African supply chains and trade finance were already fraught with instability before COVID-19. Global lockdown measures have only exacerbated the problems. We spoke with a regional expert to find out what exactly has been happening, and what treasurers need to know.
There are two main impacts of the pandemic and subsequent lockdowns on African supply chains according to George Wilson, Head of Institutional Trade at Absa.
Firstly, and perhaps most obviously, has been the physical effect of lockdowns on the practical business of moving goods and trade. “Prior to COVID, this was and continues to be very analogue and paper-based,” he explains.
Shipping documents often follow traded goods via air courier. When lockdowns were implemented, there was a significant interruption of both the physical movement of goods, as sea and airports were closed, and the accompanying documentary trade processes. “Valid claims under guarantees often require original documents to be presented alongside the claim. But we found issues arising in a number of jurisdictions across our African home region where shipping companies had ceased flights into certain countries,” he says.
The second main impact has been on trade finance in Africa, particularly the financing of supply chains. The economic fallout of the lockdowns struck three major categories, says Wilson. The most immediate was dollar liquidity. “Cross-border trade is typically denominated in US dollars, and that dollar liquidity suddenly became very expensive.”
At the same time, he notes, there was the oil crisis between Russia and Saudi Arabia. Saudi Arabia initiated a price war with Russia, facilitating a 65% quarterly fall in the price of oil. With oil-producing African countries either heavily dependent on, or their central banks heavily in control of, the payment of dollars out of the country, the double whammy of COVID and the oil crisis hit them particularly hard. “And then at the same time, South Africa was also downgraded,” adds Wilson.
Alongside this there has been an impact on credit appetite. Wilson explains that several years ago there was a substantial de-risking out of Africa by international banks and companies, due to perceived compliance risks and costs associated with doing business in Africa. Credit appetite had been curtailed because of that, and then worsened because of the pandemic. “Every credit officer in the world, responsibly, said ‘just shut down emerging market credit, we don’t understand what’s going on,” he says.
As a result, countries are regressing to their previous economic situations. For example, the environment in Nigeria is akin to that of 2016, whereby there was a real strain on the availability of FX to pay for imports. A lot of the ‘hot’ money that was put back into the country has now simply vanished. Likewise, Wilson notes that the Middle Eastern banks, which were very active in providing trade liquidity and had a lot a credit appetite in support of trade finance across Africa, pulled back, using those financial resources to look after their own corporate clients in the Middle East. “This was writ large everywhere. European banks disappeared, and even African banks and credit officers said ‘we don’t understand the credit consequences of COVID, shut it down, reduce the limits.’ We, ourselves, tried to de-risk as much as possible without hurting our clients because nobody knows what’s going to happen.”
For treasurers, the main impact comes from the reduced capacity of African banks to finance trade transactions. “Liquidity has dried up, your credit appetite either dries up or contracts considerably, and then later on corporate liquidations or loan losses and impairments for banks start to materialise and reduce available capital,” says Wilson.
Additionally, currencies are beginning to devalue – the South African rand devalued by 30% and the Zambian kwacha by a similar amount. “Our Tier One capital is denominated in rand for the South African part of the bank, so the share prices of everyone – including the banks – falls.” The capital that was available to fund trade finance is now being triaged, along with everyone else wanting capital to support local corporates.
The end result is the contraction of liquidity, credit availability and available capital. “And now there’s been a delay with goods moving, the cash conversion cycle that was running perfectly happily, is also subject to delays, so buyers and sellers are needing to extend the financing terms of those supply chains.”
When it comes to how corporate treasurers have been coping with the challenges, Wilson is yet to come across a business that says it can’t get any finance. “I’m sure there are some that fall through the cracks though,” he adds. “I tend to get requests for financing from either the importers’ banks, where the treasurers are trying to manage the cash conversion cycle and they want to leverage the buyer’s credit status, or the suppliers, whose treasurers are trying to make sure they get paid as soon as possible.”
One of the most significant things he’s seen in terms of financing has been dealing with natural disasters that have destroyed a large number of crops. Between several locust plagues, and floods that occurred in a few countries, Wilson has witnessed the agricultural industry in Africa take a particularly heavy hit. “We’ve financed a lot of cargoes going into east Africa in particular,” he notes.
As a response to market conditions, Wilson has observed the migration from open account back to documentary trade. “I don’t think it’s happening because counterparties no longer trust one another, but there are significant issues with some FX shortages,” he explains. “Where you have big oil economies like Nigeria and Angola in the middle of an oil crisis – where oil goes to zero or negative WTI [West Texas Intermediate is a global oil pricing benchmark] – and their source of dollars is fuel or crude, and you’re pushing your cargo into one of those countries you’re going to want a way to mitigate the risk that the FX isn’t available.”
And whilst he reports no major problems with this so far, he has seen increased requests to extend financing where the full cargo price could not be obtained at maturity from the central bank.
Next week in part two, we look at industry-specific impacts.