Behind Asia, Africa is the second fastest growing economic region in the world. But it’s not without its difficulties – namely the twin deficits weighing on several African currencies and the tripling of external debt since 2006. At the beginning of March, the long-term outlook for the continent was still positive, but now the COVID-19 pandemic has the potential to decimate African economies.
Intra-African trade is something that hasn’t been too common in the past. In fact, the World Trade Organisation puts exports within the region at 19% of total trade volumes. The African Continental Free Trade Area (AfCFTA) was hoping to change that, with the IMF projecting an increase of 52.3% by 2022.
However, the COVID-19 pandemic has inevitably caused a slowdown, and Esther Chibesa, Head of Treasury and Trade Solutions for Sub-Saharan Africa for Citi, has noticed in particular a decrease in demand for goods that are moving cross-border – and thinks it’s fair to say that trade in general will probably suffer. “Depending on how borders perform, the policies that are put in place to make the crossings safer and more efficient, such as conducting tests and isolating movement of customs, it’s likely that there’s going to be some kind of slowdown for several months to come,” she says.
Inter-regional cooperation is key
It’s important to note that to what extent trade will suffer is yet to be determined. Chibesa explains that a key factor in this will be how well inter-regional corporations, customs and borders cooperate to standardise regulations on cross-border trade. For example, there will need to be a high level of transparency of how prepared traders have to be to ensure that they are inspection-ready. “It will be interesting to see what new processes or regulations come out in order to ease the movement of goods and services across African borders – without the exportation of disease as well,” she adds.
Additionally, a renewed momentum is required around ensuring that the regulatory environment for electronic signatures continues to move forward with Africa’s drive for better cyber-security. The pandemic has increased the need for a digital revolution as people work remotely and wet signatures aren’t always possible. “It’s not directly related to intra-African trade, but I think if you are in Africa and are moving goods and services across borders, you do need a corporate treasury that has a certain level of digital sophistication in order to actually operate,” says Chibesa.
Cross-border trading treasuries
The delays in cross-border exports are also leading to lengthier cash conversion cycles. Chibesa notes that she has seen examples in certain sectors where receivables would usually sit at around 90 days, but are now being extended to 200, or even 300 days, due to the demand simply drying up.
Additionally, there are likely to be incremental costs of shipment, for things like costs related to inspection or compliance, which will in turn lead to margin pressure for companies that choose to engage in cross-border trade. This is only added to in Sub-Saharan Africa, where there is already a degree of volatility in local currency rates, and depreciation has already been seen.
Modelling recovery is also likely to be difficult, notes Chibesa, as treasurers are going to struggle to forecast their cash flow and working capital cycle, owing to the decrease in consumer spending due to full or partial lockdowns. “When we come out of this crisis, it’s very likely that what households demand and spend on, will change, and some industries may take quite a bit of time to recover,” she says.
One way that Chibesa has seen treasurers try to deal with the challenges to cross-border operations and mitigate the risk has been through an increased demand for financing. “We’ve observed an incremental demand and drawdown on working capital facilities, as well as a need to buffer costs in the near term,” she explains. Additionally, there has been a small increase in the use of local currency facilities.
Predicting the future
The question of what the new normal will be is something that’s been on everyone’s minds. Cross-border trade post-pandemic is difficult to predict, but Chibesa has seen some key themes emerging. “I think there’s recognition that supply chains themselves need contingencies,” she says. For example, companies with a heavy reliance on sourcing suppliers from China may start thinking about contingency supply chains so that goods can be sourced elsewhere. This will reduce the risk that concentration and dependence on one central supplier in one particular geography brings.
Secondly, Chibesa thinks visibility of the supply chain will change. “If you’re a treasurer sitting in Kenya, and you’re exporting to Rwanda, if you don’t have a lot of digitalisation of your distribution chain, it’s difficult at the best of times to tell where your sales are sitting, where your inventory is, or how demand is going.” Therefore, post-pandemic she predicts a fresh bid to give people the stability that strong inventory management, particularly outside the country of operation, brings.
Thirdly, the e-commerce market in Africa will evolve. The value of e-commerce in Africa at the moment is just a fraction of what it is in Asia or North America, but Chibesa thinks that will change. “Companies are talking about how to build e-commerce strategies for the future, so that they have the ability, over time, to move away from physical distribution of their goods and services and instead build a digital brand and a digital distribution channel,” she says.
Lastly, Chibesa predicts that the interest in mobile wallets, such as M-PESA, will grow. Treasurers across Africa are exploring how they can re-design payment and collection flows to include these alternative forms of payment. She believes this will be expanded to include cross-border payments as well.
The increase in mobile wallets during the pandemic works to reduce the amount of cash in circulation for hygiene reasons. But, says Chibesa, as volumes on these channels pick up, regulators will find themselves in full support of not only keeping the instruments readily available, but giving them higher value limits. “It enables not only safer and more hygienic transactions, but it also brings better information, better transparency, and it’s often cheaper to move money using digital channels than having to move, process and store hard cash,” she concludes.
