Wednesday, September 17, 2008

Soaring Asia trade benefits Africa

21 August, 2008

Despite the recent climb-down of crude oil prices- off historic highs- the almost daily reports of worsening economic growth prospects and rising inflationary pressures have made for a very sombre mood in the world’s financial capital.

Yet despite the turmoil in the global financial markets, Africa-Asia trade flows remain robust, apparently bucking the trend for worsening economic data throughout the rest of the world. Some stark statistics:

In 2007, trade between Africa and Asia exceeded $120 billion; India, Japan and Korea accounting for over $45 billion of the figure.

Last year, trade between Africa and China exceeded $75billion; having grown by 43% per annum on a compound basis for the last 5 years.

Putting these staggering figures into perspective, trade between China and India was valued at ‘only’ $38.7 billion in 2007, clearly short of Sino-African trade figures.

Soaring trade levels with Africa are continuing. And soaring trade between Africa and China especially, has been, and will continue to be, very beneficial for Africa. Africa is experiencing its fastest economic growth rate in years, with GDP growth for 2007 averaging an impressive 6.1%. The commodities boom, relative political stability and progressive economic management are setting the foundation for more businesses to generate more profit in Africa.

However, improving fundamentals aside, it would be a crude oversight to ignore the impact made by the growing trade corridors with Asia- the data very much underlines Africa’s growing international economic standing. Standard Chartered Bank- as a truly international bank, with extensive and well-established African and Asian operations- is capitalizing on these strengthening global trade corridors. This month, the Bank published its Interim Results for the first six months of 2008. The results mirrored the robust nature of the economies in which the Bank operates. The Group’s key markets in Asia continued to enjoy strong economic growth, underpinned by resilient domestic demand and increased intra-regional trade flows, while the Middle East region continued to benefit from high oil prices and ample liquidity. The result was that most of the key markets in the Standard Chartered network delivered strong performances, with Africa increasing its pre-tax profits by 41 per cent, due in part to the strengthening trade corridors with Asia and the Middle East.

With the Olympic Games in Beijing underway, it is an opportune time to articulate the benefits that Chinese trade in particular, has brought to economic development in Africa.

Firstly, the massive increase in trade flows. As I have stated, economic resilience in Africa has in part been the result of Chinese investment. Domestic economic reform, strong domestic demand and sound fiscal policy has been hugely influential, but new Chinese trade flows have played their part in continued African economic buoyancy. The well-documented pursuit of African commodities and resources by China is a major contributor to these trade corridors, but other flows are also strengthening, and the Sino-African trade relationship runs much deeper than simply Chinese demand for raw materials in resource-rich African countries. The relationship is very much a reciprocal one, with African merchandise exports to China more than doubling to 2004; China accounting for over 40% of African exports to Asia. And just as the burgeoning global trade has benefited Standard Chartered, strengthening trade ties with China will continue to benefit Africa.

However, in my mind, the most beneficial impact of Chinese investment in Africa has been, and continues to be, in terms of the international perceptions of Africa. Partly because of China, Africa is no longer seen as a relative underperformer on the global economic stage. For many years now, international investors have ‘bought-in’ to China’s growth story; they believe in what this means for demand for commodities, and China’s need for what Africa produces. So in effect, China, and Chinese trade with Africa, has helped to correct the chronic undervaluation of African assets. 

In turn, a revision of this chronic undervaluation is generating new investment opportunities. A virtuous investment cycle is being created. So much so, that the World Bank has suggested that Sovereign Wealth Funds (SWFs) invest 1% of their assets in Africa. Even a mere 1% of global SWF investment might exceed the total Overseas Development Aid to African economies, according to the OECD. SWFs clearly have an important role to play in future African economic development, especially given the increased investor-confidence in Africa and the revision of the value of African assets. SWFs are also more likely to be providers of long term capital – exactly what Africa needs. And although China’s SWF (the CIC) does not currently have a mandate to invest directly in Africa, the activity of some state owned companies in Africa have played a key role in helping to build African infrastructure, develop business opportunities and boost investor confidence in African markets. In the current environment of commodity price strength, this development is generating exciting opportunities for African economies. 

Another exciting opportunity for Africa will be with its growing ties with the Middle East. Living and working in Dubai, in the Bank’s Africa Regional Office, provides a unique insight into Africa’s global trade flows. Not only is Dubai geographically at the centre of the Africa-Asia trade corridor, but as one of the Middle East’s fastest-growing and most exciting economies, is also actively increasing its economic ties with the continent. Dubai’s companies are increasingly looking at Africa for investment opportunities. In addition, African companies are moving into the Middle East too and Dubai is actively seeking South African investment: already South African investment in Dubai had risen by 130% since 1999.

But what of the future? The turmoil in the world’s financial markets will not be reversed overnight. But African economic growth should remain resilient with continued reform and strong domestic demand. Clearly, African growth in part relies on Asia. And as we have argued, it would be wrong to ignore the impact of the growing trade corridors with Asia. Despite questions over inflation and a decline in local demand, we remain optimistic that Asia will be able to cope with the slowdown in the United States and in Europe.

However, I predict the next exciting economic development in Africa, and for Standard Chartered, will be the rapid increase in India’s economic ties with Africa. The Bank opened its first branch in Calcutta, India in 1858- the same year we opened our doors in China. The Bank’s operations now extend to 90 branches in 33 Indian cities, with India now Standard Chartered’s second largest market, behind Hong Kong. Our first half profits there increased by 89 per cent this year- evidence enough of the continued strength of the Indian economy (GDP growth has infact grown by more than 9% each year over the last three years). Yet despite the strong domestic growth, India’s economic ties with Africa have not grown as rapidly as those with China. At less than $30 billion, the value of the India and Africa trading relationship is a mere 40% of that of China and Africa. Although there have been significant Indian investments in Africa, the rapid expansion of the Indian private sector into Africa has yet to fully materialise. International investors believe in India’s rapid economic development. As with China, an upsurge in the presence and scale of the Indian private sector in Africa, will bring additional benefits to Africa’s economic environment. It will give further credence to the revaluation of African assets following recent Chinese investment; it will strengthen global perceptions of Africa as an international investment destination, and it will generate new businesses and jobs and boost associated domestic growth.

The global economy may have slowed on the back of a severe credit contraction in the US and in Europe, but Africa’s economic growth prospects remain resilient. In a truly globalised world, foreign investment- particularly Asian investment- in Africa will continue to prove very beneficial for the continent. China has already demonstrated to the world the value of African assets and the massive socio-economic potential of the continent; India- complete with its vast demographic, corporate and entrepreneurial resources- will be next in substantially growing its trade corridor with Africa. Despite the current gloom in the West, the future is indeed bright.