Africa’s shifting trading patternsStrong growth and shifting economic power areaiding Africa’s growing trade

February 2015

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African trade is acceleratingaided by growing demand for resources and commodities

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• SSA’s exports slowed in the last year, whilst import demand has risen– leading to a net zero trade balance.

• South Africa has been particularly impacted by shifting terms of trade,with low commodity prices leading to lower export values, while importdemand has remained strong – resulting in a large trade deficit.

• This will likely be exacerbated in 2014 and 2015, as low oil prices leadto lower export earnings (although not lower exports by volume).Hence, deteriorating terms of trade means potentially Africa posts itsfirst trade deficit, failing lower imports.

What this means

South Africa remains the region’s largest trader, but is only the2nd largest exporter, following lower commodity prices. But thatis likely to change, should oil prices remain at 50 p.b.

Since 2003, Nigeria’s total trade has grown 290% in value,

Angola’s by 530%.

South Africa’s growth over the same period was 140%.

SSA still has a net trade surplus, despite S. Africa’s large deficit

2003 2004 2005 2006 20072008 2009 2010 2011 2012 2013

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Africa could benefit from greater intra-regional trade

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Source: UNCTAD EconomicDevelopment in Africa Report 2013

Average share of intra-regional exports to total merchandise exports, 2007 - 2011

11% 21% 50% 70%Africa Latin developingEuropeA America AsiaWhy is there such a vast gap between Africa and other regions’intra-trade levels?The poor quality of road networks is one of the main hindrances to the movement of goods in Africa. It also drasticallyincreases the cost of transportation.Transportation costs in Africa represent about 70% of the value of exports compared to 20% in the rest of the world.Road maintenance is the single most critical area of infrastructure spend that requires attention.Electricity generation is inadequate to meet the population’s needs, let alone industry requirements.Many African countries do not have submarine fibre-optic infrastructure, increasing the cost of basic ICT services, andlimiting the development of low cost ICT systems.The majority of African countries fall in the bottom half of the World Bank ‘Ease of Doing Business’ index.

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Africa’s major trading partners are Europe, China and the US

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A selection of African countries’ major trading partners% share of total trade • Angola, Mauritius and Ghana are three countries overly-reliant on one

or two markets for the bulk of their exports;• Angola is largely reliant on China for oil imports.• Mauritius and Ghana are largely reliant on the EU.• There are good examples of SSA trade taking place, both Kenya and

Mauritius have strong trade ties within SSA, Kenya largely trading withits neighbours, and Mauritius trading with South Africa.

What this means

Ideally, nosingle tradingpartner shouldaccount for toohigh a portion oftrade

Many trade ties are often determined by historical colonial ties.North Africa has stronger trade ties with France, as does much of FSSA.

Case studies: Nigeria AngolaInfrastructure deficit results in (re)importing (refined) oil Lack of manufacturing capacity results in wide ranging imports

Refined oil14.5% Foodstuffs

13.2% Vehicles8.5% Electronics

5.6% Iron2.5%

Refined oil4.0%

Industrial&

Construction10.6%

Foodstuffs6.5% Furniture

2.0%

Vehicles8.0%

Source: World Bank Ease of Doing Business report 2014

Some African countries have vastly improving business climates

-49-44

-30-28-27-26-25-25-24-23-22

-20-16

-12-12-11-10

-8-8-8-7-7

-5-4-4-4-3-3-2

00

7788

101617

20212223

98

KenyaNamibiaMalawiSwazilandAlgeriaGabonDjiboutiEthiopiaBeninNigeriaCote D'ivoireZimbabweGambiaLesothoMozambiqueChadMauritaniaBotswanaCARCongoCameroonNigerAngolaSenegalSouth AfricaTanzaniaDRCGuinea BissauUgandaSudanTogoMadagascarMaliBurkina FasoMauritiusCape VerdeSeychellesEgyptSierra LeoneLiberiaZambiaGhanaRwanda

Change in Ease of doing business rank 2008 - 13

improving

regressing

constant

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29 sub Sahara Africancountries recorded a netdecline in ease of doing

business in 2013Only 12 markets

improved their rankings.

But there are obstaclesDoing business remains challenging, albeit with some improvements

3

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Africa could benefit from greater intra-regional tradeThat requires infrastructure investment; people investment and economic diversification

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Source: ConsultancyAfrica.com

• Raw materials still account for the majority of African exports – hence these exports are destined to higher income

developing and mature markets.

• Most countries on the continent have followed the same development pattern, relying heavily on resource exports, and not

sufficiently diversifying their economies to potentially generate additional revenue streams.

• The dependence on manufactured and high value-added imports is the result of weak industrial sectors.

• Diversification is critical, and barriers to intra-African trade need to be addressed to ensure that diversification benefits can

be enabled by an environment which supports intra-continental trade.

• In addition, capital markets need to expand. Many countries cannot access trade finance to export to other African countries.

• Trading with neighbouring markets greatly reduces the cost of transporting finished goods & services.

• The time taken for products to reach their end market is similarly reduced.

• Producers and suppliers are able to respond to changing demand patterns more readily than what they can from further away

locations.

What’s currently missing

The benefits can be lucrative

7

Three countries account for nearly 40% of Africa’s total tradeCommodity exports in turn account for the bulk of S African, Nigerian and Angolan exports

• There are still relatively few economies in SSA with sufficiently largemarkets to engage in trade on a meaningful scale.

• But this will change as the growing middle class demands greaterconsumer goods and services. Angola’s imports are rapidly rising inline with its growing (oil) exports.

• The same is true for Nigeria.

What this means

The USA’s trade – by value – fell from $125bn in 2011 to $99bn in 2012, and$85bn by 2013U.S.-Africa trade

2011 2012 2013

US$125bn US$100bn US$85bn

…the USA’s share has been declining

While China’s African trade is rising…

7

China’s trade – by value – rose from $95bn in 2009 to $198bn in 2012, and$201bn by 2013U.S.-Africa trade

2009 2012 2013

US$95bn US$198bn US$210bnAfrica’s large economies are ‘open’ markets

trade

8

Increased intra-continental trade requires higher infrastructureinvestment

• China has already linked future trade flows to infrastructureimprovements. This aids China’s overall African trade target (which isaimed to hit $400bn. by 2020, from $200bn. In 2012.

• This approach simultaneously allows opportunities for Chineseconstruction contractors, who typically fund and manage theinfrastructure developments.

• Further down the line though, it benefits the home countries, whoseimproved infrastructure allows for quicker and cheaper trade withneighbouring countries.

• The AU and NEPAD African Action Plan (AAP) 2010- 2015 includes 80flagship projects for regional and continental integration, focusing oninfrastructure.

What this meansConsultancyAfrica estimates thatfor every 1% increase intransportation andtelecommunicationinfrastructure investment,exports would likely increase

3%.

Improved infrastructurerequires funding

9

Why this is important: Africa’s potential is promising

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362 568890 965

1 314 1 344 1 393 1 471 1 694 1 971

251285

447 523

615 690 698 726899

1 060

2000 2004 2007 2009 2011 2012 2013 2014* 2016* 2018*

North Africa SSA* Estimates

The African economy has trebled over the last decadeGDP, current prices

(US$b)

Source: IMF World Economic Outlook Database, April 2014.

African trade will be at least 50% higher than 2013 levels by 2020Closer trading partners could potentially further stimulate prospects

Africa is one of the fastest-growing regions globally

Key observations

►GDP of US$1630b in 2013, SSA would qualify as the 12th largest economy in the world, according to World Bank data.►Since 2004, SSA has experienced average GDP growth of 5.6%, with projected growth in similar territory for the medium term.►Major drivers of growth include:

►Favorable demographics►A diversifying, consumer led spurt.►Fiscal stability, rising tax revenues, falling public debt, and responsible fiscal polices.► Increasingly liberal trade and investment policies.►A growing middle class, estimated at 300 million, with increasing disposable income

Real GDP growth compared to other markets

Source: IHS Global Insight, 30 January 2012. OECD Annual Projections, December 2011.

Source: OECD Annual Projections, December 2011.

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F

Gro

wth

rate

Turkey Brazil Russia India China

11

South Africa has historically large trading ties with maturemarkets

Source: Institute for Futures Research

Ø South Africa has a much closerassociation with mature marketsgrowth prospects

… but planning to shift trade to rapid growth emerging markets

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0

2

4

6

8

10

12

14

16

SSA China

12

Intra African trade will benefit from rapid growth

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FDI is rising

Africans are increasingly investing in their own region

Regional integration will also provide a boost to trade

The formation of theEAC in east Africacreates a $100bn+economy, with nobarriers tomovement of trade,people or capital.

Factors driving trade growthGrowing middle income marketEconomies of scaleEconomic diversificationAgriculture and agro-processingPolitical stabilityIts all about infrastructure

EY Knowledge – Data Quality & Management CI Overview

Published February 2015Report InformationThis report was authored by Graham Thompson, EY Knowledge, South Africa.RWarningThe information contained in this report is dated material.Major events may have occurred since original publication which might alter the accuracy of the report.

May include copyrighted materialAny use of this material, including reproduction or distribution, must comply with applicable copyright law, as well as EY’s contractualobligations. Reproduction or reuse in excess of “fair use” may result in liability for copyright infringement.

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Africa’s growing trade

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