Unlocking the Trade Potential of a Continent on the Move

Barclays’ Corporate Banking CEO, John Winter analyses the role of Africa’s sleeping giants in driving future continental trade opportunities

President Obama’s heralding of Africa as a continent ‘on the move’ highlights a region characterised by economic growth and where business is playing a positive role in lifting millions of people from poverty.

Various nations across Africa increasingly present major economic opportunities given growing consumer markets, relatively under-developed natural resources and widespread political and economic reforms.

‘On the move’ also works as a description for improvements in trade across the region. Sub-Saharan Africa (SSA) in particular has made major inroads into market openness. East Africa, to provide a clear example, is well-established as a bustling trade hub with Kenya at its heart.

Yet it is also clear that progress is not uniform across the region, with the World Bank estimating that, on average, it takes 54 days, 10 documents and costs nearly $8,000 to import a single container into the Republic of the Congo, compared to 21 days, six documents and $2,080 cost incurred for a similar container into South Africa.

The region as a whole has also experienced a major shift in terms of trading partners, with the conventional narrative of trade with Africa in recent years being a story of major investment by Asian trading partners.

The region received 19 percent of its imports from Asia in 2004, but this had risen to 32 percent by 2013. Other trading partners across the Middle East, the UK, Europe and the US are keen to become more involved; look no further than President Obama’s trade visit and the renewal of the African Growth and Opportunity Act (AGOA) as evidence.

Much of this interest is directed at South Africa, Kenya and Nigeria as SSA’s three largest economies, but SSA is much bigger than these three giants and, as evidenced by the Republic of Congo example, not only does the ‘size of the prize’ in terms of market opportunity differ, but so does its ease of access in the form of physical infrastructure and softer enablers of trade such as tariff policy, border management and access to mobile networks and internet services.

With a potential slowdown in China refocusing attention on SSA’s future growth and trading partners, Barclays has studied trade openness and market opportunity across SSA to provide a comparative perspective on the opportunities ahead. The research demonstrates:

Sub-Saharan Africa is characterised by the potential of five sleeping giant economies

Ethiopia, Mozambique, the Democratic Republic of the Congo, Ghana and Tanzania have significant potential with young and growing populations, under-developed natural resources and a future that we believe will boast steadily rising incomes, growing middle classes and much-larger and more sophisticated consumer markets. 

Within the next five years, these five countries will represent a population larger than the United States and today enjoy rates of economic growth that, over the past decade, have rarely been seen outside of China.

Yet this is a story of potential. Clearly these markets are not yet as large as in countries such as Kenya, South Africa and Nigeria. However, many of the barriers to trade even within the DR Congo are relatively soft; tariff policy, corruption, border controls. The hard work of infrastructure development is well underway.  Increased political will is needed and, if the launch of the Tripartite Free Trade Area (TFTA) is a guide, then this political support will be forthcoming.

The size of the prize; market opportunity does not always correlate with trade openness

Unsurprisingly, Nigeria and South Africa dominate the continent from a size perspective, but spin this around to consider market openness alone and a different perspective appears.

Nigeria appears in spot twelve, significantly behind other SSA nations such as Botswana, Zimbabwe or Senegal. These nations may not be as attractive from a sheer size perspective, but the ease of doing business changes perceptions. 

It’s clear that Nigeria gets through in spite of trade policy and infrastructure, not because of it.  In order to achieve a higher level of trade openness, Nigeria will need to address a range of business environment factors while investing more heavily in transport networks and power provision.

Kenya and South Africa by contrast set an example to follow. Countries such as Botswana, Namibia and Zimbabwe essentially support South Africa’s trade policy and logistics offer to mutual benefit.

Kenya meanwhile benefits as a hub for the East Africa region, with the region as a whole now enjoying relatively strong border administration and relatively high-levels of formal regional trade; still a novelty across much of sub-Saharan Africa.

Infrastructure remains absolutely pivotal to trade

SSA still suffers from a hard infrastructure ‘gap’ particularly in terms of transport and energy. The index shows Southern African states are leading the way, but the greatest progress over the past decade has arguably been seen in East Africa with both regions now developing planned multimodal transport investment such as the fast growing transport link across the Ethiopia to Djibouti Corridor; the North-South corridor running from the Tanzanian port of Dar es Salaam; the Nacala corridor linking the DR Congo, Zambia and Malawi to the port of Nacala in Mozambique and the Beira corridor linking the Mozambique port of Beira with its interior and landlocked countries of DR Congo, Zimbabwe, Zambia and Malawi.

Yet the research also shows that soft infrastructure such as border controls and customs processes matter almost as much.

The trend is for less resource-dependent states to have better developed border administration, with Benin and Senegal outperforming on market accessibility. A related trend is the development of special economic zones such as those across Ethiopia, Mauritius, Nigeria and Zambia and the growth of one stop border posts, where neighbouring countries share customs procedures such as between Zambia and Zimbabwe.

The future; new hotspots present an untapped opportunity for foreign investors

What then for the future of sub-Saharan Africa and trade? Undoubtedly wider global forces such as the likely Chinese slowdown will impact the rate of progress. Yet, the fundamentals are sound; growing populations, emerging consumer markets and investment into both physical and soft trade infrastructure.

Unlocking this market opportunity will take time, but it’s clear that market openness across the region varies dramatically. For now, traders with an interest in Africa would do well to broaden their focus; South Africa, Nigeria and Kenya will remain hotspots, but investing now in the sleeping giants of Ethiopia, DR Congo, Mozambique, Kenya and Tanzania may present future growth opportunities.

Rapidly developing consumer markets are not only increasing the size of the market opportunity but the opportunity is also becoming more accessible, thanks to continued progress in improving soft and hard infrastructure.

Air transport is a notable highlight with a growing number of connections transforming the air connectivity of key markets. Ethiopia, for example, now has links to 33 African destinations and Kenya has 35, both well ahead of South Africa’s 26.

Africa is evidently a continent on the move and nowhere is this more evident than in improvements in trade openness.