Trade patterns in Africa are changing, with new products, new trading partners and new technologies all influencing the way African countries trade with each other and the world.
As a result, African trade is growing as it has never grown before. This is benefiting African companies and economies, lifting living standards and providing opportunities for trade to and from the continent and between African countries.
Africa is rich in opportunities - now while it is in the midst of transformative change, and in the future when expanding populations will increase the market size and a better educated middle class will increase consumer demand.
By 2020 Africa will have a population of 2.1 billion people and a collective GDP of US$2.6 trillion. The continent is a minerals treasure house, has 60% of the world’s uncultivated arable land when world food demand is rising, and offshore gas finds are transforming economies, particularly down Africa’s east coast.
Barclays has been involved in Africa for more than a century. Leveraging that experience, we have identified 10 factors which are influencing the rising trend of African trade in a combination that bodes well for the continent playing a larger role in world trade.
- Rapid and sustained economic growth. Africa’s GDP growth averaged 5% from 2002 to 2012, and is expected to climb above 5.5% from 2012 to 2017. This is higher than any region except Asia and puts Africa above Europe and America.
- Healthier economies. Together with economic growth has come improved governance, lower inflation, lower foreign debt, and lower budget deficits. African economies are more resilient than in the past.
- New trading partners. Expanding Asian economies, particularly China and India, have altered Africa’s trade patterns. For many African countries, China is now the top trading partner. In 1998, China was 21st in South Africa’s import list and only 38th as an export destination. Now China tops both lists. India was down at 32 and 59 for imports and exports, but it is now up at 5 and 6, with trade growing by 19% a year.
- Diversification of products. For decades, one or two products dominated the export list of most African countries. Economic growth and rapidly expanding consumer markets have resulted in the diversification of African economies. New industries and new products have in turn brought new trade opportunities.
- Infrastructure development. Many African countries are investing heavily in infrastructure projects. New road and rail links and expansions at airports and harbours assist trade, while the substantial capital investment, much of it internationally financed, demonstrates confidence in these economies.
- Governments are facilitating trade. Regulations are changing, some tariff barriers are being lowered, particularly for intra-African trade, and requirements are being harmonised. In addition African governments are supporting trade transactions by providing or facilitating finance.
- Development finance institutions are boosting trade. Institutions such as the International Finance Corporation, the African Development Bank and the African Export-Import Bank are increasingly providing or facilitating trade finance. This is done directly, such as through letters of credit, or indirectly by helping commercial banks provide credit or loans to exporters and importers.
- Local and international banks are increasingly trade-focused. Trade expertise, local knowledge and sophisticated banking systems are available to provide finance and mitigate risk. Large banks will support import and export trade payments, offer structured trade and commodity finance deals, provide trade loans in local and foreign currencies and products that mitigate risk in imports and exports, such as letters of credit and guarantees.
- Improved technologies and payment systems. World-class clearing and payment systems give comfort to clients concerned about engaging with new markets. These include South African, southern African and East African payment systems. In a continent which often lacks efficient postal services, many bank products and channels are also using mobile technology to authorise payment or enable clients to request loans.
- Perceptions of trade risk are decreasing. For decades, traders in African countries have had to pay for imports in advance, or are paid only once their export goods have been received. This perception of high risk is easing as Africa develops sophisticated trade finance mechanisms and risk mitigation products are increasingly available.
Africa is a continent where local experience and expertise is critical to concluding a deal. Banks such as Barclays Africa with extensive local and regional experience understand local requirements and practices. It is often not credit risk, or reneging on agreements that causes a trade deal to fail, but a lack of understanding of unique local customs or systems. Partnership between local and global parties will ensure the sustainable growth of African trade.
*Jason Barrass is head of Africa trade at Barclays Africa