What was the motivation of Citibank to start a funded trade finance program in Africa?
Africa is a potential pole for growth and can certainly play a role in the global recovery as an additional zone of growth and demand. To quote a recent article in the Economist: Banks are taking Africa seriously. Africa is a fast-growing continent and its growing trade with other emerging markets, mainly in Asia and Latin America, has created a need for new strategic partners. Several key players in the banking sector are positioning themselves by establishing a sizeable presence in the region to benefit from the growing ties between Africa and emerging countries. The Industrial Commercial Bank of China (ICBC), China's biggest bank, acquired a 20% stake in Standard Bank of South Africa in February 2008. Barclays bought a controlling stake in ABSA, the country's largest retail bank, in 2005. HSBC is most likely to acquire a controlling stake (70 per cent of Nedbank's shares) in Nedbank, South Africa's fourth-largest bank, in a deal that would be announced soon. HSBC and Standard Chartered have both indicated that they were keen to expand further into overseas markets.
Citi has an extensive footprint in the African market, with an office presence in 15 countries (covering 95% of Africa's GDP) as well as offering services in another 26 countries, through a centralized Non-presence Country Unit based in Johannesburg.
Therefore, leveraging the comparative strengths of AfDB (risk capacity, AAA-rating, regional knowledge and development focus) and Citi (operational capabilities, global network, regional footprint and trade expertise) can improve the current trade environment for African economies as well as address the demand-supply deficit spikes occurring from specific and recurrent crisis (e.g. food price volatility) and structural shifts (increase in South-South trade flows).
What are the lessons learnt from this crisis?
Current financial crisis has highlighted how crucial trade finance is to international trade. The capacity to export and import is significantly affected by the availability and cost of financing and the availability of instruments to mitigate risks associated with international trade transactions.
Economists have been trying to assess reasons behind the rapid decline in international trade Between October 2008 and January 2009, global trade fell by about 20 per cent and by around 12 per cent in 2009 -- the sharpest decline since the end of the Second World War. The main explanation for this freefall has been the simultaneous reduction in global demand (the postponement of trade transactions is most likely the main reason as suggested by the rapid recovery), compounded by some instances of increased tariffs and domestic subsidies, new non-tariff measures and more anti-dumping actions. The drying up of trade finance during the period has also been a contributing factor.
The crisis has underlined Africa's undiversified exports i.e. the continued dependence on primary commodities: This implies that growth in the medium-term will largely depend on the recovery of global demand. Last year, import demand remained low in Africa, but as demand picks up, the problem of import financing will materialize fully, and may hamper economic growth if not addressed adequately.
With the exacerbation of risk aversion globally and particularly in Africa, it is increasingly difficult for Low Income Countries (LICs) to obtain trade financing both from international financial markets and their own domestic financial institutions. Fear of default, (i.e. counterparty risk), is causing banks to tighten lending criteria. Several banks have substantially reduced their credit lines, raised their costs, and become reluctant to confirm letters of credit in Africa. Therefore, LICs access to trade financing seems more difficult today than before the crisis.
The "outsourcing" approach has allowed us to leverage on partners' platform and outreach. The Bank has therefore implemented a relatively sizable program in a short period with minimal budget implications.
Concerted efforts of the Development Finance Institutions (DFIs), and commercial banks were crucial for setting up the crisis response and allowed the GTLP programme to quickly move from concept to reality and provide significant support for trade in RMCs.
The implementation of the TFI has provided the necessary expertise and a global network of DFIs. Building internal capacity was a requirement from the Board of Directors and should enable the design of appropriate responses in the future if needed and based on the market situation.
Short term financing if integrated as a specific activity/sector needs fast processing and streamlined implementation approach across the Bank as well as additional institutional resources. IFC for example has devoted significant resources to establish a dedicated GTLP Operations Team.
The crisis also highlighted the lack of trade finance data in the Region. Data archive documenting trade experience in Africa is scarce and the assessment of trade finance gaps and market needs is based mainly on overviews and inventory assessments. The lack of consistent, portable data may translate into overly conservative risk weightings for trade finance products. It is therefore pertinent to build timely insight into trade finance trends.
Now that the market situation for trade finance has, by and large, been gradually improving - Can we say that the situation is back to normal?
The situation is characterized by the regional context with the high perceived risk and small operations in Africa, and the global context with the uncertain global recovery and looming and recurrent crisis.
Economists and major international banks agree that the trade finance situation in Africa is still constrained, particularly in the financing of manufacturing imports and inputs. It is true that trade finance markets have continued to improve since the fall of 2009. However, recovery patterns have been mixed across regions with Asian markets leading the recovery. In this vein, the trade finance experts meeting in Geneva on May 18, 2010, were unanimous in highlighting continuing constraints on trade finance in Africa. Even if global access to liquidity seems to be less problematic (although dollar liquidity is quite a problem and European banks are asking for high liquidity premium in addition to risk premium), the problem of risk aversion remains particularly for smaller players and low income countries. As a growing number of global banks have improved liquidity positions, they face increased risk aversion and lower lending appetite, particularly in emerging markets such as Africa (where small issuing banks have greater difficulty in getting bank confirmations). To summarize, market demand is shifting from liquidity support to a mix of liquidity and guarantees, the latter of which should have greater demand as market recovery takes root.
The landscape has changed and so have international commercial banks. A number of prominent banks - previously big players in the market - found themselves caught up with restructurings and have either been much less visible or have shifted their interest to Asia and Latin America.
In the new Basel II regulatory environment, several international Banks have shifted interest to Asia and Latin America, and those that stayed have become more selective in working with local counterparty banks, i.e. African issuing banks, with increased requirements on documentation, cash collateral and other forms of guarantees which are very costly to fulfill. Beside the trade finance gap, the cost of collecting information on counterparty risk is high and coupled with relatively low profitability of small operations in Africa, make trade financing unattractive, particularly on the import side.
Global recovery is still shaky: Although the data indicates positive trends, in the short-term, fears are growing about a revival that has been impressive in breadth but retains several risks to its durability.
Today, the financial crisis appears to be mostly behind us, global trade continues to bounce back rapidly from its huge fall more than a year ago (world trade is expected to grow by 13.5 per cent this year), and the global economy seems to have stabilized and is expanding again. However, the outlook remains "unusually uncertain". At a fundamental level, the unusual uncertainty reflects the disruptive combination of deleveraging, regulatory changes with Basel II and Basel III, euro zone budget deficit, the looming double dip recession, and other ongoing structural changes. The result is an extended period of economic vulnerability, during which the initial relief could mutate into a renewed slowdown.
But even in the most optimistic scenario we can expect slow growth in advanced economies capped by poor credit availability and austerity in the public sector.
Therefore, the same ingredients that prompted AfDB response to the financial crisis with the TFI are still very much present in a maelstrom of worrying signals that may impact Africa and its sustainable growth. In this context, I believe that the Bank should be vigilant, monitor closely the evolution of the situation and propose innovative and creative solutions within its mandate.
The Bank was successful with it trade finance response to the crisis, as evidenced by several international awards won. What are the next steps for the Bank in trade finance?
Programs like the GTLP and other emergency liquidity facilities have reversed the financial crisis' negative trend to some extent. Although no statistics are available, regional commercial banks and international financial institutions report that the secondary market is stronger. The three awards won (Trade Finance Deal of the Year, Best DFI in Africa, Trade Finance Bank/House of the Year award) are a testimony of the Bank's ability to also deliver efficiently in a time of crisis and a recognition of the Bank's role and its visibility as requested by the Board of directors.
According to local and international commercial banks active in Africa as well as development finance institutions and the WTO, there is still an important role for the AfDB to play in supporting trade finance in the immediate post crisis period.
First, several commercial banks indicate that the crisis is not over, there is still a shortage of dollar liquidity and AfDB should continue to maintain its Trade Finance Initiative. Hence, the GTLP will continue to provide needed support and is expected to cease operations only when the markets have normalized and demand for its products is no longer sufficient to justify continuation of the program.
Second, access to trade finance facilities continues to be constrained by the small size of many African financial institutions. The liquidity problem has become a capital allocation problem; we have a problem of risk appetite. In the short-term, the Bank could assess the additionality and the impact of different options, among which a guarantee program in partnership with a key trade finance player. This outsourcing would allow major partners active in trade finance to increase the scope of their program (i.e. include more banks) and to complement the existing program so existing banks can access increased trade lines. Another possibility could be the aggregation and monetization of Trade Receivables for low income countries.
Third, the impact of Basel II and III is unknown and preoccupying the market. Risk ratings attached to trade finance transactions in Africa will default to the highest requirements as there is no verifiable data on which to base expected losses. The lack of consistent, portable data will translate into overly conservative risk weightings for trade finance products. Consequently, AfDB should lead the development of a data archive documenting trade experience in Africa to allow market participants to model expected losses. This could be a useful starting point for a more comprehensive mapping exercise aimed at quantifying the extent of trade financing gaps, identifying the institutions involved in trade financing in Africa, their strengths and weaknesses, the constraints faced by these institutions, and how the Bank can assist and work with these institutions. We had recently a useful meeting with ECON and ONRI to discuss the mapping of key trade actors operating in Africa, and the discussion will continue with the round table co-hosted by AfDB and WTO to be held in Tunis on October 27, 2010.
AfDB President Donald Kaberuka and WTO Director General Pascal Lamy will open the debate on trade finance and the potential role of the Bank in a post-crisis context. This event will provide an opportunity to assess the status and evolution of trade finance in Africa in the light of observed and anticipated market movements. This would assist DFIs and other market players to guide their strategic decisions on their vision, approach and cooperation to support financing African trade.
The objective of the meeting is to bring together leading trade finance and trade facilitation practitioners around Africa to share ideas on critical issues as well as lessons learned based on best practice in the areas of trade finance and trade facilitation in Africa. The meeting would also provide a forum for exchanges on key constraints to availability of trade finance in African markets (liquidity, pricing, tenure, insurance cost, perceived risk) as well as strategic recommendations for improving access to trade financing in Africa.
Fourth, the growing relationship between Africa and emerging economies is creating new demand for partnership. Several African commercial banks reported increasing demand for facilities with importers and exporters in emerging Asia. However, banks report that trade transactions are constrained by Asian banks' unfamiliarity with the continent and its financial institutions. Asian firms require letters of credit, and transactions are slow and difficult. African commercial banks suggested that AfDB could facilitate trade transactions by working with its counterpart financial institutions in Asian markets, especially India, China, Korea and Thailand.
Just to give you an idea about the importance of trade in the region, Africa's total trade in goods with emerging countries (non African developing countries) increased from U.S.$ 34 billion in 1995 to U.S.$ 283 billion (32,5% of total African trade) in 2008 just before the onset of the crisis. China alone represents U.S.$ 93 billion in 2008, and is expected to reach U.S.$ 100 billion in 2010. Trade with rich OECD countries increased from U.S.$ 138 billion to USD 588 billion over the same period. Intra-African trade also increased from U.S.$ 46 billon to U.S.$ 115 billion.
In fact, Africa's South-South trade, including intra-African trade, actually surpassed that of the European Union for the first time in 2007, indicating a marked increase in the importance of developing countries to Africa's merchandise trade patterns. The EU is still Africa's largest trade partner, its share of trade declined from around 55% in the mid-1980s to below 40% in 2008.
Trade is key to Africa's sustained economic growth and job creation. But for trade to work, it is essential that trade finance be available and affordable across the continent. Under the leadership of President Kaberuka the African Development Bank has worked hard to stabilize trade flows and preserve growth across the continent. In the aftermath of the financial crisis, we should put the emphasis on financing regional trade integration through further development and integration of existing regional capacities, putting emphasis on regional vertical integration to ensure a certain degree of specialization in countries within the region. This would allow trade in "specialized tasks" rather than finished products: parts and components produced in one location would be assembled in another.
President Kaberuka in his speech during his visit in Korea (September 16, 2010) said: "Our aim is to seize opportunities offered by Trade and Investment and reduce reliance on foreign aid." Therefore, investing productively in infrastructure, enhancing trade facilitation and increasing access to trade finance are key elements for self sustained growth in the region and the fastest way to take advantage of economic complementarities in bordering countries to increase investment, facilitate business reforms and consequently boost industry, growth and job creation.
Contacts
Ghazi Ben Ahmed
