Making the case for Europe-Africa trade

August 2020 | SPOTLIGHT | GLOBAL TRADE

Financier Worldwide Magazine

August 2020 Issue

The European Union (EU) is Africa’s largest trade partner – constituting 31 percent of the continent’s exports and 29 percent of its imports. Logically therefore, the trading relationship between these two regions – that had been showing signs of great potential pre-coronavirus (COVID-19) pandemic – should play a crucial part in the regions’ economic recovery.

However, the crisis has damaged confidence in global trade and supply chains. And with a changed risk landscape and a steep climb toward economic recovery ahead, it remains to be seen if the virus will have a negative longer-term impact on the Europe-Africa trade corridor. It would be short-sighted to let Europe-Africa collaboration fall behind.

Over the past few months, the world has witnessed a dramatic decline in global trade – by around 27 percent during the second quarter of 2020. The fast-developing trade corridor between Europe and Africa has been no exception, showing a dramatic slowdown in the flow of goods and services between the regions as a result of the COVID-19 outbreak. As we come through the worst of the crisis, and gradually approach the recovery stage, the future relationship between the two regions remains shrouded in uncertainty, however.

The European Commission has forecast that EU27 trade will decline by up to 16 percent overall in 2020. And after the economic and social consequences of the pandemic, it remains to be seen whether European trade partners will still see Africa as the land of opportunity they had before or whether the new risk landscape may prove less hospitable.

For all the challenges, however, there is some reason for optimism. Indeed, African countries have, to date, performed admirably in managing the social effects of the virus. Certainly, past experience of dealing with pandemics meant governments had the foresight to intervene early and contain the spread of the virus. The coordinated introduction of travel restrictions and localised lockdowns proved effective in preventing the already pressured health infrastructure on the continent from becoming overwhelmed.

Focus begins to shift to economic consequences

Testament to Africa’s well-managed response to the COVID-19 outbreak is how soon the gaze has turned to addressing the economic ramifications of the crisis. Certainly, in this regard, the impacts have already been sizeable. With the slowdown in trade, export-heavy economies suffered large economic contractions, even from the early stages of the outbreak. Instability in the global commodity market in recent months has not helped either.

With many of the region’s economies, such as Algeria, Libya and Nigeria, reliant on the export of oil, the slump in oil prices – which reached negative figures in mid-April – piled additional pressure onto African economies. Nigeria’s exports plummeted by 40 percent in April, for instance. Indeed, so far during the crisis, the automotive and energy industries – both of which many African countries have a large market share – have taken the largest hit across all sectors, with trade dropping by 41 percent and 44 percent respectively from the first quarter of 2020 into April.

This, of course, has occasioned a knock-on effect on available foreign exchange reserves, which were already in scarce supply for many countries in Africa. With some 41 currencies serving the region – many being illiquid or rarely-traded – inconvertibility of local tender has long stood in the way of trade growth in the region, particularly as the majority of cross-border trade, both intra- and extra-regionally, relies on hard currencies to complete.

During the crisis, the import of essential goods, such as food and medical supplies, became a national imperative and put further pressure on already scarce reserves, leading to some African countries denying liquidity on trades of ‘non-essential’ goods. In developing countries – and especially in many export-heavy African economies – declines in exports are usually driven by a drop in global demand, whereas declines in imports instead signal growing levels of economic stress, including exchange rate movements, debt concerns and shortages of foreign currencies.

These shifts in trading habits dramatically altered trade flows in the Europe-Africa trade corridor, but for those that remained committed to doing business with Africa, logistical challenges to business continuity also stood in the way. New risks were introduced with the need to implement a largescale and rapid migration to remote working arrangements and, in the case of trade finance, adopt digital alternatives in an industry that had long been reliant on paper-based processes. Many African financial institutions defied expectations in this regard, acting fast to implement contingency plans that also helped to keep trade – particularly of commodities – moving as much as possible.

Increased risk of defaults on letters of credit were flagged as a potential consequence of the pandemic-induced disruption, particularly at the start of the crisis. Thankfully, concerns around this have yet proved unfounded. Payments, in some instances, have been delayed, but industry practitioners are all too aware of the longer-term risks attached to defaulting. The market has a long memory and could withhold financing from offending companies a long way into the future.

Trade remains key to recovery

In addition to practical challenges, the crisis has raised concerns about a shift in perception around global trade relations, with some countries resorting to protectionist policies with the aim of safeguarding national interests. This has been particularly noticeable in the movement of pharmaceutical and medical hygiene products throughout the crisis, which left some African countries cut off, according to the head of the African Centres for Disease Control and Prevention.

But to rail against globalisation would be unwise. Trade will be key to global economic recovery, and nowhere more so than between Europe and Africa, a trade corridor that had, pre-pandemic, been showing great signs of growth. In fact, in March this year, the EU published its ‘Comprehensive Strategy with Africa’, a progressive roadmap outlining future collaboration in a range of areas, including trade, digitalisation and sustainability. The EU-African Union (AU) Summit is also still scheduled to take place in October and the future partnership remains the planned focus. Making good on these pledges would reap substantial benefits for both regions in the long run and create new opportunities to recover growth lost during the crisis.

What is more, given the largescale overhaul of the global trading system and rerouting of trade and supply chains that have already taken place, the aftermath of the crisis presents an opportunity to reassess and reset corporate strategies. With a spotlight on the dangers of overdependence on Chinese manufacturing capabilities, European corporates may well look to diversify their exposures by remapping supply chains to providers closer to home. African countries, many of which are already developing their capabilities rapidly in the area of manufacturing, could stand to benefit from this shift.

Of course, all of this will require ever-increasing pools of liquidity on the continent – something that can only be achieved with the help of specialist providers. The trade finance gap in Africa was already estimated by the International Chamber of Commerce (ICC) to be worth between $110bn and $120bn, and an unwelcome consequence of any global crisis is usually that such financing deficits worsen.

A real concern is that financial support for trade with Africa may contract further as international lenders look to safeguard their interests in the face of longer-term macroeconomic uncertainty. While trade flows currently remain somewhat stalled – and thus demand for trade finance in African markets has temporarily dipped – this will not be the case for long. Specialist financiers, that are committed to facilitating trade flows with the region, and can navigate the risks involved, will be absolutely necessary to ensure that economic recovery is kickstarted.

The effects of the pandemic have been grave, but they could be short-lived if efforts are made to facilitate cross-border trade toward pre-crisis levels. Certainly, the crisis has underscored the need to build greater resilience into the global economy, but it would be a mistake to think this could be achieved via self-sufficiency. Maintaining connections between Europe and Africa will be vital to economic recovery, and specialist banking partners that remain committed to Africa are on hand to help navigate the process.

Jeff Fallon is head of client coverage at British Arab Commercial Bank (BACB). He can be contacted on +44 (0)20 7648 7777 or by email: jeff.fallon@bacb.co.uk.

Jeff Fallon

British Arab Commercial Bank (BACB)