Despite growing interest for Africa, Middle East trade flows are still largely focused on Asia. Melodie Michel reports.
Perfectly located between Africa and Asia, Middle East businesses are heavily influenced by developments in both continents. And with the growing economic importance of emerging countries in the two regions, the Gulf Co-operation Council (GCC) is rebalancing its trade flows to accommodate shifting demand. But despite the expected boom in African growth, infrastructure challenges on the Sub-Saharan continent mean that Asia is still the favourite destination for GCC exports.
Evolving Asian relationships
The proportion of GCC trade going to Asia never stops growing. From 10% in 1980, it reached 36% by 2009, and according to the World Trade Organisation (WTO), 53% of Middle East products went to Asia in 2011. An Economist Intelligence Unit (EIU) report on GCC trade and investment flows published in 2011 predicted that, if this level of trade growth continues, Asia will be the GCC’s biggest trading partner by 2017, accounting for a greater volume of trade than the OECD.
While OECD demand for oil is slowing down, consumption in Asia is expected to grow by an average of 4.4% a year over the next five years, making it a prominent export destination for GCC countries. But the rising middle class in Asian economies, particularly China, also represents opportunities for other types of exports from the region.
Speaking at Exporta’s Middle East trade and export finance conference in Dubai, BNP Paribas head of global transaction services, Middle East and southern Africa Frank Weilack said: “For Asia, the shift in commodity trade flows is there, especially for oil and gas. Demand is growing and will continue to grow, especially in China.”
In fact, GCC companies are now looking into developing their renminbi (Rmb) offering in order to cater for their increasingly influential Chinese counterparts. As China gradually liberalises its currency with measures like free Rmb movements between the mainland and Hong Kong, research reveals that 80% of companies in China are looking to change their trade currency to the Rmb. As a result, even if Rmb trade volumes with the region remain low for the time being, GCC firms have no choice but to offer Rmb services if they want to ensure the sustainability of their trade with China.
Sudhakar Tomar, managing director of Dubai-based commodities firm Hakan Agro says: “We have looked into Rmb transactions and talked to Chinese banks, which are very keen to help.”
On the other hand, when Asian corporates look for GCC funding, Islamic finance is gaining momentum, and GCC firms and banks are forming new partnership with Muslim countries in Asia. JP Morgan’s executive director, Islamic product, Middle East and North Africa, Gohar Bilal, says: “There is a huge Islamic finance market in Malaysia, especially because our customers are large corporates with activity in Asia.”
Malaysia is considered by many as the world’s major sukuk market, issuing over 60% of these Islamic bonds, and as such will undoubtedly become a major platform for GCC banks and companies to tap into the overall Asian growth.
Al Hilal Bank has also noticed strong appetite in Asia for Islamic finance products, particularly in Sri Lanka. Head of trade services K. Nizardeen points out: “Sri Lanka, with its 15% Islamic population, has a popular Islamic banking system because its corporates deal a lot with the Middle East and North Africa region.”
No matter where they are in the world, exporters can no longer afford to ignore Africa, and Middle East corporates are no exception. As a major oil exporting region, the GCC is hoping to get a share of the growing commodity demand prompted by the continent’s industrialisation. Admittedly, trade with Africa accounted for only 3.6% of the GCC’s total trade in 2009, but it has increased at an average of 11% a year since 1980 – more than double the rate of growth in trade between the GCC and the OECD. This suggests that Africa’s share of total GCC exports and imports is likely to keep rising strongly.
But exporters who choose to sell on the African continent face a number of infrastructure challenges, whether physical or financial. Some GCC companies have experienced situations where their African customers did not know how to transfer money to them because of the poor trade finance offering in local banks. However, this is bound to change, as African banks are being pushed to fill the commodity financing gap left by European banks, therefore perfecting their products and services.
Standard Bank global head of structured trade and commodity finance Craig Polkinghorne says: “The scale of trade finance opportunity is substantial when considering that Africa’s exports alone grew to US$500bn in 2012 from US$445bn in 2011.
“It is something of a phenomenon that the general tightening of global credit continues to curtail availability of commodity trade finance from the traditionally dominant players, even as African countries ramp up trade relations with the fastest-growing economies.”
He explains that the resulting funding gap has opened up opportunities for African players.
“This has created great opportunities for African banks to be more active in trade finance because they have strong balance sheets, the necessary capital and liquidity, and risk appetite. For domestic currency transactions they also have competitive funding costs compared to global counterparts,” he says.
For Paul Blair, general manager, finance and control at Sony in Dubai, the success of GCC trade with Africa lies in educating the continent’s banks and companies on trade finance practices. He says: “Africa is a very important market for us. North Africa is very risky at the moment; there are good underlying opportunities but in the short term we’re not expecting to see any of that. The rest of Africa is very strong: Ghana, Uganda, Kenya and Nigeria have very strong potential.
“There is some difficulty accessing those markets directly so you have to work through channel partners; educating them is a challenge to get that growth.”
But the real African opportunity for GCC corporates is on the import side. The Middle East in general is not a big producer of agricultural commodities, and as such, it makes sense for companies to develop partnerships with the continent, which is expected to join Brazil in the lead for world food production in the next decade.
“Africa’s abundance of arable land presents an opportunity for the GCC to implement food security strategies through the acquisition of land for export-oriented farming. However, GCC investors need to be aware of legal and political risk in this area,” says the EIU report.
Africa also presents a cultural advantage for GCC companies and banks with its large Muslim population, particularly in the north, which makes it likely to seek shariah-compliant financing. Just as partnerships have grown between the GCC and Malaysia or Sri Lanka, the same could happen in Africa with Morocco, Sudan, Tanzania or Nigeria, but only when infrastructural issues are resolved.
Whichever way they look, GCC corporates see opportunities, whether in ever-growing Asia or in emerging Africa. The region’s exports are already benefiting from the Asian boom, and are set to take advantage of increasing African demand, but the GCC also serves a purpose as an intermediary between the two continents. Growth in seaborne trade between China
and Africa is having a positive impact on the UAE ports, as the world’s third largest economy and the emerging African continent rely on the country’s trading gateway status. As both economies keep growing, the GCC’s role as a re-exporter is bound to become even more crucial.