The fall in energy and commodities prices has turned the fortunes of Africa’s economies upside down, writes Sarah Rundell.
Not long ago, the African continent’s celebrated exporters, the likes of Ghana, Nigeria, Angola and South Africa, were some of the world’s fastest-growing economies. Now the low oil price has caused Nigeria to slip into recession for the first time in two decades, while in South Africa, where mining accounts for half of exports, growth has slowed to almost zero.
As these high-flying economies come down to earth, it’s no surprise that others less reliant on metal and oil exports are proving more resilient to the commodity downturn. Countries such as Côte d’Ivoire, Ethiopia and Kenya will continue to grow at more than 6%, predicts the IMF in a trend it calls “Two Africa’s” in a recent report. Economies dependent on oil imports are benefiting from lower fuel costs, and for others, export diversification and adding value are keeping trade flows buoyant.
The commodity slump has hit Nigeria and Angola, Africa’s big oil producers, hard. But lesser-known resource-exporting economies are suffering the same symptoms, and just as acutely. Like Nigeria and Angola’s fortunes rise and fall on the oil price, so are Zambia’s tied up in copper. It is Africa’s second-biggest copper producer, depending on the metal for about 70% of its foreign exchange (FX) earnings and 25% to 30% of government revenue. Prices have fallen by almost a third since 2011, resulting in copper producers closing mines and slashing jobs. China buys up to 45% of copper worldwide, and until growth picks up there, Zambia’s fortunes remain in the balance.
As the copper price has weakened, so has the country’s currency, the kwacha, falling to record lows against the US dollar. The low copper price has reduced FX earnings, and the clamour for dollars from corporates, importers and manufacturers has depleted bank reserves even more.
It has led to unprecedented demand for currency convertibility insurance from the African Trade Insurance Agency (ATI), a provider of political risk and trade credit insurance to businesses operating in 13 African countries. ATI senior economist Kefa Muga explains: “We have insured a substantial number of transactions in Zambia’s mining sector, particularly covering currency convertibility. There is a real concern about the government’s inability to generate foreign exchange because of the commodity price slump.”
In all commodity-dependent economies, tumbling currencies have pushed up the cost of manufactured imports. “The region is very dependent on imports spanning building materials for infrastructure to information and communications technology (ICT) goods,” says Rebecca Harding, CEO of Equant Analytics.
Nigeria’s nascent auto sector is one industry feeling the heat. The government has introduced import controls to conserve hard currency – and encourage local manufacturing – by prioritising strategic imports. It is starving the auto sector of vital inputs and leading to a collapse in supplies of product lines from glass to rubber, seriously hitting output. According to Equant Analytics, imports of vehicle parts and accessories into Nigeria dropped from US$4.4bn in 2014 to US$2.5bn in 2015. Nigeria’s auto industry body, the OICA, estimates that total new vehicle sales in Nigeria also fell by more than half in 2015 compared to 2014.
Regional economies are not able to use their weakening currencies to their trade advantage because they have few exports beyond natural resources. The hardship for households has been compounded by rising prices for food due to drought in southern Africa.
Increasing the chance of success
Yet as Zambia and Nigeria struggle, other commodity exporters that have managed to diversify their exports – if only in terms of other commodities – are thriving. Côte d’Ivoire has built up diversified exports of cocoa but also rubber, palm oil, cotton and cashews. It only began planting cashew trees 40 years ago but production has grown 10% annually for the past five years, turning the country into the world’s second-largest producer. Now the Cotton and Cashew Council, the national marketing board, has slated production to rise to 725,000 tonnes. According to Equant Analytics, the value of Côte d’Ivoire’s exports of edible fruits and nuts, which stood at US$1.2bn in 2015, is forecast to increase to US$1.5bn in 2016 and US$1.7bn in 2017.
Nearly all Côte d’Ivoire’s production is shipped off to India and Vietnam for processing, but the government has pledged to process 30 to 40% of its production locally in the next five years. “Rather than being completely dependent on cocoa, Côte d’Ivoire has diversified its exports and become a bit of a trade hub,” says Edward George, head of Ecobank UK and group research at Ecobank.
Processing cashews will stand Côte d’Ivoire in good stead for the future: economies that have been able to add value to natural resources have proven resilient.
Tea and coffee lead Kenya’s soft commodity exports, which Equant Analytics values, together with spices, at US$1.3bn in 2014, and forecasts to rise to US$1.5bn in 2017. Close behind come horticultural exports and vegetables. Annual flower and horticulture exports to the EU are valued at €1.1bn, accounting for more than 25% of EU flower imports and about one-seventh of the EU’s fruit and vegetable imports, according to Eurostat, the EU’s statistical office.
Kenya’s role as a transport corridor for exporters from neighbouring Uganda and Rwanda gives Kenyan processors another chance to extract value en route to global markets. And adding value helps access trade finance.
“We like processing businesses that add value because it makes more sense from a lending point of view. The loan-to-value perspective is more attractive and they also tend to be exporters,” says Ben Storrs, vice-president at Scipion Capital, an investment manager that specialises in trade finance. Storrs similarly notes that a number of metal traders that Scipion lends to are also adding value by smelting scrap for export in Côte d’Ivoire, Morocco, Cameroon and Zambia.
Regional integration is also creating winners. East Africa’s economies are becoming increasingly linked through customs unions and lower tariffs. The African Development Bank (AfDB), in its inaugural African regional integration index report, rated the East African Community (EAC) comprising Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda as the top-performing regional economic community on the continent. The EAC has advanced further than its peers in reducing cross-border barriers to trade and other economic activity, it said.
It is no coincidence that these buoyant economies are also net oil importers, reaping the benefits of low energy prices. “Kenya is a big importer of oil and the reduced price at the pump is helping to drive the economy,” says the ATI’s Muga. Importantly, lower oil prices have also helped rein in inflation. “Oil is a big factor in the basket that determines inflation,” he says.
Lower energy prices have also seen some governments begin to phase out fuel subsidies, seizing the moment without risking a backlash from consumers or vested interests. Rwanda has cut subsidies and Morocco has ended subsidies of gasoline and fuel oil and started to significantly cut diesel subsidies as part of its drive to repair public finances.
“The question is what will happen when oil prices go up. Will governments keep the subsidy at zero or will they reinstate them?” questions Robert Besseling,executive director of consultancy Exx Africa.
The financial impact
Is access to commodity trade finance easier in economies that are riding out the slump? It seems the availability of trade finance has also split into two tiers, but not along the same fault line of economic winners and losers. Instead, large conglomerates are still accessing funds easily, but SMEs are struggling.
“Local champions and large international companies find banks happy to give loans at competitive rates. There is competition in this segment and everyone jumps on the same deals. For SMEs it is incredibly tough. There is no interest from international banks and the cost of funds from local banks is prohibitive,” says Jan de Laat, managing director, trade and commodity finance at Rabobank in Nairobi.
When European banks pulled back from the market, local banks lost their credit lines. Since then, local lenders have been unable to offer trade finance at reasonable prices off their own books because of their small balance sheets, and a lack of access to dollars.
“Local banks depend on people depositing dollars. This has fallen away for many, so they have to borrow dollars from other banks and pay a hefty price,” says de Laat.
Kenyan banks’ ability to lend to finance trade has just dampened further on the back of tightening capital adequacy regulation. The sector has seen a rise in non-performing loans (NPLs) and a run on reserves at some smaller banks, with three taken into receivership last year. The fact that Africa’s banks have been unable to step into the gap created by the withdrawal of global players from trade finance is a source of frustration, says Besseling. “The opportunity to get local banks on board is being missed,” he adds.
Will large lenders reinstate their credit lines? The continued fear of falling foul of anti-money laundering and know your customer (KYC) regulation makes it unlikely for now. Trade finance in Africa is needed by small, often opaque businesses and the risks of inadvertently breaking regulations is perceived as too high.
Scipion’s Storrs says that despite strong investor demand for access to trade finance, due diligence and regulation contributes to make investing in trade finance “labour-intensive.” Institutional investors also tend to want to invest large amounts, but trade finance in Africa isn’t always on a grand scale. “It is difficult to ramp up quickly, or deploy cash straight away,” he says.
In another trend, access to trade finance for farmers and growers needing to fund planting is more difficult than at the other end of the value chain, observes Ecobank’s George. “Banks perceive financing a crop that still has to be produced as risky. They are happier financing at the end of the chain when the crop is in a warehouse and they have more control.”
Storrs also believes that the drop in commodity prices has disguised the fact that many banks have withdrawn their funding lines. Lower commodity prices mean the same amount of bank lending can finance the same quantity of goods. “We are still seeing the same volumes but if commodity prices go up, traders with lower credit lines may not have the funding they need,” says Storrs.
The next commodity cycle has already begun. Oil prices are creeping higher and OPEC’s decision to implement their first production cuts in eight years – excluding Nigeria – will boost Africa’s oil exporters and alleviate some pressure on their foreign exchange reserves.
The World Bank’s latest commodities forecast suggest the worst is over, in line with Bloomberg’s commodity index, a basket of 20 commodities weighted by volume and value, which increased 12% during 2016 following a 24% decrease in 2015. Price rises will give Africa’s struggling economies respite to diversify and add value to their exports. It remains to be seen if they can act on the lessons of the slump.
“If they can’t diversify in the best of times, it will be impossible in the worst of times,” says Besseling.