After a better-than-expected bounce back from the COVID-19 pandemic, Africa’s economies are now being put to the test once more amid trade disruption, food and fuel price spikes and macroeconomic instability caused by Russia’s war in Ukraine.
In 2021, the region – which prior to the pandemic was the world’s second fastest-growing –exceeded GDP growth expectations of 3.7%, posting an expansion of 4.5%. This, said United Nations Assistant Secretary-General Ahunna Eziakonwa in a recent keynote at the US Institute of Peace, was largely a result of effective strategies towards greater resilience. “While multilateralism appeared to be shrinking in the rest of the world, it was expanding in Africa,” she said.
Today, as the continent faces another crisis that threatens to reverse its hard-won gains, Africa has an opportunity to build on the experience of the past two years to pull together once again.
“Africa’s current trade challenges can be neatly boiled down to the three Cs: commodities, COVID-19, and containers,” says Motasim Iqbal, Head of Transaction Banking Sales, Africa and Middle East. “In commodities, we’re talking essentially about food and fuel, the rising costs of which are having a very significant impact on import bills as well as leading to issues in terms of foreign exchange availability in some markets. Meanwhile, COVID-19, particularly the resurgence of lockdowns in China, continues to have an impact, especially because Africa is very dependent on China. This then brings us to containers, because the cost of shipping, although it has levelled out somewhat, is still punitive to companies’ bottom line.”
In spite of these challenges, corporates are striving for growth. “In our Future of Trade 2030 report, we asked corporates in Africa what their priorities were, and building resilience in the face of these issues was at the top of the list,” says Iqbal. “Almost six in 10 said their main concern was de-risking their supply chain and realigning their footprint to protect against disruptions, while half said they wanted to capture value from bilateral, regional and trade bloc agreements – such as the African Continental Free Trade Area (AfCFTA).”
But in order for them to capture that value, they need the supporting infrastructure. According to a recent report1 by consultancy firm McKinsey, inadequate transport links add as much as 40% to the costs of goods traded among African countries, holding back cross-border business.
“In some of the key port cities in Africa, we are seeing long waiting times for goods to be released,” says Iqbal. “This eats into corporates’ working capital to the extent that some of our clients have asked us for financing specifically for the period of time between the vessel coming in and the unloading of the goods.”
However, a recent upswing in infrastructure spending, from the newly completed Nairobi Moja Expressway to work on Tanzania’s Standard Gauge Railway project, is improving connectivity, laying the groundwork for the AfCFTA to achieve its full potential – as well as building the foundations for a more sustainable future.
“All of the infrastructure development that is going on has a huge social upliftment, as well as a positive environmental impact,” says Roshel Mahabeer, Head of Clean Tech Industry and Sustainable Finance for Trade and Working Capital. “It’s creating jobs. It allows businesses to operate more efficiently. There’s a massive positive social impact coming out of the way that the infrastructure gap is being addressed in Africa.”
What’s more, alongside the large infrastructure investment, new opportunities are emerging to bolster the health and resilience of supply chains and enable trade to flourish, explains Iqbal.
“There is a lot of demand to see if we can replicate in Africa some of the large value structured trade deals that we’re used to doing in the Middle East, to support infrastructure growth,” he says. “While there are lots of transactions in infrastructure, we’re also doing a lot of work supporting large fast-moving consumer goods companies, helping them to meet their broader working capital requirements as well as co-ordinate with multiple banks. We are also working with a growing number of home-grown corporates that have expanded across the continent as they are increasingly asking us for more support in terms of structured financing solutions.”
Another trend that is contributing to greater resilience is the growth of supply chain finance, which is increasingly serving as a conduit for greater economic participation. “We’ve had a lot of success with the payables model where many suppliers are linked to a key client of ours,” says Iqbal. “Within that dynamic, we’re providing the financing from day zero, whereas our anchor is paying us on day 60, or day 90 as per the payment terms. We really encourage this, because it’s helping to lift participation and enable SMEs to get access to finance. We have carried out some very interesting transactions with this model across different markets, supporting SME suppliers, and this will be a big focus for us as we go forward.”
Meanwhile, with African countries especially hard hit by wheat and fertiliser shortages as a result of the war in Ukraine, bolstering capacity in the domestic agricultural sector has become a priority. In order to meet growing needs in this space, Standard Chartered has started to bring in multiple investors to boost the availability of capital. “In the past, we would typically go to a client and offer credit capacity on the basis of their financials or their business model,” says Iqbal. “Now, particularly in the food and agriculture space, we are reaching out to multilaterals and other institutions who can come in and participate in the risk, which enables us to increase the amount of capacity available to a client.”
An opportunity space for sustainable finance
Last year, Standard Chartered launched its Sustainable Trade Finance proposition, embedding the Loan Market Association’s (LMA) green and sustainability-linked loan principles into its offering.
The solutions can be used to finance underlying goods that are farmed, processed or produced aligning to the best sustainability standards, to support trade with incentives for suppliers who improve ESG metrics, or to finance trade in sustainable industries, such as renewable energy, and transition activities that support emissions reduction.
“When we designed the green and sustainable trade finance document, we did so thinking about all of our home markets,” says Mahabeer. “An important point to bear in mind is that many countries in Africa have made key commitments around net-zero strategies, for example, and it’s our job as financiers to help them on this journey. What Standard Chartered did was to contextualise all of the good work the bank had been doing in driving the sustainability agenda, which also allowed investors to access markets where investment is needed, but it wasn’t being directed.”
In Africa, where the trade finance gap is estimated at an annual USD 91bn, this is key.
“Trade remains a key driver of Africa’s social and economic development, and the African continent represents a significant sustainable finance opportunity space,” says Mahabeer. “The harder you look, the more you’ll see complete alignment in terms of environmental and social standards, as well as willingness from both government and the private sector to meet broader international standards. In commodities and agriculture, for example, by virtue of a lot of trade in Africa going to Europe, many of our African clients have already adopted industry best practice standards in how they produce, and they’re aligning themselves with the export market.”
“This is helping to attract more liquidity into the market,” adds Iqbal, “to the extent that when we go to investors to create more capacity, they are a lot more interested if we present a solution to them that already has a sustainable lens to it.”
Trade remains a key driver of Africa’s social and economic development, and the African continent represents a significant sustainable finance opportunity space.
A sustainable future for African trade
According to Standard Chartered’s research, global trade is predicted to increase by 70% to almost USD 30tn by the end of this decade, with Africa expected to play an important role. Of the 13 markets that the Future of Trade 2030 report finds will drive much of the world’s trade growth, three are in Africa: Kenya and Ghana are expected to pivot and enhance their roles in the world’s supply chains, while Nigeria is tipped as a “hypergrowth” market that is rapidly progressing towards becoming a major global trade partner.
As business environment improvements, enhanced regional co-operation and infrastructure investments continue to boost these markets’ trade prospects, opportunities to reinforce sustainable practices across the continent are emerging, cementing Africa’s place at the centre of efforts to make trade more equitable and responsible for all.
This article was also published in Global Trade Review.
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