The overspill of the credit crisis in the developed world drove a huge new demand for Afreximbank’s trade finance products, leading it to develop new partnerships with other multilateral institutions, the Bank’s chairman and president says.
THE GLOBAL CREDIT CRISIS THAT began in 2007 created a vacuum in the availability of finance for African counterparties, one that prompted a surge in demand for Afreximbank’s products. This, in turn, drove major changes to how the organisation funded its operations, according to Jean-Louis Ekra, the Bank’s chairman and president.
Very few African financial institutions had direct exposure to the kind of complex financial products that prompted the near collapse of banks in the developed world. However, the crisis rapidly turned into one of liquidity squeeze. Needing to cover positions at home and rebuild capital buffers quickly, banks in Europe and the US stopped lending. African banks who had previously relied on credit lines from their global counterparts found themselves cut off.
This absence of liquidity was reflected in a broader pull back from Africa by international investors and banks, who were looking to retrench and reduce their exposure to riskier assets. This compounded the problems caused by falls in commodity prices, prompted by weaker industrial demand in markets that consume Africa’s natural resources. With money hard to come by, companies started to turn to Afreximbank en masse.
“Before the 2007/2008 crisis, Afreximbank used to have an average of $3-3.5bn in the pipeline of requests for financing,” Ekra says. “During 2008–2011 this figure grew to an average of $17.5bn per annum, suggesting that most of the African operators who used to have access to credit in the international markets, were now turning to us.” Available funds in international markets were expensive at the height of the crisis in 2008/9. Before the crisis, raising two-year credit in European markets meant paying 100 basis points, or 1%, above the interbank rate. During the crisis, that rate rose to 6%.
SHIFT IN APPROACH
The Bank had to find alternative sources for its financing, turning to a source that had begun to fall out of favour prior to the crisis. Afreximbank approached its peers around the world, looking to the export credit agencies in Europe, the Americas and in Asia to expand partnerships with institutions who also needed to build trade links with fast-growing economies in Africa. It was a turnaround for a group of financiers whose place in world trade had seemed to be disappearing in an era of cheap credit.
“The activities of Eximbanks were seen as unfair competition. However, when the financial crisis broke in 2008/09, the whole approach to export credit, or more generally to development finance, shifted,” Ekra says.
“I think it is a trend that is likely to continue for quite some time. Not only because of the crisis, but because it is also quite convenient. It is a win-win situation. Clearly, it is important for those countries whether European, American or emerging countries, to continue to boost their exports. To grow internal demand takes a longer time, because you have to grow the middle class, and to grow the middle class takes time. So the quickest way to maintain a certain level of economic activity in the country is to develop those exports. And those export credit agencies have been established for that.”
Ekra also reached out to development financial institutions (DFIs), including the International Finance Corporation of the World Bank and the African Development Bank, who realised that the sudden lack of available trade finance in Africa and elsewhere in the developing world could have a severe social and economic impact. Cutting off the supply of credit and holding back exports risked undermining the progress many countries had made in generating productive jobs, and DFIs offered financing at concessionary rates.
Afreximbank also tapped the market, issuing its first $300m bond in November 2009 under its EMTN programme of $1.5bn. The order book for that issue was more than $3.5bn, showing that there was a considerable demand for the return profile offered by the Bank’s debt. As a multilateral institution with an investment-grade rating from the three major rating agencies – Fitch, Moody’s and S&P – the Bank offered something that was in short supply in the market at the time. A further $500m issue, in 2011, was oversubscribed six times. The Bank is no stranger to difficult external conditions. When it was first conceived in the 1980s and founded in the early 1990s, the continent was yet to emerge from a difficult period characterised by structural inefficiencies in economies and political turmoil. Credit was in short supply.
Today’s Africa offers a different context. With the majority of African countries having experienced uninterrupted economic growth for the past decade, the continent has sparked a newfound importance for international businesses from the developed world and other emerging markets.
“At the time the Bank was established in 1993, African economies were not growing at the same pace they are growing right now,” Ekra says. “The private sector at that time was still embryonic. Most African countries were exporting through commodity boards, and those commodity boards were government-backed. As a result of the structural adjustment process, those commodity boards were dismantled. And in lieu, the private sector took up the role of the dismantled commodity boards and the Bank stepped in to provide financial and technical support to enable the private sector play that role.”
GROWING AFRICAN PARTNERSHIPS
That means helping the private sector reach new markets and understand emerging opportunities in African countries’ growing partnerships with Asian economies. The expansion of trade and investment links between the continent and China, now the world’s second largest economy, is an important avenue for African business in light of the continuing turmoil in Europe and stagnant growth in the US. (See ‘China-Africa Trade’ p. 14.) This year, Afreximbank will hold its annual general meeting (AGM) in Beijing.
“We have been invited to China to hold our AGM, and we believe that is a sign that our continent is becoming more and more like a beautiful girl that everybody wants next to him,” Ekra says.
“Why shouldn’t we go and see what China has to offer? We see this as an opportunity for Africa to sell itself properly. That is, not just be a continent that is providing raw commodities, but a continent that has a strategy to sell. That is is why we decided during that annual meeting, we should have, as a side event, an exhibition where African exporters are going to have the opportunity to show what they are producing.”
The nature of China’s trade with Africa currently highlights the continent’s struggle up the value chain in its exports. China consumes large volumes of raw materials coming from Africa, shipping back in return manufactured goods produced cheaply by its now huge industrial base.
Changing that balance to bring more African content and services into the trade mix is one of the Bank’s biggest challenges, Ekra admits. “At Afreximbank we think that we should be able to change that perception, particularly in the traditional exports,” he says. “The Chinese are now drinking Bordeaux wine imported from France. If they do that, there is no reason why they should not buy chocolate bars or cocoa powder coming from Africa.” Those naysayers who believe that the current configuration is hard wired need to look back two decades, he adds. China’s own consumptive society and manufacturing base were developed out of a country emerging from poverty.
“Today, Hyundai is selling 1m cars a year in China. Today, you have an upper class of Chinese who can buy a bottle of Chateau Lafite from Paris at $1,000,” Ekra says. “Maybe we should reflect on those and try to see China also as a market for Africa, rather than just the other way around. Rather than see Africa as a place to buy raw materials and sell cheap products.”
To assist in making this a reality, Afreximbank is working with China Eximbank on a three-pronged approach, which includes financing, a “twinning” system between Chinese and African exporters and promoters, and a market information service. As a package, this means that African companies have access to competitively priced funding to buy equipment and goods from China, can develop partnerships with Chinese exporters who already have specific sector know-how and experience, and can tap the knowledge of China Eximbank to ensure that they reach the right partners in China when looking to trade.
Ekra also believes that African exporters need to understand the potential on their own doorstep, and tap the same macroeconomic and demographic trends that have attracted Asian businesses to Africa.
“In the last 10 years of continued growth in most African countries, as a result of steady commodity prices and the beneficial effect of the structural adjustment programmes, you have now a growing middle class in Africa,” he says. “You now have a population of about a billion people, meaning it is becoming a sizeable market. So we see our role not only in assisting African exporters to export to their traditional markets, that is Europe and America, to export to the emerging markets – to the BRICS and the like – but also to develop intra-African trade.”
The momentum behind breaking down the barriers to trade between African countries has been growing in recent years. The infrastructure hurdles are being addressed through investment and the political barriers are being tackled through high-level initiatives and negotiations at the regional and continental level. The financial barriers, and the lack of productive capacity in the manufacturing and service sectors are what Afreximbank hopes to change by investing in business that helps commodity producers move up the value chain into manufacturing, and promoting the use of local service providers by global resource companies.
“You’ve seen that over the past three to four years, intra-African trade has been growing. It is not at a level that is satisfactory yet. It is about 11% of African trade. It used to be less than 8%,” Ekra says. “Our role is to ensure that Africa, increasingly, trades with itself. To do that, Africa needs to diversify its exports. We need to diversify our exports, not only in terms of composition, but also in terms of destination.