What post Covid-19 economic recovery strategies to adopt for countries in the Southern African region? What are the priorities of the SADC nations as the global debt crisis is looming ahead? And what are the tools that can help the way forward?
Disrupted global and regional value chains, due to the ongoing Covid-19 crisis, present a significant challenge to economies worldwide. With the current global recession and trade contraction, cyclical unemployment is expected to rise, further affecting consumption levels and patterns.
China, the world’s powerhouse has been forced to stop production. Transport corridors have been affected. Ports and airports did suffer temporary shutdowns. Trade flows got interrupted. And the procurement of essential goods faced substantial challenges.
Priorities following the Covid-19 crisis
Governments around the world are injecting huge amounts of taxpayers’ money into economic relief to stimulate recovery, support businesses and save jobs. These emergency measures are, indeed, much needed. But how long will that last? Is that liquidity flowing into the right places?
Following the report “The Impact of COVID-19 on SADC Economy”, April 2020, sectors that have been severely hit by COVID-19 include the tourism and leisure, aviation and maritime, automotive, construction and real estate, manufacturing, finance services, education and the oil industry.
The food processing and retail business have remained stable and witnessed a rise in demand that has the potential to fuel inflation. The global lockdown has also presented opportunities in the ICT industry and online shopping with delivery options.
As stated by the report “The Impact of COVID-19 on the SADC Economy”, the damage to our economies will remain with us even in the long-term. It, thus, recommends Member States to prioritize investments and channel scarce resources to identified economic sectors to resuscitate their economies, strengthen resilience and improve competitiveness.
The SADC’s Bulletin 8 of the SADC Response to COVID-19, July 2020, key recommendations, mentioned to shift policy focus from broad fiscal support to more affordable and targeted policies along with increasing investments in renewable energy technologies, as part of their economic stimulus and recovery plans.
Can FDI play a role in SADC’s growth and recovery strategy?
Foreign direct investment (FDI) can play a key role in driving investment for growth and recovery. A research paper, FDI Trends in SADC: Implications for Value Chains, Industrialisation and Inclusive Growth, by Chelsea Markowitz for the South African Institute of International Affairs (SAIIA), April 2020, analysed inward FDI trends in SADC countries in relation to the SADC Industrialisation Strategy and Roadmap (SISR), released in 2015, which has placed industrialisation-led growth and investment in value chains as a central development strategy.
But meanwhile, times are changing… “Traditional” global value chain investment destinations are changing. Developing countries are becoming less attractive due to rapid technological advancements and the automation of labour. Consumers demand for sustainable supply chains. And the growing role of services within the global production are changing investment destination decisions. And above all, the Covid-19 is set to be a game changer.
Among the key insights of this report, between 2005 and 2019, the financial services, business services, communications, software & IT services and food & beverages received the most investments in SADC. Renewable energy, real estate and metals sectors received the highest capital investment per project. Of the top 15 sectors, only the real estate and textiles sectors saw an increase in investments.
Food & beverages received the fifth highest ‘number of investments’ in the region (the highest outside of the service sectors with 263 projects. The sector shows strong growth potential in SADC, particularly beverage investments and in agribusiness manufacturing, with comparatively high job counts and capital investments, along with sectors involved in the poultry value chain (maize, oilseeds, feed & poultry).
Retail investments in the Food & beverages sector are primarily from regionally based retail supermarkets. Many agribusiness/manufacturing investments come from multinational manufacturing companies such as Nestlé, Coca Cola, Lonrho Springs, among others. Enhancing farmers’ ability to supply these multinationals could be an area for regional focus.
Recent textile investments have primarily been in retail, while recent real estate investments have been in offices/ workspaces and industrial projects.
Renewable energy has grown the most in aggregate over the period (albeit from a small base). The sector grew the most, with the number of investments increasing by 118%. Renewable energy has much higher value per investment than all other sectors, with an average of $706.6 million per project.
Financial services receive the most FDI in the region with an increase in investment from pan-African banks. However, these investments do not favor financial inclusion. Many financial sector investments follow natural resources. Access to finance from commercial banks remains quite restrictive and difficult for regional development projects or small businesses
Metals, automotive OEM, real estate, minerals, food & beverages and textiles sector investments create the highest average number of jobs in the region. Sectors with high job creation have benefited from industrial policies (automotive & textiles in South Africa, business process outsourcing in Mauritius). The business process outsourcing activities in Mauritius creates more jobs on average than all other service activities, but average jobs are still fewer than manufacturing activities.
Business services, chemicals, retail, financial services, food & beverages, minerals and metals have received the most investments from other countries within SADC. Intra-regional investment is low. It accounts for only one third of SADC FDIs and has not increased significantly over time.
The author thus recommends that manufacturing-intensive sectors such as automotives should therefore not be abandoned as secondary activities generate high job creation. The increase in retail supermarket and agro-processing investments in the region presents opportunities for SADC countries to supply agricultural and/or processed products to these stores and to supply multinational agro-processing plants increasingly investing in SADC.
The growth in retail textile investments creates an opportunity for a renewed manufacturing push to supply regional retailers. The shift towards sustainable sourcing creates new opportunities for regional cotton supply and cut, make and trim (CMT).
According to emerging trends of digitalisation and sustainability, renewable energy, communications and business services will all likely continue to grow and the region should explore opportunities to better capture value-add in these sectors.
The fact that industrial policy is not a major driver in FDI trends points to a need to develop targeted policies and incentives in specific sectors with high export potential but low levels of FDI. Sectors identified by the report include aquaculture in a range of coastal countries, meat in Botswana and Namibia, and oilseeds/legumes in Tanzania and Malawi.
Post-Covid-19 recommendations from the SADC Business Council
The private sector and business associations in the Southern Africa Development Community (SADC), in their communiqués in April and June 2020, on COVID- 19 trade challenges and post recovery strategies, coordinated by the SADC Business Council urged governments to provide cheaper loans to SMMEs at special lending rates.
To aid the quick economic recovery to COVID-19 as lockdowns are phased out, they recommend governments to provide loan facilities and other incentives at special rates to businesses to fund the resuscitation of key economic industries such as Manufacturing, Agriculture, Tourism, Health and Transport.
They also urged to implement the following financial interventions to promote import substitution measures to replace previously imported commodities and to promote the use of the SADC Integrated Regional Electronic Payment System (SIRESS), now known as the SADC Real Time Gross Settlement (RTGS) system, to reduce corresponding banking charges in regional trade.
Freeing up supply chain liquidity
Mikkel Hippe Brun, co-founder and senior vice president of Greater China at Tradeshift, a Danish company involved in fintech, in a paper exploring resilient supply chains for a post-COVID-19 world on the Bloomberg New Economy Forum, gives an interesting insight on how to better use the money governments are injecting into economic relief and accelerate economic recovery.
The proposal is to unlock liquidity and working capital and, in the process, saving otherwise healthy companies and allowing government support to be directed to where the need is most acute. And he argues that there is already evidence that this approach can deliver impact at scale.
Two pilot programs are being run for now. One in Denmark, where the Danish Export Credit Agency (EKF) and Tradeshift are piloting a program designed to unlock $55 billion in supplier payments in just 12 months.
And another program is being rolled out in South Africa, Tradeshift is implementing a $1.5 billion instant supplier payment scheme for local businesses as well as companies in select African markets. The latter is being done in partnership with Raindew Trade, a trade and supply chain financing and services platform.
And according to Professor Philipp Schröder, a member of the government’s economic expert group for reopening Denmark after the corona crisis, quoted in the paper, “the immediate payment scheme can become a very strong aid package for companies in the corona crisis; particularly in complex industrial supply chain where liquidity is absolutely crucial.”
Under this supply chain financing model, he claims that large established organizations act as a pipeline to get working capital flowing through supply chains. “These programs, he asserts, function as a symmetrical credit line where the buyer must agree to pay their suppliers early to get access to a credit facility. Suppliers can request early or upfront payment within 48 hours of invoice approval, while corporate buyers can benefit from extended payment terms of between 30 and 360 days.”
The financing model provided by Tradeshift ensures digital transparency, minimizes risk and is easy to replicate. Mikkel Hippe Brun explains further that: “banks are encouraged to provide low-interest credit lines to large buyers on the understanding that these funds will be used to pay supplier invoices quickly. Those credit arrangements are guaranteed by governments, Export Credit Agencies, or private companies like Raindew Trading. Digitized invoice data exchanged between buyers and sellers provides an accurate picture of existing invoice liquidity that is eligible for finance. This information is made available to both the bank and the insurer so that they can see very easily when a supplier invoice is eligible for funding.”