In 2014 the EU and West Africa finalised an economic partnership agreement with the goal of providing 16 West African countries with long-term access to the European market, without being subjected to tariffs or quotas. GTR gathered experts from both regions to discuss this and other initiatives to drive trade flows.
Roundtable participants:
- Tony Uzoebo, executive director: business development, Zenith Bank (chair)
- Kofi Bedu-Addo, deputy head: credit risk, Ghana International Bank
- Rupert Cutler, managing director, financial & political risks division, CGNMB LLP
- Edward George, head of group research, Ecobank
- Christian Karam, director, Africa Trade Finance (ATF)
- Ebele Ogbue, managing director/CEO, UBA Capital (Europe)
- Ayodele Okunola, senior management, business development, Diamond Bank
Uzoebo: How has the European recession impacted on West Africa? Did it slow down trade between West Africa and Europe? Did it have much impact on the availability of finance for both counterparties? Traditionally, European banks want to guarantee African risk, so what changes, if any, have been noticed? Has there been any impact on exchange rates?
Ogbue: From UBA’s point of view, the recession did impact on our business because a number of banks had to withdraw their lines. Where certain institutions had provided trade-related lines, when the recession hit hard, a few either withdrew their lines entirely or reduced their level of exposure to us. That impacted on what we were able to then pass on to our customers through a combination of letters of credit, etc.
It is now coming back and more financial institutions are much more comfortable with where Africa is – and West Africa in particular. Nigerian banks are enjoying a good run. There are also new entrants in Nigeria, so it has been positive. We are seeing a lot more players and increasing lines, which supports our trade business to our customers.
George: There is also the issue of de-risking, which is related to the recession in the sense that the recession that affected Europe has produced a wave of regulatory change and increased scrutiny.
There really is a phase of de-risking going on, with the cutting of credit lines, but also the exiting of relationships. One of the problems that we have seen in the trade finance space in the last year is a lack of activity in some of these relationships, where banks are allowing them to wither on the vine, because they are uncertain about the risks. The huge fines that have just been imposed on BNP Paribas have had a huge impact on all the other banks too. What I have heard from other banks in the same space is that they are finding that a number of clients are exiting or cooling relationships with them, so it is also choking trade finance going forward; it is not just in the short term.
Karam: One would think that in times of recession, banks would try to expand their cross-border activity but this time it is not the case. There have been significant changes in the environment of the lenders that have had a direct impact on the capacity of the region to access funding. European banks or European-based banks that remain the main financiers in African trade are bound by a return to home market strategy, the latest regulations under Basel III, and a new compliance guidance which has requested them to have a fresh look at their traditional trade finance activity in Africa.
As you may understand growing economies cannot wait, African markets are more and more in need of financing, so you have to fill the gap with alternative sources of funding.
Today, regional banks, whether pan-African, Middle Eastern or Asian, play a growing role in financing this trade and we are witnessing non-banks, namely funds and asset managers, investing in African trade. Many credit funds are happy to consider Africa trade assets as their entry point to the African debt market and are looking to enjoy the returns on these types of asset class.
It is a pity to see European-based and specifically UK-based banks losing their share in financing African trade.
Ogbue: The emergence of funds that are now being targeted towards supporting trade as another asset class has been seen over the last couple of years. The recession was a double-edged sword: yes, it did hit a few African countries, but it also created, as Edward mentioned, a risk in certain aspects as well as new avenues and new instruments for those looking for better yields on their assets and investments.
Bedu-Addo: In our experience, we found the slowdown was short-lived, partly because of the emergence of China. In terms of trade flows, those to Europe may have died down a bit, but demand in Africa continued to rise as the emergence of China stepped in. With interest rates at rock-bottom levels in Europe, however, the only way out was to look further in Africa. Those who stepped out of the risk came back within a short time. The impact of the recession on the continent as a whole was less harsh than it could have been.
Okunola: I would say the situation was muted. The European recession did have an effect but trade flows continued and new entrants came from new regions. What is having an impact now is more what has happened to BNP Paribas: fines. We will see how this goes and whether it has a ripple effect on other banks too.
George: The level of flows has remained consistent. There was growth in overall trade flows between Europe and West Africa in 2013. The total was around US$87bn, comprising crude oils and ores – bauxite, iron and uranium – in one direction; and, in the other, petroleum products and consumer goods. These flows have not really changed, but this is mostly because West Africa is a relatively insignificant trade partner for Europe. By my calculations, only 0.7% of Europe’s trade flows are with West Africa. There are some significant relationships, particularly with oil producers such as Nigeria, or, say, between Niger and France in terms of the uranium flows. But outside those, trade flows are relatively insignificant. The importance is for West Africa, which puts it at a huge disadvantage to the EU, because the EU sources so much of its trade from elsewhere.
Ogbue: It is an issue of relativity and what is important to us as a region. West Africa exported over €42bn and imported about €30bn, so the scale is more in favour of us exporting goods and services to Europe. In terms of the African, Caribbean and Pacific (ACP) Group, West Africa accounts for over 40% of trade between Europe and the ACP. With the signing of the new Economic Partnership Agreement (EPA), there are lots of positives that will come out, including the US$6.5bn fund that has been set aside to support development in trade and infrastructure, in terms of both exports to Europe and regional trade. There is a lot of work to be done to facilitate more regional trade before exporting to the likes of the EU.
Uzoebo: Of the West African countries, the Ivory Coast, Ghana and Nigeria account for 80% of the exports to the EU. What other West African countries that you do business with or in are growing their exports to Europe, and in what sectors? Will Europe take more of Nigeria’s crude oil, now that the US and Brazil are drastically reducing their imports?
George: That was my question. The reason for the second half of that question, just to explain, is that, when I was looking at trade flows between South America and Sub-Saharan Africa, what is amazing is that 80% of all flows are just between Nigeria and Brazil, and the flows are crude oil in one direction, and sugar and meat in the other direction. We know that Brazil is developing its incredibly rich offshore oilfields; inevitably, it will have less demand for West African oil. We have also seen a shale oil and gas revolution in the US, which is also dramatically reducing its imports of West African crude. Crude oil flows to Europe make up 84% of all flows from West Africa to the EU. A big question is whether the EU is going to take more of these flows, because they are going to have to go somewhere.
Bedu-Addo: With the Russian situation, they are likely to look towards Africa for gas and crude.
Ogbue: I share your sentiment, but I am also aware, because I have been working with a few people on this, that Asia and the Caribbean islands have been looking for a more reliable source of crude and gas. Nigeria is toying with the idea and asking: ‘What can we do with the Caribbean islands?’ and situate on maybe two of the islands where we create a storage facility, and we distribute crude and gas to the Caribbean islands. That is one way in which I know Nigeria is going to do that, once demand reduces, which is going to happen soon, I expect, given the US and all its shale gas.
Going back to the question on other West African countries, I know Senegal does quite a bit of export trade with the EU, in fish. Senegal and Cape Verde do a lot of trade business with Europe. Crude is a major commodity, as is cocoa. Big cocoa companies, such as Nestlé and Cadbury, are setting up plants in Africa but are also exporting as much as they can to Europe. Cocoa and crude are big, as is gas. With the development of oilfields across the Gulf of Guinea, we are going to see a lot of crude being moved to other regions globally, not just Europe. China is definitely looking for as much crude as possible.
Agriculture will see an increase, especially with the conditions in the EPA that give us a lot more advantage, whereby we are able to protect that aspect of our industry or economy so as not to encourage any subsidies being given to farmers in Europe, giving us more of an opportunity to add value to raw materials and export them. I think we will see a lot more now with the EPA kicking in, and the conditions on tariffs and duties acting more in our favour to export things there. Investments are encouraging EU companies to set up in Africa to export back to Europe. I think we will see a lot more happening in the agriculture space in countries where there is expansive land and where there are the right policies to encourage agriculture.
Cutler: In terms of the development of liquefied natural gas (LNG), Shell is trying to build offshore, floating processing, as is Brazil. A lot of LNG is now being developed. There are advanced stages in Nigeria, where it is going to stop being flared. LNG vessels are now also more short-term charters, so, if you can go with the shipbrokers, rather than getting tied into long-term agreements, you can be pragmatic. In a 10-year space, crude from Nigeria is already being exported, processed at Société Ivorienne de Raffinage (SIR) and then shipped back, so there is intra-regional trade to grow too. We have been talking about this for years, but West Africa is not just about exports and imports. Unfortunately, as you know, the informal trade cannot be recorded by anyone.
George: Particularly if you look at the flows going through Togo and Benin, which are just proxies for Nigeria and Ghana. What I also find extraordinary is that the Francophone bloc and the Anglophone bloc do almost no trading with each other. It is extraordinary. Last year, Ghana exported US$82mnn of goods to Côte d’Ivoire, or 0.4% of all of its exports. They are neighbouring countries and probably the two most important economies in that region. Officially, at least, they are not trading with each other, but the informal flows are vast and, I would estimate, probably double the value of formal flows.
Ogbue: Senegal does hardly any business with Gambia. It exports everything to France.
Uzoebo: In terms of statistics from the European Commission on what the region exports to Europe, sector-wise, we have noticed some improvement. Going into fishery products, in 2009 the region exported €554mn of fishery products to the EU; as against €680mn in 2013. Even with sluggish growth in Europe, there seems to have been an increase in exports going from the West African region to the EU. In terms of mineral products, most big trading companies are looking at PFFs (project finance facilities) – the likes of London Mining and African Mining etc. In 2009, it was just €12.52bn; and increased to €33.16bn in 2013 – an increase of over 100% within a short period. The only sectors that did not pick up much – crude materials and inedibles – remained within a €1bn band, even though there was a slight increase. Minerals fuels, lubricants and related materials moved from €12.2bn to €30.3bn within the corresponding time.
You can see that, even though there was this recession in the EU, West Africa’s exports have shown consistency in growth with trade with the EU.
With that in mind, how successful have West African countries been in moving away from primary commodity dependency and becoming manufacturing hubs?
Bedu-Addo: In Ghana, for example, the current-account deficit seems to be expanding. We connect it all to the fact that we are not self-sufficient enough. We have to import almost everything you can think of, which means using the foreign exchange that we do not have to pay for these things. If we could just make use of the education system to become more self-sufficient, the strain on current accounts would be removed. I guess it is a long-term thing, but I look across West Africa and I do not see the economies moving in that direction. We seem to have established a service base, but not a manufacturing base.
George: More than anything, power is the key issue. The lack of reliable, available and cheap power is the main obstacle holding back manufacturing, and that is across the board. It is not just industrial; it is also in the agri area too. Nigeria produces roughly the same amount of power as London and its suburbs, but has a population more than twenty times as large. Power provision is woefully short of demand. I discovered on my last trip to Lagos that one of the people I know there has three generators: one to use, a back-up, and a back-up for the back-up, because you do not want to be two or three days without power. The amount of power being generated by generators is incredibly wasteful. If you have cheap power, you have the basis for manufacturing. That is why they are re-shoring in the US to the ‘beast in the east’, where they have all of that shale gas.
It is why you had an aluminium-manufacturing business outside Maputo, because they had loads of cheap power from the Cahora Bassa dam. They bring the bauxite from Australia to turn it into aluminium in Mozambique because the power is so cheap. Without this cheap power, you cannot have manufacturing. Which brings us back to the whole question of value addition. There are too many manufacturing entities in Africa that do not add value. They are there and you can understand why governments want to have them but, over the years, they lose more and more money. They are not adding value, but adding some sort of prestige. To get to the nub of that problem, then, it definitely starts with power.
Cutler: And railways: more than roads. If you look at the development in Europe and America, most shale gas is transported by rail, not road. It is cheaper and safer. It is important to have a rail infrastructure because it is easier and better to run, and you can still employ people.
Bedu-Addo: It goes with being able to manufacture and produce steel. At the moment, the cost of importing steel is quite high for these economies. Without steel, they cannot develop a good enough railway infrastructure. It goes with power, so we need all that in the mix to make it possible.
Karam: Trade tariffs and policies come into it too. If you want to develop your domestic production, you have to somehow protect it and fund it in a sustainable way. Import bans followed by waivers send negative signs to investors that believe in local production: this creates market confusion.
Uzoebo: I think there is light at the end of the tunnel, especially for the Economic Community of West African States (ECOWAS). It is not moving as quickly as it should, but currently we have the gas pipeline running from Nigeria to Ghana. That should change the landscape of activities for all the countries on the pipeline route. Then, currently under development we have the railway that will run from Lagos to Abidjan via Ghana. It is going to be both a freight and passenger rail service. They hope to build an Autobahn along the railroad into these regions. In the long term, if all these infrastructure efforts come to yield, we might see a rejuvenation in the financial landscape of ECOWAS and easier flow of goods and services.
Because of a lack of power, companies like Dunlop and Michelin shut down their plants in Nigeria and moved to Ghana, where power was cheaper. What we witnessing is that more companies are opening plants in Togo and Benin, but they are not manufacturing for the local markets; everything is being exported straight into the region.
We are not going to see much because, by the time the EPA comes, how will it affect intra-regional trade within ECOWAS? The incentive for you to manufacture and trade locally or regionally will vanish.
George: Some companies are pioneers in this field. In Nigeria’s case, they have been very successful with backward integration of certain sectors. Cement is a huge success story. Five years ago, Nigeria was by far the largest importer of cement in Africa; it is now a surplus producer, driven by Dangote. Exactly the same for sugar: they have cut imports of refined sugar from Brazil to practically zero, and now the imports of raw sugar are gradually being squeezed to. It can be done, then, but that does not mean it can be done perfectly. In the case of rice, they tried the same, but it has not worked and there has been a surge in smuggling. In fact, they have had to backtrack on some of the issues. They have, however, shown that you can successfully pull yourself out of import dependence, again with the right structures and support to enable companies to invest.
Uzoebo: According to the European Commission, EU exports to the Ivory Coast and Ghana are dominated by industrial goods, machinery, vehicles and transport equipment and chemicals. What success stories have you come across in your business? Which European countries are the current ‘hot spots’ for exporting to West Africa and why?
Karam: Europe has always been the way to approach Africa. All the big traders and exporters from Asia or America have opened shop in Europe to cover this market. Maybe they feel that Europe traditionally has a better understanding of Africa than any other continents, or they want to be closer to the European-based financiers and credit insurance companies that are the most active in African markets.
Cutler: There are also lots of small companies – ie under US$500mn – that trade on a regular basis. There are engineering companies in Britain, Germany and Italy that regularly supply throughout West Africa and have done all the time, but it probably does not get into the EU stats. If you go to Accra, you will see Komatsu, Cat and Chinese built equipment being imported. In some ways, the Japanese and JCB have done well, because the machinery has traditionally been smaller than the American equipment, which is more suited to the terrain. In the insurance market, we see more things coming out than going in, but there are projects beginning to start. The projects then bring the equipment.
If you look at machinery vehicles, when you are building something you have a supply chain. If you are building a house, you are not buying it all from one supplier, and I think that will be the same in the West African countries in a project, because certain countries produce very good goods that will meet your standards. The export credit agencies (ECAs) are all talking about one or two big projects, but they do not make a massive impact in terms of the regular trade, which is the subject here.
Bedu-Addo: There is also a perception that, with infrastructure, for example, if they contract a European firm, they are more likely to build a better-quality infrastructure. I guess this is probably informed by the experience of Angola, where a lot of contracts went to China and, soon after the projects were completed, much of what was built fell into disrepair. I have a feeling that that has had an impact on West Africa thinking, and it is more likely to go for European project-leaders and institutions to build its infrastructure.
Uzoebo: We used to see new factories in Nigeria that were built by Scandinavian and European companies at twice the price at which a Chinese company would build them. What we have now realised is that the same European companies are going in and buying out or partnering with some of these Chinese manufacturing firms and giving them a certain level of upscale in their production scale, so that, at the end of the day, they do not lose out totally in what is happening in Africa.
Let’s move on to the next question. Guinea, Sierra Leone and Liberia have all been burning holes in their finances trying to curb the outbreak of ebola. What will be the potential impact on trade flows and trade operations/subsidiaries in the affected countries?
George: One thing is the human impact, which has been appalling, and the other is the impact on trade flows and perceptions. Probably more people die from bee stings every year in Africa than they do from ebola, but the outbreak has brought business activity to a halt. Even as far afield as Ghana and Côte d’Ivoire, where they are very worried about ebola and doing everything they can to prevent the spread, we are seeing conferences being cancelled, because people are saying: ‘We cannot risk it, because other West Africans will want to travel to this conference.’ Even though cancelling a number of conferences will not have that large an impact on the economy, all the potential deals do not take place, nor do the other business meetings usually held on the sidelines. Very often, you need a face to face meeting to sign off certain flows of credit and financing, but these are being postponed. There is a slow strangling of those economies under way. Even the best-case scenario suggests it is going to be nine months before the disease burns itself out, and that is if everything goes to plan.
Ogbue: At least 2,500 people have been affected and died as a result of ebola. Having worked in Liberia and having overseen UBA’s operations in Sierra Leone, I have been in touch with colleagues there. Also, colleagues from Nigeria have moved back to Lagos. Flights have been cancelled. A few airlines stopped flying to Liberia. That is affecting business into and out of those countries. It is absolutely affecting business being done in and out of those countries and it will continue to impact and effect the bottom line until those issues are addressed. Sierra Leone was shut down for three days; Liberia is doing the same. That is impacting on the economy and on trade. This disease is real. Unfortunately, we do not really want to record the impact on economies like it has done here in developed economies, but if one was able to do that, one would be amazed at the impact it has had on those economies.
Okunola: I think there may be a pull-out by multilaterals from those countries very soon if it is not properly calmed.
Karam: Financiers are requested to take financial risks rather than physical risks, so they are the first ones to pull out from a market in times of health threats. If they want to go and check what they have financed, today they cannot do that.
Uzoebo: Despite advanced regional integration processes in the region, barriers to intra-regional trade remain a challenge for the economies in West Africa. Regional trade lags behind compared to trade with developed and emerging countries outside West Africa. What is your experience in terms of the growth of intra-regional trade?
George: I think it comes down to trade corridors, and it really depends on where you are talking about. For Africa, the current figure is around 17% of formal flows being intra-regional. If you look at West Africa and the trade corridor going through somewhere like Côte d’Ivoire, 40% of Côte d’Ivoire’s trade is with other countries in the region. Togo, Benin, Senegal and the route into Mali are clear trade corridors, where there is a lot of intra-regional trade going on. It is just that you get examples like Ghana and Côte d’Ivoire next to each other practically trading nothing.
Ogbue: I would add the issue of exchange rates, which is a very critical issue regarding facilitating more intra-regional trade. We have been working on the West African Monetary Union (WAMU) and a single currency to act as a yardstick for determining exchange rates moving from one country to another. It has worked better among the Francophone countries but, as was mentioned, the corridors between Francophone and Anglophone countries have been a bit of a problem. Even between Anglophone countries, it has been a problem, because there is no clear exchange rate mechanism in place between the naira and the cedi, or the cedi and the Liberian dollar and the leone. That has been a challenge.
At UBA, we have tried to work around that by attacking the more informal sector and working with the regulators to help facilitate intra-regional trade, but looking at transactions that are below a certain value. There is still the issue of anti-money-laundering: being able to move moneys within regions; questions around certainty that money is being moved around for legitimate business or in order to get around the issue of money-laundering. There are a number of questions and issues around the region coming together to put in place the right mechanism to facilitate the exchange of currency within the region.
I do not know whether we are still going to go ahead with the WAMU. The exchange in Côte d’Ivoire has tried to determine what the WAMU rate is and to compare it with other currencies in West Africa but, because it is not a legal currency, it is neither here nor there. Trying to address that will also help facilitate more intra-regional trade in West Africa.
Uzoebo: Irrespective of the exchange issue, however, the biggest issue is the tariff. In every country and region, there is always a different tariff. The question is how ECOWAS is going to harmonise that in order to make it easier for people to trade. It is easier to bring items into Benin, because tariffs are cheaper, than into Nigeria. That is why you still see the port of Cotonou being very active, although 80% of those commodities are going to another country. I am sure that many countries will fight against a common tariff because they believe that they will lose out to a country like Nigeria in terms of revenue. What would happen to the smaller Francophone countries that surround it? Let us hope that ECOWAS can look inward and come up with a practical solution.
George: There is going to be a change, of course, in January, when the Common External Tariff (CET) comes into force. It is going to hugely reduce the tariffs on things like cotton, coffee and tea, which should boost intra-regional flows, but a lot of that stuff is going to be exported anyway to the international market. The tariff change will be significant for things like cereal and dairy, which are traded in large volumes intra-regionally. They are going to increase the tariffs on things like sugar, confectionary and meat, so there will be some protection for local industries. They are talking about a potential revolution in January when the CET comes into effect, so that really is the hope. I would love to see between Nigeria and Côte d’Ivoire that were not just crude oil and petroleum products. Both sides need a shake-up and it really is the case that Anglophone Africa does not know Francophone Africa, and vice versa. This could be something which drives that relationship.
Uzoebo: At the end of the day, the Francophone countries still depend on Paris for a lot of their monetary rule. Meanwhile, most of the Anglophone countries have self-rule and self-administration of the monetary policies. If everyone had their own self-rule, maybe the idea of a single currency would work better. There is still a lot of work.
Karam: Ghana has recently seen a hard currency and cash liquidity crisis. A lot of local producers and manufacturers who import have obligations in dollars but sell in local currency in the market. Those who have been sitting on big stock or big production capacity, because they did not want to reduce or stop production, also considered exporting a lot to neighbouring countries, even if the margins were lower than if they were selling in their own market. They wanted to have access to hard currency that way. Sometimes a crisis creates more trade among neighbours.
Uzoebo: Now for a contentious issue: ECOWAS is negotiating an Economic Partnership Agreement (EPA) with the EU. The agreement prohibits the use of tariffs or import duties and export taxes. What effect will the deal have on trade relations? Which countries will be hardest hit if it is not – or is – finalised?
I have a slightly different view: if we look at the region as a whole, if the EPA is finalised, the region stands to lose US$1.8bn annually in import tax, but the EU promises US$8.8bn over a five-year period, so there is a shortfall. If the region decides today not to adopt the EPA, they get to make more revenue than what the EU is promising.
Bedu-Addo: Frankly, I think industries will be suffocated.
If I can import from the UK and face no tariffs whatsoever when I get to Benin, for example, what happens to a small cottage start-up firm in Benin? There is no real protection for them.
George: There are a number of protections being built into it, but my real question would be: is the EPA ever going to be finalised? I am very doubtful that it will be. Look at the difficulty they have had with the Doha Round: even after what they managed to achieve in Bali, it has fallen apart, because India has refused to sign up, despite all of the commitments. Will they ever be able to finalise an EPA agreement? I doubt it. If you look at how far apart they are, ECOWAS has been offering to open up about 70% of its market over 25 years, which probably is realistic. The EU wants 80% over 15 years, and there are so many different moving parts and so many different potential exemptions, etc, that I do not see how a deal can ever be made that would be accepted by all the different regions. I think they are biting off too much.
Ogbue: Different countries are looking at what meets their requirements and needs, and using the EU. As much as there is no overarching agreement with West Africa, different countries are looking at their own peculiarities and signing with the EU in terms of: ‘These are things which we think would work for us’, using the master agreement, for example, as a guideline. It is left to each country to determine what works best for them and to get the best deal for the country. The spirit of the agreement means well. The devil is now in the detail, and working out the detail to suit your own conditions.
