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Business News of Wednesday, 26 February 2020

Source: goldstreetbusiness.com

Containing Ghana’s business risks in Africa’s impending single market


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Ghana’s joining the African Trade Insurance agency, ATI, could not have come at a more opportune time. In July this year, the African Continental Free Trade Agreement will come into effect, creating the world’s largest free trade area, adjudged by both geographical size and market population. This market is worth US$4 trillion in consumer and business spending and its commencement is expected to serve as a trigger for a projected 20 percent increase in foreign direct investment into the continent, to some US$50 billion, with multinationals from the United States, United Kingdom and France likely to continue holding the largest share of FDI in Africa.

This opens the door for exporters in Ghana to secure new markets across the continent for their products and to increase their market share in countries which already buy their products – although this also comes with the danger of losing market share to exports from other African countries which are more quality or price competitive.

Similarly, the advent of AfCFTA creates opportunities for importers in Ghana of goods from other African countries which will henceforth be more price competitive because import duties will no longer be applicable on them.

Instructively, Ghana has successfully bid to become the administrative headquarters of AfCFTA, a clear indication of the country’s commitment to its success. Indeed, Ghana is hoping that it will provide the platform for a major increase in non-traditional exports and consequent, direly needed, foreign exchange earnings. In 2018, Ghana made US$2.813 billion from non-traditional exports and instructively, the biggest share of this came from West Africa, where the ECOWAS Trade Liberalization Scheme already allows duty free export of goods from Ghana to fellow member states of the sub regional grouping.

The extension of duty free export status to most of the rest of Africa therefore provides a clear opportunity to Ghana, which aims to increase its NTE revenues to US$5 billion by 2023 and US$10 billion by 2028.

However, export is a tricky business, more so in Africa which has political as well as commercial risk. Political instability often translates into macroeconomic and public policy instability; and African governments and enterprises alike are notorious, by global standards, for reneging on commercial agreements for various reasons – or excuses to put it more accurately.

This is where the ATI is crucial. It was established in 2006 to provide, facilitate, encourage and otherwise develop the provision of, or the support for, insurance, including coinsurance and reinsurance, guarantees, and other financial instruments and services, for purposes of trade, investment and other productive activities in African States in supplement to those that may be offered by the public or private sector, or in cooperation with the public or private sector. To serve its objective and purpose, ATI facilitates the development of trade, investments and other productive activities in its African member states by providing insurance or reinsurance cover against political and commercial risks as well as bond products. Pursuant to its objectives, ATI’s main activities are: Political Risk Insurance; Credit Risk Insurance; Bonds; and Political Violence and Terrorism & Sabotage Insurance.

For enterprises and investors doing business with Ghana, political violence, terrorism and sabotage insurance is hardly necessary and indeed are largely alien to Ghana’s private sector, which is why it will be hard put to see the need for taking such policies. However, if businesses in Ghana are to try and take maximum advantage of AfCFTA, they will soon discover that such risks are real in several of the counterparty countries they will be dealing with.

Ghanaian enterprises and investors are more familiar with purely commercial risks and these will definitely be common place as they strive to establish new export markets and sources of imports across Africa. Such commercial risks will not only emanate from private sector counterparties but from public sector ones as well, including sovereign government institutions.

Curiously, while reinsurance is one of the most globalized financial services, primary insurance in Africa is mainly localized, and therefore insurance against cross border commercial risk is hard to come by and where available, inordinately expensive to procure.

But this is precisely the type of specialized insurance ATI offers through its trade credit insurance solution. Trade credit insurance is a risk mitigation tool that protects against payment default risks. The product replaces relatively expensive collateral such as letters of credit that are usually required by banks to secure trade loans or a line of credit. ATI’s version of this rare product therefore ultimately not only ensures that payment will be received for goods supplied, but also therefore allows its clients offer better terms of payment to their own customers, which makes them more internationally competitive against counterpart exporters from other parts of the world who have ready access to trade credit insurance themselves.

ATI can cover payment risks posed by single buyers or can cover a client’s entire portfolio of buyers or debtors. Risks covered comprise those of a corporate buyer who blatantly refuses to pay or is unable to pay due to deteriorating financial circumstances or outright insolvency; or a buyer who extends payment beyond the agreed credit period. Coverage can be extended to public institution buyers, such as sovereign government institutions too.

ATI can also insure foreign importers providing critical inputs into the economy that can help the Government scale-up exports in the manufacturing sector and create higher-paying and more jobs in the sector. Here, foreign exporters, both from within Africa and from further afield can use trade credit insurance to protect themselves from payment defaults by Ghanaian trade counterparties. This also stands to reduce the cost of Ghana’s imports in consonance with the lower risks that exporting counterparties would incur.

Another product line offered by ATI which will be of immense usefulness for enterprises in Ghana seeking to exploit the opportunities created by AfCFTA is investment insurance. Phase one of the implementation of the single market includes foreign direct investment flows between member African countries as well as trade. This will prove crucial for Ghana’s aspirations with regards to selling its brands around the continent. For instance, companies such as Cocoa Processing Company and Kasapreko will eventually need to set up production facilities abroad, especially in countries such as Nigeria whose markets are much larger than their home market, possibly in partnership with local investors, in order to fully penetrate those markets by thus operating as local enterprises.

But the Ghanaian investment into such foreign based production plants, whether majority or minority equity stakes, will need protection, because of the peculiarities of investment environments across Africa. Here, ATI will now offer, for the first time, protection against political risks, which covers expropriation of assets, currency inconvertibility or transfer restrictions and trade embargoes. Protection will also now be available against non-payment risks with regards to contracts executed in other African countries, wrongful calls on performance bonds taken out by Ghanaian enterprises executing foreign contracts as well as damage to their property or loss of revenue from business interruption caused by politically motivated violence or terrorism and sabotage events.

Such cover now becoming available includes that on overdue payments by foreign governments on contracts given, revocation of licenses granted by an African government that has lost power, and the likes.

Importantly, ATI will, going forward, offer due diligence on African trade and investment counterparties, thus providing invaluable information to Ghanaian enterprises seeking to use AfCFTA to expand into the rest of the continent on who it is safe to do business with as counterparties.

All this could be crucial for Ghanaian enterprises as they leverage on AfCFTA to expand beyond their home market. But it will also be equally important at home in capacity building as local enterprises seek to scale up to cope with product orders from abroad.

“ATI is an institution that will be a strong partner for Ghana” enthuses Ken Ofori-Atta, Ghana’s Minister for Finance, who played a key role in getting Ghana to sign up. “Importantly, it is an African institution with the respect and credibility of an international financial institution. ATI provides a valuable tool for governments because its insurance is a well-rated security. ATI’s insurance, strong international financial network, coupled with their investment-grade credit ratings have helped African governments create more sustainability within their economies. I’m also confident that the benefits of Ghana’s membership into this important institution will extend well beyond the government as many sectors stand to gain from increased access to ATI’s credit and investment insurance facilities.”

.In 2019 alone, ATI insured transactions across Africa valued at US$6.4 billion and expects to insure much of its current pipeline of transactions in Ghana valued at US$1.2 billion.

The government itself stands to benefit from ATI’s entrance into the market. ATI has successfully helped neighbouring governments attract lower-cost financing at longer durations by providing a novel insurance scheme that effectively ‘wraps’ the government’s borrowing requests with insurance. This makes the request more appealing to commercial lenders and thus attracts better terms (such as longer durations or lower all-in cost of finance). The energy sector in particular stands to gain, as ATI’s investment insurance cover and bonds will serve as a much cheaper alternative for government than the take or pay contracts hitherto used to attract the investment of Independent Power Producers, and which have caused major payment obligations for the state, with regards to power not actually needed yet.

All this points to major benefits for Ghana with regards to competitiveness in an increasingly globalized economy that is broken down on a region by region basis. As AfCTA looms closer and closer, Ghana’s private sector would do well to take a leaf from government’s own play book and look towards insuring the risks that its own local insurance industry is not yet up for.

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