Trade between Africa and the Bric countries -- Brazil, Russia, India and China -- has grown 10-fold over the past decade. The value of total transactions increased to about $166 billion by the end of 2008 from $16 billion in 2000. Now the flavour of the month is Sino-African trade.
South Africa's Standard Bank is positioned to take advantage of China's, in fact Asia's, appetite for Africa. The institution is widely regarded as the bank of choice for Asian traders when it comes to Africa. Craig Polkinghorne, Johannesburg-based global head of structured trade and commodity finance at Standard Bank, and Tee Chong Ong, Singapore-based Asia head of structured trade finance at the bank, discuss the evolving trade relationship between the world's two largest continents with FinanceAsia.
Trade globally was down approximately 12% in 2009 according to the WTO. How did Africa-Asia trade perform?
Craig Polkinghorne: There was a decline in trade between the two continents during the first half of 2009. Several factors influenced this, including a loss of confidence between banks which severely impacted inter-bank trading. Performance in the trade services business dropped especially with large transactions that required funding, and in general a global inventory downsizing directly led to the slowdown in trade globally. At Standard Bank we were fortunate enough to have a close relationship with the International Finance Corporation (IFC) and held similar views with their approach to trade acting as a stimulus for economies during the financial crisis. The IFC provided a $400 million funding line to Standard Bank to specifically address the shortage of trade finance in 2009. Similarly our close links with ICBC, a shareholder in Standard Bank, have assisted in the development of specific China-Africa opportunities.
Considering the economic slowdown in most developed markets last year, would you say the importance of Asia as a trading partner with Africa has changed?
CP: I think if anything it has increased, certainly with China. During the financial crisis last year Europe and the US showed low to negative growth while China continued to grow which means that its trade importance is becoming proportionally larger all the time. As a trading partner, China then becomes increasingly important especially for the commodity exporting countries in Africa.
Africa is seen as a "land of opportunity" when it comes to natural resources and infrastructure development in Asia. How would you characterise the sentiments of Asia in Africa?
CP: There is a potential to create a win-win partnership between both parties, each has what the other wants and needs. On the one hand, Asia has the markets and demand for Africa's natural resources which are the dominant exports from the continent. The Asians have the capital and capital goods which can assist with African infrastructure requirements. In Africa there is a major infrastructure backlog and therefore Africa has become a natural infrastructure client as it lacks roads, ports and railways. There have been accusations in the past of bias towards transactions that have only benefited the Asian side of the equation but this is correcting as local African issues, including those impacting the environment, are taken into consideration.
Do you think traders can look forward to closer trading ties between Africa and Asia, perhaps in the way of free trade or similar agreements?
CP: Ties between the two regions will become closer as each becomes increasingly important to another. With the history that builds up with continued trade, a level of trust is gained which allows alterations to the terms of trade between individual parties or countries. Perhaps not in the direction of free trade but there could be a higher volume of open account transactions between trading entities. Facing this evolving relationship, Standard Bank must adapt the services that it provides. If the level of trust is low then heavily structured transactions are required. As trust builds up then there will be a move from issuing letters of credit or highly secured and structured transactions to a more cash and payment approach.
On the whole, there was a resurgence of structured trade finance in 2009. Do you expect this trend to continue through 2010?
CP:There was a continued reliance on traditional trade instruments and structures at the end of 2008 and through 2009. Banks were far more aware of linking the tenure of a loan to individual trade cycles. Pre-crisis it was not uncommon for loan tenures to be much longer than trade cycles. Another visible trend is the increase in secondary market trade transactions; inter-bank trading which completely died during the financial crisis. This will certainly make a comeback as confidence between banks returns. Through 2010 and 2011 we expect a continued reliance on heavily structured finance as "memories are not that short".
Ong told us last year that one of the reasons for structured trade finance between Africa and Asia was because there was a lack of "mutual understanding" between the two parties. Based on Standard Bank's work, would you say understanding between the two regions is increasing?
CP: Understanding between the two regions is not really improving fast enough, but not because of a lack in trying. Africa is known as the dark continent with over 50 individual countries each having their own unique peculiarities - when people look at Africa they see a black hole in terms of their understanding. It provides an opportunity for financial partners to assist where they have an understanding of the global trade business combined with the relevant local knowledge.
Tee Chong Ong: This is an evolutionary process. Just one unhappy experience between a buyer and seller and things will take a step back before confidence picks up again. Standard Bank's relationship with Chinese banks will certainly help improve understanding but these sort of relationships take time and are very difficult to measure.
Standard Bank has been manoeuvring to make itself thebank for Sino-African trade. How is this strategy progressing?
CP: It's something we are working on all the time. There is certainly increased inter-regional trade flow and we are receiving more referrals. There is enough going on to keep us all busy and we have increased capacity in Asia with a 50% increase in staff.
As Africa and Asia trade matures, do you expect to see any shifts in the trade pattern?
CP: As African and Asia trade matures we would expect to see the number of importers in Asia to increase as the region becomes more familiar with trading counterparties in Africa. Similarly we would expect Asia to become a competitive provider in projects linked to infrastructural development.
TCO: Islamic financing would be less of an excitement in terms of a new flavour. Islamic financing was the flavour two years ago but has lost its sparkle as it has come more into the mainstream.
As more banks participate over time there will be a differentiation over the services provided rather than price. I think that price is an important factor but tends to be quickly forgotten. People will head back to the bank that provides the best products, service and solutions.