The Impact of COVID-19 on African Trade
The coronavirus disease (COVID-19) has resulted in mass production shutdowns and supply chain disruptions due to port closures in China, causing ripple effects across all global economic sectors in a rare “twin supply-demand shock”. With South Africa having reported its first cases of COVID-19 recently, Africa is beginning to feel the full impact and strategies to control and manage the humanitarian challenges of the virus are underway across the continent. Economically, the effects have already been experienced – China’s demand for Africa’s raw materials and commodities has declined and Africa’s access to industrial components and manufactured goods from the region has been hampered. This is causing further uncertainty for a continent already grappling with widespread geopolitical and economic instability.
The number of COVID-19 cases is reportedly decreasing in China, with increasing expectations that it will eventually plateau and be brought under control. However, in early March, the Organisation for Economic Co-operation and Development noted that “annual global GDP growth is projected to drop to 2.4% in 2020 as a whole, from an already weak 2.9% in 2019, with growth possibly even being negative in the first quarter of 2020, with global markets plunging in the days thereafter.”
Although Chinese growth will fall in the short term, it is expected to rebound quickly, some suggesting this could even happen in the second quarter of 2020 when the virus will hopefully be contained. In the meantime, central banks are implementing measures to mitigate the effects of the virus on the economy, cutting interest rates and injecting liquidity into the banking systems in some countries.
In early March, the World Bank announced it would commit USD 12 billion in aid to developing countries to help them deal with the impact of the virus and limit its spread. The World Bank said it would prioritise the most at-risk countries. The World Bank also introduced a pandemic bond in 2017, which, as part of the Pandemic Emergency Finance Facility, was intended to provide funding to assist developing countries cope in the event of a pandemic reaching certain thresholds and conditions. So far, these criteria have not been met and the bond has not been paid out.
Uncertainty regarding the spread of COVID-19 is high and its impact on Africa is expected to be serious, given the continent’s significant exposure to China. So far, cases have been reported in Algeria, Egypt, Morocco, Nigeria, Senegal, South Africa and Tunisia. If there is a widespread outbreak of COVID-19 in Africa, it could overwhelm already weak healthcare systems in the region.
According to ratings agency, Fitch, the coronavirus outbreak will have a downside risk for short term growth for sub-Saharan African growth, particularly in Ghana, Angola, Congo, Equatorial Guinea, Zambia, South Africa, Gabon and Nigeria - all countries that export large amounts of commodities to China.
COVID-19 is expected to impact China’s global trade for several months. As China is Africa’s biggest trading partner, the effects of COVID-19 are already being felt in Africa. With China having shut down its manufacturing centre and closed its ports, there has been a resultant decrease in demand for African commodities. Importers in China are cancelling orders due to port closures and as a result of reduction in consumption in China. Sellers of commodities in Africa are being forced to offload products elsewhere at a discounted rate.
Over three quarters of African exports, to the rest of the world, are heavily focused on natural resources and any reduction in demand impacts the economies of most of the continent’s countries. Countries such as the DRC, Zambia, Nigeria and Ghana are significantly exposed to risk in terms of industrial commodity exports, such as oil, iron ore and copper, to China. The Organization of Petroleum Exporting Countries’ has dramatically reduced its outlook for oil demand this year as a result of the virus.
The impact of COVID-19 will also be felt in the manufacturing sectors. As China is part of the global supply chain, factory closures raise the risk of supply chain disruptions for multinational companies with delays, raw material shortages, increased costs and reduced orders already affecting manufacturing plants around the world, including in Africa.
Further, a look at African imports from outside the continent reveals that industrial machinery, manufacturing and transport equipment constitute over 50% of Africa's combined needs. Currently, external imports from outside of Africa account for more than half the total volume of imports to African countries, with the most important suppliers being Europe (35%), China (16%) and the rest of Asia including India (14%). As such, disruptions owing to the impact of COVID-19 will lead to a decrease in the availability of manufactured goods imported into Africa from China.
The widespread nature of the virus makes it challenging to envisage how supply chains could be hurriedly adjusted to meet demands. The obvious alternative choices of Vietnam and Indonesia, where supply chains were re-routed as a result of the US/China “trade wars”, are almost at full capacity and may not necessarily be able to meet the demands if China is unable to produce, and if these countries have to deal with further challenges caused by COVID-19. Both countries have reported cases of coronavirus, although Vietnam recently announced that all 16 infected citizens had been cured and Indonesia reported only two cases so far.