How Can Africa be More Competitive?
Extract from The Africa Debate 2022 Report
In times of high volatility, as the global economy is currently experiencing, capital tends to retreat to markets closer to home. Africa’s funding gap is such that private capital, both domestic and international, will have to fill the bulk of the region’s development needs. Emerging from the challenges of the pandemic, it is more evident than ever that Africa will have to drive the solutions to its own challenges and advocate for its own interests in global markets. Though the continent has long suffered from a number of factors holding back private sector growth, the region also boasts structural strengths that can provide a springboard to unlock growth.
Cheryl Buss, International CEO, Absa Group
Transforming African Trade
For businesses assembled at The Africa Debate, market fragmentation, policy instability, shallow capital markets and foreign exchange volatility were highlighted as key barriers to attracting investment in Africa. For Uche Orji, CEO of the Nigerian Sovereign Investment Authority, the weakness of the continent’s capital market’s means that the region “doesn’t have the liquidity to drive the sort of growth you’ve seen in OECD countries.” For this reason, Cheryl Buss, CEO of Absa International, called to prioritise “better integration into global markets and global trade” while Nisrin Abouelezz, Managing Director and Head of the Africa Group, and SMBC, highlighted the importance of governance as the thread linking the challenges facing private capital in Africa.
“Our goal is for Africa to one day become as globally competitive as any other part of the world.”
In the African Continental Free Trade Agreement (AfCFTA), the continent has set down a marker of its ambition to transform from an exporter of primary products to a region that trades in valueadded products and is able to assert its role in the global economy. Addressing representatives from the African private sector and international capital custodians, Wamkele Mene, Secretary General of the AfCFTA Secretariat, outlined the agreement’s ambition “to consolidate this market of 1.3 billion people with a combined GDP of 3.4 trillion dollars to make it competitive, industrial, and of course to create jobs and attract investors.” As well as reducing tariff barriers to trade, the AfCFTA Secretariat is working with Afreximbank to address the non-tariff barriers faced by businesses on the continent. Afreximbank’s PanAfrican Payments and Settlements System (PAPSS) will facilitate payments between 42 countries across the continent, reducing cost and time for businesses, with 60% intra-African trade expected to flow through the platform by the end of 2022. An Africa Trade Gateway is also set for launch this year which will become the largest KYC platform in the world. The vision from Africa’s leaders for the continent to “one day become as globally competitive as any other part of the world” was clear throughout the discussions with welcome support from the UK Government.
Harnessing Positive Global Tailwinds
Despite ongoing barriers to trade, including inefficient transport systems, limited industrial capacity and weak infrastructure, investors and businesses expressed optimism about the AfCFTA’s ability to take advantage of the global tailwinds that could act in Africa’s favour. Chief amongst them, a shift to multipolar supply chains with greater emphasis on reliability than cost, consumer preference for sustainable products manufactured locally, improving policy frameworks for private investment and an abundance of in-demand natural resources. Amongst these, producing for intraAfrica trade emerged from discussions as the most significant opportunity in Africa for businesses planning a long term strategy. Gagan Gupta, Co-Founder of the infrastructure and trade platform, Arise IIP, Arise IS & Arise P&L, is already taking advantage of this explaining that through robust private-public partnership frameworks it is already possible to trade successfully in Africa, and the advantage of the AfCFTA lies in allowing “Africa to build pockets of excellence” as countries specialise in different value chains.
Finding the Right Financial Model
To fully capitalise on these opportunities Africa will need to significantly expand sources of private finance. Traditional private equity models imported from the US and Europe, with low risk appetites and short tenures, may not be the best model for to crowd in the type of finance Africa needs. “In the West, development is not done by private equity”, explains Babatunde Soyoye, CO-Foundering Partner and Managing Partner at Helios Capital Partners, “it’s a different type of capital that takes on high risk such as large corporates or governments”. Hence the central role that development finance continues to play in African markets. “We’ve done a better job of investing our own capital than we have of mobilising other people’s capital” acknowledges Nick O’Donohoe, CEO of British International Investment. The organisation is now redoubling efforts to develop new models of financing and work more closely with larger private companies to maximise the de-risking role that development finance can play.
Developing local sources of capital is also an essential piece of the funding puzzle. For Mohan Vivekenandan, Group Executive: Origination & Coverage at Development Bank of Southern Africa (DBSA), growing local pension funds is key as international investors will take comfort in being able to invest alongside local entities. “If we don’t create the local pension funds, it’s going to be very difficult to solve for some of these problems” he warns. Similarly for Ade Ayeyemi, CEO of Ecobank, who believes that Africa’s difficulties raising investment stems “not from a lack of capital but a lack of imagination”, encouraging the financial sector to take a holistic approach and build from the ground up so that local savings can be deployed to generate wealth. savings can be deployed to generate wealth.
