Banking on Africa’s post-pandemic recovery

By Jeff Fallon, Head of Client Coverage at BACB.

While the Coronavirus outbreak has certainly stalled trade flows and again highlighted some of the systemic challenges that continue to hamper Africa’s potential, James Cantamantu-Koomson, Managing Director, Corporate and Institutional Banking at British Arab Commercial Bank Plc (BACB), is hopeful that the effects on African trade will be short-lived, and opportunity will come forth from the crisis.

Well-accustomed to coping with pandemics with sometimes-limited public health infrastructure, African governments were impressively swift to act to curb the spread of Coronavirus during the early stages of the outbreak. Now, in light of the relatively low infection and death rates, there has been a shift in dialogue: from the social impacts of the virus, to the wider economic implications and how long-term these will prove.

There’s no doubt that the pandemic’s effects have been exacerbated by some legacy issues– such as the region’s dependence on hard currencies, lack of economic diversification and scarce foreign exchange reserves. We have also witnessed some dramatic changes in African trade and available financing over a relatively short period. With prevailing uncertainty around the severity and duration of the crisis, combined with the contraction in capital inflows, African governments have been well aware of the need to deploy their limited foreign reserves sparingly. Understandably, governments have therefore prioritised trading for essential goods– mostly energy, pharmaceuticals and food items. Ghana and South Africa, for example, closed their borders to all but these essentials, while some countries required banks to restrict import cover for any non-essential goods and commodities.

Of course, the oil-price slump in March and April worsened economic uncertainty for Africa’s many oil-exporting countries, too, and highlighted the region’s continued susceptibility to external shocks. Angola, Algeria and Nigeria were among the hardest hit. With largely undiversified economies, and without the sovereign wealth buffers available to many Middle Eastern oil-exporting countries, the temporary oil-price decline into negative territory left them exposed. While oil is now gradually recovering, prices continue to fluctuate well below budgeted estimates, highlighting the need to build resilience into the region’s economies via trade diversification.

Economic contractions have been further exacerbated by banks and non-bank lenders restricting access to liquidity in response to the crisis. While understandable that lenders are exercising caution in the current uncertain environment –and, in fact, demand for trade finance has reduced substantially for the same reason – facilitating trade flows will be integral to global economic recovery.While we remain hopeful that lender appetite will soon return, we also remain realistic: even pre-pandemic, estimates of Africa’s widening trade finance gap reached up to an estimated US$120 billion – a figure which may well increase once financial institutions re-evaluate their credit lines in the region.

Unwavering commitment

Lenders that retrench into the longer-term could be missing a trick, however. Volatility has no doubt increased in recent months and delays in payments have been, in some cases, unavoidable. Corporates and financial institutions alike have had to adapt to the changed risk environment. But the increased risk factor on trade in recent months is not unique to African countries. And indeed, further defying expectations, the wave of defaults on letters of credit (LCs) that was predicted on African trade transactions has so far failed to materialise. On the contrary, BACB plc has not witnessed a single default on an LC since the pandemic began. The risk on LCs on African trade was also already very low. Between 2016 and 2017, for instance, default rates declined from 0.59% to 0.05% for export LCs and 0.48% to 0.14% for import LCs. We expect the associated risk factors on trade financing to stabilize and continue to improve during and beyond the recovery phase.

Multilateral institutions have been quick to offer their support to help catalyse the continent’s shift towards the recovery phase. The G20, together with partners such as the Institute of International Finance, have pledged to co-ordinate debt relief for Africa’s poorest countries, giving local governments additional financial firepower for sorely needed stimulus packages. Doubtless, investors with an eye on the long-term have not forgotten that Africa remains a land of opportunity. The expected worldwide economic contraction is projected lower for Africa at an average of -2.8% (with some countries maintaining some level of positive growth of between 1.2% to 2.5%) and the continent has the economic dynamism to bounce back in 2021 once commodity demand picks up.

While planning for the European Union-African Union summit in October this year may have taken a back seat as a result of the crisis, we are confident that focus will revive during the recovery phase, and the EU will make good on its pledge to build on its special inter-regional relationship with Africa. Indeed, the recently published “Comprehensive Strategy with Africa”, lays out the EU’s intentions to collaborate with the African Union on green transition, energy access, digitalisation, growth and employment, among other priorities, signalling opportunities ahead for trade in the region. France continues to have close ties with West African governments in particular and has spearheaded a significant investment drive aimed at the Francophone side of the continent.

Interest from the UK is also likely to increase as it maps out its post-Brexit relationships with the rest of the world. The UK has already committed £744 million in pandemic-related aid to developing countries. Africa’s leading Anglophone economies represent attractive targets, and the UK-Africa Investment Summit held in London in late January was a clear statement of intent, with British Prime Minister Boris Johnson asserting that the UK would strive to be “Africa’s partner of choice”.

Specialist markets requires specialist banks

There’s no doubt that working in African markets requires expertise and good risk management, particularly during times of crisis. But the best results always come from partners who know their field of expertise inside-out. Indeed, nimble players with lower lending thresholds – that understand the risks – are well positioned to contribute to the next stage of Africa’s development. With that in mind, kickstarting trade flows will require a dedicated, boots-on-the-ground approach by banking partners firmly committed to clients in their core markets. All in all, the case for relationship banking has never been stronger.

The true impact of the pandemic will take some time to ascertain. But Africa’s appreciation for relationship banking remains as strong as ever, and will continue to be essential in helping the region’s economies to navigate their way out of the crisis. After all, African countries are displaying remarkable resilience. They deserve partners who demonstrate the same commitment, and remain by their side in the tough times, as well as the good.