Although African governments have been largely successful in mitigating the social impacts of the Coronavirus outbreak, these past few months have nevertheless highlighted the challenges the continent faces in managing its economic recovery. Jeff Fallon* explains how the current situation might provide further impetus for positive change in Africa and provide new avenues for growth in a post-pandemic environment
COVID-19 has led to global, widespread disruption to trade flows this year, but the virus has exposed social and economic weaknesses in some less-established markets more than others. Understandably, this has roused concerns that some African countries would be less equipped to manage the virus’ impacts compared to other markets. Yet Africa has so far been remarkably resilient. In fact, quick action on the part of many countries in the region has contributed to lower incidence and mortality rates relative to the overall population, than in many other regions.
Governments might have mitigated the social consequences of the virus through prudent and early decision-making, but the potential for economic damage remains substantial. In many ways, Africa remains only at the beginning of its recovery: having performed admirably in managing the virus’ social consequences, now the continent must face the virus’ economic fallout – an endeavour that may prove equally arduous. Indeed, to varying degrees, countries will need to address a variety of challenges, such as scarce foreign currency reserves, a reliance on volatile commodity markets, lack of access to international funding, as well as the limited progress made in terms of regional integration.
The virus has certainly exacerbated some of these pre-existing economic vulnerabilities. Foremost, the perennial thorn in Africa’s side has been foreign currency shortages and reliance on hard currencies to trade. These seem evermore acute in today’s context: as borders closed and economic activity shut down across the continent, commodity flows predictably suffered. And with fewer inflows of export-driven revenues, governments with more limited foreign exchange reserves were forced, in many instances, to restrict imports to all but the essentials – such as food, energy and medical products. Ghana and South Africa were two such examples, rapidly opting to bar non-essential goods from entering their borders.
Second, the need for extraction-based economies to diversify has also become increasingly evident – a concern that has reappeared during the oil-price collapse in March 2020. Diversification efforts have been expedited since the commodity market crash in 2013, but the current crisis only demonstrates the importance of these continuing during the recovery in order to build resilience against future macroeconomic shocks. There have already been positive outcomes, in this regards: manufacturing capabilities are fast-increasing on the continent, particularly in the auto and tech industries, with Ghana and Kenya becoming something of specialists for these sectors respectively.
Africa’s enhanced manufacturing capabilities will be key to easing the recovery – as will forging stronger, global relationships. Through the crisis, global supply chains have been in flux – with lockdowns disrupting incumbent supply chains to the extent where manufacturers re-routed their production lines. In this regard, African countries may be among the key beneficiaries of the disruption. Many European trading companies, for instance, will likely be undertaking a reassessment of their shoring strategies in the wake of the virus, and given that Africa is the nearest neighbour, the continent could stand to benefit.
The relationship between the two regions is already well-established. In 2019, the EU-27 was responsible for 31 percent of Africa’s exports – primarily made up of energy, raw materials and food products – and provided 29 percent of Africa’s imports, largely manufactured goods. France, in particular, continues to have close ties with West African governments and has launched a significant investment drive aimed at the Francophone side of the continent.
As the UK seeks to chart its post-Brexit relationships with the rest of the world, too, African countries are likely to be considered as desirable trading partners. The groundwork is already being laid for this blossoming relationship – the UK committed £744 million in pandemic-related aid to developing countries (many being African economies), and Africa’s rapidly growing Anglophone economies represent attractive targets for investment.
The UK-Africa Investment Summit in January also evidenced a clear commitment on the part of the UK to become – in the words of Prime Minister Boris Johnson – ‘Africa’s partner of choice.’
And this potential is not just for extra-regional trade, either. Intra-regional trade, on first look, might seem like it has taken a step backwards. The African Continental Free Trade Agreement (AfCFTA) marked a significant milestone in the development of intra-African trade – however its implementation has been pushed back due to the crisis. However, this pause in proceedings might well provide the leeway required to iron out any remaining issues – some countries in the region still hold concerns around the potential for disruption within their business sectors during the transition, as well as scepticism around the efficacy of the proposed AfCFTA mechanism for resolving non-tariff barriers to trade.
Large lenders turn elsewhere
Of course, these initiatives cannot be achieved without the financing needed to mitigate the risks on both sides of a transaction. Sellers naturally want to be paid on point of sale, and buyers naturally want to withhold payment until they have the goods in their hands. Financing to bridge these conflicting desires is therefore essential to ensure that trade reliably flows and all parties are protected – and even more so on African trade flows which have (often wrongly) been considered a risker venture.
In the current economic climate, some banks and non-bank lenders are understandably revising their risk appetites and adopting a “wait-and-see” approach to engaging in new ventures in Africa. But this is only the latest development in a larger trend. Since 2008, international banks have understandably seen their regulatory exercises increase in scope; the extensive ‘know your customer’ (KYC) requirements on complex trade transactions – many of which involve multiple counterparties – have sufficed to deter many less committed lenders. And of those banks that remain, many have high lending thresholds which some smaller African traders would not meet. There are fears that the current crisis may widen the already-substantial trade finance gap in the region, which the International Chamber of Commerce (ICC) in 2019 estimated could be as high as $120bn.
For the time being, any lack of supply has not been felt as keenly – with trade flows reduced to a trickle, demand for trade finance has declined too. But this will be very temporary. As African countries enter the recovery phase, an adequate supply of finance will once again be crucial to enabling trade flows.
Cause for optimism
To shun opportunities in Africa solely on account of the continent’s risk profile would be to ignore the broader opportunities, in our view. Many African countries have displayed remarkable resilience through the crisis so far: with some even maintaining positive growth projections for 2020 of between 1.2 percent and 2.5 percent, depending on duration and severity of the crisis. African corporates and financial institutions have had to adapt to the rapidly changing circumstances, but they are proving to be equal to the challenge. Moreover, the wave of defaults on letters of credit (LCs) that was predicted on African trade transactions has, in our experience at least, failed to materialise. Delays in payment have been more common – but this has been a phenomenon witnessed across a host of trade routes, and is not unique to Africa.
In fact, pre-pandemic, the risk profile of transactions for African trade was already far lower than may be perceived. Weighted by obligor, defaults on LCs had fallen from 0.59 percent to 0.05 percent for export LCs and 0.48 percent to 0.14 percent for import LCs between 2016 and 2017 according to the ICC’s 10th Annual Trade Register.
For smaller, more nimble lenders, complete with deep-rooted market expertise and boots-on-the-ground, the positives of African trade far outstrip the challenges – even amidst the current uncertainty. Familiar with the nuances of African markets and with lower lending thresholds, such players remain crucial to ensuring that trade flows amid the crisis and into the recovery.
Navigating new markets is much easier with a banking partner that can help manage the risks, has an intimate understanding of the exporters’ needs, and knows the local business environment. In the case of Africa, with its remarkably diverse markets and a strong appreciation for relationship banking, the local component is nothing short of critical.
The challenges facing the continent are significant, and the twin blows of the pandemic and the oil price slump will certainly continue to make their mark in the immediate-term. But BACB’s commitment to Africa is unchanged. We believe that Africa’s resilience and dynamism provide solid foundations for economic recovery. Rekindling trade flows will be vital, and will require more than just financing. It will take partners who are fully committed to overcoming short-term challenges to reap the long-term rewards.
*Jeff Fallon is the Head of Client Coverage at British Arab Commercial Bank in London
Reproduced from the July-August edition of Africa Briefing magazine