Should emerging countries such as Zambia be worried about the current bank crisis?
Why the Banking Crisis?
During the current US banking crisis, three U.S. firms faltered. Silvergate and Signature Bank were related to cryptocurrencies. Banks faltered as cryptocurrencies declined. Silicon Valley Bank failed because clients pursued higher interest rates elsewhere, and because the bank had to sell investments at a loss to pay depositors. Credit Suisse the troubled but vaunted Swiss lender was taken over by UBS for US$3.25Billion in a deal brokered by the Swiss government to stem contagion. It is by any measure a show of false by regulators who have seized control of Silicon Valley Bank and Signature Bank, and the U.S. Federal Reserve has devised a loan program to assist other struggling institutions. In Switzerland, it is reported that UBS will receive a US$100Billion cash line from the Swiss National Bank. They also said UBS softened a major adverse change rule that would void the deal if its credit default rates rise. People said the major adverse change rule applies between signing and closing the deal. The Swiss National Bank and Finma greatly affected the terms, according to the people. It is reported that the US Federal Reserve approved the deal.
The Financial Crisis: Recession?
Many have predicted a U.S. recession since the middle of 2022, but none has occurred. Despite elevated inflation, economic growth and employment outlook are positive. Recent banking crises led to economic downturns. Three years ago, Covid-19 sank the stock market and precipitated the quickest but darkest GDP-measured recession in decades. This issue may result in a U.S. downturn, and perhaps, a global downturn. The current situation is attributed to the U.S. Federal Reserve’s interest rate increases to combat inflation, and many financial experts have warned that a stricter Fed policy will lead to a recession.
Another Economic Crisis?
Fortunately, not all market crises result in monetary crises. There are reasons for concern, but market-wide crises that devastate the economy are uncommon. Frequently, small market crises occur. Every three years, a Julius Baer study predicts minor market disruptions. Julius Baer anticipates large market crises once every twenty years as a result of these minor market fluctuations. Following the Great Recession of 2008, we have five years until the next major crisis.
Repercussions of the crisis on emerging markets such as Zambia
Emerging markets such as Zambia may be subject to a variety of repercussions as a result of the failure of three major institutions in the United States and the one in Switzerland. It is essential to keep in mind that the particular effects could be different depending on the specifics of the crisis as well as the degree of interconnectedness that exists between the financial systems of the United States and Zambia. However, we can talk about some prospective impacts that are more general:
Reduced capital flows: In the aftermath of a crisis in the financial industry in the United States, investors may become more risk adverse, which may contribute to a decrease in foreign direct investment (FDI) and portfolio investments in developing markets such as Zambia. This could result in less funding being available for the advancement of enterprises and infrastructure.
Currency depreciation: As global investors pull their capital out of developing markets, the demand for those markets’ local currencies may decline, which may lead to depreciation of the currencies of those emerging markets. The Zambian kwacha’s decline could lead to higher prices for imported goods and contribute to inflationary pressures.
Disruptions in trade: The United States of America is an important business partner for many developing economies. If there is a financial crisis, it could cause a downturn in the economy of the United States, which could contribute to a reduction in the demand for products from countries like Zambia. A decrease in Zambia’s income from exports might have an adverse effect on the country’s balance of payments and economic expansion.
Remittances: Many people from Zambia find employment in other countries and transfer money back to their families in Zambia. It is possible that remittance transfers will decrease if the financial crisis in the United States causes economic slowdowns in countries where Zambians are employed. This would have an effect on household earnings and expenditure in Zambia.
Conditions in the global financial market could become more difficult if there were to be a catastrophe in the banking industry in the United States. It may become more difficult for Zambian businesses and the government to support development initiatives and to make payments on existing debt if this leads to higher borrowing costs.
Risk of contagion: In an international financial system, there is always a risk of contagion, which is the possibility that difficulties in the finance industry of one country could extend to other regions. Even though Zambia’s financial institutions may not have direct exposure to collapsing U.S. banks, they may still encounter difficulties if global investors lose confidence in developing market assets in general.
Aid and development assistance: The availability of aid and development assistance from the United States or other international partners might be impacted if there is a financial problem in the United States. In the event that foreign nations experience economic difficulties, it is possible that they will decrease their assistance obligations, which will have an impact on societal and development initiatives in Zambia.
To lessen the severity of these potential repercussions, it is essential for the Zambian government and the central bank to keep a close eye on the developing situation and put in place the monetary and budgetary policies that are necessary to maintain economic steadiness and ensure the economy continues to expand. It is to these that we turn next.