Authors: Michelle Knowles, Head of Trade and Working Capital (Pan Africa), and Michael von Fintel, Head of Financial Institutions at Absa CIB
As the global economic landscape continues to evolve, shifting trade relationships among major economies are set to have profound impacts on African trade. With traditional trade routes being redefined and new alliances forming, Africa finds itself at a crossroads of both opportunities and challenges.
The continent’s rich resources and growing markets position it uniquely to benefit from these changes, but only if strategic adjustments are made to navigate the complex web of international trade dynamics. The challenges are well-publicized. We have an all-out armed conflict in Ukraine and a worrying Middle Eastern situation that could draw additional countries into a wider conflict.
For those looking to the future, all eyes are on the relationship between China and the US, as the former is taking on a more influential role in global politics, as are the formations of bodies like BRICS. As global powers are vying for relevance, we are seeing financial mechanisms being deployed. This takes various forms including direct sanctions, and exclusion from financial systems such as SWIFT or Foreign Direct Investment (FDI) being utilized as a carrot or stick.
As various countries and regions try to build their global dominance, we are seeing several countries rethink their way of doing business. As an example, we are seeing a clear move of trade transactions traditionally being denominated in currencies like USD, to increased settlement of transactions in the Renminbi and the Chinese Cross-Border Interbank Payment System (CIPS). These initiatives all add momentum to a shift from Western-dominated global trade to a more multi-polar environment.
As a business owner, global geopolitical events, tensions, and wars bring in an additional element of risk. Perhaps it is best understood when one looks at the 2023/24 AON Global Risk Management Survey which highlights the top 10 global risks businesses face. While several factors are identified, “Supply chain or distribution failure” comes in at number 7. In an increasingly connected world, these “big picture” factors are incredibly influential.
Take for example the tensions in the Red Sea which are influencing critical trade routes. These conflicts are negatively impacting supply chains by introducing a combination of costs and time for those looking to move products around the world. This in turn drives inflation which has an influence on monetary policy including interest rates.
There is a saying in Africa that “when two bull elephants fight, it is the grass underneath them which suffers, and this is very relevant in a world that is seeing a shift from Western-dominated capitalism to a multi-polar world where markets including China and India are becoming increasingly prominent in the world order. The reality is that Africa itself only contributes 2 to 3% to global trade. Rather we need to focus on intra-African regional trade which currently sits at 15 – 17%. In comparison to regional trade in places like Asia (59%) and Europe (69%), there is still a lot of work to be done.
New trade zones such as the African Continental Free Trade Area (AfCFTA) and the establishment of Special Economic Zones are good starting points. If we can make it easier for businesses and countries to execute regional trade, this will not only buffer African countries from global geopolitical events, but it will drive financial independence and long-term sustainability as well as economic growth.
It is important that we take learnings from countries like Singapore which understood that while the private sector can be an innovator, it takes engagement at a sovereign or government level to deliver real scale. This is why we’re excited about the opportunities being unlocked by the AfCFTA and now the other stakeholders need to play their part to support the ecosystem.
We need to acknowledge that trade is now global, and we need to look at the work that the various global industry bodies such as the International Chamber of Commerce (ICC) and Bankers Association of Finance and Trade ( BAFT) is doing to develop global trade standards. At the same time, DFI’s are taking a more active role in looking for transactions that can stimulate regional trade.
As a bank, we are excited about the opportunities presented by digitalisation and the use various technologies to enhance efficiencies and reduce trade finance costs. We are constantly exploring various initiatives, including Blockchain OCR and AI. If we can reduce the cost of transacting while enhancing the integrity of transactions by putting in place anti-fraud mechanisms, we can see regional trade increase significantly.
It is no longer “business as usual” for traditional international trade corridors and Africa is likely to become a focal point for global superpowers. It is critical that the continent takes the initiative in terms of innovation and collaboration to allow it to chart its own course in the global economy.