Closing Africa’s $100 billion trade finance gap will require coordination across many ecosystem components, especially given the current geopolitical instability and supply chain challenges.
Will the existing trade finance gap, which has reportedly fluctuated between $100bn and $120bn over the past three years, narrowed, or will the illiquid, growth-oriented nature of emerging market economies make the gap truly Whether it never goes away is often debated. near.
Before 2020 and the COVID-19 pandemic, there were some important advances. The trade finance gap narrowed to $81 billion. If we can get back to those levels, $20-30 billion of investment in the SME sector would be welcome.
But 2022 so far shows no signs of such a recovery. The world looks very different today due to geopolitical uncertainties such as Ukraine, Russia, China and Taiwan.
This is driving up input costs and creating supply chain constraints. Given that much of emerging market debt is dollar-based, this is also putting pressure on the trade finance ecosystem.
This is perfectly highlighted through a case study of a South African client whose core business was disrupted by events in Ukraine.
The sharp increase in input costs and the cascading impact on rising transportation costs required the client to completely restructure its business model.
Absa has increased its import credit facility from R1.8 billion (R) in 2021 to R6.5 billion in 2022 in response to the evolving environment.
As a result, the client increased its market share in Mauritius and the Democratic Republic of the Congo, as well as improved profitability while maintaining its leading position in the South African market.
Sharp inflation and rising input costs, combined with tightening central banks, could put pressure on emerging market companies that are just beginning to rebuild their balance sheets.
It is paramount to avoid situations where banks start drawing credit when businesses are cash hungry. Especially if these companies are just starting to take advantage of the economic recovery.
It is important to re-emphasize here that trade finance, by its very nature, is less risky than other types of financial assistance to importers and exporters.
According to the African Development Bank (ADB), the average approval rate for trade finance transactions in 2019 was 88%, while the average default rate for trade finance from 2017 to 2019 was 7.5%. loan execution.
In South Africa, this figure was just 2% over the period 2011-2019. It highlights the power of putting liquidity in the right place in the system and shows how economic activity can be unleashed without taking on too much risk.
Fortunately, we live in a world that is constantly evolving, and especially as the African continent develops economically, countries continue to both import and export goods.
In addition, significant progress has been made on digitization, liquidity, financial inclusion and engagement of Development Finance Institutions (DFIs) to enhance Africa’s growth prospects.
Absa chief economist Jeff Gable said:
“International Monetary Fund (IMF) data show that the dollar value of Africa’s exports to the world has increased by more than a third from last year and more than half from pre-pandemic levels.
“Africa has similarly shown significant increases in intra-continental trade volumes, with exports in the first quarter of 2022 up 37% compared to a year ago and more than 40% post-pandemic. ”
About 60% of banks engaged in trade finance activities in Africa receive some support from DFIs.
This highlights how close the relationship between these parties is and why we are excited about some of the innovation and interest from DFIs who are focusing their time and resources on this market sector. .
For example, ADB recently approved a $175 million regional trade finance facility for eastern and southern Africa. Specifically, “ADB’s strategic effort to support the African Continental Free Trade Area’s agenda of restructuring markets and economies across the region by helping to increase output.” in the services, trade, manufacturing, and natural resources sectors;
The deal is expected to generate a value of $2.1 billion over the next three years.
Absa believes that increasing access to trade finance is one of its most important focus areas and has the potential to unlock vital economic activity at relatively low risk.
