to our world.

I apologize for not editing, i hope majority will understand.
Mdau # 1

Anonymous said...

anonymous of 16:00Am you said all, there is more than return when you compared returns from one country to the other. One of main the risk is foreign exchange risk, most of our currencies are not stable. You can get even 20% return but if the country loose its strength every morning, then it doesn't matter.

Forex risk is one of the big problem.This problem caused US to introduce American Depositary Share for their citizen.
Mdau # 1

Anonymous said...

Haya MaQuants shukeni Physics zenu Fanyeni usanii wenu. Mh Peter unahifadhi na kuchuja data au hoja za watu?

Nalitolela, P. S. said...

To the Anonymous poster from Fri Jul 25, 07:16:00 AM EAT

I am not sure I follow your point. It is true you can't compare returns in absolute terms, i.e. like you pointed out 10% of $1 is not the same as USD 1 of TZS 1, obviously because of their different values; one equals more than TZS 10 while the other is a mere TZS 0.01 (at the current exchange rate). But these two values are comparable in relative terms; i.e. to a guy who has TZS 1, TZS 0.01 has the same value to him in comparison to what USD 0.01 is to the guy with USD 1.

Having said that, when the previous posters (specifically me, Deo and Mdau #1 were taking about %age returns), we were not comparing absolute values of the returns between different markets or different currencies. When Deo brought up the 15% return, what he meant is that, in our financial markets, returns (profit) earned from trading of T-Bills is 15% of the total lot. What he was trying to say is, a substantial part of our market depends on T-Bills which are safer instruments than other securities, as opposed to the US market whereby they do a considerable amount of business in highly risky assets.
I hope I got that correctly.

Nalitolela, P. S. said...

oh by the way, I wanted to make a minor point to Mdau #1's comment about NSSF. It is not true that they have invested 100% in real estate. The law would not allow them, and certainly the one most basic of portfolio management theories would frown upon it (diversification reduces risk).

NSSF does own a number of shares, as well as T-Bills, T-Bonds, nd Corporate bonds. It is true however that real estate makes up a considerable amount of their porfolio. The reason for this is mainly based on Actuarial Valuations. The membership base for NSSF is the biggest of all social security funds; and the most diverse in terms of age groups. Since they cover mainly the private sector which employs a lot of the young workforce; NSSF is not faced with a burden of paying pension liabilities in the near future. In addition, they have a lot of contributors to cover whatever liabilities they will be facing in the near future. Therefore expert advice dictates that they invest in more long term, "safer" assets that will give a small but steady income and will appreciate in value over time. Take now say, LAPF on the other hand, which is the total opposite of NSSF in a sense that they have a small membership base; most of their members (i.e. Local Authorities' employees) are ageing and retiring and they had to do massive hirings in recent years, e.g. in 2005 they hired a lot. So they have fewer contributors than pensioners. That is why they invest in more liquid assets and less in real estates (Millennium Towers and the Residential flats and bungalows in Dodoma and about 10% in the Bunge project are to-date their only real estate investments).

The longest maturity for T-Bonds in Tanzania is 10-years, and considering they pay fixed-rate coupons and we have a volatile inflation rate; for a fund like NSSF, investment in real estate is the way to go. Ofcourse it is not the only way; but but our government prohibits pension funds from engaging in off-shore investments.

That is why NSSF have highly concentrated in real estate investments. It's all based on actuarial recommendations, and not merely a matter of choice

Nalitolela, P. S. said...

Anonymous wa Fri Jul 25, 08:46:00 AM EAT
Unamaanisha kuchuja in a sense that I moderate comments? kama ni hivyo, the answer is no, nimeamua watu waweze kupost comments 1 kwa 1.

Comments zinahifadhiwa hapa hapa katika blog, sijasave ktk comp yangu, but that is a good point, nitaangalia njia ya ku-back up at least some of the stuff (ingawa google nawaaminia ila watu wa IS watakubaliana nami kuwa when it comes to info, you can never have too much security). Pia wadau wenyewe, hili ni darasa kwetu sote, hivyo ukipata point mpya hapa zikakupendezea, unaweza kuzinakili na kwenda kuzisomea zaidi; ndio kujifunza.

PS: I am glad umezungumzia quants. Ndio area yangu. Are you a Mathematician/Physicist/Engineer or Computer Scientist?

Anonymous said...

Peter,

He who goes to bed last; will alsways get a priviladge of suggesting the next day subject...how about that wadau.

rUtA.

Nalitolela, P. S. said...

haha, that would be nice, but problem is we have contributors from all over the world; from different time zones, so that would be hard to manage. And I am afraid I am a little insomniac now so I'll always win, hehe.
Anyways, there is a member who already suggested that we talk a little about the 2008/09 Tanzania budget; that is my next post. That is not to say that this discussion is closed; members are welcome to post comments at any time t.
By the way, if you have a google account, you can log in with your google account while leaving a comment, that way you have an option of google emailing you any time someone leaves a new comment on a topic.

I also welcome anyone who wants to be an author to email me and I will send them an invite. That way they would be able to post a topic directly instead of them emailing me topic and posting them here. It would keep the blog more active, and in case I am forced to go a few days without internet access, new topics will still be posted.

Anonymous said...

Good point,

If you think you are insomniac; i am under Prescriptions to keep me asleep.Thanks to Canadian pharmaceutical industry for making Ambian available for Americans at a cheaper price.So anytime i want to go to bed early, i just reach out to my cabinet. haha. Anyways; You have a good suggestion that, if one wants to Author can do it directly. If its ok i can make use of the opportunity and will pass it along to members should the same occur to me.

rUtA.

Mliakuvana said...

"HOW DID THE AFRICAN FINANCIAL SYSTEMS AVOID THE WALL STREET CRUNCH?"

Does this have something to do the with the disjointed nature of African stock exchanges? I kinda seem to notice that the only thing joining us together is the fluctuating price of oil, and recently, rising food prices.