There is a growing clamour to add Nigeria to the BRICS league of developing economies (Brazil, Russia, India, China and South Africa) so that it becomes the BRINCS. GTR gathers representatives from a number of the countries to talk trade flows and finance, and to find out if the West African country would be a suitable addition.
- Edward George, head of soft commodities research, Ecobank
- Kevin Ryder, head of investment banking, Nedbank London branch
- Tony Uzoebo, executive director: business development, Zenith Bank
- Vasudevan M (Vasu), head of commercial banking, ICICI Bank UK
- Anne-Marie Woolley, head or structured trade and commodity finance, Africa, Standard Bank (chair)
- Ping Xiao, head of trade finance department, Bank of China London Branch
Woolley: How relevant are BRIC economies going forward, and what gave them that cachet other than the Goldman Sachs moniker in the past? Let us start with intra-BRICS trade and trade barriers, certainly as it relates to Nigeria too. I had a look at a few Economist Intelligence Unit reports, and I guess the one common factor is that China is by far the single-largest origin of import or destination of exports for most of the countries that we are talking about today. India is there on a couple of occasions. For South Africa, it is certainly a major export destination and a country of natural resources. Nigeria is a destination of exports because of oil, otherwise it is China all the way, with a little bit of the US and Europe.
George: I would very much agree with that analysis. I think the issue to bear in mind about intra-BRINCS trade is that most of these countries are commodity producers. These could be minerals or soft commodities, particularly in the case of Brazil and India. But aside from food flows, these countries do not have much use for each others’ exports. You will see, for example, very large exports of oil from Nigeria to India and China, but they are still much bigger from Nigeria to the US, although this is changing.
What is clear is that there is a structural change going on with trade. According to the WTO, south-south trade is taking increasing prominence. Whereas, back in 2000, around 60% of world trade occurred within the northern hemisphere (north-north trade), and just 10% was south-south, that is going to switch. By 2020 the WTO expects that one third of all global trade flows will be south-south. Part of that reflects increasing industrialisation and urbanisation in these countries, which will require more hard and soft commodities from each other.
The big problem is the low level of industrialisation in these countries and their strong focus on exports of raw commodities. There needs to be more processing. Even though we have seen broad-based economic growth, particularly in Brazil and Nigeria, commodities still dominate the economies. For example, the vast majority of Brazil’s exports to Africa are food, and we are not seeing a surge of high-level capital goods and manufactures. I would expect the trade in food and soft commodities to surge dramatically between the BRICS countries over the coming months.
But I would also like to say something on this whole question of BRICS, BICS or BINCS: I think there was a logic to singling out these countries when the acronym was coined in 2001, because of their size and the kind of economies they were, and also the dynamics of the world economy at the time. Now, however, if we are looking for really interesting countries to invest in, we should also be thinking about the CIVETs, ie Colombia, Indonesia, Vietnam, Egypt – maybe less so in its current state – and Turkey, as well as many more. These are countries that are not just focused on commodities, but have a lot of other things going for them. In my view we should add some African countries, aside from Nigeria: definitely Kenya, while Côte d’Ivoire is booming at the moment.
Uzoebo: Nigeria is a peculiar nation in that nearly 80% of our revenue is from one commodity, which is oil. If we look at what we do with the BRICS nations, a lot goes to places like China, as you have rightly mentioned. I looked at what we did in the second quarter of 2013, which was about US$2.4bn with China. With places like India, we had about US$650mn of imports, and about US$260mn with South Africa. In terms of exports, other than China taking the lead, Brazil had about US$2.76bn of exports, with fewer imports. What you would generally notice is that there is a balance-of-trade surplus between Nigeria and most of the BRICS nations.
Vasu: The BRICS, both individually and collectively are now important forces in the global economy. Within the BRICS, China and India have been the fastest-growing economies, accounting for almost 20% of the world GDP in 2010. While China is undoubtedly leading the intra-BRICs trade, India has been very active in the last six to seven years and statistics reveal that trade between India and BRICs markets accounts for more than 10% of India’s total trade. This can be traced back to the migration from India to Africa and its link to trade in oil, precious metals, food and agriculture, auto and engineering goods on the continent. More recently, India has been following the Chinese philosophy of pursuing and securing commodity and energy assets, in the region – the latter accounting for US$14bn of trade. The economic reforms in India in 1991 have provided the ideal opportunity for Indian corporates to become global players and some of these large corporates have successfully made inroads into the continent particularly in auto and agriculture equipment like tractors.
Overall, India’s involvement in intra-BRICs trade is significantly increasing. Although there are challenges for India in that it faces a large trade deficit as compared to other BRIC countries, the economy has seen very high trade growth – the fastest of the BRIC economies. Between 2007 and 2012, exports increased over 100% in US dollar terms, while imports increased by around 120%. The rapid growth is a result of a burgeoning middle class and the development of export industries in the country.
The long-term prospects for India remain bright, as the growing population and continued economic development offer considerable opportunities for investment. However, the trade deficit will continue to have an impact on economic growth until investor confidence improves.
Ryder: First, I would agree fully with suggestions that say there needs to be a question mark placed against the BRICS concept, and its relevance and value for proper analysis. Certainly, from the South African perspective, there are some clear upward trends in trade with the east, but any relatively open trading economy has seen a very substantial pick-up in trade with China over recent years. It is not a South African feature or an African feature, but a global one: everyone is trading more with China. The thing that one sees in South Africa is a strong uptick over recent years in trade north of the Limpopo.
Given its geographical positioning, it was relatively slow, or could have been faster in terms of that, but there have been some substantial success stories and the message is getting through to participants in the South African economy as a whole that they are not an island.
There are and will continue to be very strong trade links with India off the back of the growth in the Indian economy and given the strong historical and cultural links between South Africa and India. They can be seen as natural trading partners. The fact that these countries have seemed to give some form and substance to Jim O’Neill’s concept has been very good for South Africa from a messaging point of view, but what South Africa needs to concentrate on is trade with its fast-growing neighbours on its own continent.
Woolley: Language is always a barrier, which is why we are seeing Brazil’s involvement in countries like Angola and Mozambique, given that they are Portuguese-speaking. With the Chinese, that is something that always has to be overcome, I guess.
Xiao: China is still a very active market. Recently there have been some negative comments about the Chinese market. The industry is perhaps worried about Chinese banks’ bad debts. Growth in trade is also not as fast as before. I must say, however, that what we are seeing is imports and exports growing steadily. The Chinese government is trying to upgrade some industries. Growth may not be as fast as before for some industries, but the government is trying to adjust the structure of imports and exports. For example, previously, as you all know, China imported raw materials, commodities and energy products; now, however, the government is encouraging state-owned and private companies to do more outward investing. This year in particular, direct investment increased very quickly. According to a statistic from the Chinese ministry of commerce, from January to October, total direct investment amounted to US$69.52bn, an increase of 19.5%. Direct renmimbi (Rmb) investment to other countries is also quite active. Most investments are concentrated in BRIC and African countries.
George: I very much agree with what you are saying about the rebalancing of the Chinese economy although, at the same time, this is not having much effect on changing China’s demand for commodities, because of political reasons. For example, China has an estimated 10-million-tonne stockpile of cotton and is still buying more cotton for its strategic reserve. That is the main reason prices have gone up despite huge global surpluses and stocks. The same goes for imports of soybean, wheat and maize. Even as the Chinese economy rebalances, the outlook remains bright for agricultural producers globally, because what we are seeing is the unleashing of demand in urban and rural populations. While it is conceivable that imports of hard minerals could slump, the demand for soft commodities will remain buoyant.
Xiao: For soft commodities, there are still some challenges in the market. More and more Chinese companies are now exporting processing lines to those countries and trying to help them to build processing centres outside of China. This is regarded as one kind of method of upgrading.
George: That is also because the cost of labour in China has gone up. That goes back to the point made about the BRICs. If you are looking at an area where you are seeing massive development in processing and agri-industry, it is Southeast Asia: Indonesia, Malaysia and Singapore.
Vasu: Sri Lanka too is becoming an attractive destination for manufacturing due to a number of factors, with some manufacturers witnessing high productivity and of course, wages which are lower than those in China.
George: Would Sri Lanka be involved in mostly Indian investment or domestic investment?
Vasu: Sri Lanka is undergoing a reconstruction phase. Foreign direct investment received by country is in the range of US$2bn, and a significant part of it has come from China. Within the BRICs, India and China are the largest trading partners. Although China is by far the biggest destination for Indian exports already, the two countries are keen to grow bilateral trade substantially, with a target of $100 billion by 2015. Exports from China to India are huge with trade between the two countries reaching US$66bn and a major focus on resources, telecommunication equipment, automobiles and textiles.
China has historically been the manufacturing hub for South Asia, but that trend is changing, as you rightly point out. Corporates which used China as a hub for manufacturing, are beginning to move their production facilities to other territories. For example, textile manufacturers are moving to Bangladesh, Malaysia and Sri Lanka which has become a cheap production hub in the region.
Conversely, there is also a trend of India’s emergence as a global manufacturing hub. Indian wages are a third of those in China, and the country is inheriting the age demographic dividend that has powered China since the early 1990s. Today, the average age of an Indian worker is 23 and, with a population of over a billion, India has a huge and inexpensive workforce. The country offers not just a large domestic consumer market, but also a rich vein of product availability for global sourcing businesses.
India and China are in a position to enter a new stage of economic engagement. There are interesting dialogues between India and China on the proposed Bangladesh, China, India, Myanmar (BCIM) economic corridor and prospects of regional trade arrangement (RTA).
Woolley: Looking at the economic downturn in Europe, how have the BRICS countries seen that unfold in terms of the impact on their own economies? In terms of outsourcing, there has been a moving back to Europe and the US of call centres, for example, and other areas of manufacturing back to the European markets.
Uzoebo: Nigeria’s trade with Europe is being impeded by the non-ratification of the final economic partnership agreements (EPAs) between the EU and the African, Caribbean, and Pacific Group of States (ACP). The EPAs are aimed at promoting trade between the two groupings through trade development. However, the two sides have cited contentious political issues and issues of principle and these grey areas are yet to be sorted out. The official list of contentious issues which were agreed upon by the ministers of trade and finance of the African Union includes, among other things: transition periods for tariff liberalisation, export taxes, national treatment principle in goods, free circulation of goods, regional preference, safeguards and infant industry provisions, most-favoured nation, non-execution clause, and rules of origin. African states are still struggling with a delicate balance between liberalising their economies and protecting budding domestic infant industries.
Earlier this year, the EU extended the deadline for conclusion of trade agreements to October 2014, after several ACP states either failed or refused to ratify EPAs with the EU. It is expected that trade between Nigeria and Europe will substantially improve when the trade agreements are finally ratified.
Ryder: If you go back a quarter of a century, the economic environment that Europe has had to deal with over the last five years would have had a very substantial impact on the South African economy. As it is, the impact has been more muted, simply because South Africa-rest of Africa trade, and South Africa-eastward trade has picked up the slack. The South African economy has its own difficulties that it needs to address, and specifically localised ones, but it has done rather nicely, thank you very much, simply by substituting its historical heavy reliance on Europe with a more appropriate trade mix.
Woolley: How do you feel the European recession has impacted China as a BRIC economy in terms of imports and exports?
Xiao: I do not feel that there has been much impact from the European recession on the Chinese economy. The increase in other areas has compensated for the recession part. Imports and exports are still growing, but perhaps the structure has changed somewhat. China-UK trade has not been influenced. It is booming and is still increasing very quickly. For some countries, however, there is some impact; for example, Greece and Italy. This is only a small portion of imports and exports, so I do not see any great impact.
George: BRICs and countries like it – the most attractive developing countries – have all benefited from the global recession. With the fall in investment and interest in Europe and the US, there has been a surge of investment and flows of hot money into these countries in search of yield. That is why Brazil’s currency was so strong, and this has propped these economies up. As soon as the world started thinking that tapering had begun and sentiment shifted, there was an exodus of this money. The BRICs are now going to have to see how they compete when Europe and the US return to economic strength. Hopefully, in the intervening period, they have strengthened significantly.
Vasu: The European Union is India’s largest trade partner. Looking back over the last three or four years of trade and investment between India and Europe, this figures have hovered around US$100bn. There has been an impact on Indian manufacturing on account of the recession in Europe, particularly affecting the leather and textile industries. The slowdown in Europe has also impacted the largest component of trade between India and Europe – that of jewellery and diamond exports.
A free trade agreement between India and Europe has been under discussion since 2007, which could become a significant enabler for growing trade between the two.
Woolley: The next topic is the success of beginning to see international trade in currencies other than sterling, the dollar or the euro – if it ever became a major currency for trade. We are now seeing the Rmb moving. From Nigeria, are you seeing settlement in Rmb? Certainly Standard Bank was one of the first to issue an Rmb letter of credit (LC) for Malawi. What are you seeing in Nigeria?
Uzoebo: For Nigeria, I think the first positive sign was the central bank putting some of their reserves in Rmb and also recognising the Rmb as an acceptable currency for trade. The major issue, however, is that 99% of trade that happens between Nigeria and China is denominated in dollars. Until there is a switch from the dollar to the Rmb, most settlements will still be dollar-based. We still have a long way to go until Nigeria and China use Rmb settlement. As trade levels grow, it will become a reality.
Woolley: How balanced would you say your imports and exports with China are? How much would it support a migration to Rmb as the currency for you to perhaps sell your oil to China and buy goods from China? Where do you see that balance being or the level that it could grow to?
Uzoebo: China is overtaking the US as Nigeria’s main importer of oil. In terms of the level of imports from China, it is going to be based on a lot of Nigerian banks also having the competency to trade in Rmb. It is not just an issue of having that settlement, because the first currency of settlement in Nigeria – and, just like China, Nigeria is highly foreign exchange (FX)-regulated – is the dollar. I think the push will come either from Nigeria or China having exporters invoice Nigeria in Rmb.
Woolley: Do you think something like the Nigerian National Petroleum Corporation (NNPC) is ready to sell its crude in Rmb?
Uzoebo: No. Basically the price of oil and its products is predominantly dollar-based.
Woolley: Without that competency, the banking system clearly needs to have those logistical challenges of sorting out clearing arrangements, as you say, and people who have the ability to trade and understand those markets and what is driving the fundamentals behind those exchange rates. Clearly, however, having companies that also have that confidence in the banking system and being able to deal with those currencies is another aspect.
Ryder: Yes, you are trying to undo an awful lot of established practice and to take an awful lot of people out of their comfort zone. It is very difficult to undo things like trade in commodities such as oil and gold, where prices are traditionally set in a particular currency. If we are going to see it – and no doubt this is going to be a growing trend – we are likely to see it more in things like iron ore.
Woolley: Until commodities are traded in those currencies, it is going to be awkward, particularly in a lot of African countries and emerging markets generally. The banking system does not have much of a forward book. What are your views in terms of foreign currencies and being able to hedge outwards from the naira or the Indian rupee (INR)?
George: It is extremely complex, because even though something like 80% of world trade is done in US dollars, all of the commodities remain exposed to currency risk. Even something like cocoa is quoted daily in dollars but traded in pounds here in the UK, so you already have the dollar/pound exchange rate risk. But when you are in dollars you are in the comfort zone. You have so many risks to address in a trade finance deal that, as soon as you go into dollars, it is as if you have gone into the final room of risk and everyone is comfortable dealing with that.
Another issue is doing trade finance in West Africa’s CFA franc zone. In many ways, this is the same as financing in euros (as the franc is pegged to the euro), and that gives you a lot of flexibility, particularly in terms of raising local finance. We have definitely seen a huge increase in interest in Rmb trades.
I would have thought that, from anecdotal evidence, Rmb trade finance is rising more quickly than other kinds of trade finance, which will give it a bigger market share. Last year, an estimated US$1.3tn of trade finance needs were not met globally, which is a huge hole that can be filled by the Rmb.
Xiao: The latest data shows that more than 13% of total trade with China is denominated in Rmb, but there are a lot of counterparties located in other countries that do not regard the Rmb as a reserve currency and, once they receive Rmb, they exchange them into other currencies.
There was also a huge increase in foreign exchange trading in Rmb and other currencies in spot and forward deals. Rmb-denominated trade finance has achieved a big increase this year. A lot of companies do not regard the Rmb as a reserve currency. As a settlement currency, however, it is much more readily accepted. Soft commodity traders like Cargill and Noble are now using Rmb LCs. More and more big European names are now accepting Rmb as a settlement currency.
Vasu: The Indian rupee has undergone a bit of a stress period during the recent past, primarily because of the widening current account deficit, arising from the massive import of gold, oil and fuel and lag in corresponding growth in exports. The government has taken short and medium-term measures to stop the depreciation of the rupee.
Woolley: Looking at some of the individual BRIC countries, and while we do not have a Russian delegate with us, they seem to have the narrowest export of resources, namely, oil and gas. What are the countries’ experience of dealing with Russia as a country? I know there was talk at one time of Rusal looking at aluminium in Nigeria before their troubles.
Uzoebo: Apart from foreign direct investment in terms of big Russian companies owning assets in Nigeria, the biggest thing that would have happened some years back was the planned gas pipeline from Nigeria all the way to Europe, managed by Gazprom. Although this hasn’t taken off, it is still being reviewed by the government – it was quite an ambitious project.
What I would say about Russia and other BRICS countries is the non-ease of communication and transport. Among the BRICs, Nigeria has direct flights to China and South Africa only.
If we want to go to Brazil, you have to go somewhere else and then down to Brazil. If you want to go to India, the same applies. At the end of the day, if the communication and transport problems are improved on, that would open up better bilateral relations between those countries.
Ryder: You cannot get a direct flight from Johannesburg to Russia. There is quite a strong political desire on both sides of that equation to see more trade. Despite a lot of encouragement from the political side, I think it has been quite muted. We have seen a little bit of investment coming from Russia, but again it is in the sectors that Russia likes and is familiar with.
Woolley: I do not know whether the statistics bear it out but, out of all the BRIC economies, Russia always seems to be the most inward-looking.
George: Yes, it has been described as an ‘oil emirate’, because of the way the economy performs. Certainly one reason why there is relatively little trade and investment between Africa and Russia is the problem that Russia produces the same commodities as Africa does, whether they be minerals or softs like grain. South Africa is a major grain producer; so is the Black Sea region. You often find that, when you are looking at the international markets, Russia is competing with Africa in looking for export markets. But there is huge potential when it comes to Russia offering technical assistance. In terms of the pipeline project you mentioned, even if it is a long-term goal, there is no doubt that there are huge amounts of Russian expertise, particularly in the oil, gas and minerals sectors, which could be well used in emerging markets.
Woolley: Whereas we talked about Nigeria and Russia being focused on energy resources, Brazil is very much more around soft commodities and food. Do we see opportunities in expanding that? Could they even start more food processing on the continent? People talk about ethanol, which is probably their biggest success story in terms of their processing of a foodstuff into a biochemical for driving vehicles, but how do you see Brazil’s role in terms of food security?
Uzoebo: It is on two fronts: first, what does Brazil have that Nigeria does not in terms of commodities? Traditionally, sugar, wheat and sorghum come from Brazil. Processed tobacco comes from Brazil. What do we give to Brazil apart from oil? Our biggest market is still hide and skin, which is a huge market. In terms of whether Brazil can improve, right now the Nigerian Investment Promotion Commission (NIPC) had its first major road show in Brazil in November. This will bring a lot of agricultural, energy and service companies looking at investment and trade in both countries.
Woolley: With someone like Dangote doing so much with government support to promote sugar production now in Nigeria, does Brazil run the risk of other countries wanting to start processing and them losing some of the market?
Uzoebo: On the second front, because there is a lot of investment now by the Nigerian government in agricultural-based sectors, whereby Nigeria is looking at being a net exporter of agricultural commodities by 2015, it might impact on what we see between Brazil and Nigeria. Nigeria has a very large population and, even with all the projections, I do not think we will be able to meet up with the full projection, unless we go down the value chain of having processing plants and industrialisation reforms to be able to use what we have for the populace. If not, we will still be tied to being a net importing nation for basic commodities. The private sector, promoted by the likes of Dangote will go a long way in bridging this gap on the medium to long-term by taking advantage of the government incentives in agriculture.
George: It is interesting to see with Nigeria how there is a radical change to the agricultural sector. They really are starting to produce and process more food domestically, through a process of backward integration. They started off with the cement sector. Nigeria went from being a net importer of 7 million tonnes of cement two years ago to being a net exporter this year, with potential exports of up to 40 million tonnes within the next 10 years. They did exactly the same with sugar. They started by squeezing packaged imports, then refined imports, and now raw. You can only get raw imports if you also invest in sugar cane production. It has not worked as well for rice, where they have moved a little too quickly, and this has led to massive smuggling from Benin.
Nonetheless, Nigeria is moving forward as a producer and processor of food. This means that Brazil, which has been exporting its sugar raw to Nigeria, it is going to have to find a new market for its sugar. But this doesn’t detract from the fact that Brazil is that it is the world’s largest producer of sugar, coffee, soybean, and probably maize.
It also has enormous amounts of unused processing capacity, which is why the country is a net importer of cocoa and cashew nuts. Brazil is going to be the world’s breadbasket and food powerhouse for the next 10 years. In the case of West Africa, however, Nigeria could definitely take over that role, although probably by 2025, not 2015.
Xiao: We see a great potential in Brazil as a food-processing hub. Previously, Brazil only exported raw materials, but now it has some competitive processing at a reasonable cost.
Woolley: As a new member of the BRIC economies, has South Africa has proved its mettle, and would Nigeria be a worthy addition to a BRINC.
Xiao: South Africa is definitely a good addition to the BRIC economies. China is making great efforts to strengthen the relationship with South Africa.
George: I think we are going to need a lot more letters and a very long acronym! Nigeria is a worthy addition. The BRICs have gone beyond the BRINCs: we have the CIVETs. Elsewhere in Africa, Ethiopia is poised to become a major economic power.
Tanzania is going to have the second largest population in Africa by 2050, with huge mineral and arable resources that have scarcely been developed. The same goes for the DRC. That is just in Africa, let alone Southeast Asia. There are many more members who will join this club, but Nigeria is definitely going to be punching above its weight.
Vasu: Nigeria is an oil-producing country with rich mineral resources. India and other BRIC countries have always targeted such countries. Within BRICS, India has historical ties with Nigeria and large ethnic Indian population and trade is growing. We see Nigeria as a potential sub-BRIC member initially before moving up.
Uzoebo: Nigeria by all indicators has qualified as a worthy addition. Nigeria’s GDP will be rebased in December 2013 and this is expected to lift the Nigerian economy to an entirely new level. Some projection put Nigeria’s GDP at US$400bn after rebasing, effectively overtaking South Africa at US$354bn.
Also, Nigeria’s population of over 160 million is a massive market. Nigeria’s economy has also been growing at a much faster pace (6.3% in 2012) compared to South Africa’s 2.5% in 2012 and many other emerging market economies according to IMF estimates. Nigeria’s political risk has also substantially reduced, having had 14 years uninterrupted civilian rule – an unprecedented feat in the country’s history.
Nigeria is also included in the group ‘Next 11’ (N-11), in line to become economic powerhouses by Goldman Sachs. The N-11 countries are Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea, and Vietnam.