Thursday 13 May 2021 4:44 pm

The City is the global gateway for financial flows post-Brexit, says Africa's rising finance star

With the focus of Brexit being on the relationship between the UK and EU, some in the City and beyond argue that not enough attention is given to the international impact of Brexit, specifically on Africa.

With the removal of European market caps, there has been an increase in trade between the UK and Africa, with Kenya’s trade agreement allowing specific UK goods to be imported tax-free, and the removal of the cap on fresh produce imports from South Africa.

Moreover, international trade opportunities into Africa are often facilitated via London, with the majority of European-African capital flows going through the City. 

While these investment flows have been disrupted due to Brexit, London is in a key position to build up its reputation as a international financial centre through facilitating investment flows from international and UK investors into Africa, argues Cheryl Buss, CEO of Absa International, formerly Barclays Africa.

City A.M. sits down with Buss to dive into the increased trade and investment opportunities for UK investors looking to Africa, and to discuss why the direct impact of Brexit will be a good thing for the continent. 

You share the view that not enough investors pay sufficient attention to the international impact of Brexit on Africa. Why is that?

Naturally as Brexit is a divorce agreement between the UK and the EU, the onus of the attention has been placed on the two sides.  However, there are also huge international implications for the UK as it breaks away, especially on global trade.

The UK now has the ability to negotiate its own trade agreements with countries, which could have a large impact on Africa as the UK could make independent trade agreements that are better tailored to individual African countries. Following the UK-Africa investment summit at the start of this year and in January 2020, the UK is in a position to strengthen its relationships with Africa post-Brexit.  This will lead to a more collaborative relationship based around trade and investment.  

What are the positive impacts of Brexit on Africa?

We’ve already seen a number of positive impacts post-Brexit for Africa. The UK has signed a free-trade agreement with South Africa which was extended to both the Southern African Customs Union and the Mozambique-UK Economic Partnership Agreement (SACU+M). 

While the trade agreement is largely similar to the trade deal the SACU+M had with the EU, the negotiations centred around a realignment of quotas for SACU+M countries in favour of African countries. Ghana and the UK also recently completed a trade agreement worth £1.6bn which includes mineral fuels and oil, preparations of fish, fruit, cocoa and cocoa preparations.

Why is Africa such an interesting place for UK investors? I often hear a lack of connections, corruption and bureaucracy are major reasons to think twice before pumping capital into African markets or businesses.  

For an investor in the standard developed markets, Africa offers a number of opportunities and can play an important role in diversification of investment opportunities. The continent is not only young and growing, but has huge infrastructure needs which presents a lot of untapped opportunities for UK investors.

At the current growth rate of Africa, we expect its demographic to double by 2050. With population growing rapidly, there are huge demands for new infrastructure, technology and services across the Continent. For investors who are looking for unique investment opportunities and want to have a positive effect, Africa is a ripe market to make an impact.

Alongside population growth, Africa is the world’s largest producer of a number of core commodities, including platinum, oil and gas, diamonds, cobalt and copper and due to where we are at in the global economic cycle, we are currently seeing commodity prices rise steeply. 

We like to think that what we are seeing now, will be a repeat of the supercycle we saw play out in the early part of the 2000s.

Investing in Africa requires a shift in mindset for a lot of investors as it needs to be thought of as a long term investment with higher risk than developed market investments. However, with greater risk, comes greater reward, and in a world which is light on yielding assets, Africa remains a source of elevated yields and risks. 

As mentioned earlier, international trade opportunities into Africa are often facilitated via London. How do you see London’s position as an international financial centre?

The City has always been the gateway for financial flows into Africa, both due to its historic and geographic background. Because of this, it is also the global centre for capital raising for the emerging markets. While some of this may change in the post-Brexit world, when you look at the listings of companies from emerging market economies, London has a higher number of these listings than any other stock exchange in the world. 

But we are starting to see African companies looking at alternative exchanges such as Euronext, or Nasdaq. This is certainly an impact from Brexit, but policy makers and UK regulatory bodies have a role to play through the harmonization of rules, and alignment of other regulatory or fiscal aspects on the trading of securities for investors, particularly European investors, in London markets.

We think that it will be quite some time, if ever, before London is dethroned as the global financial investment centre when it comes to Africa.

However, while some of this is down to Brexit, there are other factors at play that is heightening the competition between other financial centres and exchanges and London. Technology is certainly disintermediating the advantage London has as a partner to Africa, as companies can now look for the most economically viable and most suitable places to list their company without necessarily having to think through location and history.

The UK and Kenya recently ratified their free trade agreement. What do you expect from that deal?

The UK is one of Kenya’s largest trading partners so this free trade agreement was incredibly important for both countries with the UK market accounting for 43 per cent of total vegetable exports from Kenya and at least 9 per cent of its cut flower exports. Under the terms of the deal, Kenya is allowed to continue exporting tea, coffee, spices, vegetables and flowers to the UK without paying duties, while Kenya will start phasing out duty and quota barriers on a set number of UK products 12 years after the trade agreement comes into force.

Through the trade agreement, it will further support job creation and economic growth in Kenya, with Kenya aiming to enhance its market share in the UK by 5 per cent by 2025.

However, Kenya is also part of the East African Community (EAC), a trading bloc which includes Uganda, Rwanda, Tanzania, Burundi and South Sudan. The UK-Kenyan Economic Partnership Agreement has been extended to the rest of the EAC, so all members have secured unlimited access to the UK-Kenya trade deal.

City-based Cheryl Buss is a former director at the British Chamber of Business in Southern Africa and a former Standard Chartered Bank

Let’s look ahead, life after lockdown, the market post-Covid. What are your thoughts on the recovery process?

From what we’ve been seeing so far, the recovery process for Africa will be uneven, however we’ve been seeing much stronger growth at this point than what we anticipated six months ago.  We’re seeing strong growth numbers from the mining, agriculture, manufacturing and retail sectors, but much weaker numbers for other sectors, such as tourism and transport. Tourism especially is a huge industry for South Africa, and we don’t anticipate to see a return of pre-Covid tourist levels for quite some time, with South Africa currently experiencing a 95 per cent decrease in international tourists.

Last year, there was a ‘covid contraction’ of 7%, but we are looking at an above trend growth this year of about 3.8 per cent due to this contraction and the economy’s recovery from Covid. When we are thinking about the recovery process, we are also considering a number of other factors such as fiscal risks, tax collections and the political environment.  The ethos of our view is that we are gaining traction in terms of recovery and are hopeful for what lies ahead in the long term, but acknowledge that it will be a lengthy and uneven road as we look towards full recovery.

Finally, ethical investing, including implementing ESG standards in investment strategies, is increasingly ‘a thing’ in the City and across Europe. Is this a serious issue (yet) for banks and businesses across Africa?

In a single word – yes.  We’ve seen a huge demand for ethical investing and implementation of ESG standards across the Continent with banks and businesses leading the charge.  Every single conversation we have with a client, or prospective client, starts with ESG. 

Some of this enthusiasm comes from the financing that is being lent to Africa. For example, we have seen a number of development financial institutions attaching ESG and impact goals to the capital that they are lending to businesses and further with the upcoming COP26, we are seeing more and more discussions around how to make Africa’s energy transition a renewable one.  

Africa has a lot of challenges set out for it – it needs to make the transition to renewable energy, while also alleviating poverty and turning towards carbon neutrality.  We believe that responsible capital is and will continue to play an enormous role in implementing ESG standards in investment strategies across Africa and we are keen to ensure that responsible investments with strong AML and KYC governance continue to support a plethora of projects across the board in Africa.