When lockdowns were imposed across Africa, some of the measures were much harsher than seen elsewhere in the world. Based in South Africa, George Wilson, Head of Institutional Trade at Absa has been experiencing them first-hand.
It was in part one that the agricultural industry was already hard-hit by the various locust plagues and flooding that occurred in several East African countries. Wilson notes that these events haven’t just had an economic impact: restricted food supplies have had a devastating social impact as well. “Zimbabwe is in a very difficult situation at the moment. It’s on the verge of famine and has been for a while,” he explains.
Whilst in many parts of the world, retailers that have managed to make the switch to online have prospered fairly well (consumer spending on Amazon between May and July was up 60% from the same time frame last year according to financial data firm Facteus), retailers in Africa have had no such improvements.
In fact, Wilson explains that in South Africa, people weren’t allowed to buy non-essentials. “You could buy a monitor online, but you couldn’t buy a TV or a kettle,” he says. Forcefully removing the demand for certain products will inevitably have an impact on the suppliers. “If you’re on the wrong side of it, then you’re not selling anything. If you’re on the right side, then you could be selling a lot – but there’s also a lot less disposable income and large swathes of Africans don’t have access to online shopping.”
Wilson notes that depictions of Africa in certain media are always far worse than the reality – “there aren’t just elephants walking in the streets” – but there are many people living impoverished lives, which has only been made worse, through lockdown, by the removal of their income. “In South Africa, there was a 500bn rand support grant pushed in by the government. A lot of that went into benefit payments, just to keep people alive,” he says. The fact that some consumers could still buy some items online is marginal from a retail perspective.
Likewise, the hospitality industry has suffered considerably. Wilson explains that hundreds of restaurants in South Africa alone have been forced to close – even after lockdowns began easing, as alcohol (and cigarette) bans remain in place.
Development finance agreement
Given the extreme economic volatility across Africa, it goes without saying that companies and countries won’t be able to pull themselves up without some additional help. Pre-COVID, at the end of 2018, Absa began negotiations for a developmental trade finance programme with the UK government-owned development finance institution (DFI), CDC Group.
“CDC isn’t going to share in some random African corporate risk,” explains Wilson. “It wants to deploy responsibly.” With over 40,000 “boots on the ground” across Africa, CDC looked to Absa to originate trade flows and trade assets.
“One of the issues that we particularly have in African trade finance is that it’s nearly always denominated in dollars, because international trade is denominated in dollars. African buyers and African banks don’t have a natural source of US dollars, and they also tend to be quite expensive,” he explains.
CDC “came to the party with a new team of very transaction-oriented people, who were practically moving things along,” says Wilson. Because of this, Absa signed a trade loan agreement at the end of 2019, and drew down US$100m of it in March 2020 – right before lockdowns were implemented. Since then, a further US$50m has been agreed as part of the COVID-19 response, using the same loan template. “So now we have US$150m of liquidity specifically aimed at trade finance, to help with the US dollar liquidity constraint.”
Fund and support
Alongside the trade finance deal, Absa also signed a risk participation agreement with CDC for US$75m at the end of 2019. “We’ve begun to utilise that very heavily over the last few months. It’s increased the credit capacity for both funded and unfunded participation, which has in turn improved the liquidity delivered into trade finance across the continent,” explains Wilson.
This risk sharing agreement at least doubles Absa’s capacity, and where it’s funded participation it also doubles the USD liquidity availability to fund the transactions. Recently, the bank was also able to increase the risk participation agreement by another US$75m, bringing the total to US$150m for the risk participation and US$150m for the trade finance.
Change will take time
The economic fallout of COVID-19 will produce a good deal of trade hysteresis or lag, says Wilson, noting that “some of the problems, like liquidity, are going to hang around”. He explains that the cost of funds has doubled since the beginning of the pandemic, and he doesn’t believe it’ll be lowering any time soon – especially considering the high level of uncertainty surrounding the pandemic.
“Corporate treasurers are going to need to come to terms with the fact that doing business in Africa in particular, especially in terms of supply chain management financing is going to be more expensive,” he says. The hysteresis will continue into physical supply chains as well, as liquidations and unemployment reduction in demand by African consumers and economies may also linger. “With the US/China trade war, it’s possible that rather than the US sourcing from China, it might look to Africa – and vice versa,” he explains. There was previous evidence of this in the production of soybeans in 2018. China began buying East Africa’s soybean supplies after Beijing imposed 25% duty on soybean imports from the US in retaliation to US tariffs on Chinese goods.
“So there will be some physical hysteresis, but mostly I think it’s going to be a financing issue,” says Wilson. “The credit spread has widened, liquidity costs have increased, and as companies negotiate new supply chains, and financing of those supply chains, it’s going to be more expensive and they may need longer tenors – and that’s going to be more expensive as well.”
The future is digital
If there’s one good thing to come from the pandemic, Wilson, like many, believes it will be the embracing of trade digitalisation. “The International Chamber of Commerce (ICC) is really trying to move digital trade along. The banks side is moving in the right direction, the customs and trade administration side, less so” he says. But currently he feels there’s very little synchronisation between jurisdictions and moving into that digital space is “a bit like herding cats”.
Whilst agreements like the African Continental Free Trade Agreement are a step in the right direction, Wilson predicts that the practical effects probably won’t be felt for a while. “The acceleration towards trade digitalisation is as true in Africa as it is in the rest of the world but probably it’s less advanced in Africa just because of where it is in the grand scheme of things,” he opines.
However, Wilson is hopeful that the various African governments have been given the impetus to realise that these changes need to happen. Without it, the US$110bn trade finance gap in Africa, identified in the 2016 ICC Trade Survey will only grow. But Wilson believes that African banks practical ability to address this gap, particularly with the help of the DFIs, isn’t so much a financing problem, but a data problem. “This is more my assertion than the ICC Survey’s – the gap was described, sized and associated with African SMEs in the 2016 Survey – I believe fixing it with DFI support requires fixing the data problem with digitalising trade finance.”