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New report highlights COVID-19 impact on African trade finance

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African Export-Import Bank (Afreximbank), in collaboration with the United Nations Economic Commission for Africa (ECA), the African Development Bank (AfDB) and Making Finance Work for Africa Partnership (MFW4A) released on 15 April the African Trade Finance Survey Report which provides a better understanding of the trade finance landscape across Africa and how it has evolved during the COVID-19 pandemic. The report is the first of its kind, surveying 185 banks from across Africa, representing more than 58% of total assets held by African banks.

In his opening remarks, Professor Benedict Oramah, President of Afreximbank, highlighted how the tightening global financial conditions triggered massive capital outflows from Africa, exceeding $5 billion in the first quarter of 2020. “These massive capital outflows strained African banks, many of which recorded sharp drops in their net foreign assets. This further exacerbated liquidity constraints and undermined the capacity of banks to finance African trade”, said Professor Oramah.

As a result of the pandemic and inherent tightening financing conditions, heightening balance of payment pressures and liquidity constraints, the supply of trade finance was affected between January and April 2020, the period covered by the survey. According to the report, the number of correspondent banking relationships fell across the region, and the rejection of L/C requests increased, with about 38% of local/privately-owned banks and 30% of foreign banks reporting an increase in rejection rates, respectively.

Dr Vera Songwe, Executive Secretary at the ECA, commended Afreximbank for the counter-cyclical measures it took to help countries deal with the economic and health impacts of the COVID-19 pandemic. “The Bank has also played a major role in putting together a $2 billion facility to help African member states purchase up to 400 million doses of the COVID-19 vaccines”, she added.

Dr Songwe also urged African leaders, especially Central Bank Governors and Ministers of Finance and other development partners to further support institutions such as Afreximbank through capital increases as such banks can leverage this capital five or six times and deploy more resources towards Africa’s recovery.

The report highlighted the role trade finance can play in overcoming the social and economic fallout of the COVID-19 pandemic to quicken the process of economic recovery through trade and investment growth.

For H.E. Mr Ebson Uanguta, Deputy Governor of Bank of Namibia, the crisis was deep and government interventions needed to be bold and swift to help banks support businesses and limit insolvencies. “Most sectors of the economies were severely impacted, and we took several measures to support the broader economy and trade finance in particular, including easing of monetary policy, relaxation of regulatory requirements and institution of loan repayment moratoriums to the tune of $619 million”, said Mr Uanguta. 

According to Ms Mervat Soltan, Chairperson and Managing Director at the Export Development Bank of Egypt, the bank had seen a big uptake in its digital services during the pandemic downturn. Egypt is one of the few countries where output expanded in the face of a synchronized global downturn. “Digitalisation which sustained business and trade growth during the pandemic offers a great opportunity to help reduce costs and increase the use of trade finance facilities and should become an integral part of the strategy to boost African trade post-COVID-19”, she added.

The report pointed out that African trade amounts to $1,077 billion but that banks intermediate $417 billion of this, approximately 40%, whilst the global average is 80%.

Ms Bola Adesola, Senior Vice Chairman for Africa at Standard Chartered stressed the need to increase businesses on the continent, to help drive trade both extra- and intra-African trade and banks’ intermediation. The African Continental Free Trade Agreement (AfCFTA), she added, can provide a platform to help drive greater businesses.

Mr Amr Kamel, Executive Vice President, Business Development and Corporate Banking at Afreximbank, highlighted the role of Development Finance Institutions during downturns, pointing out that “Afreximbank’s Pandemic Trade Impact Mitigation Facility (PATIMFA) has provided timely support to banks, helping to clear payments falling due and avert payment defaults.”

He also shared some of the key initiatives the Bank is pushing through to address the challenges of liquidity constraints and boost African trade such as the Pan-African Payment and Settlement System (PAPSS) to reduce the foreign currency content of African trade and Afreximbank Trade Finance and Trade Facilitation (AFTRAF) programme to increase the provision of correspondent banking services to African banks.

One of the Bank’s longstanding partners, Eng. Hani Salem Sonbol, CEO of the International Islamic Trade Finance Corporation (ITFC) reiterated the importance of international collaboration even if the initial instinct in a crisis is to look inwards. Their response in Africa to the crisis has been anchored on three Rs: assist to help Respond to the pandemic; help with the Recovery; and contribute to restart the economy.

The report made numerous recommendations. These include: a greater engagement between central banks and industry; push for increased digitalisation and take up of technologies; and better data, which will help better understand and price risk.

In his closing remarks, Dr Hippolyte Fofack, Chief Economist at Afreximbank, reiterated the need to sustainably grow the supply of trade finance across the region. “Trade finance is the lifeblood of commerce and will play a key role in the recovery and structural transformation of African economies to better prepare the region to future global crises”, he added.

MD Africa Editor Kester Kenn Klomegah is an independent researcher and writer on African affairs in the EurAsian region and former Soviet republics. He wrote previously for African Press Agency, African Executive and Inter Press Service. Earlier, he had worked for The Moscow Times, a reputable English newspaper. Klomegah taught part-time at the Moscow Institute of Modern Journalism. He studied international journalism and mass communication, and later spent a year at the Moscow State Institute of International Relations. He co-authored a book “AIDS/HIV and Men: Taking Risk or Taking Responsibility” published by the London-based Panos Institute. In 2004 and again in 2009, he won the Golden Word Prize for a series of analytical articles on Russia's economic cooperation with African countries.

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Summit of Business within Portuguese-Speaking Countries

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President of Equatorial Guinea, Teodoro Obiang.

Long before the Portuguese-speaking countries wrapped up their first business summit in Simpopo, Equatorial Guinea that gathered approximately 250 government officials and corporate business leaders from Guinea Bissau, Cabo Verde and Sao Tome and Principe, Portugal, Brazil and Mozambique, it was described as a step directed at bringing sustained business development.

Some argued that the gathering historically provided the chance for immense business networking opportunities and building strategies. It additionally offers an important impetus for strengthening future corporate business collaboration among the countries.

According to the organisers, the primary goal was to explore ways to attract investments to the countries in bloc, as well as strengthening economic ties between member states and improving the business environment.

Opening the two-day summit, promoted by the Confederation of Businesspeople of the Community of Portuguese-language Countries (CPLP), President of Equatorial Guinea Teodoro Obiang, said frequent militant attacks in Cabo Delgado, in northern Mozambique, should be of concern to the Community of Portuguese Speaking Countries (CPLP).

“The Republic of Mozambique is the scene of aggressions perpetrated, planned and financed from outside its borders, claiming human lives, displacing populations, destroying personal and public property, and sowing terror in the north of the country,” he said.

Obiang believes that the CPLP “should not remain oblivious to this tragedy, which goes beyond the dimensions of a simple internal conflict. It is an aggression”.

He characterised it as an opportunity to identify the challenges the bloc faces and seek ways to facilitate trade between CPLP countries as well as attracting more investment. “Our wish is that the business community takes this opportunity to form a common front when it comes to facing the challenges that affect its activity. It should also make the most of its respective advantages to participate actively in promoting economic cooperation among the CPLP countries, always having as priority the member countries of our community,” the Equatorial Guinea president said.

President of Cape Verde, Jorge Carlos Fonseca, who participated in the summit virtually, advocated for the creation of customs facilities for CPLP countries within the bloc. “There is an urgent need to create joint solutions for the reciprocal protection of investments, reducing, or even eliminating, where possible, double taxation, and facilitating the circulation of public documents within our community without excessive authentication and notarisation burdens,” he urged.

President of Sao Tome and Principe, Evaristo Carvalho, spoke of the need for investments in the CPLP countries to be sustainable, especially in Equatorial Guinea, which was experiencing a boom in mineral resources. “Our appeal is to look at the country with confidence, stripped of a culture of short-termism. With thought for the country’s development, let’s seek sustainable solutions and invest in the medium and long term, he advised.

While various issues were discussed during the two days, there was particular interest in mineral exploitation, oil and gas development within the bloc. The panel session spent time analyzing widely the various dimensions and aspects of the sector.

Equatorial Guinea’s Minister of Mines and Hydrocarbons has called for a common project of the Portuguese-language countries for gas exploration, stressing the need for a longer energy transition in some African countries. “Hydrocarbon producing countries such as Equatorial Guinea, Angola, Mozambique or Brazil and Portugal, as a major consumer, it is very important that we can work on a coordinated project at the CPLP level to be able to exploit the gas for use in our economies,” Gabriel Obiang Lima said.

“It will be increasingly difficult to get funding to develop our [oil] products because worldwide there is a great motivation to carry out the energy transition from hydrocarbons to renewable energy,” he noted.

Despite this, he said, in countries such as Equatorial Guinea and others in Africa, this transition will have to take at least another 20 years. “Only then will we be at the level of developed countries,” he said.

The Equatorial Guinean Minister was speaking at a panel with government officials from Guinea Bissau, Cabo Verde and Sao Tome and Principe, as well as representatives from Portugal, Brazil and Mozambique on the role of governments in attracting foreign investment.

Speaking at the panel session, Luís Moreira Testa from the Portugal’s Socialist Party in Parliament, explained that in the new advent of renewable energy, Portugal has the potential to move from energy consumer to producer. “Hydrocarbons will serve in the coming decades as transition fuels. Portugal is a major consumer of natural gas, mainly from Algeria, and the new generation of natural gas consumption in Europe foresees the mandatory inclusion of green hydrogen,” he said.

According Luis Testa, the pipelines that bring gas from Algeria may soon take the gas produced in Equatorial Guinea or Mozambique cut with green hydrogen produced in Portugal. “This could be a great opportunity for energy communion in the CPLP,” he said.

Cabo Verde’s Minister of Trade, Industry and Energy, Alexandre Dias Monteiro, considered mobility within the Portuguese-speaking community as a critical factor for creating a favourable framework for business and foreign investment. “Mobility is a critical factor for contacts and exchanges between companies and businesspeople,” he said, stressing the progress made in this area in recent years, which should make it possible to sign a mobility agreement at the next summit of heads of state and government, in July in Luanda.

Guinea-Bissau’s Economy Minister, Victor Mandinga, advocated the creation of an investment promotion agency at the community level to link up with agencies in each of the countries. “This mechanism is essential to make legislation on investment more homogenous and the distribution of investment opportunities between countries more harmonised,” he said, adding that businesspeople lacked transversal information about the CPLP as a whole.

Sao Tome’s Foreign Minister, Edite Ten Jua, noted the importance of creating a climate of trust for attracting investment, particularly in terms of legal protection and tax justice, as well as simplifying administrative procedures, along with the existence of infrastructure and means of transport and communications.

President of the Community of Portuguese Speaking Countries Business Confederation Salimo Abdula, speaking during the opening, urged the governments of member countries to speed up the process of creating the CPLP Community Development Bank to facilitate financing for bloc projects.

“The bank will be a tool which will support projects of small, medium or large size, thus overcoming the difficulty of access to financing, which often has a high cost in CPLP countries, making projects unfeasible,” Abdula argued.

Abdula further proposed the creation of a CPLP arbitration court, because, despite being united by the same language and economic interests, conflicts between stakeholders from different member states could arise.

“This court would make it easier to settle disputes between businesspeople in the community. At this moment, this project (the CPLP Arbitration Court) is at a very advanced stage. A team was formed that is working hard on the subject and has already produced several document proposals and prepared a questionnaire aimed at defining an ideal model for the construction of such an arbitration court,” Abdula told the gathering.

The opening of the summit coincided with World Portuguese Language Day. According to Rádio Moçambique, there is an estimated 300 million speakers spread across four continents. The first CPLP Business Confederation business summit held under the motto, “Together We Are Stronger and Move the World Forward” in Simpopo, Equatorial Guinea.

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Can Sukuk Match the Growth Trajectory of Green Bonds?

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As the socially responsible investing movement in fixed income began to take off a decade ago, a great deal of ink was spilled on the similarity of green bonds and Sukuk. Both products are explicitly ethical and appeal to investors’ social consciences over and above their desire for financial returns. The thesis at the time was that an ever-increasing number of investors would seek out these types of ethical investments, leading to a steep upward trajectory in demand for both green bonds and Sukuk. MICHAEL BENNETT writes.

***

To a certain extent, that thesis has played out. Between 2010 and 2020, the annual issuance of green bonds increased from less than US$5 billion to more than US$270 billion. They have successfully transitioned from being a highly niche product to one that has a role in the portfolios of major institutional investors across the globe. Green bonds became the product that mainstreamed socially responsible investing on the fixed income side of the capital markets.

Sukuk have also increased during that time-period, going from US$53 billion of annual issuance in 2010 to US$140 billion in 2020. While a 164% increase in annual issuance volume is impressive, it clearly lags the 5,300% growth for green bonds. This divergence in the growth trajectory of the two products can also be observed in Chart 1 that looks at annual issuance volumes between 2014 and 2020:

In absolute terms, it should come as no surprise that Sukuk volumes now trail green bonds, as there is a much larger market globally for conventional instruments than for Shariah compliant ones.

Even the most passionate supporters of Islamic finance accept that the potential market for Islamic products is only a fraction of that of their conventional comparators. However, that does not explain why, in percentage growth terms, Sukuk have fallen so far behind green bonds. Why has one product exploded while the other has made only a steady climb?

Many explanations have been offered for why Sukuk have not grown at a faster pace in recent years. These usually focus on global economic hurdles that have impacted the market (eg oil price declines, COVID-19-related slowdowns).

However, many of these same issues have impacted, to one degree or another, the conventional markets as well. In addition, some economic hurdles could reasonably be expected to increase issuance volumes (eg a decrease in oil prices could cause an oil-exporting sovereign to have greater need to tap the capital markets).

Therefore, these explanations seem insufficient to fully explain how green bonds have grown at such a faster clip than Sukuk.

I believe the reason for the difference may stem in part from the fact that the Sukuk market has simply not responded sufficiently to the socially responsible investing movement. As the remarkable growth of the green bond market proves, predictions a decade ago that socially responsible, fixed income investing was about to take off were correct.

In other words, the socially responsible investing wave did indeed come. The problem for Sukuk is the product has not found the best way to ride that wave.

Sukuk are ethical instruments. They cannot be used to finance impermissible activities like gambling, tobacco and weapons manufacturing. Also, they are structured to avoid high degrees of leverage and speculation, and therefore promote a sounder financial system.

Many investors who are motivated by ethics and feelings of social responsibility should be quite happy to add Sukuk to their portfolios, regardless of whether they are adherents of Islam.

A conventional bond has none of these built-in restrictions. Therefore, to make a conventional bond an ‘ethical investment’, additional steps must be taken, for example adding covenants to limit the potential uses of the financing. This building-in of these additional prohibitions is the genesis of green bonds and other labeled sustainable development bonds. In essence, these bonds adopt the types of restrictions on the use of proceeds that already to a certain degree exist for Sukuk.

However, the Sukuk market has not sold the standard Sukuk product as ethical. Rather, it has treated Sukuk as equivalent to a conventional bond (no better or worse from an ethical perspective), and therefore sought to develop green and socially responsible labels for certain types of Sukuk that mimic the labeling that is required to make a conventional bond ethical.

I believe such labeling of certain Sukuk can have the unfortunate impact of obscuring the ethical nature of the basic Sukuk product and, at the extreme, possibly throwing the social responsibility of most Sukuk into doubt.

In other words, if certain Sukuk are labeled ‘socially responsible Sukuk’, what does that imply about all the Sukuk that do not carry that label?

While I certainly would not advocate against green and other types of labeled Sukuk, I think the Sukuk market needs to spend more time and effort to be clear that such labeled Sukuk are simply a special use of proceeds instruments within a broader universe (ie all Sukuk) that is already ethical in nature.

Such an approach would mirror the one the World Bank takes in the conventional market. The World Bank issues green and other labeled bonds from time to time, but the priority always is to stress the ethical nature of all the issuances.

By focusing on the ethical quality of the Sukuk product itself, I believe Sukuk can best benefit from the ethical investing movement, and take its place, aside green bonds, as an ethical investing success story.

World Bank

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US Sanctions Against Russian Sovereign Debt: Possible Alternatives

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The US and the EU have imposed new sanctions against Russia because of the so-called “Navalny case”. The European Union has activated the human rights sanctions mechanism approved by the EU Council in December 2020. On March 2, the EU added four Russian security officials to its sanctions list. The sanctions include a ban on entry to the EU, an assets freeze in the EU and a ban on economic transactions with persons involved in the lists. However, such officials are unlikely to have assets in the EU. Even if they exist, such assets are not significant for the Russian economy. The sanctions were introduced as a reaction to the arrest and then imprisonment of Alexei Navalny, while restrictions on the topic of the alleged poisoning were introduced back in October 2020. At the time, six high-ranking Russian officials and the Research Institute of Organic Chemistry and Technologies were subject to the restrictions. Such sanctions have zero impact on the Russian economy.

Unlike the EU, the US has refrained from imposing sanctions following the alleged poisoning of the politician last year. However, on March 2, they were introduced, both in connection with the poisoning and in connection with his subsequent arrest. That is, the topics of the use of weapons of mass destruction and human rights violations were combined. The blocking sanctions targeted seven Russian officials who were already affected by EU sanctions, as well as three research institutes. Trade sanctions were imposed against 14 companies. US government agencies have been prohibited from lending to Russia and a ban was introduced on the supply of weapons and on the provision of US financial assistance. These measures have no impact on the economy. These companies are not the backbone of the economy, Russia does not need US help, it does not buy weapons from the United States, and it does not take loans from US government agencies.

However, the new US sanctions are still fraught with uncertainty. The key question is whether the United States is imposing restrictions on Russian sovereign debt obligations. Such a measure could cause more serious damage and have an impact on the world markets.

The prospect of sanctions against Russian government bonds is related to the specifics of the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991. Properly it is used as a legal basis for the imposition of sanctions in the event that a country uses chemical weapons (in the US and the EU, it is assumed that Navalny was poisoned with a substance from the Novichok group). The CBW Law envisages the imposition of sanctions in two stages. On March 2, 2021, the first stage was implemented (a ban on aid, military supplies and loans from government agencies). If, within three months after the first stage, the President does not provide Congress with evidence that the target country has not abandoned the use of CBW and has not given reliable guarantees of their non-use in the future, then the second stage of sanctions will be introduced. It is important to note here that guarantees of non-use should be determined by UN inspections or those provided by another international organisation. Obviously, Russia will not give such guarantees and will not allow any inspections. Moreover, according to the statements of the Russian authorities, Russian chemical weapons were destroyed long ago. In other words, the second round of sanctions is inevitable. The CBW Law obliges the US President to impose at least three of the six types of sanctions. The most unpleasant of these is the ban on American banks from lending to the Russian government.

There has already been a precedent for using CBW against Russia. The sanctions were imposed in connection with the Skripals case. In 2018, the first stage was carried out, and in 2019 — the second. It was secured by Donald Trump’s executive order No. 13883. The decree reflected two types of sanctions — a ban on lending to the Russian government and blocking aid through the IMF. Then trade restrictions were added. If the last two measures were symbolic, then the ban on lending potentially had more serious consequences. However, this measure was applied in an extremely limited manner. The ban applied only to Russian government bonds denominated in foreign currencies, while most of them are denominated in rubles. The sanctions also did not affect the debt of Russian state-owned companies.

In general, the issue of sanctions against Russia’s sovereign debt has been raised many times on other occasions. In 2017, within the framework of Art. 242 of PL 115-44 CAATSA, Congress ordered the US Treasury to give an opinion on the appropriateness of such sanctions. Officials noted in their report that such sanctions would hurt Russia, but were also fraught with market fluctuations and costs for American investors. Such sanctions have repeatedly been proposed in sanction bills, including the most famous ones — DASKA and DETER. However, they have never been passed into law. In 2019, the State Department criticised DASKA.

The forthcoming second round of sanctions over the Navalny case will again raise the issue of restrictions on Russian sovereign debt. Two alternatives are possible. The first is the preservation of the existing restrictions already adopted by Trump in 2019, or their cosmetic expansion. The second is a more radical tightening, including bonds denominated in rubles. The second alternative cannot be ruled out, especially if there is another escalation in the Navalny case. If the status quo is maintained, the first option is most likely.

From our partner RIAC

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