The new normal for trade structuring in Africa
The new normal for trade structuring in Africa
Head of Capital Markets Services in Mauritius, Novan Maharahaje draws upon insights gained from interacting with African corporates, trade funds and development finance institutions to highlight the new market dynamics of trade finance in Africa post Covid-19, and how these challenges can be overcome through structuring and the right financing partners. *
Covid-19 has brought a number of disruptions in cross border investments and trade - which entail a complete rethinking of how business and trade are being conducted and with whom.
Business as usual, with historical trading partners and corridors (often established during the colonial era), is no longer an option. Traditional partners have, overnight, resorted to extreme protectionist measures, with many countries imposing export restrictions on medical equipment, pharmaceuticals and personal protective equipment, and some countries even restricting food exports.
In Africa, the pandemic has also served as a reality check about food security, health infrastructure and the manufacturing deficit resulting in an excessive dependence on imports for basic necessities.
With the disruption in global trade and the fall in commodity prices, the pandemic has also triggered USD liquidity shortages in many African economies and increased volatility of their major currencies. This could prove a major deterrent to intra-African trade, as it's a known fact that the bulk of world trade is denominated in USD, and that letter of credits are also often priced in the same currency. Hence, African trade flows are hugely dependent on and vulnerable to correspondent relationships. With the crisis, we have seen major international banks scaling back or even withdrawing trade credit lines into Africa as part of their de-risking process. Further, many regional and local banks are retaining capital in preparation for subsequent waves of infection.
Fortunately, the continent's leading development finance institutions, such as the Afreximbank and the AfDB have put in place comprehensive economic and financial support and guarantee mechanisms, such as the USD 3bn Pandemic Trade Impact Mitigation Facility by the former, and the Trade Facilitation Program by the latter. This is with a view of supporting trade (of critical Covid-19 supplies, food and agricultural inputs), assisting local banks to meet trade payments falling due and stabilising foreign exchange resources of member states - with the ultimate objective to avoid the pandemic turning to a political and economic crisis.
On the global stage, many governments are turning to their export credit agencies (ECAs) to support exporters to cover their costs of inputs for production and manufacturing. This is a trend that we are likely to see more and more in Africa.
Further, the Pan-African Payment and Settlement System (PAPSS) currently in pilot phase, could become a game-changer by relieving Africa from its over-reliance on hard currencies for regional trading. Per the Afreximbank, the PAPSS will provide a centralized payment market infrastructure for processing, clearing and settling of intra-African trade and commerce payments.
By magnifying the deficiencies and inefficiencies of cross-border trading in Africa, the pandemic has reiterated the importance of the African Continental Free Trade Area (AfCFTA), signed by 54 of the 55 African Union nations but ratified by only 31 as of date. The AfCFTA would constitute the largest new trading bloc in the world, with access to 1.3 billion people and will allow member states to draw on economies of scale to boost industrial production and manufacturing output. Hopefully the crisis will act as a catalyst for its full implementation by all member states.
Following the pandemic, strategies and policies will target the development of regional value chains and build local manufacturing capacities. Other emerging trends arising from the pandemic include acceleration of digital adoption and ecommerce; and virtual marketing and communication channels.
Investments in the short term will target pharmaceutical and medical equipment industries, as a matter of priority. In the medium term, the focus will be the acceleration of Africa’s industrial development. We are also likely to witness the emergence of regional hubs serving the whole continent: e.g. Mauritius and Rwanda for banking and financial services; Ethiopia and South Africa for aviation and logistics; South Africa, Egypt and the Maghreb countries for pharmaceutical industries; Ghana, Ivory Coast, South Africa and Kenya for food transformation and import substitution.
In the new normal, non-bank lenders, DFIs and ECAs are expected to play more prominent roles in addressing Africa's unmet trade finance gap, while regional and pan-African banks would continue to support their large corporate clients with good credit standing. The transition towards digitisation of trade documentation and digital trading platforms will be accelerated as more and more legal hurdles are removed.
At Ocorian, we firmly believe that structured trade finance will have an even more important role to play in the post Covid-19 era, as the dynamics of trade finance will evolve towards local currency financing, risk mitigation and de-risking strategies (leveraging the different support/products offered by DFIs, ECAs and insurance providers) and compliance with stringent anti-money laundering regulations and customer due diligence requirements.
Further, with travel restrictions, further lockdowns and potentially limiting physical meetings and on-site visits, access to reliable and credible information remains a critical success factor. Referrals and introductions from trusted partners and networks will be key to address any information gap in terms of preliminary KYC checks and reliability of financial information.
Post Covid-19 will catalyse the shift in manufacturing and trading patterns to lay the foundations of an integrated African market, with technology as an enabler and supported by a vibrant capital market. At Ocorian Mauritius, we have been privileged to have as clients and partners, both African corporates requiring access to capital markets and capital providers looking for quality transactions. This places us in a unique position to understand the critical success factors and market dynamics of trade and investment flows in Africa.
For more information about how we support trade and corporate financing, get in touch with Novan below or click here to view our full range of services.