SUB-SAHARAN AFRICA: STILL THE POSTER CHILD OF TRADE FINANCE? By Christiane Heldermann - Executive Director DF Deutsche Forfait AG

Despite being based in a country where many exporters still shy away from doing business in Sub-Saharan Africa, this is one of the regions that saw the biggest increase in volume in the past couple of years. Double-digit growth rates and interesting returns on trade finance transactions made it one of the most attractive markets. And yet - the news are not always good. The past year has brought a decline in oil prices, weakened currencies, a massive outbreak of Ebola and political instability in many countries. So what gives us the confidence to continue doing business there? Let us have a closer look at two of the countries we are dealing with in the region.

Nigeria:

The headlines at the beginning of last year that Nigeria had passed South Africa as the biggest economy on the continent were confirming the excellent performance of this country. The positive situation had long been reflected in the trade finance market. Even ongoing terrorist attacks in the Northern part of the country and crude thefts did not deter investors from being confident about the country risk. And also the outbreak of Ebola was just a short disruption as the problem was dealt with very efficiently. By October, the country was free of the threatening virus. But further bad news came with the drop in the oil price in a country where petroleum exports make up approx. 90 % of the total export earnings. 

In order to soften the effects, the Central Bank decided to devaluate the naira. The government cut spending by reducing the size of ministries, departments and agencies. New taxes were introduced (for example on luxury goods such as expensive cars and alcoholic beverages) and plans for an economical diversification are under development. 

But this time, the market is reacting: We see increased pricing in general, and lesser possibilities for medium term trade finance transactions from Nigeria. Also, it seems that some banks have suspended their country lines waiting for the outcome of the elections on February 14^th. 

We have not slowed down our activities in the country and are still looking at tenors of up to three years as we feel the country has proven in the past years that it is able to deal with difficult situations. But the recent postponement of the elections was a surprise to the market, and it is going to be essential that Mr. Joanathon's promise to guarantee for ''credible elections'' will be kept. Assuming the elections will be finalised confirming the current economic path, the measures that have been taken seem appropriate and supportive of a recovery. The adjustment of the oil price in the 2015 budget combined with the other steps should strengthen the economy in the long perspective. We are looking at a country with a reformed and strong banking system and many interesting trade finance transactions.

Ghana:

Over the past years, Ghana has been a favourite country for companies and investors alike who were looking to expand into the West African markets. Political stability, a positive economic climate and a safe environment resulted in strong growth rates; the country generated stable incomes from commodity exports of cocoa, gold, and lately oil. But in the past months, Ghana has been in quite an up-and-down situation, the beginning of which can be seen in the salary increase of government employees started in 2010 that added up to more than 70% of tax revenues. An increased volatility in commodity markets, the latest decline in oil prices and an external debt burden took their toll. Facing a massive currency plunge of the cedi against the US dollar, Ghana had to turn to the IMF for assistance. 

But it looks like the country is able to make the turnaround. When the IMF returned to Ghana last November, it stated that “The budget includes some important measures to increase revenues, to eliminate distortive and inefficient energy subsidies, and to contain growth in Ghana’s comparatively high public wage bill. At the same time, the budget allows for maintaining public investment above 5% of GDP (…).” (Joel Toujas-Bernaté, IMF Press Release No. 14/532, Nov 21, 2014). There will be an IMF led reform program starting in the course of the year.

The market reacts positively to this development as confidence is back. While we still saw relatively high prices and restraint from investors at the beginning of last year, trade finance transactions with a short to medium term tenor are again very much sought after and pricing is becoming more competitive.