Africa-Asia Trade Finance Gap: Time to take stock
By Kelvin Tan, Secretary General, Africa Southeast Asia Chamber of Commerce and Chief Investment Officer of GTR Ventures
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In conversations about Africa-Asia trade relations, I always hear the same words: infrastructure, China, investment, gap. Yes, African countries present tremendous infrastructure investment opportunities. Yes, China has been pouring billions of dollars into the continent. Yes, Africans are keen to do more with Singapore and the rest of Southeast Asia. Yet, Africa still lacks the industrial base to move up the supply chain from exporter of natural resources to processed goods. This is not the whole story. In order for Africa-Asia trade to evolve, we need to acknowledge and address the lack of appropriate financing in this corridor.
Asia, not just China, opening up
Asia is Africa’s number one trade partner: the region provides the largest percentage of African imports and receives the second-largest percentage of African exports. In fact, Asia has been catching up on Europe as the top destination for African goods, scooping almost 40% of the continent’s exports in 2016.
One can’t deny the impact China has had on the African continent in recent years: the country is well on track to deliver the US$60bn of investment it promised at the first Forum on China-Africa Cooperation in 2000. Chinese FDI has been focused on areas such as industrialisation and infrastructure, and Chinese imports of African goods (mainly natural resources) have grown significantly since 2000. But trade between the two peaked in 2014 and since then, China’s decision to rely more on its own natural resources has caused a shift in the balance: after almost a decade of trade surplus, Africa exported only half the value of what it imported from China in 2016.
Overall, the share of imports from Asia has grown in recent years, from 34.9% in 2014 to 45.9% in 2016, dominated by machinery, electricals and electronics, which account for over 25% of the continent’s imports from Asia. But African countries have been deepening their trade relationships in a much more balanced way with the rest of Asia, particularly India and Indonesia. Exports to Indonesia increased 147% between 2006 and 2016, while imports grew 107%. For India, these numbers went up 186% and 181% respectively over the same period.
Southeast Asia presents an incredible opportunity for Africa, especially in terms of plugging into global value chains. Indonesia, but also Malaysia, Singapore and Thailand, are increasing their presence on the continent. Within the region, the main destinations for African products are Indonesia and Thailand. For example, high grade cocoa from Ghana and Cote d’Ivoire are sent to processing plants in Malaysia and Indonesia, to be transformed into cocoa products meant for Asian markets. Meanwhile, the biggest African exporters to Southeast Asia are South Africa, Nigeria, Algeria and Angola, which tells us that exports are dominated by minerals and oil & gas.
On the other hand, exports to African economies from Southeast Asia mainly consist of intermediate goods, vehicles and machinery and their parts. These are crucial to Africa’s industrialisation and move away from an over-reliance on natural resources exports - a process that has been taking much longer than it should due to the lack of availability of trade finance between the two regions. As long as exporters of intermediary goods from Asia don't give African importers more buyers' credit, Africa’s move towards a manufacturing economy will remain slow.
Risk and flexibility
While recent conferences such as the Africa Singapore Business Forum, the Indonesia Africa Forum in Bali in April 2018, or various Africa Development Bank (AfDB) meetings in South Korea and Japan are useful for fostering trade, they don’t have a direct impact on increasing the bankability of Africa-Asia trade.
The current reality I regretfully observe in the market is that financial institutions from Asia, or those based in Asia, are reluctant to take on African risk. There is a crucial lack of understanding, trust, infrastructure, and systems to handle African risk in Asia-based banks, due to a number of factors.
Historically, Asian banks have not had a presence on, or a direct trade finance channel with, the African continent. Most transactions between Asia and Africa are relayed to a Dubai or London branch, which has impeded Asian risk officers’ understanding of African risk, and therefore their appetite. Aside from Chinese institutions, only a couple of Asian banks have opened representative offices on the continent - though this is set to change, with Japanese banks in particular keen to increase their presence.
Additionally, most Asian banks don’t have an Africa desk for internal reporting, which means that despite the significant margins they could achieve, bank staff lack incentives to originate, lead, and underwrite transactions between their Asian clients and their African counterparts. In order for Africa-Asia trade to blossom, financiers must have the in-house infrastructure, pricing, and risk management systems to do such trade deals.
On the African side, some banks have made encouraging inroads into Asia. In China, Afriland and Ecobank have representative offices in Beijing; while Morocco’s BMCE Bank of Africa is expected to open its branch in Shanghai this year. South Africa’s Standard Bank is in Singapore and Hong Kong. The majority of African banks however, are not equipped for cross-border trade deals with Asia. Most lack the tools to assess risk on these transactions, and simply put, do not have sufficient balance sheets to support trade with Asia. Banks and insurers in Asia, with stronger balance sheets, must take the lead.
Finally, for financiers from both regions, the Africa-Asia trade corridor suffers from two other systemic issues: one, persistent information gaps, particularly amongst SMEs, which makes underwriting challenging and costly; two, the high costs of currency hedging and swaps in trade transactions, arising from domestic African currencies which are either illiquid and/or subject to strict capital controls.
Finding durable solutions
With the exception of current negotiations between India and the South African Customs Union on a preferential trade agreement, there are currently no free trade agreements between Asian and African countries.
The recent signing of the African Continental Free Trade Agreement (AfCFTA) by 44 African nations could pave the way towards such a pact between the Africa and regional economies in Asia such as China, India, or the Association of Southeast Asian Nations (ASEAN), by initiating the harmonisation of trade within Africa. But from my experience, FTAs deliver limited benefits to signatories. This is because in order for an importer to enjoy tariff-free international purchases, the administrative task of filling out FTA documentation falls on the exporter - who does not have a direct financial incentive to do so.
Increasing trade finance liquidities along the Africa-Asia trade corridor will move the needle, and grow current region-to-region trade from US$500 billion to a projected US$1 trillion per annum. In this respect, support from multilateral financial institutions such as the International Finance Corporation (IFC), the AfDB, Afreximbank or the Asia Development Bank (ADB) tends to make a much more significant difference. The IFC's Global Trade Finance Program (GTFP) for example, which guarantees the trade-related payment obligations of approved issuing banks in emerging markets, or ADB’s Trade Finance Program, which does the same thing in Asia, are good examples of the ways multilaterals can foster trust within the commercial banking sector. But of the 286 issuing banks included in the GTFP, only about 50 are African (17%). These initiatives need to be expanded on the African continent, and more importantly, specific Africa-Asia trade finance solutions must be developed.
The New Development Bank, headquartered in Shanghai, and formed to support infrastructure and sustainable development efforts in Brazil, Russia, India, China and South Africa (BRICS) as well as other emerging economies, also has a role to play in promoting trade finance flows between Asia and Africa.
In addition, a dedicated Africa-Asia trade finance liquidity and guarantee fund, funded in part by multilateral, regional development finance institutions, insurers and banks from both regions, would be an efficient way to catalyse trade liquidity between the two regions. Central banks, multilateral and governments need to take the lead as individual banks are unlikely to mobilise the resources. Corporates – both SMEs and large multinationals – will be more than happy to contribute their time and resources to this endeavour, as they are the ones who will benefit the most from the enhanced trade finance collaboration.
Role of fin-tech and Singapore
Fin-tech companies like Orbitt Capital, a deals origination platform for Africa-focused capital, are leading the way in reducing the trade finance gap on the continent; and in terms of technology, much can be done to improve existing payment infrastructure and reduce costs for African counterparts that cannot shoulder the burden of Swift or letter of credit transactions. Why couldn’t a US$1mn invoice be paid via the likes of a B2B WeChat-like platform in the not-so-distant future?
As a global financial and fin-tech hub in Asia, Singapore -- home to over 1,200 financial institutions and US$700bn of trade every year -- can and should leverage its experience and position as a trusted financial intermediary to foster these relations. Africa and Singapore based firms can work together to create global funding platforms for Africa-Asia trade finance; or create tech infrastructure and portals which reduce the trade information gap, improve underwriting and manage currency risk. FX solutions can perhaps carry a stronger focus on RMB, considering China’s prominence in the continent.
The only certainty is that in order to address the trade imbalance between Africa and Asia, financiers, sovereigns, and other trade enabling stakeholders need to take concrete action to start fixing the trade finance gap today.