Feature: Unlocking Africa’s trade potential
Greg Cline of Investec Import Solutions analyses the continent’s trade credentials in the current business landscape
Trade is the lifeblood of growing economics, and trade projects that knock down barriers and improve efficiencies can go a long way to strengthen cooperation between countries. This cooperation is needed to maintain competitiveness and drive GDP. Such trade agreements and projects also contribute to transparency and certainty in the global economy – which, at times can be turbulent.
And while the trade and logistics market itself is growing at a rapid pace, it still faces a number of challenges such as currency and market volatility, price instability, increasing global freight rates and of course, political decision making – all of which is compounded by unpredictability and tightening of operational costs in a very challenging global economy. What’s more, given globalisation and the entwined nature of the markets, trade agreements and trade wars can have massive impacts on countries outside the direct setting – where they either benefit from such negotiations, or face collateral damage.
Looking at Africa trade
Despite US Congress’ 10-year renewal of the African Growth and Opportunity Act (AGOA) to 2025, there is still concern that the Trump administration could change its approach to African trade. Ostensibly designed to give African countries easier access to American markets by scrapping import duties on certain goods, AGOA has had a great impact on the continent since it was first enacted in 2000. For South Africa alone, the act has resulted in exports to the US totalling approximately R92.9 billion and imports from the country reaching approximately R85.2 billion as at the end of 2017. And research by the Brookings Institution shows that AGAO has created 100,000 jobs in the US and 350,000 direct and 1.3 million indirect jobs in sub-Saharan Africa.
But given how the Trump administration has adopted a more restrictive foreign policy, and the tendency for the US to penalise countries that appear to vote in contrast to US-tabled resolutions at UN, the concerns around African trade appear to be valid. Additionally, amid a recent decision to impose import duties on steel (25 percent) and aluminium (10 percent), the US has also decided to investigate whether it should do likewise with regards to vehicles and car components which adds impetus to the school of thought that the continent has come to rely too heavily on imports from America for economic relief. If that trade is negatively impacted by the new US leadership, the pressure will be on boardrooms across Africa to find alternative avenues for growth.
However, for all the doom and gloom that has been building in recent months, there are positives to be taken from these scenarios. For one, it will force governments and businesses to re-evaluate their import and export strategies with America. This could likely lead to an environment where more trade is happening between countries on the continent and other untapped territories.
According to the World Economic Forum, seven of the 10 fastest-growing economies globally are in Africa. This urbanisation is creating significant opportunities for social and economic development and more sustainable living. In turn, this could revitalise trade across the continent as countries seek to leverage each other’s respective strengths in infrastructure and resource development. And this is exactly what we are seeing with the African Continental Free Trade Area (AfCTFA) agreement which is aimed at facilitating a single market for goods and services on the continent. Experts believe the agreement will benefit the continent and enhance intra-African trade as tariffs will be reduced, benefitting entrepreneurs as well as small to medium business.
It’s difficult to determine what the impact of such trade agreements and discussions will be, but one thing is certain – getting the value chain right will be critical. Various strategies will be deployed by different businesses with some having a rigid and consistent policy while others looking to manage their risk on a more ad hoc basis in conjunction with the market at a point in time. Ultimately, importers need to do what is right for their business based on the current market conditions, and the only way to do that is to ensure that they have greater visibility to make the right decision - something that is very much needed in the current business landscape.
Moving beyond tariffs
Managing the import process, and associated finance component, effectively within the overall supply chain cycle can go a long way to saving businesses not only money, but endless frustrations, delays and implications that could have a negative effect on the business, in a time that they cannot afford one.
Trade finance is, thus, gaining popularity among importers and funding options need to be carefully considered; as while it is often noted that companies require debt to grow, they also need to be cautious about accessing too much debt. The emergence of fintechs have contributed to a more innovative approach when it comes to financing. Companies are no longer limited to waiting for weeks while banks approve additional credit. Finance as a high touch service is becoming the new norm. Customers are best served with flexible facilities where the limit is dynamically increased to meet seasonal demands. Clients are choosing the right partner with their finance providers and expect to go to credit once and the partnership is such that the bank understands the commercial and operational dynamics of the business and the industry.
Traditionally, customers opted for debtors’ book factoring. But with times becoming tougher, banks are not making the entire facility available. This is resulting in a drive towards funding where the customer has a guarantee that the total amount is available to finance imports. And where organisations manage the movement of goods, they can place value on the stock of the items in transit. This means that it can offer more in terms of financing as it looks at assessing risk differently than the banks.
By financing the cost of goods as well as the forwarding, clearing duty and other local costs involved in the import transaction, working capital that is tied up in imports is able to be released with payment terms that closely match the cash-flow cycle. What’s more, having a company that facilitates every aspect of an import transaction - from order placement, confirmation and tracking to the hedging of foreign exchange risk and the management of import logistics until delivery to the client’s warehouse - can go a long way to mitigating risks and saving costs.
The global trade war will decrease exports, and in effected countries, impacts on related employment in those respective sectors will ultimately increase pricing. Companies will look to manage their supply chain costs even more efficiently. In addition having the ability to access funding terms to either increase supplier payment terms or decrease inventory levels (more frequent orders and more frequent supplier payments) is critical to being competitive.
If you are in the import business, it is important to look for options that allow you to alleviate pressure on the business, such as using the import processes to free up working capital. Finding the right business partner who understands the business requirements and is committed to being a partner in growth is also essential.
In addition, transparency in the supply chain and unlocking the value chain through information, up-to-date dashboards and industry insights have become paramount for businesses trying to navigate a difficult trade environment. Understanding the production and import cycle and using technology that is geared to assist in decision-making is also important for facilitating better planning around lead times, shipment quantities and mitigating risks and delays.
Ripe with opportunity
The South African and African market is ripe with opportunity, investment and innovation. Greater visibility for the strategic management of the import supply chain will open up massive growth possibilities for importers in a resource constrained economy. Couple this with positive trade agreements and intra-African trade as well as transparency around trade policy means visibility, which means less risk and better forecasting - something that is very much needed in the current business landscape.