Sub-Saharan Africa offers an expanse of trade opportunities for UK businesses. Yet the fact remains that, outside of a handful of larger African countries, relatively little is known about the continent’s trade openness, or the size of the trade opportunity, writes Dan Roberts, Head of Trade and Working Capital at Barclays.
As governments in Sub-Saharan Africa make strong progress in cutting red tape and reducing legislative barriers to trade, UK exporters are positioned to take advantage of exciting growth markets.
UK exports to the region increased by 6% annually between 2004 and 2014, according to the Barclays Africa Trade Index 2015 report published in August. This trade was worth around £8.2bn in 2013. This figure is set to rise exponentially, with some exporters anticipating double-digit growth from many African countries within a few years.
The Index has identified a set of “sleeping giants” that are increasingly attractive to business players looking for long-term returns in fast-growing markets.
These include Democratic Republic of Congo, Mozambique, Tanzania and Ghana that are emerging from the shadow cast by Index leaders such as South Africa.
Sectors that are racing ahead include rubber and plastics, food and beverages, chemical products, textiles and furniture. Drinks manufacturer Diageo, for instance, is among the UK-headquartered corporations poised to take advantage of pro-business reform and burgeoning economic growth across the sub-continent. It expects sales to expand to 20%1 in the coming years.
Expanding trade horizons
Many UK-based firms already have a strong presence in larger African economies including South Africa, Nigeria, Botswana, Angola, Kenya, Ghana and Senegal. British companies are also increasingly active in the fast-growing economies of Tanzania, Côte d’Ivoire, Ethiopia, Zambia and Cameroon.
However, the potential for revenue growth in African markets is considerable. Consumer spending is expected to rise annually by between 4% and 5% compound annual growth rate (CAGR) over the next decade. Not even currency depreciation is likely to dampen this expected economic performance, say experts consulted for the Index.
A key factor driving growth is the development of a strong communications infrastructure. It’s no coincidence that the top eight African countries in terms of internet penetration achieved higher-than-average trade and investment flows.
Transport infrastructure improvements, particularly in East Africa, have also spurred global trade with Africa. As Frank Matsaert, CEO of TradeMark East Africa, noted of these trends: “Five or six years ago, it used to take around 18 days to move a container from the port in Mombasa to Uganda; now you can do it in around six.”
Africa’s international allure
British business has competition in Africa from Europe and Asia, not least as China, India and Japan all reshape their focus on the region. It is also vying for business with Africa-based corporations. Intra-Africa investments grew by a robust CAGR of 16% from 2004 to 2013. However this still represents a relatively small portion of total trade flows.
“The important thing is the size of the market,” notes Alan Winters, Professor of Economics at the University of Sussex. “Ten years ago, the sum total of the Sub-Saharan economies, other than South Africa, was equivalent in GDP terms to Belgium.”
However, the opportunity is strong for businesses with a robust proposition such as technically-advanced goods, internationally renowned professional services, effective supply chains and marketing expertise.
Rising consumer wealth
Although Africa is valued for its mining and natural resources, many opportunities are linked to its large, young and growing population. Sub-Saharan Africa has a burgeoning middle class that is developing a larger appetite for fast-moving consumer goods and financial services.
Regional experts highlight that success depends on forming strong relationships with local partners and gaining an understanding of the market demand and regulatory frameworks. It’s also important to tailor products and services to meet local consumer expectations, including achieving a good balance between quality and price.
South Africa leads by example
Thanks to its investment in transport networks and a competitive tariff policy, South Africa has achieved a top overall Index ranking for openness and opportunity. This has also had a positive impact on less-developed neighbouring economies such as Zimbabwe, Botswana and Namibia, which have all taken advantage of South Africa’s improvements in trade policy and infrastructure to increase their own trade openness.
Nigeria, however, overtook South Africa as the continent’s largest country in terms of GDP last year. It offers the most exciting long-term openings for UK businesses and is seen by many as providing the most potential for UK investors.
Topping the Index for opportunity, the country currently imports around £1.5bn in goods from the UK annually. For companies with the knowledge and confidence to negotiate its complex regulatory framework and comparatively basic infrastructure, it could offer a potentially lucrative market.
The critical role of air connectivity
Recent improvements in air travel networks have led to a high score for Nigeria’s international air connectivity. “Air transport can act as a catalyst to unlock the potential for the trade and exchange of services and goods in Africa,” says Adefunke Adayemi, Regional Head of IATA in Africa and the Middle East. Investment in air transport between Nigeria and Ghana has transformed the way the two countries do business, she adds. And, with at least 11 of the Sub-Saharan African countries working to remove all restrictions on air travel and many upgrading their current air transport infrastructures, the future of Africa’s freight services looks positive.
Kenya’s role as a central trade hub for East Africa is evident in its strong transport-related scores. It ranks third among southern African nations for transport infrastructure and appears in the top five for air connectivity.There are also positive transport developments on Africa’s west coast. The African Development Bank singles out Côte d’Ivoire as an example of a success story thanks to its role as port city for landlocked countries in West Africa.
The rise in the value, volume and variation of goods and services traded between the UK and Sub-Saharan Africa is expected to accelerate along with infrastructure investment. In addition, there is a push for greater regional integration, which could encourage a more extensive value chain and larger consumer markets. As is the case with any emerging market, gaining an understanding of the economic, cultural, infrastructural and geographical barriers to business is a vital first step into lucrative opportunities in Sub-Saharan Africa. But, as the Index shows, savvy exporters are successfully negotiating these barriers to see healthy returns on their ventures.
The Index compares and ranks 31 Sub-Saharan countries on their appeal for cross-border trade, assessing a range of factors from consumer demand to trade barriers. It aims to provide an informative guide to trade openness and opportunity for global traders doing business in the region.
To read the Index in full please visit Barclays.com/corporatebanking and visit our Insight & Research pages.