Roundtable: Overcoming disruption in the Middle East and Africa

In a roundtable discussion held virtually in June, GTR gathered leading figures in trade from across Africa and the Middle East to discuss the impact of geopolitical tensions, supply chain disruption and currency pressures on trade finance across both regions, as well as how trade corridors are shifting and financing demand is changing as a result.

Roundtable participants:

• Bilal Bassiouni, head of risk forecasting, Pangea-Risk (moderator)
• Norhan Ezzat Amin, head of global transaction banking, Arab African International Bank (AAIB)
• Motasim Iqbal, managing director, regional head transaction banking sales, Africa and Middle East, Standard Chartered
• Michelle Knowles, pan-Africa group head of trade and working capital, Absa Bank
• Zhann Meyer, head of agricultural commodities, Nedbank CIB
• Sinan Ozcan, senior executive officer, DP World Trade Finance
• Anirudha Panse, managing director, head of GTB trade finance product innovation, global transaction banking, FAB

Bassiouni: We cannot overlook geopolitical tensions. The lingering effects of the Russia-Ukraine war and the recent escalations in the Middle East continue to pose major risks to traditional trade routes and market stability in the region.

Beyond that, we’re seeing proxy wars between multiple states and non-state actors, and growing volatility around maritime security, which not only disrupt supply chains but adds to the cost and complexity of doing business.

This, of course, will have far reaching implications on global trade flows and trade finance. From what you are seeing, how are these geopolitical trends shaping demand and activity in the trade sector?

Panse: This region is a large trading hub, and the last few years have been tough times for trade. Just in the last year, we’ve had high interest rates and inflation as well as those geopolitical issues, and it has been difficult. But I think trade is coming out of it. There is light at the end of the tunnel.

There are three issues I see continuing to impact the global trade business: the continued US-China trade war, the Russian invasion of Ukraine, and closer to home, the Israel-Palestine conflict.

As a result, the trend seems to be to look at doing more business with geopolitically aligned countries, rather than just near-shoring. Research shows there is clear evidence that business between countries which are geopolitically friendly has grown or significantly grown.

The conflict in the Middle East and attacks in the Red Sea are also having an impact on shipping routes, with vessels going all the way around the Cape of Good Hope instead. I imagine that is causing a shortage of empty containers in China, which is still a major hub for the world’s manufacturing, and so freight prices are going up.

From a UAE perspective, being a trade hub, these trends provide an opportunity as well as a challenge, especially with governments in this part of the world shifting their focus from the hydrocarbon-based industries to the non-oil sector. That provides opportunities for other sectors to grow their business.

Knowles: The changing geopolitical landscape is significantly impacting economic relationships. Many countries are reconsidering their trading partners as a result. There is a re-evaluation of heavy reliance on the dollar for international trade and reserve holdings, as well as a shift in foreign direct investment driven by political factors. There are both advantages and disadvantages to this shift.

On the positive side, it may lead to governments focusing on building more resilient economies. However, on the negative side, it could lead to a departure from global norms of engagement, potentially resulting in increased trade restrictions and financial sanctions that disrupt supply chains and trade flows.

Europe remains Africa’s largest trading partner, closely followed by China, with around a third of African trade now occurring with other developing markets. Due to increased geopolitical fragmentation, new trade routes are emerging, including flows from South Korea, India and Singapore.

Despite these disruptions, African economies have shown resilience during a very tough economic and political environment.

Ezzat: We’ve definitely felt the effects of these geopolitical tensions in Egypt over the past couple of years, especially the Russia-Ukraine war, and we’ve also seen new corridors opening up for countries that are geopolitically aligned. Some countries and partners are moving away from the historic approach of supporting globalisation to looking more closely at regional partners that are more politically aligned.

Accordingly, we have actually seen growth in our export flow from Egypt, as new countries that have historically been looking at partners in Asia or Europe start eyeing Egypt as a key market.

Also, after the tensions across the Red Sea and the recent geopolitical tensions in the region, we’ve started seeing more Egyptian exporters looking at new markets in Africa and Europe. This makes sense given our proximity, and helps reduce reliance on the Red Sea, where disruption has had a significant downside effect on our flows through the Suez Canal.

We’ve also seen a change around reliance on the dollar for handling trade transactions, with alternatives that strengthen relationships with new partners and facilitate flows. This has helped us support clients in African markets, where we have seen Ghana, Nigeria and other markets as well struggling with the lack

of foreign currency availability. We’re trying to advise our customers who are now exporting to Africa to implement some of the same structures and customised solutions that we have done for Egyptian importers.

Generally, there have been a lot of changing tides over the past couple of years, and interestingly, in the past it used to take three, four or five years for a certain change in a certain direction. Now we’re seeing something new that is popping up every year.

Bassiouni: In the logistics sector, how do businesses manage these supply chain risks and ensure continuity of operations to mitigate some of this volatility that we’re seeing?

Ozcan: Geopolitical tensions and macroeconomic impacts are bound to happen. We are in strange times, not just in terms of geopolitical tensions but going back to events like the pandemic and the blockage of the Suez Canal. Supply chains are quite fragile, and making them more robust is the key.

At DP World, we are on a transformation journey to become an end-to-end logistics and supply chain management provider to make trade flow efficiently across the globe. With over approximately US$37bn of capital employed, we are creating a seamless end-to-end connectivity for many of our customers, not just within the UAE but across the globe. To put that in context, DP World handles 10% of global trade through its infrastructure around the world.

Our client base has shifted from being primarily shipping lines to what we call cargo owners: exporters, importers, manufacturers, traders and wholesalers. To help the trade flow, apart from making supply chains robust, what we learned is that they also need access to finance, so that’s why we also ventured into the trade finance space and set up DP World Trade Finance.

The idea is not necessarily to compete with the banks, but rather to complement requirements in the market. The trade finance gap was about US$1.4tn eight years ago, and it’s now US$2.5tn, and this is holding back global trade to quite an extent. Being an end-to-end supply chain provider, we are trying to bridge this trade finance gap and help our clients move their supply chains and support trade flows.

To give an example, we were seeing congestion at the port of Mersin, in the south of Turkey. It’s a sizeable port, and Turkey is a major importing and exporting country, but the goods flow was getting restricted. Since the client needed goods in an area close to Mersin, our colleagues in DP World handled the cargo from the east Marmara region instead and used rail to move the cargo. This solution may have increased the costs marginally but ensured that the client received the cargo without waiting 15, maybe 30, days, and incurring even bigger costs due to congestion.

The lesson is that we need to be agile.

Bassiouni: Which commodities have been most affected by these market shifts, both in terms of geopolitical conflicts and the challenges we’re seeing around supply chains?

Iqbal: From a commodity price perspective, we have seen agri prices really go up in the last couple of months, particularly from January to now. If you look at cocoa, for example, the entire cocoa-producing belt, whether it’s Côte d’Ivoire, Ghana or Nigeria, the price of cocoa has gone up from around US$4,000 to close to US$9,000 to US$10,000. It’s been oscillating up and down, but it’s been quite a significant increase irrespective.

Then you look at coffee prices. Across the board, soft commodity prices have gone up. The Middle East depends heavily on importing basic food products, so there is going to be an increased requirement for financing facilities, and we are seeing customers coming to us and saying they need more working capital to facilitate imports. There’s an incremental requirement in West Africa from our agri clients to provide them with more facilities too.

Meyer: Approaching this with an agricultural supply chain lens, you mentioned risks and opportunities pertaining to the vessels now forced to come around the Cape of Good Hope. One would assume that there’s a tremendous opportunity for the ports of Durban, Cape Town and Coega to capitalise on this.

Unfortunately, this is not the case. On the contrary, it is putting immense pressure on already stressed infrastructure suffering from a lack of maintenance and direly needed upgrades. The timing is also not opportune as it’s in the middle of our citrus season with congested berths not receptive to additional capacity.

Some commodity prices have come down quite significantly since the Russian invasion, but some are still propped up by the fact that the majority of Africa’s oilseeds imports came from that region, and are persistently holding up at these high levels.

We also see that Ukrainian and Russian wheat – historically a slightly cheaper cultivar of wheat to mix into the blend for our local millbake industry – are now not available because of sanctions and because Odessa and other Black Sea ports are simply not operating at the capacity required. As a result, Southern African millers are forced to import alternatives from Germany, Canada and the US, which often come at a considerable premium and are not always ideal for blending.

I would guess it’s going to take years, maybe even decades, for supply from that region to be normalised. The effect is going to be far-reaching, and for much longer than we anticipate in terms of agricultural commodity prices and availability in the sub-region.

Bassiouni: We’ve mentioned issues companies are experiencing around dollar settlement. How much of a challenge is the currency situation in these regions, and how are digital initiatives addressing this?

Iqbal: I would like to summarise this into five Cs: Covid, conflict, commodities, containers and climate. You can place most of the challenges that we are facing from a trade finance perspective into those buckets. But if you look at Africa, there is a sixth C: currency.

You need to be able to settle between countries, and not all countries have the same kind of instant payment infrastructure like Ghana and Nigeria have. You can’t just do cross-border local currency settlement outside the dollar without that infrastructure.

Meyer: The commercial banks in this room will know how we struggle to obtain sufficient liquidity in US dollars in Mozambique, Malawi or Tanzania.

It is a major issue for all commercial banks to effectively service our clients in hard currency, so maybe the solution lies in looking at a combination of alternative currencies.

Ezzat: On the currency front, one of the initiatives I’ve seen that should have a good impact is the Pan-African Payment and Settlement System (PAPSS), established by the African Export-Import Bank (Afreximbank), which enables cross-currency settlements between African markets and currencies other than the dollar.

I know that Tunisia has signed up, and I’m expecting a similar trend in Egypt and other markets. This will really open doors for African countries to transact together, with the trade agreements that they have, coupled with local currency settlement.

It means they are protected from the impact of foreign currency availability, and at the same time, it’s cheaper for them to trade across borders. So it’s all back to the point of the regionalisation of trade flows.

Bassiouni: We’re seeing initiatives such as the African Continental Free Trade Area (AfCFTA) which aims to ease cross-border trade, but some governments are implementing new trade regulations that are impacting export and import activities. How do you reconcile this, particularly on the African continent?

Iqbal: We’ve been closely associated with the AfCFTA for some time now – it’s a fantastic initiative and I think it’s absolutely critical. It has, however, taken time, and you have to keep in mind that this is across many countries, 50-plus countries in total, that are present in Africa.

But now, AfCFTA has started the operational phase of the journey, looking at which tariffs and barriers need to be cut. The average tariff right now is around 6% between African countries, which is very high. Afreximbank is doing a fantastic job, as are some of the multilaterals we are working with like the International Finance Corporation and FMO, which are actively supporting cross-border agri.

For example, we have a sizeable programme with IFC to support local corporates in Pakistan and are now replicating that in Africa, which helps free up capital in markets impacted by sovereign rating downgrades post Covid. Hence, if we issue a letter of credit (LC) for US$400,000 out of a market where the sovereign rating is very low, versus a country which is rated triple A or double A, the amount of capital required from a trade perspective is very high.

In order to offset that capital required, we need to bring in these multilaterals to help us get the right return thresholds in some of these markets, and they are coming together. We’ve done bilateral transactions in markets like Zambia with support from FMO, for example, despite all the challenges.

Meyer: I think it’s important to note that the UAE only has free trade agreements on the African continent with Sudan and Morocco. No Sub-Saharan African country currently enjoys free trade agreements with the UAE, although there were some talks about it in Kenya in July 2022, when there was a visit by the UAE and talks about closer relationships.

Unfortunately, at this point in time, where we are with trade into the UAE is that unprocessed goods leave the African continent, and we get flooded with Chinese processed goods. That, to me, is where the solution lies: to install policies and governance that actually promote the trade of processed goods and food between us and the Middle East.

It can only be done if we open up these corridors and put in place well-considered free trade arrangements, to ensure that Africa has unfettered access to markets in the Middle East. AfCFTA, whilst a brilliant idea, needs consensus and closer collaboration amongst governments. We continue to see African governments instituting other trade barriers that go right against what the AfCFTA is trying to accomplish.

Ezzat: Countries like Egypt and other markets in North Africa have done quite a lot in terms of signing trade agreements with their counterparts and neighbours across the rest of the African continent, and it’s reaching a point where exports from countries like Egypt and Morocco are becoming cheaper for African importers compared to other European exporters, for example.

This has definitely helped, as I said, during this period of geopolitical tension where exporters are adding new markets. As mentioned, AfCFTA is expected to have a positive impact in supporting trade flows between Africa.

Bassiouni: How are these supply chain shifts and movement on trade agreements changing the type of financing demand you’re seeing, and more broadly, are you seeing an impact on trade within this region?

Knowles: It’s estimated that there is an annual trade finance gap of around US$120bn in Africa, which has been further exacerbated by supply chain risks.

Many clients in our markets are seeking new suppliers to stabilise their supply chains and are bringing warehousing and distribution centres closer to their buyers. The traditional approach of just-in-time stock management is no longer feasible.

Importing goods requires a larger amount of working capital, leading to increased demand for both short-term and long-term financing, particularly for infrastructure investments necessary to support the construction of warehouses and distribution centres.

Addressing the size of this gap cannot be solely the responsibility of banks.

It requires the involvement of alternative providers and financiers, and the support of development finance institutions (DFIs) to navigate this complex environment, where financing needs and risks are on the rise.

Clients are increasingly seeking financing through alternative products, solutions and structures, reflecting the evolving landscape of our markets.

Panse: One trend we are seeing is a larger interest in the African market from companies in the UAE and GCC. That interest spans not just the energy sector but also multiple commodity sectors. There’s more offtake from Africa, more supply to Africa, and a lot of investments and acquisitions of assets are occurring in Africa from various UAE and GCC countries.

Couple that with what’s happening in the rest of the world, especially in Europe, where many financing institutions are exiting the commodity trade finance business. This shift provides opportunities for local lenders, whether in Africa or the Middle East, to play a dominant role in these trades.

We’ve seen significant benefits from this strategic shift to this part of the world. Clients have been making substantial investments in Africa, and we’ve been able to support them through various structures, whether on the prepayment side or through reserve-based lending. Different financing needs require different solutions.

We’re also seeing more active participation from banks like Afreximbank, which are able to structure or de-risk transactions through lending or securitisation structures. This collaborative approach helps banks support our clients across these corridors.

Iqbal: One thing we’re seeing in the commodity space is that on the geopolitical side, the Africa and Middle East regions are now coming together quite significantly. We’ve been covering Africa and the Middle East, but it was always quite siloed, and most of their trade was with Europe or Asia. I’ve never seen it like this before.

They’re trying to look at new markets as well, with investments into resources, for example. The investment that the International Resources Holding from the UAE has done into Mopani in Zambia, for example, that’s a very significant investment in copper. You would have never thought about something like that happening a couple of years ago.

Bassiouni: Will specific products take centre stage in solving some of these solutions? Do you have any ideas specifically about how banks can use letters of credit or supply chain finance, for example, to ensure trade transactions happen on the continent?

Panse: If you look at the statistics, or talk to corporates, the LC is looking more like a dying product. Year on year, the volumes are coming down and more corporates are moving towards open account business with each other. To that extent, financing needs are also changing, and banks are looking at moving towards more open account solutions right now in order to be able to provide financing solutions efficiently.

The industry is also moving towards prepayment or pre-export financing, where the banks will still do the funding but in a different structure and on a more long-term basis.

If you look at the receivables finance business, there is a bouquet of products available to clients now, depending upon whether they want to do it on a disclosed basis or undisclosed basis, whether they want to look at a single debtor or a pool of debtors, whether they want to do it in an Islamic way, or want a sustainability angle to it.

Another recent trend is corporates looking at how they can be efficient with their inventories. They’re really pulling all the levers on their balance sheets to see how they can extract better working capital in a more efficient and automated manner.

Knowles: It’s true that the use of LCs is decreasing, and open account trade is on the rise. However, the majority of high-value LCs are still being issued in Africa, mainly for commodity transactions. This suggests that LCs will remain common for the foreseeable future. Clients engaging in open account trade still face risks such as counterparty, sovereign and performance risks.

To address these challenges, new supply chain products have been developed.

There is a growing demand for industries like telecommunications, where selective receivables financing is used to mitigate sovereign and liquidity risks. Supply chain disruptions have increased interest in payables finance, with buyers seeking programmes that can improve stability and resilience in the supply chain by identifying key suppliers.

Despite the increasing demand in specific sectors, there are still challenges in terms of legal frameworks supporting receivables financing, which remains relatively limited in certain markets. Efforts are being made to address these limitations.

Digitisation is playing a critical role in making trade finance more accessible to a wider audience. We have made significant investments in digital payables and receivables capabilities, as well as in areas like documentary trade.

Bassiouni: There is a huge emphasis here on creative and innovative solutions. What specific trends around innovation are you seeing at the moment, and how can they help overcome the challenges we’ve discussed?

Ozcan: Technological advancements like blockchain, AI and machine learning hold immense potential to unlock access to finance, particularly for underserved markets. This will undoubtedly lead to a surge of innovative use cases in the near future, but technology alone is not going to be the saviour for everyone. It’s a tool to implement and improve programmes, minimise risk, increase efficiency and make life easier for everyone, but there are very significant underlying factors, especially when we talk about the trade finance gap.

That’s where a lack of transparency and information asymmetry contributes to inefficiencies in trade, increasing the inherent risk associated with supply chains. In my opinion, I do not think there will be a single technology or trend that will change the world altogether; it’s a multi-faceted approach, a combination of multiple technologies.

The key is inclusivity and collaboration. So fintechs, banks, financial institutions, technology providers and logistics players must all find common ground to collaborate to reduce the ever-widening trade finance gap.

We see this in initiatives like digitising trade documents: electronic bills of lading, digital negotiable instruments, electronic transferable records, global trade data registers and so on. In our opinion, global digitalisation and standardisation of trade documents and assets will enhance overall operational efficiency, while significantly reducing the risk of frauds.

We have recently completed a proof of concept with Emirates NBD and Enigio, where a trusted digital identity was created, verified and used to transfer electronic trade documents from one party to another. We aim to keep repeating this, making the transfer of documentation secure, efficient and genuine.

Meyer: One of the main themes related to climate change is the effect it has on agricultural production, and the impact of reduced volumes and lower-quality crops on the downstream trade and processing of these commodities. El Niño created unprecedented shifts in the historical trade flows between countries in the sub-region.

Zambia, which was a net exporter of maize since 2004, has lost almost half of this year’s maize crop due to drought and, like Zimbabwe, has declared a natural disaster as it pertains to food security. Zambia will thus be importing maize for the first time in 20 years.

Similarly, South Africa has had a 25% reduction in its white maize production and will not run an active programme of exporting maize and soya beans to the extent it had merely a year ago.

These shifts and changes in directional flow place tremendous pressure on logistics and shipping. It further changes the trade finance requirements and identities of the lenders and obligors to the extent that banks are required to reassess risks and opportunities in this space.

It is clear that climate change and the El Niño-induced droughts and heatwaves also impacted the livelihoods of literally hundreds of thousands of small-scale and subsistence farmers in the region. These farmers are largely destitute and will be dependent on food aid and grants to see them through the winter.

There’s a move towards using technology better to combat this. We are currently using remote sensing and infrared satellite imagery to support our South African primary agriculture exposure through parametric soil moisture index insurance. The move is towards expanding this as a risk mitigant on a more inclusive basis with the aim to keep those farmers on their farms. Technology is an essential tool for banks to scale their exposure to primary agriculture, which for much of the African continent is the pillar of the economy in GDP terms.

The talk about Africa being the food basket of the world is not realistic if we don’t address problems and threats associated with climate change, and if we don’t give small-scale farmers access to technology, financing and insurance to ensure sustainable and responsible consumption and production in the agri sector.

Bassiouni: To close, what advice would you give to market participants, for instance on how to expand trade operations in Africa and the Middle East?

Iqbal: If you look at this panel, we have DP World which can help solve a lot of the logistics and financing issues for SMEs. We’ve got the African banks, we’ve got the Middle Eastern banks, and banks that are cutting across both sides. This is where I think we don’t do a good job. We need to come together, because there’s so much opportunity to support more of the financing requirements and increase capacity. There’s no way that one bank can support a large commodity transaction flow across borders, but I think collectively we can.

Knowles: The partnership between the Middle East and the Asian corridor is crucial for funding Africa’s growth. The UAE serves as a key re-export hub, and we are witnessing increasing bilateral trade between the UAE and Africa. Given the geographical proximity and historical ties, trade between Africa and the Middle East holds immense potential for economic growth and development in both regions.

I fully agree that achieving this requires enhanced collaboration and investment. How can we work together to finance the critical supply chains within this corridor?

This necessitates sharing knowledge across our respective markets. In this regard, I would advise anyone venturing into these corridors or seeking growth opportunities to ensure that they engage with banks with on-the-ground experience, and have a good understanding of how to navigate the challenges of currency, regulations and other relevant aspects.

Panse: Another enabler is having better global standards or regulations around how open account solutions are monitored. If you look pragmatically at assignments, every country or jurisdiction has its own way of doing it. Some are very opaque, some very transparent.

One example is that some Middle Eastern countries don’t even recognise assignment of receivables as a legal concept. That provides challenges to the banks to then be able to offer their clients good working capital solutions.

But having said this, I think the increased adoption of the UN Model Law on Electronic Transferable Records would be a game changer in digitising trade and making financing more inclusive, and that’s something we want all parties and all countries to adopt as a global standard around what digitised trade looks like.

Ezzat: Yes, we all have to come together, including with the DFIs. We all have similarities in the challenges that we’re facing in the markets, we have clients that are changing their operating models entirely, and we need to step up our game together as banks. Our regional expertise and local expertise can offer support to our clients as they’re navigating these uncertain times.

Digitisation is also an important pillar, because as flows change and transactions become more complicated, the utilisation of digital tools does not just make it easier for our customers to do transactions. It also makes it easier for us to monitor transactions, and the more we can monitor, the more our risk teams can have a better appetite for the types of flows we can enter into.

Ozcan: We are already seeing an expansion of our operations in Africa and the Middle East, where we are actively engaging with clients and partner banks. Looking at Sub-Saharan Africa alone, we have about 27,000 employees, over six ports, 200-plus warehouses and more than 10,000 trucks in the region, so the size of the opportunity is huge. Today, Africa represents more than 17% of the population across the globe, but only 2% of the GDP. Looking at the growth, the young population and the demographics, the magnitude of this can increase significantly, and that’s what we are seeing as an opportunity across the whole continent.

We have a special focus on the trade lanes between the Middle East and the African continent, which have been further strengthened by our on-the-ground presence at both ends. Partnering with financial institutions in both regions remains the key to unlocking the trade potential.

Meyer: Partnerships are crucial for trade flows between Africa and the Middle East to function optimally. There are more than 1,600 African companies that in the last three years have established presence, either with executive management or at least a central treasury function, in the UAE. They clearly see the benefit of conducting business into Africa with the UAE as a base.

It is evident that our clients are going there, and it’s imperative for us to follow them into these jurisdictions, whilst forging partnerships between banks, export credit agencies, insurers, DFIs and technology platforms in a collaborative effort to open up trade.