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Optimism Amid the Challenges Facing Europe-Africa Trade

Posted on 04/09/2020

Trade Finance

It has been a tumultuous year for Europe-Africa trade. In March, the EU released its “Comprehensive Strategy with Africa”, demonstrating clear commitment to an enhanced inter-continental relationship with African countries in areas such as green growth, energy access and digitalisation. But the scale of the challenges posed by the ongoing coronavirus outbreak has forced both regions to divert their efforts almost exclusively onto mitigating the pandemic’s social and economic effects.

While the public health crisis remains Africa’s foremost priority, tackling the virus’ economic repercussions requires keeping trade flowing as much as possible. The continent’s largest partner, in this respect, is the EU: in 2019, the EU-27 represented 31% of Africa’s exports, mostly comprising of primary goods such as energy, raw materials and food products. Similarly, 29% of Africa’s imports – largely manufactured goods – are from Europe.

The world has witnessed a dramatic decline in global trade as a result of the pandemic – by around 27 percent during the second quarter of 2020 – and the fast-developing trade corridor between Europe and Africa has suffered as a result. The European Commission has forecast that EU27 trade will decline by up to 16 percent overall in 2020. And as European countries redirect finance towards their domestic economies and companies reassess their future strategies, it remains to be seen whether Africa will still be seen as an attractive regional trading partner, with the opportunities outweighing the risks.

We hope that the perception of risk will gradually temper to the reality. Indeed, the situation on the ground is, so far, more stable than expected. Inevitably, delays on payments have been a more common occurrence amid the increased uncertainty. However, fears around defaults on letters of credit (LCs) remain unsubstantiated – at least in our experience. The risk of default on LCs in African trade transactions was actually already very low. Between 2016 and 2017, for instance, weighted by obligor, default rates declined from 0.59% to 0.05% for export LCs and 0.48% to 0.14% for import LCs.

The ambitious aims of the EU’s “Comprehensive Strategy with Africa” could well play a crucial role in the recovery years ahead for both Europe and Africa, and, in our view, momentum should be maintained as much as possible. With global supply chains already re-routing due to lockdowns, Africa may be on track to further increase its trade with Europe in the longer term – particularly given the closer geographical proximity compared to some other key partners, such as China.

And while trade flows will doubtless continue to be affected by the uncertainty, we remain hopeful that appetite will bounce back. One thing that won’t change, however, is our support to our clients. In both the good and the turbulent times, we will remain on hand to provide support, and helping to manage risk on both ends of the transaction to ensure that trade continues to flow to and from Africa. In times of crisis, partners with niche expertise truly show their worth in maintaining these vital connections between markets – connections that are key to restoring confidence in the Europe-Africa trade corridor.

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