AfCFTA: Afreximbank play
Trading under the African Continental Free Trade Area (AfCFTA) agreement is now effective since the start of the year. The AfCFTA agreement is an agreement that allows free intracontinental access to commodities, goods and services in Africa.
The World Bank delved into the benefits of this agreement, which it categorised between macroeconomic and distributional impacts. Key macro-economic benefits are given as follows.
An increase in real income by 7% by 2035 in Africa. This increase translates to US$450 billion using 2014 prices and market exchange rates. According to World Bank’s report titled The African Continental Free Trade Area: Economic and Distributional Effects, Zimbabwe and Cote d’Ivoire are expected to record the highest gains of 14% apiece, while Madagascar, Malawi and Mozambique will be at the low end of the spectrum.
A 29% increase in total export volumes by 2035. Intracontinental exports are expected to increase by 81%, while exports to non-African countries are expected to rise by 19%.
Intra-AfCFTA exports to AfCFTA partners is expected to rise fastest in Cameroon, Egypt, Ghana, Morocco and Tunisia. Under the agreement, the manufacturing sector is expected to record the greatest gains while the services sector is anticipated to achieve modest growth.
A boost in regional output and productivity and efficient allocation of resources. Total production on the continent is estimated to increase by almost US$212 billion by 2035 under the agreement. We opine that the trade agreement will afford African countries the opportunity to focus on their comparative advantages and improve overall efficiency.
The distributional impacts largely address poverty and unemployment on the continent. The AfCFTA has the potential to lift 30 million (c.2,2% of the continent’s total population) Africans out of extreme poverty, and an additional 68 million people out of moderate poverty.
These distributional impacts will largely benefit sub-Saharan Africa which has the highest poverty rate of 41,1% on the continent based on 2015 data. The agreement’s impact will likely see a 10,9% decline in people under extreme poverty by 2035 from a baseline of 34,7%.
The World Bank also asserts that the agreement will increase employment opportunities, wages for unskilled workers and contribute to efforts to close the gender wage gap on the continent. Given that Africa is extensively agro-centric, employment in the agricultural sector is expected to increase in over half of African economies. Wages for unskilled workers are also anticipated to increase the most in countries that are set to record high employment growth in the agriculture sector.
Overall, wages for unskilled labour under the agreement will improve by 10,3% by 2035, and 9,8% for skilled labour over the same period. Wages for women are anticipated to increase by 10,5% versus a 9,9% increase in wages for men, with the net effect resulting in a lower gender wage gap.
The success of this agreement also hinges on the ability of the African economies to pool and efficiently allocate the necessary capital that will ensure that the AfCFTA agreement’s objectives are realised. Enter the African Export-Import Bank (Afreximbank). Afreximbank is a supranational pan-African multilateral trade financial institution — a fancy way of saying a bank for Africa by Africa — that was established in 1993 with the help of the African Development Bank.
The bank has since grown to become a top trade finance bank in Africa with top shareholders that include African governments, government institutions, and African nongovernment institutions.
Zimbabwe’s central bank, the Reserve bank of Zimbabwe (RBZ), is among the bank’s top 20 shareholders while other Zimbabwean entities with a stake in the bank include the National Social Security Authority (NSSA) and ZSE-listed First Mutual Holdings Limited.
The bank has deployed over US$16 billion in debt capital to different regions and sectors of the continent. Currently, the bank’s loan book is largely skewed towards financial services and the oil and gas sector, which account for 53,4% and 15,9%, respectively.
In addition to the value that will be unlocked through the AfCFTA agreement, Afreximbank’s investment thesis is also strong. The bank is an extensive player in one of the fastest growing regions in the world.
According to the International Monetary Fund (IMF), Northern Africa — which accounts for 26% of Afreximbank’s loans — is expected to rebound in 2021 with a real GD P growth rate of 4,9% before increasing again in 2022 at a real GD P growth rate of 5,9%. Other regions on the continent, however, fall below the global real GD P growth rate of 5,2% in 2020 and 4,2% in 2021. Despite this, the case remains solid for Africa as the least untapped investment destination for emerging market investors in the near future.
The bank also boasts a relatively good credit rating which affords it the ability to unlock value for its shareholders through the disparity between interest rates on its debt funding and the rates it charges on its loans.
According to Fitch Ratings, Afreximbank is rated BBB- (above investment grade). In comparison, Africa’s most industrialised nation, South Africa, was recently downgraded to BB-, which is three notches down from Afreximbank’s rating.
The ratings agency also highlighted that the bank has managed to maintain adequate solvency despite the impact of the Covid-19 pandemic on the continent’s economies.
The bank’s performance also considers the fact that it is one of the few supranationals that continue to support high-risk countries such as Zimbabwe which have fallen from the international investor’s grace. The entity’s approval of US$70 million to finance the expansion and upgrade of the Beitbridge border post in Zimbabwe is testament to the bank’s commitment to Zimbabwe.
The rewards for investors of Afreximbank are also tangible. The bank is a consistent dividend payer, and dividends for the FY2020 are forecasted to range between US$58 million and US$75 million.
These dividends are based on the bank’s net income, which has achieved a two-year compounded annual growth rate (CAGR ) of 18,5% since 2018. These dividend pay-outs that are expected to continue trickling into Zimbabwe through the RBZ, NSSA and First Mutual Holdings as the prospects of Afreximbank shine even brighter.
However, one question remains; will the direct and indirect benefits accruing from the AfCFTA agreement outweigh the potentially cannibalising effect of lowering tariffs in different economies on the continent, such as Zimbabwe? Food for thought.
Mtutu is a research analyst at Morgan & Co. He can be reached on +263 774 795 854 or tafara@morganzim.com