In every adversity lies an opportunity: Africa after COVID-19

As the sun sets on the first two weeks of a UK-wide lockdown in the wake of the most deadly pandemic that the world has witnessed in a generation, claiming the lives of thousands and with more to come, the reporting on the spread of the virus in Sub-Saharan Africa has been sporadic at best.

This could be attributed to two main reasons. The first is the lack of freely available information on testing and diagnosis of the infection. The second is the lack of public interest in a region where funding that is necessary for the facilitation of widespread testing is scarce, if not non-existent in some countries.

It has been well documented that the risk of contagion in the emerging economies could be considerably greater due to the lack of infrastructure available to diagnose, monitor and contain the rate of transmission of the virus.

Nigerian woman wearing a face mask, Lagos

Photo Credit: Time Magazine, 21 March 2020

What does this mean for the economies of the different countries in the region?

The global equity markets have been in free fall since the start of March and will continue to remain in bear market territory. Recent reporting that the pandemic could induce a global recession as severe as the Great Depression adds further fuel to the fire.

In response, governments in the USA, Germany and the UK have sprung into action, delivering unprecedented proposals to support small and medium businesses, the self-employed and the unemployed in an effort to dampen the impact of the pandemic on average households and their economies at large. These economic stimulus packages could be just the beginning as countries that are gripped by the pandemic find ways to stave off the potentially catastrophic impact that the virus will have on their economies.

Unfortunately, Sub-Saharan African governments don’t have the resources or financial muscle to replicate such measures. Indeed, Figure 1 below shows that 24 countries across the continent have debt to GDP ratios that are well above the IMF’s prescribed level of 55%, meaning that a good portion of government revenues are already spent on debt servicing. A lack of economic diversification in the region, particularly among commodity exporters, make the impact of financial shocks even more acute in Africa.

Figure 1: Debt to GDP ratios of countries (Source: IMF, 2018).

Figure 2: GDP per capita by region (Source: World Bank)

Given the state of affairs, the risks for average households in Africa are far higher than for those in developed countries. Figure 2 below compares Sub-Saharan Africa’s average GDP per capita with its peers in the rest of the world. The average income in the region is 15% of the rest of the world and 2.5% of North America. According to the ILO and World Bank (2019), 7.1% of North Americans are self-employed compared to an astounding 76.1% of people living in Sub-Saharan Africa. Low earnings coupled with poor income security could result in households having to resort to desperate measures for survival, including theft and looting, particularly in those countries that are more exposed to global economic risks (large commodity producers such as South Africa and the DRC included).

There has been discussion in various quarters of a potential debt relief package for several countries in the Sub-Saharan African region. However, pre-occupied western powers are less likely to focus on foreign policy at a time when their domestic economies are in tatters

The immediate need to avert disaster     

Some organisations such as the Africa Development Bank (“AfDB”), an influential development financial institution (“DFI”) in the region, have been proactive in managing the risks stemming from the pandemic. For instance, the AfDB recently raised a US$ 3bn COVID-19 bond to “help alleviate the economic and social impact the COVID-19 pandemic will have on the livelihoods and Africa’s economies”. According to the DFI, the social bond, with a three-year maturity, garnered interest from central banks and official institutions, bank treasuries, and asset managers including Socially Responsible Investors, with bids exceeding US$ 4.6bn. This is the largest dollar denominated social bond ever launched in international capital markets to date, and the largest US Dollar benchmark ever issued by the bank. It will pay an interest rate of 0.75%.

While this is certainly a step in the right direction, more action is required to avert a major economic crisis, which according to some UN estimates has already cost African countries over US$ 29bn in GDP terms. Can more be done to support the world’s most fragile and vulnerable economies?

One answer could lie within the impact investment community. Over the last 10 years, these investors have developed an innate understanding of the socio-economic realities of the region and made a significant positive catalytic “impact” in the investment landscape of many developing countries. This is particularly true of those impact investing organisations that can create efficient and effective multi-stakeholder collaboration, facilitating the blending of finance and development funding sources, as well as a range of other much needed resources.

United States Agency for International Development (USAID), a prominent donor in Africa

Photo Credit: The African Exponent, 2020

What are the first steps towards offering a solution?

If experts are to be believed, this economic crisis is expected to last for at least 3 quarters, with GDP contraction likely to reach the high teens on average for most Sub-Saharan African economies. The severity of such a recession will affect small and medium sized enterprises (SMEs) the most. According to Norfund and the World Bank, up to 95% of businesses in Sub-Saharan Africa are classified as SMEs, employing as much as 40% of the working population (in the formal sector). Given the scale and importance of SMEs to the economies of these countries, it is imperative that access to finance is enhanced in these troubled times to ensure that vast populations have the means to obtain the necessary goods and services for basic survival.

SMEs in the region typically operate nimble and lean organisations with low cash balances that are promptly reinvested in inventory cycles that are typically longer than those witnessed in the developed world. Companies in tertiary sectors such as hospitality are likely to be most severely impacted, but consumer goods retailers, manufacturers and distributors will also be affected by the lack of spending by populations that will be looking to preserve their existing wealth (or at least make it last for longer).

This is where the impact investment community can demonstrate leadership and make a significant difference. DFIs, donors, institutional impact investors, family offices and the CSR groups of large corporations operating in the region can allocate funds to create blended finance vehicles (essentially COVID-19 Working Capital facilities) that can provide either grant funding, concessional finance or patient capital to create liquidity, not only in critical sectors such as food retail, distribution and healthcare, but also in some tertiary sectors such as hospitality, travel and transport where the impact is likely to be the most severe. Although these tertiary sectors are not critical for human survival, they are large employers in the Sub-Saharan African context, with a material impact on income earning potential for the citizens of the region.

By providing much needed interim funding on terms that are more relaxed (with a focus on capital preservation rather than generating significant commercial returns), impact investors can create an actual difference by acting as the gatekeepers of financial security to vulnerable SMEs in the region, at least until the global economy witnesses a rebound.   

Of course, there are several large corporates that have recognised the risks posed by the pandemic, prompting them to act swiftly to secure their supply chains. In fact, at ThirdWay Africa we are already structuring options to set up a liquidity facility for the SME retailers and distributors of a large corporate in the region to help ensure a seamless and uninterrupted supply of goods. Such a liquidity facility is expected to be funded by impact investors, donors and the private sector, a perfect example of creating and coordinating an ecosystem of multiple stakeholders in the new temporary paradigm of physical isolation, to crowd in and blend capital with different risk / return profiles to catalyse business revitalisation.

But how is this relevant in the long term?

In a world where economic interdependence has become the formula for financial success, China has emerged as the world’s manufacturing and processing hub. Good access to infrastructure, lax environmental regulations and low production costs have led many of the world’s leading companies (Apple, Tesla, etc.) to design their supply chains around manufacturing hubs in China. Today, China processes almost 100% of the world’s natural graphite for lithium ion battery production and produces almost 60% of the solar panels that are installed globally.

A manufacturing process in China

Photo Credit: FT.com / Getty Images, 2020

The COVID-19 pandemic has renewed the urgency for firms to lower their reliance on China for manufacturing, thus reducing their risks to economic and political shocks. Before the pandemic, the growing tensions between the USA and China on trade had already begun boardroom chatter on how to diversify supply chain risks away from China in the event of a full-blown trade war. Over the last three months this chatter has turned into a clamour. In short, it is highly possible that in the future countries such as the USA, UK and Germany will spread their geographical risk and reduce their dependence on China for processing and manufacturing.

This spells a significant opportunity for Africa. The African continent is one of the world’s largest supplier of raw materials, particularly in the metals and minerals space. To date, countries across the region have primarily been suppliers of these crucial raw materials, with little value-added manufacturing performed by local manufacturers. But given the right conditions, Sub-Saharan African countries could play a much larger role in the global supply chain.  

This is where investors with a focus on the African continent, particularly impact investors, can take on a leadership role in the sustainable development of the region. Right now, there is a short to medium term need for patient capital in the region to provide businesses with the necessary liquidity and time to see through these difficult times – keeping enterprises afloat will be the starting point for international investors to develop strategic assets in partnership with local players in the region. From here, one can envision  strategic partnerships that look very different from the past, where Sub-Saharan Africa is not just the source of raw materials for the rest of the world, but the supplier of value added goods (though mineral beneficiation, purification and commodity processing) as well as services that will de-risk a global supply chain that is now heavily reliant on China.

Only time will tell when this transition will take place. Until then, let’s all strap up for a roller-coaster of a winter in the Southern Hemisphere and work to come through this pandemic stronger than ever before