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Africa’s Global Links

Africa’s global links still indicate that even after 50 years after the end of European rule in most parts of Africa, more than a third of Africa’s trade remains with Western Europe. This high concentration shows that historic ties still have a large influence on these markets, but the balance is beginning to shift as trade with East Asia increases. The nature of the imports compared to the exports reflect the fact that Africa almost exclusively exports raw materials, and has not yet begun to manufacture goods for export markets.

Imports from Western Europe are mainly made up of capital goods such as machinery and vehicles, with refined oil and fuel products also making up a large share. Manufactured goods, plastics and pharmaceuticals also make up smaller contributions to imports. East Asia is the second largest source of imports, while relatively little is imported from North America, only slightly more than from Eastern Europe. The profile of imports from East Asia is similar to imports from Western Europe in many respects, with the obvious exception of refined oil and fuel where very little is imported from East Asia. It is interesting to note that ships are also largely imported from the East rather than Europe.

 

On the export side, Western Europe and East Asia are Africa’s largest trading partners, with two thirds of exports going to these regions. Almost three quarters of exports are of crude oil and gas, and more than 90% of all exports are extracted hydrocarbons and metals. Agriculture makes a small contribution in the form of cocoa, tea, coffee and fruit. Around 8% comes from other non-extractive industries such as the assembled electrical equipment and vehicles.

 

Exports to East Asia are even less diversified than those to Western Europe, with 97% of exports extractive in nature. The remainder is made up of agricultural products such as cotton, wood and plant oils. The trend in recent years has been a decrease in exports to the US, and a corresponding increase in exports to Western Europe and China. The main reason for this shift has been the advent of shale oil and gas in the US, which has led to lower demand for African crude oil in that market.

 

When one considers the export and import profile of the continent as a whole, Africa’s trade balance is only marginally negative, which is expected within developing economies that attract investment capital allowing for higher trade deficits. However, on a regional basis the picture is very different, with resource-rich regions such as Nigeria and Southern Africa (ex-SA) being able to maintain significant positive trade balances, allowing for the purchase of capital goods to fuel economic growth. What has become apparent with the recent lower commodity prices and dramatic decrease in the oil price is that certain countries and regions are very vulnerable to shocks from commodity prices. In particular, Nigeria, Ghana and Zambia have experienced significant currency devaluations due to sudden large current account deficits. The reliance on commodities such as tea, coffee and sugar for export income by the East African zone has equally exposed this region to trade deficits and currency weakness in the 2014 period.

High macro-economic volatility due to large exposure to a single export product can increase investment risk in otherwise attractive markets by exposing investors to significant foreign currency risk and volatility in government finances.

Another interesting point to note is the large role that remittance plays in Nigeria, Egypt & Sudan and the Maghreb region as a source of hard currency. The diaspora of people from these regions has resulted in significant money flows, which also support local currencies. These remittances have proven to be relatively consistent through the economic cycles, supplying a stable source of hard currency.

 

NEXT: Infrastructure development in Africa