There is appetite to fund trade in Africa despite the continent’s risky status, reports Shannon Manders from Exporta’s annual Africa trade and export finance conference.

“Risks exist, but the rewards in Africa are second to none,” commented Ebenezer Essoka, Standard Chartered’s CEO, South Africa, speaking at Exporta’s conference, held in Cape Town in March.

Six of the world’s fastest growing economies are in Africa; Angola is top of the list, and Nigeria comes in at number four. But while African trade levels are significantly higher than they were two years ago, the continent still faces constraints in terms of the availability of trade finance.

Denys Denya, executive vice-president of administration and banking services at Afreximbank, noted in his conference presentation that “under-investment and non-availability of appropriate project and export finance” is one of the key constraints to export development and diversification. He called on all trade finance institutions to raise the supply of export finance in Africa for the development of African trade and economies.

ECAs often take a ‘cookie cutter’ approach to Africa. Each country and system is unique. Successful ECAs will recognise this and adapt to needs.”

Speakers at the conference addressed additional grievances faced in finding access to trade finance in Africa, and highlighted capital and credit constraints, poor infrastructure, as well as a general lack of understanding in the industry, especially in terms of operational abilities, regulatory problems and dispute resolution.

Other issues raised included the lack of trust between local and international banks, the tendency for banks to “cherry-pick” deals on the continent, and the often distorted perception of risk in Africa, which led to a call for credit analysts to better “know their territory”.

Delegates highlighted the importance of risk mitigation, and were pleased to note that export credit agencies (ECAs) were beginning to offer more flexible solutions. “ECAs often take a ‘cookie cutter’ approach to Africa,” commented Yusuf Khan, head of structures and trade finance at Citi. “Each country and system is unique. Successful ECAs will recognise this and adapt to needs.”

Market trends

Although Africa produced less jumbo structured trade finance deals and an increasing number of smaller bilateral transactions in 2010, this trend is set to change. “Commodity prices are high and we expect to see more activity in syndicated structured trade finance loans in 2011,” said Pamela Green, director, syndications, Standard Chartered.
Deal sizes in Africa are becoming noticeably larger, and Ghana’s Cocoa Board was listed as an example of this trend. Cocobod raised US$100mn in 1991, US$1.2bn in 2010, and, as cocoa prices continue to rise, is understood to be looking to raise US$1.75bn this year.

A more varied group of banks are financing these deals, with fewer European banks participating and new entrants such as Nigerian banks and development banks stepping in.

China’s surging demand for raw materials continues to play a major role in the transformation of the continent. In 2010, trade between China and Africa reached US$114.8tn and is expected to grow by around 20% in the next three to five years.

According to Omen Muza, managing director of TFC Capital Zimbabwe, China’s interest in Africa’s resources is stimulating greater investment into mineral beneficiation. China and South Africa have set up a working group to develop a memorandum of understanding, signed in 2010, in which China committed to the beneficiation of minerals at source.

“China’s appetite for commodities has prompted Western mining companies to boost their mineral reserves in resource-rich Africa,” said Muza, citing Commerzbank’s recent offer of a loan for €500mn to the Zimbabwe government for infrastructure development over the next 12 years. In return, it is expected that the German bank will be granted rights to purchase a wide range of minerals, including zinc, chrome, nickel, earth metals, iron, steel and platinum.

According to reports in the Zimbabwean press, the deal was revealed by bank representatives who met with Zimbabwe’s minister of economic planning and investment promotion. Terms and conditions of the loan have not yet been publicly disclosed.

As international banks become more confident about doing business in African countries, it is thought that similar long-term partnerships may be set up across the continent as nations strive to secure raw materials to ensure the survival of their industries.

While the majority of Africa’s exports are still commodities of agricultural and mineral origins, recent data shows a gradual decline in the share of food and agricultural raw materials in total exports, as well as an increase in the share of manufactured exports in some countries. “These trends are in response to on-going efforts for the diversification of Africa’s exports away from commodities,” noted Afreximbank’s Denya. GTR