Africa’s under-developed infrastructure, non-tariff barriers and finance constraints will limit the potential benefits of a continental free trade agreement that is due to receive political backing before the end of this month, Moody’s Investors Service said in a report today.
The African Continental Free Trade Area (AfCFTA), which aims to create a single African market for goods and services, could boost intra-regional trade – which remains far lower than in developing Asian countries.
“There is significant potential for further trade integration in Africa, which the AfCFTA could stimulate,” said Colin Ellis, Moody’s Managing Director-Credit Strategy and the report’s co-author. “This could improve the region’s credit profiles, given the greater stability and sophistication that intra-regional trade could offer compared with traditional commodity exports to the rest of the world.
“That said, countries with larger manufacturing bases and better infrastructure, such as South Africa and Kenya, are most likely to benefit from further integration. For others, poor infrastructure and non-tariff barriers will continue to restrict the trade sector’s development and long-term growth potential.”
Intra-African trade has increased in recent years to 15% of total trade from 11% in 2008. However, overall levels remain lower than those recorded by other developing regions before the global financial crisis.
African exports to the rest of the world are largely undiversified and are heavily oriented toward raw materials. By contrast, exports between African countries contain more value added products. Manufactured goods accounted for 43% of intra-Africa exports between 2012 and 2016, compared to only around 20% of its exports to the rest of the world.
Continued growth in intra-regional trade could help to reduce growth volatility and develop the region’s local economies, which would in turn increase demand and investment in trading sectors. During the recent commodity downturn, countries with improving intra-Africa trade generally fared relatively well.
One of the key barriers to the growth in regional trade is the lack of quality infrastructure. Between 2007 and 2016, African countries that made the most improvements to their infrastructure also experienced the highest export growth.
In addition, non-tariff barriers – such as corruption, ineffective Customs documentation, and broader procedure remain problematic in Africa. The costs for intra-African trade are the highest among developing regions and around 50% higher than in East Asia, according to World Bank estimates.
A lack of trade finance also limits trade potential in Africa. The continent’s trade finance gap continues to exceed US$90billion annually, the African Development Bank estimates.
The end of the commodity price boom could marginally incentivise investment into manufacturing.
Countries with larger manufacturing bases are in a better position to tap the benefits of further trade integration. Among rated countries, South Africa, Kenya and Egypt are most likely to benefit from further integration – thanks to their large manufacturing bases and relatively robust infrastructure, particularly given their access to electricity.
For similar reasons, Morocco, Namibia, Tunisia, Cote d’Ivoire, Senegal and Cameroon also stand to gain from increased intra-African trade. In addition, Ethiopia – which has made significant progress in developing its industrial sector over the last five years, with annual growth in manufacturing value added of around 20% – also has the potential to gain further through rising intra-regional trade.
The report, “Sovereigns – Africa, Intra-regional trade can promote growth, but infrastructure and non-tariff barriers limit upside”, is available on www.moodys.com. Moody’s subscribers can access the report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.