Africa’s Tethered Trade Finance Hub
The African Development Bank after approving a $1 billion export credit support program completed a 45-country survey of 275 banks noting unmet demand over $100 billion, or one-third existing lines. Default rates at 4 percent are quadruple the average in other regions, but still lower than the overall NPL ratio as the activity accounts for over 15 percent of earnings. Limited dollar liquidity and confirming bank risk parameters for letters of credit are major constraints, but three-quarters of respondents plan near-term balance sheet and off-balance sheet expansion. Intra-African trade is only 10 percent of the total and during the 2008 global financial crisis facilities were cut with higher costs and shorter terms and stiffer collateral conditions, according to the study. The respondents were a cross-section of local and foreign, and state and privately-owned institutions, with North and Southern African ones the largest. Return on equity was 15 percent as of 2012 and bad assets were 9 percent and concentrated in government-run groups. In the sample 95 percent were involved in export finance, and its income contribution was greater in conflict and oil-importing countries. Guarantee and L/C volume is more from developed-country based sponsors and their amounts typically exceed normal loans and revolving credit. The BIS estimates global trade finance around $7 trillion, half in the Asia-Pacific, which puts the continent’s share at 5 percent. African banks issued an annual 400 L/Cs with median value of $2 million, and the fee was between 0.5-1 percent, with the upper range in Central and East Africa. The rejection rate was 10 percent, with the absence of central credit registries often cited as an obstacle. Among currencies, 80 percent were in dollars, with the rest in euros and renimbi and Basel III prudential guidelines will further shrink exposure from traditional Western players such as Standard Chartered, Citigroup and HSBC, the review notes. Less-dominant confirming banks are also found in all sub-regions and the Cairo-based Afreximbank has joined as a multilateral agency. With GDP growth expected to average 5 percent according to the AfDB the majority polled expect needs will remain unmet due to foreign exchange, capital and creditworthiness drags, and the Development Bank’s pool can only cover a “fraction.” In 2009 international financial institutions combined for $4 billion in assistance, but the shortage has since worsened, the paper concludes.
While AfDB headquarters was returned to Abidjan, it chose Casablanca, an aspiring cross-border hub, as the domicile for the $3 billion Africa50 infrastructure fund. Morocco’s BMCE focused on trade is in 15 countries, and the IMF predicts 4-5 percent growth in 2015 with tourism and auto-related FDI improvement. Despite the 5 percent of GDP fiscal deficit and cautious subsidy reform Fund program compliance enabled smooth euro 1 billion bond placement and stock exchange performance has been positive. President Kaberuka praised the vehicle launch as the search intensified for a successor after his two terms colliding with commercial finance mobilization.