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Managing your money 6 August 2021

Three surprisingly predictable African Continental Free Trade Area opportunities

As the global economy recovers from the effects of the pandemic, eyes will almost certainly turn to Africa as a source of long-awaited, accelerated growth.

The African continent is endowed with natural riches that have long been the envy of other parts of the globe, but it lacks what many other regions have - cohesion and a singular vision. This is hardly surprising given that Africa is neither a homogenous region nor does it have a united economic vision.

Not until very recently, that is.

The African Continental Free Trade Area (“AfCFTA”) promises to change this by lowering the cost and effort of trading between member nations. This pact promises to unlock growth and is expected to transform countries on the continent into central figures in the global supply chain.

What is the African Continental Free Trade Area?

The free trade area was founded in 2018 and came into effect on 1 January 2021. It binds 54 of the 55 African Union nations to lower trade tariffs between members, thereby creating the world’s largest free trade area.

The African market is made up of 1.2 billion people producing annual output (GDP) of some $2.3 trillion. The free trade agreement initially requires members to remove tariffs from 90% of goods, which is expected to boost intra-African trade from 15% to 25% by 2040.

Member states will also see vastly improved exports by then, with projections showing an increase of between $50-billion and $70-billion.

This projected growth presents an enormous opportunity for home-grown businesses able to capitalise on this opportunity.

Let’s take a look at three surprisingly predictable opportunities identified by Standard Bank Group that will come from this new trade bloc.

Asian tiger meets African lion

Arguably one of Africa’s most important trade partners, China will continue to dominate the development of the continent’s industrial capabilities. AfCFTA is expected to result in far greater investment in infrastructure and capacity as more integrated supply chains allow more advanced manufacturing to shift to the continent.

The lower tariffs and trade deals are also expected to attract manufacturers from China looking for new home bases closer to where the action is. It’s no secret that Africa boasts an abundance of natural resources, fast-growing domestic markets and populations and affordable labour.

The integration of industries across the region is expected to result in the rise of African manufacturing hubs that service local and regional markets.

An unintended consequence that bodes well for outward-looking growth is that increased trade between member states will build capacity and capability in handling international export orders. This will result in great efficiencies, including cutting delays and opportunities for corruption.

Putting in place the needed physical infrastructure and logistics networks is one of the major challenges, but one that could be a compelling proposition for businesspeople and investors. And one that global-minded Chinese corporates will find difficult to ignore.

Familiar Friends

The UK is a surprisingly predictable opportunity because of the historical ties and the country’s breakaway from the EU. As with all previous trade agreements, Brexit necessitated the drafting of new deals and relationships.

The Africa-UK relationship is a mutually beneficial one because London’s capital markets are a dependable source of funding, while Africa’s infrastructure backlog presents enticing investment opportunities.

However, bulking up through AfCFTA will help strengthen the case of African businesses seeking trade deals. At a time that the UK government is trying to ensure continuity, favourable supply deals with African counterparts certainly fits the bill.

The appetite for UK-Africa deals is evident in the more than $7 billion that Standard Bank has raised for its corporate and sovereign clients from the UK’s capital markets since 2018. One recent deal was assisting Acorn Holdings that with issuing East Africa’s first green bond for green-certified student accommodation.

AfCFTA’s ability to spur on developmental investment is clear to see in Côte d’Ivoire . The resource-rich country is expected to see increases in industries ranging from food production, manufacturing, and mining to oil & gas.

The World Bank estimates that the economy grew in real terms by 1.8% in 2020 despite the global pandemic and expects growth to rebound to 5.5% in 2021 and 5.8% in 2022.

This rapid recovery is attributed to the well-diversified economy as well as political stability that has led to the implementation of meaningful reforms.

With AfCFTA spurring on growth, UK investors are sure to participate in projects that promise long-term sustainability and predictable returns.

Agriculture - living up to reputation

The last of the surprisingly predictable opportunities lies in agriculture.

Africa has long been touted as the breadbasket of the world, although this is true in patches rather than across the continent.

That could change significantly in the wake of AfCFTA initiatives and could make the content self-sufficient if sub-Saharan Africa’s agricultural sector development is accelerated. This would also help spur intra-African trade in agriculture by nearly 50% by 2035.

There’s equally gratifying news on the employment front as the World Bank estimates that 60% of African countries could see agriculture jobs grow by 2035 thanks to AfCFTA. This would lead to wages for unskilled workers growing faster in these countries.

Consequently, agriculture is expected to account for more than 50% of total employment in East African countries including Kenya, Ethiopia, Uganda, Tanzania and Madagascar.

It is early days yet, but the case for investing in or establishing ventures to take advantage of these changes is undeniable. It is also a clarion call for Africa’s entrepreneurs to rise up to the challenge, and there is no time like the present to gear up for what is coming.