Africa’s economic development: risks and opportunities for corporates

The COVID-19 outbreak is changing markets worldwide – and creating new perspectives for Africa

Corporates with operations in Africa are reeling from the social and economic impacts of the Coronavirus outbreak. But, if managed correctly, the crisis could also give rise to future opportunity on the continent. Insights speaks to Christian Toben to find out what the future holds for corporates as we progress through the crisis and beyond.

How do you think the Africa’s past experience with controlling outbreaks will help in the current crisis?

Christian Toben, Regional Head Financial Institutions Africa
Christian Toben, Regional Head Financial Institutions Africa

It’s true that Africa is no stranger to crises. The region’s economies are dynamic and their past experience in coping with outbreaks (with limited resources) certainly helped during the early stages of the Coronavirus pandemic. In fact, many governments took bolder action to slow the spread of the disease – and, in some cases, sooner than some worse-affected countries in other regions.

But with high population densities, fragile social welfare systems and strained public health infrastructure, uncertainty persists around how the crisis will progress on the continent. Coronavirus was slower to advance in Africa, but now, as the pandemic reaches a more advanced stage, African governments must undertake a careful balancing act – safeguarding public health while simultaneously mitigating longer-term economic damage.

How quickly do you foresee the region bouncing back economically?

The speed of Africa’s recovery will largely depend on the duration and extent of the crisis. But the region’s ability to adapt to the changed environment in the aftermath and seize new opportunities as they come will also play a role.

One interesting development will be the extent to which European corporates diversify their supply chains and turn to “near-shoring” strategies in the future. In practice, we may see these corporates limit their dependency on Chinese-led supply chains. And instead we could see Africa – which has significantly upskilled its manufacturing capabilities in recent years – assuming the role that China previously held as the world’s new “workbench” for low-to-middle end products. The proposition is a good one: Africa and Europe operate in the same time zones and, since they’re geographically closer, shipping times (and costs) would be substantially reduced.

Foreign currency availability will still be a limiting factor for growth, particularly in the aftermath of the crisis as we see central banks having to dip into vital reserves to support monetary policy and keep economies afloat. Here again, uncertainty prevails – the duration of the crisis will determine which countries fare better than others. One thing is certain: it is essential that access to foreign exchange is improved in the region to facilitate economic recovery.

How might intra-regional trade contribute to the continent’s recovery?

This will play an equally crucial role and numerous initiatives are well underway. The African Continental Free Trade Area (AfCFTA) – which eliminates tariffs on 90% of intra-regional, cross border goods trades – will be instrumental as a means of deepening regional integration and oiling the wheels of trade post-crisis. And AfCFTA is just one among many initiatives seeking to ease trade flows on the continent. The host of other smaller-scale free trade zones and free ports within Africa are also well-positioned to facilitate the flow of trade, both intra- and extra-regionally.

Afreximbank’s Pan-African Payment and Settlement System (PAPSS) should also help lessen the region’s reliance on hard currencies in trade – another growth-limiting factor. Launched in 2019, it provides a digital platform to facilitate electronic payments on goods and services with a view to boosting formal intra-regional trade volumes. This will help create opportunities for businesses in the future by allowing for rapid and reliable access to payments capabilities.

What other long-term benefits do you believe may arise from the current situation?

We think it’s likely that the digital agenda will take a leap forward in the long-run. Companies that are tech-intensive will fare best in this crisis, and notoriously paper-based industries and processes, such as trade finance, have had to quickly adapt to cope with the new working environment. Africa was already showing great potential digitally – many countries in the region did not have to contend with legacy infrastructure, which meant that new technologies could be implemented faster and more effectively. Countries in the region, such as Kenya, Rwanda and Mauritius, had also taken strides forward in respect of IT specialisation. We hope to see Africa using the crisis as additional momentum to progress this agenda to diversify and strengthen its capabilities going forward.

How has the risk landscape changed for corporates operating on the continent? When do you expect volatility to reduce?

It’s likely that Africa will remain volatile, at least in the short-term, and so, of course, adequate risk mitigation strategies are required. Even markets as developed as South Africa have been rocked by extreme volatility in the past few months due to the virus. But volatility is nothing new for corporates operating in the region, and they have long had to build coping mechanisms into their business models.

Our greatest concern is probably the risk of private-debt restructuring – something which, even in name, holds enough negative weight to easily deter investors and trigger a large-scale withdrawal of foreign lending capacity, even if the true financial position underlying those decisions gives little cause for concern. Governments on the continent should approach such financial decisions with caution, weighing up the longer-term negative impacts against the short-term gains, as undoing the negative perception attached to this can take some time.

How is Commerzbank supporting its corporate clients in the region?

At Commerzbank, our commitment to Africa remains unwavering, despite the challenges. We didn’t close any of our representative offices in the region during the global financial crisis, and we don’t plan on closing them now. We have one of the most robust partnership networks in Africa and can continue to provide strong support to our corporate clients. Throughout this turbulent period, we seek to support and advise our corporate clients, and position them to seize the opportunities that may well spring from this period of uncertainty and hardship.

So, there is light at the end of the tunnel?

Absolutely. This is a new challenge for the region, but we expect it to remain a destination of opportunity – somewhere that businesses can look for spreads, margins and growth.

Foreign interest in the region will undoubtedly resume in the future – once countries are in a position to look outwards again for growth and political influence – and African governments can use this to their advantage by using capital inflows to improve democracies, economic systems and infrastructure. If corporates exercise caution, play to their strengths, and manage risks effectively, there is no reason why they can’t increasingly involve Africa as part of their wider recovery, and as a means of achieving a greater degree of supply-chain diversification in the future.