* Africa unlikely to suffer first-round effects of crisis

* Africa growth to average 5.9 percent for next two years * Middle-income countries with portfolio exposure worst hit

* Countries with sovereign wealth funds more exposed

* Crisis likely to reduce financial investments in Africa

By Alistair Thomson

DAKAR, Sept 25 (Reuters) - Africa should weather the first round effects of the financial crisis in developed markets but export demand and access to finance could be hit, especially in a prolonged downturn, the African Development Bank said.

The wealthier countries on the poorest continent would be worst hit by the financial crisis because of their exposure to world markets, Louis Kasekende, chief economist at the African Development Bank (AfDB), said in an email interview.

"Africa is unlikely to suffer from the first round effects of the crisis because of its weak integration into the global financial system," Kasekende said.

Some analysts have warned of possible swings in some emerging markets from the financial crisis, especially as failing U.S. banks like Lehman Brothers or other troubled institutions unwind positions in specific markets.

Kasekende said the impact on Africa would be limited in part because it represented such a small share of global markets, with 1.3 percent of world stock market capitalisation, 0.2 percent of debt securities and 0.8 percent of bank assets.

Foreign direct investment, representing 4 percent of the world's total, was concentrated in resource-rich countries.

"All these elements suggest that for most African countries the direct turbulence in the United States will have a limited impact on the domestic financial markets," Kasekende said.

Continued growth in Asian economies would underpin demand for African exports, which increased by 7.9 percent in 2007, and was helping sustain higher world prices for oil and Africa's other primary commodity exports, said Kasekende, a Ugandan.

Crude oil prices <CLc1> have fallen back from a record high above $147 in July, but bounced back from under $100 last week.

At the same time, better policy had improved the business environment, said Kasekende, who has published research on financial liberalisation and structural adjustment programmes.

"African economies have become more flexible than in the past, and are in a better position than before to absorb shocks. Our estimates thus show that GDP growth in Africa will average about 5.9 percent over the next two years," he said.

African growth was 5.7 percent in 2007, he said.

"However, the recession in developed countries may eventually weaken the demand for African exports, suggesting that the continent may suffer the second round effects of the crisis," he said.

RICHER COUNTRIES WORSE HIT

Kasekende said African countries should prepare for a prolonged downswing in developed markets, and dampened demand.

"African governments should more than ever sustain credible macroeconomic frameworks. In particular, overvaluation of currencies vis-a-vis the U.S. dollar should be avoided."

Kasekende said Africa's wealthier countries would be worst hit by the financial crisis because of their exposure to world markets.

"Most of Africa's middle income countries may be affected. We should expect the capital markets in these economies to exhibit greater volatility and uncertainty. Also, countries relying on portfolio inflows to finance the current account are also vulnerable, as those flows tend to be highly volatile."

"The crisis facing major international financial institutions is likely to reduce their investments in Africa, negatively affecting the availability of financial resources in other sectors as well," Kasekende said.

But he said the risk of a "sudden reversal of foreign private capital" for African banks was low because most was in the form of direct rather than portfolio investment.

Countries such as Algeria, Angola, Libya and Nigeria, which have established sovereign wealth funds with oil revenues, would be more exposed to market turbulence through their investments in developed countries' financial sectors, he said.

"The services sector is likely to be affected because it is very vulnerable to the slowdown of economic activity and inflation as well as to financial turbulence. Driven by financial services liberalisation, this sector has been one of the fastest growing sectors on the continent," he said.

Other services sectors like tourism also risked being hit by reduced demand as visitors from rich countries rein in their luxury spending due to the downturn, Kasekende said. (Editing by Pascal Fletcher)

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