A combination of geopolitical risk, a liquidity challenge as a result of a stronger US dollar and weaker local currencies, as well as the cost of living crisis and higher interest rates, have created an environment where banks are more risk-averse to Kenya and Africa – limiting emerging market investments by sovereigns in transformative projects.
In Kenya, the Covid-19 pandemic led to a 45 percent reduction in Foreign Direct Investment (FDI) flows into the country according to United Nations Conference on Trade and Development (Unctad) 2021 investment report that placed the flows at Sh76 billion ($717million) in 2020 from Sh131 billion ($1.3bn) in 2019. The drop in FDI was not unique to Kenya as inflows in sub-Saharan Africa on average decreased by 12 percent to Sh3.1 trillion ($30bn) in 2020.
Prior to the pandemic and the associated lockdowns, Africa was making progress in reducing the Trade Finance gap as emerging markets attracted capital. But this is fast reversing leading to an expanding trade finance gap of nearly $120bn per year, threatening to leave Africa behind once again lest we, stakeholders, take a more nuanced approach to risk and partnerships in 2024.
Unfortunately, just as Africa begins to build momentum, it is often negatively impacted by external factors beyond its control. The downsides of the global economy manifest aggressively on the continent, including the Global Financial Crisis in 2007/8, and the Covid-19 pandemic.
During the upward swings of the economic cycles, we see African countries establishing some confidence, taking on debt for key projects to support long-term, sustainable and resilient growth objectives … and then a crisis hits, and interventions are often aggressively applied.
For instance, concerns that Kenya could have defaulted on its $2bn 2024 Eurobond compounded the forex liquidity crisis which kept inflation elevated and led to the Central Bank of Kenya (CBK) hiking policy rates to contain it. This quickly reversed itself after the government returned to the market and successfully refinanced it, but by that time the economy had taken a huge hit.
In order for Africa to break this stop-start situation, we need to identify practical steps that can be taken to unlock affordable funding.
First is to ensure that the necessary structural reforms are prioritised in Africa’s economies, and then enforce a narrative that Africa is an attractive investment destination for patient capital.
The structural and fiscal reforms in Kenya are already paying dividends by improving investor sentiment. The local currency infrastructure bond issued right after the 2024 Eurobond buyback was oversubscribed 4.1 times. Kenya also managed to augment its Extended Credit Facility/Extended Fund Facility programme with the IMF secured a $500 million samurai bond, and is expected to receive at least $750 million in budget support from the World Bank.
From country to country in Africa, we continue to see many international banks taking on a more nuanced approach and optimistic stance than previously observed. This patient approach may be the best way to ride multiple crises as Africa continues on its journey of economic development.
While global banking groups enjoy deeper funding pockets, it is imperative that there is a coordinated focus on local capital pools. This segues into our second practical step – partnerships. In recent years, we have seen increased collaboration between banks, Development Finance Institutions and Insurers – particularly as Environmental, Social and Governance (ESG) funding frameworks are maturing.
Funding pools are expanding and as a result, there is a renewed focus on the Social (“S”) side of ESG, with a special interest in projects that prioritise the economic participation of women and youth. It is imperative for African financial institutions, like Absa, to be at the forefront of the global efforts to define and inform policies and frameworks around the “S” of ESG – if we fail to lead these – the tendency is a huge bias towards Global North’s agenda and priorities.
Further, African economies should – individually or through the regional collective – be bold in driving those ESG priorities, such as “S”, that align mostly with their own developmental agenda. After all, Africa is on the cusp of huge industrialisation – such should be deeply grounded on sustainability and inclusion – learning from the mistakes of the Global North.
Lastly, increased digitisation and the adoption of technology must become a priority. The African fintech sector has been able to attract both local and international funding, being a beacon of success for early-stage capital in Africa.
For Africa to effectively tackle the trade finance gap, it can no longer be business as usual. Role players on the continent must spend more time understanding the nuances around supply chains. Ultimately, we need to build resilience and sustainability.
The writers are trade finance and working capital specialists.
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