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DealMakers AFRICA Q3 2020
Africa’s strong regional trade structures make for a compelling investment case in a less globalised world
by Axel Smeulders
While international trade and gross domestic product (GDP) growth have historically been highly connected, over the past decade these once inextricably-linked economic building blocks have been steadily decoupling. There are many reasons for this trend: not least is a growing sense of protectionism and political mistrust, as well as the global financial crises brought about by the 2008 credit crunch; but now, COVID-19 has certainly presented additional barriers to once burgeoning global free trade.
Ultimately, from a trade perspective, the once aspirational global village has started shutting its city gates and the world is becoming a much more regionally-focused place. This presents obvious challenges for export-dependent businesses, countries, and indeed, continents. Given that much of Africa has been export-dependent, and that most of the regions on the continent have long relied on the hard currency derived from exports – rather than domestic or regional demand – to drive economic growth, this more regional trade focus presents many challenges – but also significant opportunities.
Of course, it could be argued, and quite compellingly, that most of Africa’s exports are commodities, the essential nature of which offers the continent some protection from the negative impact of a shrinking global trade environment. But, while this is true to a degree, it has become patently clear in recent times that relying solely on the extraction and export of resources and commodities is not a sustainable economic model for Africa. Countries and economies on the continent need to find ways of adding value to these exports and, possibly more importantly, focusing on delivering that value closer to home, rather than simply sending it overseas. Expanding the continent’s processing and manufacturing capabilities is an obvious way to achieve that.
A stronger focus on processing and manufacturing will not only allow Africa to derive more value from its exports; it will also create opportunities for countries to lower their own reliance on imports, create more sustainable and integrated supply chains and, ultimately, produce the goods needed to satisfy and grow their own markets.
The challenge, however, is that developing such a processing-led economy requires knowledge, skills and, of course, investment. Historically, foreign investment has been a catalyst to encourage skills transfer on the continent. Of course, such foreign investment requires an attractive economic and business environment, as well as compelling investment opportunities. The good news for Africa is that it offers both. While the continent still presents many business challenges, there’s no denying that the combination of a burgeoning population, rising middle class, young workforce and many successful entrepreneurial businesses makes for an exciting investment proposition.
Add to this the fact that Africa has established regional markets which are increasingly being formalised into strong, regional trading blocs, the case for investment in African businesses is made even stronger.
These regional trade blocs enable sustainable and regionally-integrated supply chains, creating bigger markets and making regional trade easier by reducing red tape. The East African Community is a prime example, where the common external tariff shared by Kenya, Tanzania, Uganda, Rwanda, Burundi and South Sudan gives investors in the region access to a population of some 175 million, and a combined GDP of some US$193 billion.
As these regional trading blocs become more cohesive going forward, they will offer a significant source of economic protection and comfort in a world where global supply chains are all but falling apart. All of which creates a potentially massive win-win scenario for savvy companies and investors – both within Africa and abroad – who have the foresight to inject much needed equity into developing the processing and manufacturing capabilities of businesses operating in Africa’s many regional trade blocs, in exchange for significant potential for sustainable returns for decades to come.
Smeulders is a Principal: Corporate Finance – Head of Africa Region, Nedbank CIB.