Baker McKenzie Partners in Johannesburg discuss key trade and investment trends in Africa, and what to expect in 2022.
Baker McKenzie Team
Mergers and Acquisitions
Last year was a difficult year for investors in Africa, with a great deal of uncertainty. The pandemic effects had a disappointing effect on many sectors and many deals had to be postponed as a result. The increase in the value of the M&A deal in 2021 is partly due to the post-Covid boom, as deals deferred last year were able to move forward.
The African Continental Free Trade Area (AfCFTA) has increased investor interest in sub-Saharan Africa as new markets open up and cross-border transactions become more streamlined. China’s continued interest in Africa, a commitment from the European Union to strengthen partnerships with Africa, the United Kingdom’s New Economic Partnership Agreements, and a renewed mutual trade focus from the United States have contributed to improving investor sentiment across the region.
The pace of growth of the digital economy across the continent has naturally accelerated due to the pandemic, and this continued demand for technology has caused widespread disruption across sectors in Africa, as the financial, energy, transport, retail, health and agricultural sectors all seek opportunities to expand their infrastructure. Technical infrastructure to acquire the skills and innovations necessary to keep pace with demand. Fintech is also a popular sector of investment across Africa and specifically in South Africa, Kenya and Nigeria, where health technology, mobility and agricultural technology are also attracting increasing interest.
Expanding access to quality healthcare services and increasing domestic capacity to manufacture medicines dominate the healthcare sector in Africa and investment continues to support these goals. Covid-19 has caused a surge in the already growing demand for affordable healthcare, with technology-centric models, allowing easy access to medical advice and care, and already beginning to loosen the constraints of the traditional delivery model across Africa, before the pandemic.
Trade – African Continental Free Trade Area
So far, 38 countries in Africa have ratified the AfCFTA agreement and 54 countries have signed it, leaving only Eritrea. The first shipment of goods under the AfCFTA took place in January 2021 and most of the signatories have now submitted proposed rules of origin. The introduction of the African Platform for Virtual Commercial Diplomacy has allowed parties across many different timelines to meet in a secure online environment – accelerating negotiations across vast regions, comprising many cultures, languages and legal frameworks. The simplification of cross-border trade and the free movement of goods across the continent is expected to take off in Africa in the coming years.
Trade uncertainty in Africa has been exacerbated by the impact of the pandemic, which has led to a double shock between supply and demand – supply has been affected by mass production shutdowns, supply chain blockages and lower demand for products from Africa. For example, global demand for commodities such as steel and copper from Africa has declined significantly during the pandemic. As a result, financial institutions and merchants had to adapt and restructure transactions, and some casualties occurred. Moreover, the oil-rich countries in Africa that were hit hard by the collapse in global oil prices have yet to recover. However, Africa is showing signs of recovery, mostly due to international traders who have discovered opportunities on the continent.
However, the African commercial banking sector suffers from a serious lack of liquidity and it is difficult to obtain credit for new projects. This comes despite the AfCFTA and the African Export-Import Bank initiative to support countries experiencing tariff losses due to the AfCFTA, as well as the implementation of debt relief measures by the African Development Bank and the World Bank on Covid-19. The liquidity problem can be addressed through the financing of trade value chains, the required cooperation between regional and local banks, export credit agencies, development finance institutions and export credit providers. Alternative financing and blend solutions are expected to grow in popularity as a way to eliminate risk and support a broader lender ecosystem.
There has been a massive breakdown in key links in global trade supply chains in the past year, with problems including road congestion and blockages, manufacturing shutdowns, a shortage of skilled labour, a global shortage of key logistical components, a lack of space in warehouses, and skyrocketing transportation costs. And a significant increase in the demand for goods around the world, after the closure. As a result, countries have been looking at ways to reconnect the broken chains. Last year, the African Union 2020 Peer Review Mechanism highlighted Africa’s supply chain challenges and over-reliance on foreign trade and suggested that the continent boost its manufacturing capacity to build a strong African supply chain that cannot be weakened by global barriers.
Our last report, License to be Bold: Transforming Industries It identified post-pandemic focus areas for IMT supply chains, which included the ability to adapt to new markets, embrace digitalization, and enable resilience to disruption in supply chains. The report noted that the disruptions arising from Covid-19 have accelerated trends already evident in the industries market, particularly digitization and trade volatility, and the shift has now turned from a “nice thing” to a necessity.