Following the recent G20 meeting in London, the IFC announced a USD400m credit line to Standard Bank to provide trade financing. Rachel Keeler analyses how business in East Africa will be affected, and what role China plays in this.
At its April 2009 summit in London, the G20 inspired a fare amount of fanfare in Africa by promising USD5bn in new trade financing for emerging markets. The International Finance Corporation (IFC) quickly announced that South Africa’s Standard Bank would be the first to receive a USD400m line of credit with which to rejuvenate flagging trade flows across the continent.
Policymakers have been biting their nails about the effect of the global crisis on international trade for some time, and especially after the WTO came out in March with numbers predicting a 9% decline in 2009 exports and depleted trade finance set to hit developing countries particularly hard.
The crisis has made the tug between importers and exporters much stickier for emerging market traders. Many importers are now hard pressed to secure letters of credit promising payment to their suppliers who are also increasingly suspicious of local bank guarantees; banks are less willing to help exporters cover their capital input and transaction costs; emerging market exporters may also face problems if their first world buyers fail to secure their own letters of credit from insolvent western banks.
“Without any liquidity around, we felt we needed to inject some money into the system and jumpstart the whole thing,” said Robert Mbugua, Standard Bank’s director of governments and international organizations for Africa. Standard was an easy pick for the IFC to begin rolling out its new funds: The bank is Africa’s largest, with an established trade finance program and subsidiaries in 17 countries across the continent including Stanbic in Kenya, Tanzania and Uganda. So what will all this fresh trading cash actually mean for East Africa?
Trouble with Demand
There are precedents for this situation: After the financial crises of the 1990s in Asia and Latin America, trade financing had also dried up. Latin America has been hit again this time around, with horticulture exports already down as a result. African exports fell from 4.5% in 2007 to 3% in 2008, with imports also down by 1%. But the decline here is not so much for lack of trade credit: A study released in March 2009 by the Institute of Development Studies (IDS) confirmed that fluctuating commodity prices, falling overseas demand and schizophrenic exchange rates are the real concern for Africa now. The study, which surveyed 25 firms in sub-Saharan Africa, found that unlike Latin American producers, horticulture and garment exporters in Africa have been unaffected by the credit drought.
IDS say this is because these growing industries are still a good bet for local banks. Big horticulture exporters also operate through well-established relationships with their European clients that ensure stable transaction financing. The study also found that Asian-owned apparel producers often have exports to the US financed by their parent companies. But in East Africa, both of these sectors have already been affected by falling demand. Tanzania says its fledgling horticulture industry is on the verge of collapse. After holding out through 2008, European demand for Kenyan flowers is now on a worrying downward trend. Textile firms in Kenya’s Export Processing Zones have said they could be wiped out because of overexposure to the US market and stiff Asian competition.
SME Risk
The real business at risk in East Africa in the trade financing sense is small and medium enterprises (SME). Small businesses have always had a harder time obtaining credit for anything in Africa and the story is no different for trade. This could become an issue for a country like Kenya, says Melissa Mwiti of Nairobi’s InvesteQ Capital, a venture capital firm focused on small businesses, because SMEs provide more than half of the country’s GDP. “Banks focus on the corporate market—when they ask for collateral, they get collateral,” Mwiti said. “SMEs do not have as much access to the credit that they want.” This was the case long before the financial crisis made credit even harder to come by.
About 40% of Kenya’s SMEs are involved in external trade. Many of them act as middle men, importing the goods that end up on corporate shelves. These suppliers are suffering from falling consumer demand passed on to them through the value chain. But few are complaining about trade finance, Mwiti said - probably because they do not know what should be available to them, or how to use it.
The IFC has been attempting to fill the emerging market SME trade finance education gap since 2005 through their Global Trade Finance Program (GTFP). In 2008, InvesteQ helped the IFC train businesses and banks from Kenya, Tanzania, Uganda and Rwanda on how to make trade finance available to SMEs across the region. The IFC has put up KES2.4bn in trade financing guarantees over the past year in Kenya through Diamond Trust Bank, which targets small businesses.
Banks have little to lose when partnering with the IFC as they often bear none of the risk themselves. But the IFC says the set up helps otherwise marginalized traders establish relationships with banks and break into new markets that they can then continue to access with less help from donor guarantees.
The IFC supported USD1bn in trade volume last year. Over 75% of that trade went through SMEs. The new Global Trade Liquidity Program announced at the G20 is simply an extension of this effort that will probably provide some stability to African trade rather than a real boost. Not discounting the IFC’s noble efforts, there is a much bigger reason that trade financing for Africa is likely to remain stable as we await financial recovery:
China to the Rescue
Last year, the Industrial and Commercial Bank of China (ICBC), now the world’s biggest bank with USD1.3trn in deposits) bought a 20% stake in Standard Bank for USD6bn. “The real focus of this deal has been in opening the trade flows between China and Africa,” Mbugua said. Craig Bond, chief executive for Standard Bank Africa, has even relocated to Beijing to make sure the trade floodgates remain open.
“Standard Bank is one of the 10 largest resource banks in the world,” Mbugua said. The bank has had its hands in African mineral trading and agriculture for over a hundred years. China needs access to these resources to continue its radical industrial growth curve. So it makes sense that China’s state-owned bank would dip into Standard and that Standard would receive the first huge chunk of the IFC’s new trade financing money, with Africa-China trade flows up 45% in 2008. China is also funding the pot, having pledged USD1.5bn for the IFC’s trade liquidity program. This is on top of financing that China already provides through the African Development Bank and the Development Bank for Eastern and Southern Africa trade. The ICBC is also rapidly expanding its own trade financing facilities.
China is looking to Africa for stability as demand for its exports lags in the US and EU. Kenya ran a KES44bn trade deficit with China in 2007, importing telecoms equipment, cars, electrical machinery, textiles, data processing machines, arms, and tires. Kenyan trade with China multiplied 7.5 times between 2003 and 2007, from KES6.6bn to KES45.7bn. This demand, and the demand just like it in other African economies, is unlikely to decline much because of the crisis. Which means China will continue to do whatever it takes to make sure African traders get the financing they need.
|
Subscribe to this comment's feed
Show/Hide comment form
