Investors Eyeing South-South Trade to Help End Crisis

By Stephanie Nieuwoudt
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By Stephanie Nieuwoudt

3/31/2009 10:42:20 AM -

Story By: Stephanie Nieuwoudt
Despite the challenges that the global economic crisis poses to Africa and other developing regions in the southern hemisphere, South-South trade still offers huge opportunities as there is room for growth beyond the current levels.

According to Jean-Louis Ekra, president of the African Export-Import Bank (Afreximbank) - a multilateral organisation that finances and promotes trade with African countries - the potential benefit from South-South trade may offer the same financial gains as trade with richer, Northern countries.

With the downscaling of North-South investments, Southern countries will do well to forge intra-regional links to optimise potential and opportunities, he said. Ekra was speaking at the third Annual Africa Trade and Investment Conference in Cape Town, South Africa. It ended on Friday Mar 27.

However, while a feeling of optimism reigned at the conference, which was attended by bankers and investors, there were also voices urging constraint because of the negative impacts the global financial crisis have already had on Africa.

Sketching a positive picture, Ekra said that South-South merchandise trade has grown significantly in the past 20 years, albeit from a very low base. South-South trade represents six percent of world trade, a 100 percent increase from 1985 levels.

South-South merchandise trade grew at an average rate of 12.5 percent per year over a 24 year period - a figure that compares well to the North-North growth rate of seven percent and 9.8 percent for North-South trade.

African trade with the BRICs (Brazil, Russia, India and China), especially India and China, has been robust with a rise of 1,170 percent between 1985 and 2007. In 2007, trade between these countries amounted to 256.25 billion dollars and represented 32.7 percent of Africa’s total trade.

Intra-African trade has grown at a slower pace - from seven percent in 1985 to about 10 percent in 2008. These figures lag behind eastern and south-eastern Asian countries where intraregional trade equals more than 40 percent of total trade.

Until recently South-South trade was dominated by commodities. It was widely accepted that this stymied growth as countries were trading very similar products.

South-South trade got a tremendous boost with the industrialisation of China and India. These countries became large-scale manufacturers, dominating the export market to a large extent. According to Ekra, South-South trade was further boosted through multilateral trade negotiations which eventually led to the establishment of the World Trade Organisation, the internet revolution and sweeping economic reforms in many countries.

The current economic crisis has led to a strong demand for investment stocks outside of the U.S.. In Egypt, Ghana, Kenya, Nigeria and South Africa some of the highest global stock returns were posted between 2003 and 2007. Investors were quick to tap into this market.

Yet, despite strong growth in gross domestic product (GDP) these past five years and political stability in many African and other developing countries, these countries have not remained unscathed by the current economic crisis.

The value of stocks in Africa has declined since the beginning of 2009 - with Nigeria being the worst affected. The World Bank’s estimates indicate that exports of Asian countries will fall by more that 40 percent this year when compared to 2007/08 levels.

Ekra added that some African countries, especially those producing fuels and solid minerals, will probably experience export declines of more than 50 percent.

“The World Bank estimates that the expected decline in global trade will be 90 percent attributable to demand and 10 percent to lack of trade finance. There is therefore a strong argument for boosting domestic demand across the world,” Ekra stated.

He added that Afreximbank, as a trade facilitator, has placed emphasis on pursuing pan-African initiatives that “make sense as a self-reliance strategy”.

This means that African financial institutions should share information and work together on intra-regional projects. Co-operation has already led to the creation of the African Bankers’ Association; the development of an African correspondent banking and letter of credit confirmation scheme (Africorrbanking); and an annual trade finance seminar.

Afreximbank is also working with the BRICs countries because “greater interaction with the BRICs provides an opportunity for the transfer of cutting-edge technical and managerial competencies as well as market access capabilities for African traders”.

Konrad Reuss, managing director of Standard & Poor’s, a financial institution providing credit ratings, indices, investment research and data, told the conference that projected GDP growth for many African countries is around 3.8 percent - down from an average of between five percent and six percent over the last five years.

“This is still positive growth. However, with the projected increase in population, the per capita expenditure will also increase which to a large degree could negate the growth. In these stormy seas, we will soon see where the good African skippers are.”

Avril Stassen, investment advisor at the Africa Agribusiness Investment Fund (Agri-Vie), a private investment fund focusing on agribusiness in sub-Saharan Africa, argued that the contraction in commodity prices will moderate growth on the continent.

But there is still strong growth in infrastructure investments - railroads, roads, dams as well as agribusiness - in Africa. “In fact, it seems as if investors are even keener to invest on the continent than last year. Foreign direct investment inflows in 2008 increased by 17 percent, from 2007 levels, to 62 billion dollars,” Stassen told delegates.

This is despite risks posed by potential political instability, exchange rate volatility, lack of infrastructure and a thin layer of managerial capacity in many countries.

Stassen explained that Agri-Vie bases its optimism about Africa on four pillars: Africa is resource-rich; there is continuous capital inflow; urbanisation is taking place at a rapid pace; and many countries have instilled measures to ensure improvements on the national and corporate governance levels.

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