TRADE INSIGHTS | 15 JUNE 2019

New trade agreement could contribute $70 billion to Africa’s GDP

Bohani Hlungwane

Bohani Hlungwane

Regional Head of Trade & Working Capital  (ex-South Africa) Transactional Services

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The African Free Trade Agreement is a significant step towards growing trade and diversifying global exports.

Africa has created the biggest trade agreement since the World Trade Organisation was established in 1994. This is the most significant step towards economic integration across the continent, although integration has already been achieved in some regions in Africa.

The recently signed African Continental Free Trade Area agreement (AfCFTA), which came into force on 30 May 2019, represents a unique opportunity to grow intra-Africa trade and diversify trade exports with the rest of the world.

The impact of AfCFTA can be seen in the context of the current very low intra-Africa trade, which represents an average of 15% of global trade across both imports and exports as of 2017.

However, with customs procedures eased under the AfCFTA, intra-Africa trade is expected to grow to at least 53% by the mid-2020s, thus effectively contributing in the region of $70.0 billion to the continent’s GDP.

The growth in intra-Africa trade will ensure that an increasing proportion of Africa’s more than US$2 trillion economy is traded internally.

An increase in trade financing demand is expected

For the financial sector, there will be increased demand for trade financing to aid the anticipated overall growth in intra-Africa trade. For example, to support the expected increase in intra-Africa trade of $119.6bn by 2022, it will require nearly $40 billion in trade financing alone.

To achieve growth to the value of $27.9 billion in industrial goods by 2022, an estimated $9.3bn in trade financing will be required. On the other hand, to support the projected growth in agricultural goods of $5.7 billion by 2022 as much as $1.9 billion in trade financing will be required.

This is a big challenge to African banks in particular, and will require flexibility in risk assessments and financing requirements as the African Development Bank already estimates that there is a trade-financing deficit of at least $90 billion in Africa as of 2018.

African banks, especially regional banks like Absa Group, Standard Bank and Ecobank, will need to adopt new ways of assessing risk in trade in order to support corporates as they take advantage of new growth and trade opportunities in Africa.

This is important, as strong regional banks have proved to be key in regional economic and trade development in other regions such as Europe, North America and Asia.

South Africa stands to benefit from the agreement

A country like South Africa, already the most industrialised and most diversified economy in Africa, stands to benefit even more as AfCFTA is expected to increase regional value chains as this agreement enhances opportunities for goods and services consumed in Africa to be produced and manufactured in Africa.

“The impact of the Coronavirus lockdown had certainly thrown up some challenges in getting the deal over the line but that an un-paralleled level of support from the vendors solicitors, IBB had helped ensure success.”

William Reynolds - Chief U.S. Economist, Absa, Research

In addition to the fact that the AfCFTA raises hopes of broader and deeper regional economic integration, it also specifically opens up new markets for South Africa’s goods and services.

Because of its sophisticated economy and relatively more established industrial base, South Africa can grow and diversify its exports into the rest of Africa, as trade and tariff and non-tariff barriers are eventually relaxed or removed entirely.

Statistics show that Africa is the second largest destination for South Africa’s exports, accounting for 26.2% of the total in 2017, second only to Asia. Additionally, South Africa’s exports to the region have recently shown the second fastest growth after Asia.

As for South Africa’s imports, Africa accounted for a much smaller share, just 9.9% in 2017.

Unsurprisingly, due to the fact that South Africa is the most industrialised African economy, a notable feature of the country’s exports to the rest of Africa is that they comprise mainly manufactured goods (84% in 2017).

In contrast, 59% of South Africa’s exports to Asia in 2017 were minerals, notably iron ore exports to China. As for South Africa’s imports from Africa in 2017, 51% was minerals, mainly crude from oil giants Nigeria and Angola.

The removal of tariffs and other constraints will, all things remaining the same, result in the development of manufacturing capacity in other countries within the continent, in line with inherent competitive advantage across the countries, allowing South Africa to reduce its dependency on manufactured imports from Asia and Europe.

Export markets set to diversify

It is also expected that the AfCFTA will help diversify South Africa’s export destinations within the continent given that more than 85% of South Africa’s exports to Africa are destined for the Southern Africa Development Community (SADC), even though these are concentrated to a handful of countries.

Exports to the other two largest economies in sub-Saharan Africa (Angola and Nigeria) together accounted for just 4.3% of South Africa’s total exports to the rest of Africa in 2017.

Additionally and given the growing risks of global trade protectionism, South Africa will increasingly prioritise the development of its trade with the rest of Africa, a goal laid out in the 2018/19 Industrial Policy Action Plan and the National Development Plan (NDP).

As it is with any agreement that involves many countries, the key will be in implementation and the speed of execution.

There is no doubt that some elements of the AfCFTA will erode member governments’ powers to design and implement national policies, in the process reducing the politicians’ powers to influence electoral results in their own countries.

There will have to be a willingness to lose in the short term in order for the continent to benefit through increased intra-Africa trade and bigger markets in the medium and long-term.

The continent will also have to make sure that the benefits do not only accrue to bigger economies such as South Africa, Nigeria, Egypt, Angola and Kenya if it wants to avoid its own “Brexit” from some of the countries as the agreement matures.

This will require a careful balancing between opening the markets and protecting smaller players in the markets. At the end, the AfCFTA’s success will boil down to political will, discipline in execution, and the active management of conflicts that arise as implementation continues.

Bohani Hlungwane
Bohani Hlungwane

Regional Head of Trade & Working Capital  (ex-South Africa) Transactional Services

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