Kobina Solomon, Regional Trade Sales Head, East & West Africa at Absa Group, provides an overview of the factors driving intra-African trade.

 

What will the African business landscape look like in 2050? This is one of the most loaded questions you can ask a room of business strategists assessing investment opportunities. On the one hand, the Afro-optimists will point to the abundance of natural resources and youthful populations representing growth opportunities. On the other hand, the Afro-pessimists will point to persistent levels of youth unemployment, weak social welfare and education systems, coupled with poor corporate governance.

As always, the answer is more nuanced and a look at the financial response to the Covid-19 pandemic and the launch of the African Continental Free Trade Area (AfCFTA) are both powerful data points informing this argument.

When the 2008 global financial crisis ripped through emerging market economies, African policymakers had limited tools with which to respond and were left vulnerable as capital flowed out of key projects. Move forward to 2020/21 and many African countries have been able to deliver stimulus programmes as well as roll out innovative financial funding models such as the so-called “corona bonds” to retain financial stability.

 

AfCFTA: A driver of exports and manufacturing

The AfCFTA is likely to be a true game-changer for the continent as it will facilitate and drive intra-African trade.

Currently, Africa accounts for just 3% of global trade and only 17% of African exports are intra-continental, compared with 59% for Asia and 68% for Europe. The potential for transformation across Africa is significant.

According to the World Bank, the AfCFTA is expected to boost Africa’s income by US$450bn by 2035 while adding US$76bn to the income of the rest of the world.

The manufacturing sector is expected to be a significant winner from this intra-regional trade zone. Exports out of Africa are expected to rise by US$560bn, mostly due to intra-regional manufacturing. With Covid-19 exposing the vulnerability of emerging market supply chains, we can expect a robust manufacturing sector to emerge over the next 15 years.

The volume of total exports would increase by almost 29% by 2035 relative to the baseline. Intra-continental exports would increase by over 81%, while exports to non-African countries would rise by 19%. Intra-AfCFTA exports to AfCFTA partners would rise especially fast for Cameroon, the Arab Republic of Egypt, Ghana, Morocco and Tunisia, with exports doubling or tripling with respect to the baseline.

Under the AfCFTA scenario, manufacturing exports would gain the most, 62% overall, with intra-Africa trade increasing by 110% and exports to the rest of the world rising by 46%. Smaller gains would be observed in agriculture – 49% for intra-Africa trade and 10% for extra-Africa trade. The gains in the services trade are more modest – about 4% overall and 14% within Africa.

In volume terms, manufacturing exports dominate the export picture for Africa. Of the US$2.5tn in African exports projected for 2035, US$823bn are in manufactured goods, US$690bn in natural resources, US$191bn in agriculture, and the remaining US$256bn in services. Of the total growth in exports of US$560bn, the increase in exports of manufactured goods represents some US$506bn – an increase of US$220bn within Africa and US$286bn with the rest of the world.

 

The trade finance gap

As a bank positioning itself to be the leading pan-African financial services group on the continent, Absa believes that closing the trade finance gap will make a material change in stimulating economic activity over the next 15 years.

Trade finance is the amalgamation of the financial instruments and products that are used by businesses to facilitate international commerce. It provides the impetus for importers and exporters to transact business through trade, and about 80% of world trade is facilitated through trade finance bank solutions.

Trade finance remains a popular activity among banks in Africa, but participation rate continues to decrease – falling by 16% between 2013 and 2019. This could be due to a combination of increased competition, adoption of stricter Basel III regulatory requirements and new anti-money laundering standards that have reduced profit margins and increased operational costs, thereby making trade finance unprofitable for small banks.

Data shows that the unmet trade finance demand in Africa is estimated to be US$81.80bn, roughly 5.5% of the global trade finance gap. To put this in perspective, total African trade represents 3% of world trade.

A key example of where the banking sector is driving economic activity is in Ghana. Commercial banks in Ghana are financing the licensed buying companies to make purchases of cocoa beans from local farmers for onward supply to Ghana Cocoa Board (Cocobod) for export purposes. This introduces liquidity, improved price transparency and rapid clearing of the transactions and allows the sector to operate more efficiently.

Absa believes that through its strong balance sheet, pan-African footprint and relationships with buyers, sellers and their respective banking partners, it can play an integral role in closing the financing gap as the African economy expands.

In this process, it will empower the next generation of entrepreneurs to re-shape the African business landscape.

 

Digitally-savvy banks will lead the way

The Covid-19 pandemic saw aggressive adoption of digital channels by our business banking clients who had to reimagine the way that they interacted with us and their own customers.

Absa is making history with its Absa Access channel, a pan-African, single sign-on platform that gives clients standardised, secure and near real-time access to their business portfolios and the banking services available to them. This enables them to make informed decisions to drive the growth of their businesses, managing their finances with the speed and intelligence that the platform provides.

Coupled with this, the Absa trade management platform is a secure online banking solution which provides our clients with the required flexibility and convenience to initiate and manage all their trade products with the bank. We have made significant progress with this channel and have seen a significant adoption since the inception of the platform. Currently, our focus is to include a cross-border payment functionality which will give our clients leverage to pay suppliers across the continent and the globe.

From a more regional, collaborative view, the MANSA platform, a pan-African customer due diligence repository for financial institutions, corporate entities and SMEs, was developed by Afreximbank to address the perceived risk of doing business in Africa. It hopes to avoid the long transaction process of converting to a third currency, such as US dollars, before effecting a trade deal.

With all of these solution, we are well-positioned to help with the AfCFTA’s objective of developing a single pan-African payment and settlement system.

New digital solutions – such as concluding trade transactions using blockchain – will increase the data integration between the flow of goods and financial transactions, which will improve the risk profile of trade transactions and be the catalyst for narrowing the trade finance gap.

These innovations will ease some of the payment challenges that may arise out of the AfCFTA and ultimately support African traders.

Absa has undertaken several programmes to upskill and help build the capacity of its clients, especially within the local corporates, small to medium-sized enterprises, and business banking client segments. Emphasis has been placed on best practices in bookkeeping, the quality and scalability of products, the need for strategic intelligence and emerging policy frameworks, as well as increased competition and sector-specific headwinds.

As a result of the events of 2020, we have seen an acceleration in the digital banking space, with fintechs and banks driving this agenda to increase penetration rates. Kenya has seen skyrocketing mobile penetration rates, with subscriptions surpassing the total population amount by 12%, and an increase in fintech innovations. Ghana’s central bank has issued new regulation to systematically grow the sector and there is talk of the e-cedi [a Ghanaian digital currency] coming onboard later this year. Nigeria is using inexpensive, accessible tech to mobilise consumers in new ways, while also promoting a cashless policy, giving banks and fintechs leverage to design digital payments solutions.

The success of the AfCFTA will not happen overnight; it will take deliberate and collaborative efforts of all industry players to arrive at the successful implementation and realisation of the projected returns. At Absa we are ready to contribute our quota to bridge the trade finance gap on the continent and become the go-to bank for all trade and business-related solutions.