Regional integration in Africa: Can the Tripartite FTA be a stepping stone toward a Continental FTA?

The official statements are clear: Regional leaders and policymakers want to make the 26-member Tripartite Free Trade Area (TFTA) the main stepping stone towards the gradual establishment of the Continental FTA (CFTA) comprising the 54 members of the African Union. Indeed, during the June 2015 African Union Summit in Johannesburg leaders ambitiously insisted that the negotiations on goods and services for the establishment of the CFTA be concluded by 2017. High-level political will seems to be strong. The challenge, now, is to convert this political will into something more than a paper agreement.

The importance of stakeholder involvement

The real effectiveness any trade agreement (or the expansion of an existing one) ultimately depends on the support and the involvement of the key stakeholders—most importantly the private sector—in the design and the implementation. Surprisingly, the regional private sector has not been vocal about its support for either the TFTA or the CFTA. The absence of vigorous national debates about the pros and cons of these agreements has been quite notable. In many countries, the prevailing attitude of the business community ranges from a cautious optimism to a wait-and-see approach. Perhaps this lack of interest is due to a lack of mobilization or consultation at the local level. Or it could be due to a lack of understanding regarding the stakes and potential benefits from what many consider a top-down process.

These stakeholders will ultimately put pressure on governments to pursue or reject steps to the CFTA. Thus, in order to comprehend how the conclusion of the TFTA negotiations may affect the prospects for the planned CFTA negotiations, it is helpful to have a clear grasp of what these agreements mean for the different stakeholders. In particular, it is useful to understand how the establishment of the TFTA affects the willingness of new members (e.g., the Economic Community of West African States (ECOWAS) or the Economic Community of Central African States (ECCAS) economies) to join or to merge. And how might the TFTA business community react to the inclusions of those new members.

The “coincidence of wants” requirement

The expansion of the TFTA requires a “coincidence of wants” among all the interested parties—members and non-members. Non-members must want to join the TFTA, while, at the same time, the members must be willing to negotiate with potential new members to expand the TFTA. It is therefore important to examine the incentives of the existing TFTA members to expand the existing FTA, in addition to those of the non-members to join it.

Incentives of new members to join (or other blocs to merge with) the TFTA

From the perspective of non-members, the domestic support for joining an existing FTA is driven by the relative strength of the import-competing lobby and the export one. A country that considers participating in the TFTA faces a trade-off between (i) the costs of opening up its own market to the other FTA members, and (ii) the gains from obtaining better (and preferential) access to the FTA’s market. In general, the gains from the latter (i.e., preferential access) increase faster than the losses from the former (i.e., increased competition) as the size of the free trade area rises. It is then very possible that even countries that initially had no interest in participating may become interested when the FTA size becomes large enough. Following that logic, the TFTA would keep expanding until all the 54 countries belong to one super-FTA—the Continental FTA.

Incentives of existing members to expand the TFTA

When deciding whether to expand the size of the FTA, a representative TFTA member compares (i) the market enlargement effect (the gains from getting preferential access to the new member’s market); and (ii) the preference dilution effect (the losses of having to share its original TFTA preferential market with the new member). Think of the analogy of a pie getting larger, but at the same time being shared by more people. If the bloc size is small enough, the gains from the enlargement of the preferential market may be large enough to offset the losses from the dilution of preferences—enough that current members are willing to accept new members. When bloc membership reaches a critical size, however, the current members’ incentives for further expansion may be reduced and could eventually go to zero before the FTA encompasses the entire continent. In other words, a gradual expansion of the TFTA may not automatically lead to the CFTA.

If Egyptian firms, for instance, can already secure preferential access to the dynamic and lucrative South African and Kenyan markets under the TFTA, what are the guarantees that they will still be supportive of further expansion of the FTA—which means having to share that preferential access with the likes of Nigeria? Would their gain from better access to the Nigerian or the Cameroonian markets be enough to compensate their losses from having to share the South African and the Kenyan markets with Nigerian or Cameroonian firms? At some point, some of the TFTA members could start to say, “Our market is big enough.” Including ECOWAS or ECCAS members into the mix could just dilute the trade preferences that they are getting in the SADC (Southern African Development Community), COMESA (Common Market for Eastern and Southern Africa), and EAC (East African Community) markets. The business lobbies in those countries will then resist, or at the very least stop supporting, the move toward the Continental FTA.

The key question

To transform the political will into reality, regional policymakers and negotiators need to address the following question: “How can we ensure that the TFTA is indeed a stepping stone and not a stumbling block towards the Continental FTA?” This is not a trivial question, and the answer is probably not straightforward. Whatever it is, it will definitely require more vigorous stakeholder (private sector, consumers, labor organizations, and CSOs) mobilization or consultation at the national level. In the predominantly mercantilist mindset that currently guides trade policymaking in many countries, the benefit accruing to the consumers in the form of reduced prices and increased product variety is unfortunately often ignored. Systematic awareness-raising activities regarding these types of benefits, accompanied by specific measures to compensate potential losers, could help broaden support for a gradual expansion of the TFTA toward the CFTA.

African survey data point to robust growth

Amid all the carnage, in emerging markets and developed ones, it is nice to discover some good news. At least it is if it can genuinely be believed. Figures out on Monday suggested Africa’s headline sales managers’ index, broadly analogous to the purchasing managers’ indices widely followed elsewhere, rose to a 28-month high in August. The index ticked up to 60.2, from 59.3 in July, on a scale where 50 is the dividing line between an increase or a decrease in activity, the highest rate since May 2013 (see the first chart).

The service sector led the way, with an SMI of 61.1, but manufacturing was not far behind, at 58.1. All of the five sub-components that feed into the headline figure were also positive, notably the business confidence index, which measures how sales managers expect the economy to perform over the coming months, which came in at a punchy 75.6.

Wonderful news, of course. But then we also know that Africa is far from immune to the economic and financial chaos sweeping the planet. China’s imports from Africa have slumped more than 40 per cent from their peak, in value terms at least, as the prices of oil and other commodities have collapsed (see the second chart). That Africa’s imports from China have also started to fall suggests this weakness has fed through to consumer spending.

Many African economies are running down their foreign exchange reserves as they battle to stem, or at least slow, the falls in their currencies. This pressure is also forcing central banks to maintain tighter monetary policy than their domestic situations would merit.

Admittedly, the IMF hailed the “resilience” of sub-Saharan Africa when it produced its latest World Economic Outlook document in April. But even at that point, before the current rout really kicked in, the IMF foresaw economic growth slowing to 4.5 per cent this year, from 5 per cent in 2014. For major north African countries, such as Egypt and Algeria, projected growth was weaker still, at 4 per cent and 2.6 per cent respectively.

So how much store, if any, should one put on the SMI index? It would appear to have a decent pedigree, being produced by World Economics, whose parent company Information Sciences developed the European and Asian PMI indices, now owned by Markit.

However, the breadth of its African product is rather limited, based on activity in just four countries: South Africa, Nigeria, Egypt and Algeria, although this quartet does provide a reasonably broad mix.

Of these four countries, Nigeria currently has the highest SMI reading, 66.3, followed by Egypt (64.2), Algeria (58.9) and South Africa (53.6). Perhaps more tellingly, the index appears to be more than a little obscure. Even Jan Dehn, head of research at Ashmore Investment Management and an old African hand, says he has not heard of it.

Is its upbeat message credible? Here opinion differs. Joseph Rohm, an African equity portfolio manager at Investec Asset Management, suggests possibly so. “That it reflects the manufacturing and service sectors, it is to some degree plausible,” says Mr Rohm, who argues these arenas have remained robust, even as commodity exports have tumbled.
He points to Nigeria, an oil exporter that has enjoyed strong growth over the past decade. Even there, Mr Rohm says, “the growth has come in the manufacturing and service sectors,” with the oil industry pretty much “stagnating” over the past decade.

In countries such as Nigeria and Kenya that have rebased their gross domestic product calculations, it was service industries such as telecoms and media, as well as manufacturing that were found to be larger than expected. “In a world where emerging market growth is falling and commodity prices are under pressure, I believe there are some really healthy underpinnings. The cost of labour has become cheaper and cheaper relative to China, for example, [so] low-skilled assembly plants are being constructed,” says Mr Rohm, who points to investment by Chinese shoemakers in Ethiopia and Asian multinationals such as Honda, LG and Nissan in Nigeria.

“I don’t think what we are seeing in the emerging market world has really affected that to any degree,” he adds, pointing instead to beneficiaries from the wider market crash, such as the countries and companies in east Africa that are gaining from low oil prices. Moreover, despite data such as that above showing the slump in Africa’s trade with China, Mr Rohm believes intra-African trade is rising, albeit from a low base, amid efforts to remove barriers to such activity.

“Intra-African trade today is 5 per cent of GDP, in Europe it is 40 per cent,” he says. “In South Africa trade north of the border was insignificant going back 10 years. Now every single corporate has a strategy to increase its trade north of the border.”

Others are not convinced, however. “Our view is that growth in Africa is slowing pretty sharply,” says William Jackson, senior emerging market economist at Capital Economics. “I find it pretty surprising that some of the survey-based data is pointing to some improvement.”

Mr Jackson accepts that the export-led commodity sectors are bearing the brunt of the pain, but says in turn that this is eroding many governments’ foreign currency earnings, putting pressure on them to cut public spending.
He predicts that South African GDP data, due on Tuesday, will show growth has slowed to just 0.4 per cent annualised, quarter on quarter, while Nigerian data, which may also come on Tuesday, will show year-on-year growth falling from 3.9 to 3.5 per cent.

As for Egypt and Algeria, he believes the former’s economy has slowed due to restrictions on access to foreign currency that have hit manufacturers, while the latter has been damaged by its reliance on oil and gas exports.
Mr Dehn also points to the “major macroeconomic adjustments” being faced by exporters of oil and other hard commodities, leading him to expect a slowdown. But he does believe some countries, such as exporters of food and other agricultural produce, are less affected.

Yet he does hold out hope that the sell-off, in bond markets at least, may be overdone. “Lowly rated African bonds are the first to be cut by market makers due to regulatory rules. Hence, liquidity, and therefore prices, falls more rapidly than justified by fundamentals,” Mr Dehn says.

Facebook and Airtel are trying to win Africa’s next generation of internet users

It is no secret that Bharti Airtel’s African adventure has not quite gone to plan. But the Indian-based company and the world’s third largest mobile carrier may have found an ace up its sleeve to help spur the company’s business on the continent: Partnering with Facebook.

“We have a strong partnership with Airtel and we continue to roll out internet.org with Airtel throughout Africa. With Airtel, we will be rolling it out in more countries after this month,” Chris Daniels, vice president of product for internet.org at Facebook, said last week.

In its march to grow its users around the world, Facebook, the world’s most popular social networking site, helped launch internet.org, a free mobile internet service, last year in Zambia, Kenya and Tanzania. Accessible via Internet, or as an app via Google Store, the platform makes certain sites available for free through select mobile service providers.

Despite boasting over 100 million users on the continent, this is a mere 10% of the Facebook’s global numbers. For a young continent, where the median age is 19 years old, the demographic typically interested in the social networking platform, the number could easily be higher.

“Africa’s attractiveness to companies such as Facebook is a no-brainer,” Manji Cheto, vice president of Teneo Intelligence, told Quartz. “Yet, the continent’s low internet penetration was always likely to constrain the company’s ability to significantly boost its user numbers.”

But mobile phone penetration stands at 69% and, through internet.org, Facebook is hoping to turn these users into Facebookers. “By partnering with Airtel, Facebook is able to access a much larger market than it may [not] ordinarily be able to do on its own—mobile phone subscribers on the continent are estimated at 650 million and Airtel holds significant share of this market,” Cheto says.

Through internet.org, Airtel customers are able to access, for free, such sites as BBC News, BBC Swahili, Facebook, Messenger, SuperSport and Wikipedia.

“The approach devised—where new users get free access to Facebook and a small amount of Internet content—is bit like a very small version of AOL in the early days of the Internet,” Russell Southwood, chief executive of Balancing Act, a research firm, told Quartz.

Both Facebook and Airtel, are hoping that internet.org is “transitional” for users, meaning that it will convert mobile users into becoming data subscribers. “It is a walled garden and in this instance if you stray outside you start paying data charges,” Southwood says.

There have been critics of Facebook’s internet.org, who argue that this is an attempt to mediate the internet experience for users in the developing world. “[Facebook] is doing its best to make the rest of the internet irrelevant,” The Guardian wrote in 2013. “Facebook is aiming for the one every big tech company tries for: monopoly or oligopoly.”

Not everyone agrees. “While concern that internet.org is ‘controlling access to information’ is somewhat justified, the service must equally be given credit for paving access to the internet,” Cheto says.

FOREX Africa: A Weaker Chinese Economy Could Destabilize SADC Countries

Concerns of a slowdown in China, the world’s second largest economy and Africa’s top trade partner, after the Asian giant devalued its currency by 2 percent a fortnight ago has seen markets across the world retreat to multi-year lows.
In Africa, where most economies rely heavily on sale of commodities, currencies have been hit or are expected to be hurt by the slowdown in China’s growth, a major buyer of raw material from sub-Saharan Africa.

South Africa’s rand fell to a record low against the dollar in early trading on Monday as other global markets like Germany and Japan also reeled from an equities slump in China. Other Southern Africa currencies in Angola and Zambia, which have strong trade ties with China, are expected to follow the trend.

All of these countries, which are members of the Southern Africa Development Committee (SADC), rely heavily on minerals and oil export to generate revenue for their annual expenditures, including recurrent ones.While some analysts say a slowdown in China’s economy could hurt the whole global economy as commodity prices fall further, in Africa the SADC countries look poised for a rough time once earnings from their export dwindle.

“Next year at a time like now we will look back and see that what we’re looking at here is a global slowdown and China is just one factor,” Ian Marnett, chief investment strategist at Absolute Strategy Research, told Bloomberg TV.
While countries in the Southern part of the continent struggle, their counter part in East Africa are expected to benefit from cheaper goods from the china after the currency devaluation.

Analysts foresee economies in Africa, such as Kenya, Ethiopia and Mozambique, benefiting from a yuan devaluation, but still caution that the ripple effect of China’s slowdown to the global economy is of far much concern to the continent.

Amadou Sy, a director at Africa Growth Initiative, the devaluation of the Chinese yuan may have little effect in African countries, since trade with China is mostly in US dollar, a currency that has been strengthening in relation to sub-Saharan units.“Because the U.S. dollar has been appreciating against African currencies, the impact of the Chinese devaluation is less important for African countries than for the U.S.,” Sy said in a Brookings opinion piece.

Southern Africa: Zuma Arrives in Botswana for SADC Summit

President Jacob Zuma arrived in Gaborone, Botswana on Sunday ahead of the 35th Ordinary Southern African Development Community (SADC) heads of state summit, the presidency said.

The summit runs from Sunday to Tuesday, under the theme of accelerating industrialisation of the bloc’s economies, through transformation of natural endowment and improved human capital, spokesperson Bongani Majola said in a statement.

“President Zuma is accompanied by Deputy President Cyril Ramaphosa, International Relations and Cooperation Minister Maite Nkoana-Mashabane, Trade and Industry Minister Rob Davies, State Security Minister David Mahlobo and Deputy Finance Minister Mcebisi Jonas.”

Ramaphosa, as the SADC facilitator in Lesotho, and who is in Botswana for the meeting of the Organ on Politics, Defence and Security Cooperation, of which South Africa, represented by Zuma, is outgoing chair.

“South Africa will give a report to the summit on matters relating to the work of the Organ,” Majola said. Environmental Affairs Minister Edna Molewa would be the acting president while Zuma and Ramaphosa were out the country.

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