Don’t put the brake on Europe-Africa trade relations
Jeff Fallon, head of client coverage at British Arab Commercial Bank (BACB), explains why keeping Europe-Africa trade relations on course could reap considerable reward for both regions as they emerge from the Covid-19 crisis.
Before the Covid-19 outbreak, Europe-Africa trade corridor had been showing promising signs of growth. Last year, the EU27 was Africa’s largest market – representing 31% of Africa’s exports and 29% of its imports. In March 2020, the European Union (EU) released its “Comprehensive Strategy with Africa” paper, which provides a roadmap for the future relationship between the EU and African Union (AU) in areas including green growth, digitalisation and trade. The paper’s publication then began a seven-month review process which was due to conclude with an agreement at an EU-AU Summit in October 2020.
Yet fast forward only a few months and both blocs are operating in a remarkably different trade landscape. European exporters with established trade routes into Africa are, of course, operating in uncertain times – not least because very little definitive data has yet to emerge around the true economic impact the virus has had in their target markets. And, with an EU-AU Summit still due to take place in the coming months, the impetus for deeper integration hangs in the balance.
While spurring the recovery in inter-regional trade volumes may carry short-term challenges, the task ahead should not be too hastily overplayed; nor should barriers to further integration be created unnecessarily. In our view, where risks are properly managed, the Europe-Africa trade corridor could bear significant fruit for both regions’ post-pandemic recovery.
African countries have already made a promising start on the road to recovery – by responding remarkably well to the social impacts of the virus in the first instance. Quick and prudent decision-making by governments has helped to curb Covid-19’s spread to a greater extent than more developed regions (with more robust healthcare systems). That said, managing the pandemic’s economic impacts upon the continent is proving much harder and remains unpredictable – particularly as much is reliant on the trading status of other worse-affected nations.
Trade practitioners well-versed in the Africa’s sensitivities are closely monitoring the economic ramifications. Of course, many of the region’s economies are highly dependent on extra-regional trade, and the slowdown in global trade – by around 27% in the second quarter of 2020 – has caused negative economic effects.
The outcome was particularly troubling for the energy and automotive sectors – two key market segments on the continent – as trade fell by 44% and 41% respectively from the first quarter of 2020 into April. This was further augmented by the slump in oil prices in mid-April to below zero. Many oil-exporting economies in the region – such as Algeria, Libya and Nigeria – suffered dramatic reductions in export-driven revenues, as a result. Nigeria’s exports plummeted by 40% in April, for instance.
Of course, with economies pressured by reduced revenues and commerce running at lower levels, underlying systemic challenges that face the continent have been exacerbated. Shortages in foreign exchange reserves – which are relied upon to enable monetary policy, support currency positions and international trade – became acute, with many countries restricting the availability of reserves to cover only the import of essential goods such as energy, food and medical supplies.
For developing countries, falling imports generally signal growing levels of economic stress, which in turn spurs exchange-rate fluctuations, debt concerns and further shortages in foreign reserves. With 41 currencies serving the region – many of which are illiquid or rarely-traded in the global markets – hard currencies are regularly relied upon to facilitate cross-border trade, so scarce supply has understandably become an oft-cited barrier for Europe-Africa trade.
And beyond the slowdown in trade itself, there has been enormous strain on importer and exporter’s business continuity due to the changed working environment. Rapid migration to remote working arrangements where possible, and skeleton staff set-ups, were a necessity to keep trade moving as much as possible. Many trading companies understandably held concerns around how adaptable African entities would prove under such conditions, particularly given the tight timeframes.
Reasons for optimism
Despite these strains, the case for Europe-Africa trade still carries many positives through the crisis. European counterparts can be encouraged how rapidly and effectively African financial institutions adapted to the changed working environment; the continued flow of commodities (albeit at dramatically lower volumes) was a clear testament to this. Unlike many other regions, some African countries are also still maintaining positive growth projections for 2020 of between 1.2% and 2.5% depending on duration and severity of the crisis.
Pre-pandemic, there had already been signs of closer integration with European partners, which we hope will continue. France holds close ties with many West African governments and has launched an investment drive focusing on Francophone markets on the continent. And at the UK-Africa Investment Summit back in January, UK Prime Minister, Boris Johnson, voiced desire for the UK to become “Africa’s partner of choice”.
Yet in the post-Covid environment, there may be additional drivers towards greater Europe-Africa integration. For instance, global overdependence on Chinese suppliers was thrown into sharp relief during the crisis, and we expect European manufacturers to begin reassessing their shoring strategies.
A key post-pandemic focus across the board will be on building economic resilience, and diversification of supply chain exposures forms an integral part of this. With a host of natural incentives pointing towards greater Europe-Africa collaboration – as nearest continental neighbours, we expect to see some companies on either side of the Mediterranean Sea remapping their supply chains to take advantage of the shorter distances and closer timeframes.
And, lastly, the perceived risks of trading with Africa may be comparatively greater than the reality. Despite many concerns around swathes of defaults on letters of credit on African trade, none (at least in our experience) have materialised through the crisis. Perceptions of risk have long done African countries a disservice in the global trading ecosystem. Indeed, data provided by the ICC’s 10th Annual Trade Register shows that, weighted by obligor, defaults on LCs on African trade had fallen from 0.59% to 0.05% for export LCs and 0.48% to 0.14% for import LCs between 2016 and 2017.
Knowledge is king
Of course, emerging from any crisis, the risk landscape will be shrouded in uncertainty – but in our view, this consequence is far from unique to Africa. Not to mention, cross-border trade will be essential to economic recovery and the continent holds vast opportunity, in this respect.
A risk-management-led approach when engaging in new markets is always prudent, but now so more than ever. Although the new environment presents new challenges, the answer remains the same: old-fashioned relationship management and local presence. Reliable and expert banking partners with specialist expertise in African markets will be key to ensuring that Europe-Africa trade does not fall by the wayside as economies mount their recovery from the Coronavirus pandemic.