Looking back at 2010, what have been the most significant developments in the Asia-Africa trade story?
Deepening trade ties between South Africa and China have been critical given South Africa’s position in Africa. With South Africa being the powerhouse of the African economy, trade relations with China are very significant for the development of the entire African continent. According to the Chinese Ambassador to South Africa, the bilateral trade volume between China and South Africa stood at $16 billion in 2009, an almost 10–fold rise since the two countries established diplomatic relations in 1998 (Ministry of Foreign affairs of the Republic of China, 2010). Over and above growth of Chinese trade with Africa, Asia’s share of total Africa trade has grown from about 10% in the early 80s to above 30% in 2008 (IMF, 2010). Despite the pull back on credit extension from financial services sector due to recessionary pressures, this picture was maintained in 2010.
We see other developments showing the continued significance and growth of the Asia-Africa trade opportunity. A good example of this is the ongoing investment by China in Zambia in to the Copper Industry, with China hoping to secure the resources it needs to fuel its booming growth.
South Africa’s invite to join the BRIC (Brazil, Russia, India and China) countries is likely to prove very significant. Although it came at the end of the year, the invite of South Africa by China to join the BRIC countries will prove to be a significant development for Asia-Africa trade given the combined economic power of the BRIC countries. This will ensure a correct representation of Sub-Saharan African interests in emerging markets.
The accelerated continuation of infrastructural investments on many African countries carried out by Asian (Chinese) companies and funded through resources remains a feature of Asia-Africa trade. Various investments are worth a mention here. In Cameroon, China’s National Machinery Import and Export Corporation (CMEC) is opening a $500m bus manufacturing factory in Douala to produce buses for West and Central Africa (Frontier Advisory Services, 2010). The factory is expected to start production by the end of 2010. In Zimbabwe, Kariba Hydro Electricity Plant expansion Sinohydro signed a $400m agreement with the Zimbabwe Power Company to expand the Kariba Hydro Electricity Plant in May 2010 by two 150MW.
In South Africa, two deals are worth a mention. Firstly, Jidong Development Group and the China-Africa Development Fund (CADFund) plan to construct a $221m cement plant in South Africa. Jidong Development Group and the CADFund will hold a 51% stake in the plant. Secondly, In May 2010 Jinchuan Group (JNMC) and the China-Africa Development Fund (CADFund) signed a deal according to which they will take a 51% stake in Wesizwe Platinum for $227.5m. JNMC and CADFund also secured a commitment from the China Development Bank (CDB) of $650m for the development of Wesizwe’s Frischgewaagd-Ledig mine (Frontier Advisory Services).
These few deals are an example of the many infrastructural investment deals that are happening in Africa initiated from Asia. Also worth a mention is the discovery of oil in Uganda and Ghana and Asia is expected to be a major market for these oil exports.
Asia-Africa trade is a big trade finance subject. Can you identify any major trends/developments that we might expect for 2011?
Asia resource dependency on Africa.
In the mist of the recession in the past two years, the big Asian economies (China and India for example) have experienced better economic growth than any other region in the world. With global demand expected to pick up in 2011, we expect Asia to continue to consume more natural resources such as oil and coal from Africa. With better trade relations between the two continents, African political stability, a recovering global economy, and market friendly policies in many African countries, we expect this trend to accelerate.
More infrastructure development as the global economy continues to pick up.
Bar a few notable exceptions, there are more African countries enjoying the longest stable political period than in any other time in the history of the continent. We expect that fact and that many African countries have adopted market friendly policies to continue to attract direct investments into the continent. Consistent with the recent structure of Africa trade composition and given the economic problems that continue to cast uncertainty over European and North American growth prospects in 2011, we expect infrastructural investments to be driven largely from Asia.
There is more formal engagement and agreement today between Africa and Asia than in any other time in history. Given the caution applied by lenders due to the recession, we expect most of the trade to still be done on traditional trade instruments and advance payment. Over time, the engagements and agreements will continue to clarify the commercial risks that traders assume form both continents and may impact the payment methods between the two continents to the benefit of trade.
A lack of mutual understanding has sometimes been cited as a feature of Asia-Africa trade. How would you assess the understanding between Asia and Africa now, and what are the major challenges in the trade relationship?
Cross-border trade in general is subject to a variety of risks, including: commercial or economic risk; exchange rate risk; transportation risk and political/sovereign risk. These risks are perceived to be more substantial in emerging markets.
The level of commercial risk facing trading counterparties is dependent on the nature of the trade relationship between the importer and exporter. The general risk perception of doing business between these two regions has led to a tradition that trade between these regions is done with some form of security in the form of letter of credit, standby letters of credit or bank guarantees. This perception has created some popularity for the use of trade products between these regions.
It is unlikely that this will change for the foreseeable future. The geographic distance between these regions and the lack of familiarity of the country’s dynamic makes it almost impossible to have trade on open account in the near future. What is likely to happen is that there might be a shift from traditional trade products to products such as bank payment obligations (BPO) as these new products mature in the market. Standard Bank has extensive knowledge and experience in facilitating emerging market trade; an expansive African footprint covering 18 African countries and strong relationships with other financial institutions in countries where the group is not present.
The above factors are the foundation of Standard Bank’s emerging market trade value proposition which aims to position the bank as a leading, emerging markets financial services organisation.
You started this new position just a few months ago. What will you bring to the new position, and in what other ways is Standard Bank developing its trade services?
I think the key area of focus for us in the coming months is going to be on doing the basics better than anyone else. Service is, and will continue to be, a differentiating factor for banks in international trade, and Standard Bank needs to focus on being the “stand-out bank” for trade in Africa. To assist in this, we are embarking upon a total refresh of our trade platform. We are also taking significant pains to review all aspects of our trade model to ensure operational and service excellence is attained.
We are also starting to work more closely with the transaction sales teams to further upgrade their knowledge of the suite of trade products we have as well as those we are developing. Central to this is the intent to combine greater technical trade expertise with the deep knowledge we possess of the African markets.
Standard Bank through its extensive African footprint has positioned itself as a bank of choice for banks when dealing with Africa. We have developed gateway trade products allowing banks outside Africa to transact with Africa without having to establish links with banks in over 50 countries. We are also one of the few banks that has developed their supply chain finance solutions on trade services utility (TSU) and partner up with other major banks in the world to provide working capital solutions to our clients, thereby broadening our trade offering. As we move forward, it is our intention to place Standard Bank at the forefront of trade innovation for Africa.
Standard Bank said to FinanceAsia Corporate Treasury News early last year that it expected continued reliance on heavily structured finance in 2011 following the financial crisis. Is this a position you maintain?
It’s a difficult one to answer. On the one hand, negative factors such as impact of the recession on lenders’ perceptions of African risk; the general unavailability of financing; and unfamiliarity and immaturity of some of the African markets are expected to result in continued reliance on structured trade. Our structured trade teams are certainly also being kept busy due to the fact that a lot of trade executed with Africa is conducted through Asian agents with limited financial standing, requiring structures to support the trades.
On the other hand, political stability; market friendly policies; deepening trade ties; lack of growth prospects on other markets; and a growing comfort on stability of many of the African markets, are expected to lessen reliance on structured finance. We certainly see significant opportunity to grow our non-structured trade business aggressively in the next few years, and to this extent I see the internal balance tipping away from the structured end of the business.