As liquidity from Europe dries up, Sub-Saharan Africa will look to its own financial institutions as well as those in China to support trade flows, writes Sarah Rundell.
There is a sense of déjà vu in African markets. Having just recovered from the effects of the 2008/09 financial crisis, fresh turmoil from the eurozone has hit key African economies.
Trade finance has started to dry up and demand from Europe, Africa’s biggest export market, is slowing yet again. WTO director-general Pascal Lamy has said that African growth will slow if the eurozone crisis continues to worsen. Finance ministers Pravin Gordhan of South Africa and Nigeria’s Ngozi Okonjo-Iweala also warn that the crisis threatens global trade and is causing volatility in Africa’s commodity, stock markets and currencies.
Yet Africa has some of the fastest growing economies in the world and scratch beneath the statistics and the continent has been rebalancing its trade towards Asia for several years now. Lessons learnt in the last crisis should stand the continent in good stead to weather this one.
Impact on exports
Dampening demand from Africa’s biggest market in Europe is causing some concern in certain sectors.
According to the African Development Bank, South Africa’s automotive industry accounts for 6% of its GDP and 11% of all its exports, half of which go to Europe. Approximately 70% of its citrus fruit is exported to European markets.
Kenya’s horticultural exporters are beginning to worry. Over two-thirds of all Kenyan fruit, flower and vegetable exports go to Europe and concerns about a slowdown in demand has put farm expansions on hold, says Stephen Mbithi at the industry body Fpeak. He predicts that exports will fall from KES115bn (US$1.23bn) to KES84bn (US$905.2mn) in 2011 due to economic problems in the US and Europe.
The African Development Bank highlights that any fall in demand in key exports will hit governments’ trade and resource-related tax revenues. This could knock planned expenditure off-course, particularly involving infrastructure.
However, it is only specific sectors that will be hit rather than entire economies. According to rating agency Fitch, Sub-Sahara Africa only exports an average of 30% of its goods to the eurozone.
Furthermore, the 14-country West Africa common monetary zone is benefiting from its currency peg to the weaker euro.
Exports from the CFA zone are now more competitive, especially dollar-based exports like crude oil, cocoa, coffee and groundnuts. “A weaker euro is good for the zone,” argues Razia Khan, head of Standard Chartered’s African research.
Another factor is also at play: Europe may be Africa’s biggest market but China is increasingly significant. The value of African exports to China has grown over the past decade from US$4.2bn in 2000 to US$38bn in 2009.
Some countries benefit more than others but 17% of Africa’s exports and 14% of its imports are now to and from China. Fitch estimates that within 10 years China will be a bigger trading partner to Africa than both the US and EU.
“We’re not worried about Europe because China is still the biggest off-taker of metals,” says Mark Madeyski, an analyst at Afrifocus Securities in Johannesburg.
Elsewhere, exports to China account for 31% of Angola’s GDP; Zambia’s main exports of copper and alloys to China amount to 14% of GDP. “The question for Africa is whether China slows down,” says David Cowan, Africa economist at Citigroup, which puts China’s growth at 8% next year. “We have got to live with a decade of slow growth in Europe and the US. What really matters is how fast China slows and whether that new demand for African exports continues to come through.”
African exporters are also doing more to boost intra-African trade. “Intra-African trade is the bullish development,” says Aly-Khan Satchu, a Nairobi-based analyst.
Although only about 10% of African trade is within the continent, a shift is underway.
Last year Uganda overtook the UK to become Kenya’s biggest market. According to UN research, trade within the Common Market for Eastern and Southern Africa (Comesa) grew by 35% between 2009 and 2010, rising from US$12.7bn to US$17.2bn.
Now, ambitions for Africa to fuse its patchwork of small countries and different trade blocs are taking shape. Policy makers are pushing for a free trade agreement between the East African community, Comesa and the Southern African development community by 2014.
Eradicating non-tariff barriers is a tougher undertaking. Custom procedures still cause long delays at border crossings and bribery at roadblocks adds to trucking costs in landlocked countries where transport alone still accounts for more than 40% of the cost of imported goods. Financing needs
As in 2009, access to trade finance is becoming scarce again. “Most of the major European banks that provide liquidity financing to commodity players are cutting their lines,” says René Awambeng at Pan-African bank Ecobank.
“Project finance won’t get hit; it’s the short-term transactions that are feeling the heat.”
Only two local Nigerian banks have access to dollars through Eurobonds and few African governments have the policy buffers of currency stability or foreign exchange reserves – Nigeria’s are down on the year at around US$34bn. Any drying up of credit lines will also hit local banks profitability. Local African banks earn about a quarter of their revenue from financing trade.
Yet, the African continent may be better equipped this time around to cope with the crisis. In 2008-09, Nigeria was having its own banking crisis, with its institutions weighed down with non-performing loans and some hit by allegations of corruption. The Nigerian banking sector has cleaned up its balance sheets and is in a stronger position to lend to support trade flows.
In the previous crisis, Africa’s multilateral lenders such as the Africa Export-Import Bank, PTA Bank, the Africa Finance Corporation (AFC) and Ecowas Investment and
Development Bank put in place measures to support trade finance, putting Africa’s own liquidity to work. Some of these programmes are still in place, and the multilaterals may be called to provide additional support if the new liquidity crisis worsens.
The crisis is providing opportunities for bigger regional and local African banks to fill the void left by dollar-strapped European banks.
“African banks appetite for trade finance is healthy. They are increasingly partnering with local commodity players and lending to flagship projects,” says Ecobank’s Awambeng. This year Ghana’s Cocobod diversified its funding sources, raising a record US$2bn. Local banks are also funding more Nigerian oil and gas exports. “The competition stepping away and prices going up have been good opportunities for banks that are still liquid and able to lend,” says Standard Chartered’s Khan.
Yet the eurozone crisis will bring other hurdles for Africa. Contagion will come through European banks’ presence in Africa, warns the AfDB. Banks in francophone countries are particularly dependent on parent funding and French banks are suffering badly. Foreign direct investment could slow, hitting project finance, although here again China is increasingly dominant.
“Chinese policy banks have lent more to Africa in the last 10 years than the World Bank,” says Richard Fox, head of Fitch’s Middle East and Africa sovereign ratings team.
Aid flows will slow and remittances from Europe are likely to fall. Global market volatility and risk aversion makes African sovereign bonds a hard sell. It has forced some countries to postpone plans to diversify government borrowing. Positively however, Ghana, Nigeria, and Namibia’s debut bond launched in the second half of 2011, shows strong demand for frontier market debt.
Appetite remains for African risk, but it is also up to the continent itself to continue to diversify its sources of financing and develop its own internal financing mechanisms in order to avoid the fallout from the eurozone crisis. GTR