Managing risk and driving trade to shape the African growth story

“A correct understanding of risk in Africa – along with an appreciation of the growth potential yet to be unlocked by trade; both cross-border and intra-Africa, provides global corporates with a new lens through which to identify and access African growth,” says Vinod Madhavan, head, transactional products and services, Africa at Standard Bank.

Corporates remain ever-interested in high growth emerging markets. Currently a large number of the world’s high-growth emerging markets are in Africa. Forecasts for 2016-2020 place Africa as the second fastest growing region in the world (at a compound annual growth rate (CAGR) of 4.3%), just below Emerging Asia.

Impressive as these figures are, they are down on the growth highs achieved during the heights of Africa’s commodity super cycle. This has led many commentators to conclude that Africa’s growth story is tailing off. “Nothing could be further from the truth,” says Madhavan.

“Africa’s future potential remains far larger than its past achievements – especially when one considers the growth potential latent in the continents current low levels of intra-Africa trade. Currently hovering around only 12%, these intra-African trade levels offer great headroom for growth.”

Global perceptions of Africa as high-risk, however, often prevent businesses from correctly identifying opportunity on the continent.  This is exacerbated by perceptions that trade in Africa is also complex and high risk. The numbers, however, paint a different picture of African risk.

The 2015 ICC Trade Register study, conducted amongst 23 banks around the world jointly accounting for 60% of global market share, for example, reports that:

• Export letters of credit (LCs) as well as performance guarantees in Africa and the Middle East have the same default rates as the Americas.
• Default rates in purpose specific loans and trade finance deals amongst African and Middle Eastern countries is 1.04%, lower than in the Americas.
• Import LCs in Africa and the Middle East have only slightly higher default rates than in Asian and Pacific countries.

Separate research shows that an increase in the availability of finance for cross-border trade drives a disproportionate increase in SME growth. For example, a 2013 Asian Development Bank survey found that a 15% increase in access to trade finance enabled firms to hire 17% more staff while production increased by 22%.

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