Private equity investor Mediterrania Capital Partners (MCP) is considering investments in supermarkets, health and education as the impact of COVID-19 whittles down the list of financially strong candidates, CEO Albert Alsina tells The Africa Report.
AfCFTA: COVID-19 is a hiccup in delay says Afreximbank’s president
Afreximbank President Benedict Okey Oramah sees COVID-19 as no more than a hiccup in the establishment of a pan-African payments and settlement system.
The 54-nation continental free-trade zone is expected to create a $3.4tn economic bloc with 1.3 billion people across Africa and constitute the largest new trading bloc in the world. But the arrival of the coronavirus pandemic has put the breaks on the rolling out of the African Continental Free Trade Agreement.
Dr. Benedict Okey Oramah, president of the African Export–Import Bank, discusses with The Africa Report the impact of COVID-19 on the bank’s lending, and the prospects for African free trade.
TAR: How much of a blow to Africa’s economies is the postponement of the implementation of the African Continental Free Trade Agreement (AfCFTA)?
Oramah: The recent announcement to postpone the commencement of trading under the AfCFTA from the initial slated date of July 1, 2020 is regrettable but necessary given the impact of the COVID-19 pandemic.
The delay is not due to any lack of political will or deficit of commitment from any of the 54 member countries which have signed the agreement but is dictated by the challenging pandemic environment which has led to a severe disruption in activities globally and within Africa. Many countries have had to focus on containing the virus so more time would be required to conclude the preparatory work to kick-starting trading.
I am pleased that those preparatory activities are now set to resume virtually. So, the pandemic amounted to a brief distraction. Work is getting back on track. For instance, we expect the Pan-African Payment and Settlement System (PAPSS) which Afreximbank is supporting to start piloting by September 2020, that is just three months delay as the initial date was June 2020.
However, the pandemic which has led to a postponement of the implementation of the AfCFTA has also reinforced the rationality of the continental trade integration project and the need to draw on economies of scale offered by the AfCFTA to boost industrial production and manufacturing output. The development of regional value chains and local manufacturing capacities, especially in pharmaceuticals and medical equipment will reduce the risk of excessive dependence on imports and the negative spill-over effects of disruptions of global supply chains which have been associated with the pandemic.
Under its $3bn Pandemic Trade Impact Mitigation Facility (PATIMFA), the bank is already working with a number of key stakeholders and institutions to support and expand manufacturing capacities in the production of medical equipment and pharmaceuticals to support implementation of the AfCFTA post-containment phase.
Do you have any idea of when it might be practical to implement the agreement? What are the main current obstacles to doing so?
While no new date has been officially announced it is anticipated that the start of trading under the AfCFTA will not be unduly delayed. Obviously, the biggest obstacle to implementation as a result of COVID-19 is the delay in concluding the negotiations, especially on outstanding phase one such as schedules on tariff concessions, rules of origin, and liberalization of services.
The rules of origin which is the cornerstone for effective implementation of the preferential trade liberalization will enable AfCFTA member countries to source more intermediate and final goods among themselves (rather than importing from abroad) and in the process drive both industrialization and intra-African trade. COVID-19 halted the negotiations for a while but they are set to resume virtually. We expect that these issues would be settled before year end.
We are hoping that the delay could provide an opportunity for more countries to ratify the agreement, such that when trading under the AfCFTA effectively starts, the integrated African market extends beyond the 29 countries that have ratified the agreement to date. Additionally, the delay allows for the commencement of phase two negotiations and the establishment of commitments addressing investment, intellectual property, and competition, which could assist in ensuring an internally consistent and more robust free trade area. Ongoing efforts to conclude the negotiations virtually demonstrates the political will and commitment to ensure that the start of trading commences as soon as possible.
Do you fear that some countries may see protectionism as a logical response to COVID? How can this reflex be avoided?
The trend toward protectionism in this unprecedented time is perhaps understandable as the pandemic has forced many governments to focus on the immediate health concerns of their citizens. Many countries, including in Africa, have resorted to lockdowns and the closure of borders, specifically restricting the movement of people in an effort to stem the spread of the virus and contagion. In other regions trade restrictive measures have become pervasive, with more than 60 countries imposing export restrictions on medical equipment, pharmaceuticals and personal protective equipment and with many others also imposing restrictions on food exports on rising concerns over food security. While most of these measures are allowed under multilateral trade rules, their implementation could have significant adverse implications in terms of growth and welfare, especially in a context of globally integrated value and supply chains.
In Africa, the instinct toward trade protectionism has not been as pervasive as in some other regions of the world. For instance, only five countries have introduced export restrictions as a result of COVID-19, and in most instances these restrictions have been on a temporary basis. In fact, the pandemic has seen several African countries, lower tariffs and other domestic taxes to facilitate greater trade during the pandemic. The rush to protectionism in a growing number of Africa’s leading trade partners may provide even greater impetus and catalyze the shift in the direction of trade, more towards intra-African trade, for greater trade and food security, especially under the AfCFTA.
Which are the sectors which most urgently need AfCFTA? What can be done to help these sectors in the meantime?
The sectors that stand to benefit the most from the AfCFTA are undoubtedly Africa’s manufacturing and services. For instance, the current profile of intra-African trade shows that manufactured products constitute a large portion of intra-African trade, in stark contrast to Africa’s external trade which remains largely dominated by primary commodities and natural resources. With manufacturing representing only about 10% of GDP in Africa, African countries have been reliant on foreign imports.
The AfCFTA creates the opportunity to gradually narrow this manufacturing deficit and in the process reduce the exposure of the region to commodity price volatility and long-term deterioration of commodity terms of trade. An integrated market which provides opportunities to draw on economies of scale to support the development of regional value chains could accelerate structural transformation and the emergence of a vibrant African manufacturing base. Afreximbank has been supporting this process through the financing of industrial parks across the continent and by leveraging more resources and FDI to catalyze technology transfers.
The services sector also hold enormous growth potential for the continent and will become even more important under the AfCFTA, especially with the increasing needs for logistics and financing of intra-African trade. Whether in the area of natural resource exploration and management or labour-intensive light manufacturing, services play a key role, both in the financing and delivery of goods. As the most dominant sector in many African economies, services are already supporting the process of structural transformation and driving intra-African trade.
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Some African economies have been developing their services industries with great success. For example, the financial and banking service industries of Mauritius and Nigeria, the creative industry across many countries, the tourism sector, especially in northern, eastern and southern Africa, the commercial and cargo air transport industry in Ethiopia and South Africa, the telecommunications services of Egypt and the port services industries of Djibouti, Kenya and Morocco. We also see growth coming in the healthcare sector. Afreximbank has strong programmes to support trade in services, from tourism, through the creative industry to healthcare. For example, the bank recently launched a US$500M African creative support facility to make funding available for the production and distribution of creative goods and services across Africa.
What has been the financial impact of the pandemic on Afreximbank so far? Are you likely to need to raise new capital?
A pandemic of this magnitude can have far-reaching implications on economic activities. For a bank, the pathway of such impact can be to access to liquidity, loan quality, access to capital and disruption in business plans. For a multilateral development bank intended to deal with market failures, there is an added challenge of being in a position to meet expectations of support to member states. What I can tell you is that Afreximbank has long experience of managing crisis and has in place institutional frameworks to respond effectively. Those frameworks were activated upon declaration of the pandemic and so far, we are satisfied that impact on loan quality will not be significant.
The bank entered the crisis with strong liquidity of over $3bn and a liquidity coverage ratio exceeding 200%. It has since then been able to raise an additional $6bn to support its operations, especially in the context of its Pandemic Response Facility. Additional equity warrant commitments have also been received to support the huge demand for the Pandemic Facility which has so far exceeded $15bn. So, we expect some growth in the balance sheet, continued strong liquidity and capitalisation as well as satisfactory asset quality.
Are you experiencing higher non-performing loans as a result of the pandemic? How are these being managed?
The bank set up the Loan Quality Committee (LQC) to manage the potential adverse impact on asset quality.
The LQC reviewed the entire portfolio (funded and unfunded) on a name by name basis to identify those facilities that may be vulnerable to the direct or indirect impact of COVID-19 putting into consideration the client’s sector, collateral, cash in debt service reserve accounts (DSRA), cash in collection account, facility structure, and other risk mitigants.
Following this assessment, the Bank identified the potentially vulnerable facilities and implemented remedial solutions to avoid default. Some of the positive steps included the following:
- Clients depositing cash into DSRA and collections accounts to cover 2020 repayments;
- Clients providing additional collateral/sources of repayment, e.g. additional cargoes;
- Clients confirming their ability to meet obligations;
- Leveraging structured trade finance in mitigating and transferring repayments risk to mitigate losses by ensuring firm demand for oil and certain metals even when prices collapsed and affording price protection through hedging derivatives;
- Receiving hedge positions pay-off cash proceeds on behalf of the clients from the hedge counterparties. All hedge counterparties are highly credit rated investment banks domiciled in the OECD; and
- Monetising some price hedge positions and terminating cash proceeds in favour of the bank’s clients are retained in collection accounts of the clients held on the bank’s books and new hedges put in place covering the remaining period of the exposures.
The LQC continues to meet on a weekly basis to review the situation. However, in view of the foregoing we do not anticipate a significant deterioration in the bank’s asset quality.
How is your $3 billion Pandemic Trade Impact Mitigation Facility (PATIMFA) being deployed?
African economies are forecast to contract by about 1% this year, the first time in 25 years. Again, while the pandemic remains a health crisis, its impact on African economies is largely trade-linked, namely sharp decline in commodity prices, disruptions in supply chains, backlog of trade debt payments, etc.
The support provided by the bank under PATIMFA will enable a speedy economic recovery in its member countries post-containment phase.
PATIMFA is targeted at:
- Supporting the procurement of critical COVID-19 supplies
- Supporting the import of food and agricultural inputs to avoid the pandemic morphing into a political crisis
- Assisting central banks and commercial banks to meet trade debt payments falling due
- Supporting countries dependent on mining royalties and import tariffs as sources of fiscal revenue.
Since the launch of PATIMFA, the bank has received requests from sovereigns, financial institutions and corporates exceeding $15bn. Of these, 47% are from sovereigns, 42% from financial institutions and the remaining 11% from corporates.