AfCFTA Expected to Boost Dealmaking in Africa

By Aduragbemi Omiyale

There are strong indications that dealmaking activity in Africa will increase by the time the African Continental Free Trade Area (AfCFTA) agreement is deeply implemented.

The trade deal officially commenced on January 1, 2021, after it was moved from the former date of July 1, 2020, due to the coronavirus pandemic.

At the moment, the agreement is struggling to begin to yield the expected results because many nations are still dealing with the global health crisis.

Last year, dealmaking activity in sub-Saharan Africa (SSA) dropped in the second half when compared to the second half of 2019.

According to Baker McKenzie’s analysis of Refinitiv data, M&A transactions in the region went down in H2 2020 by 4 per cent versus in H2 2019 with 329 deals in the period.

Also, the deal value fell by 17 per cent to $8.9 billion in the second half of 2020, compared to the same period in 2019 and for the full year 2020, transactions dropped by 8 per cent with 625 deals in 2020, and deal value dropped by 33 per cent, with deals valued at $17.4 billion in total for 2020.

In the report by Baker McKenzie, as Africa gears up for its post-pandemic recovery, it appears that the opportunities presented by AfCFTA, as well as foreign investment opportunities, due in part to new partnerships and trade relationships, could be a key factor in attracting much-needed investment to the region.

“While dealmaking has slowed across Africa, all is not lost and there are still plenty of opportunities to benefit from good deals on the continent,” the Head of Africa for Baker McKenzie, Mr Wildu du Plessis, noted.

“For the next while, we believe that deal activity across Africa, in general, will mostly be in the form of take-private transactions, distressed M&A opportunities, restructurings, disposals; and corporates looking for investment opportunities in offshore markets.

“The good news is that the AfCFTA agreement has done a great deal to bolster foreign investor interest in the region, and dealmakers are taking notice of the agreement’s first movers,” Mr du Plessis added.

The United Kingdom, for example, is already an important investor in SSA. According to Refinitiv data, the UK was the most active investor in the SSA region for the second straight year, with 29 deals announced in the second half of 2020.

There were also 29 deals from the UK for the full year 2020. When it comes to trade, recent research by Brookings showed the untapped export potential from African countries with regard to trade with the UK, with significant gaps in apparel, electronic equipment and cocoa products, for example.

Brookings pointed out that UK trade with Africa peaked in 2012 when it was valued at $51 billion, but by 2019 it had almost halved to $27 billion, representing only 2.4 per cent of total UK trade.

This shows the potential for increased trade between the UK and African nations, especially if more mutually beneficial economic partnership agreements are finalised, positioning the post-Brexit UK to take advantage of AfCFTA’s eventual continent-wide market of around 1.4 billion people.

Virusha Subban, Partner specialising in Customs and Trade at Baker McKenzie in Johannesburg, noted that intra-African trading started on 1 January 2021 for African countries that had ratified the AfCFTA agreement and submitted their tariff offers.

“Trading in products started at the beginning of the year for the African Union member states that had aligned their customs procedures and agreed on the rules of origin for 81 per cent of the tariff lines.

“All countries in Africa, except for Eritrea, have signed the agreement and 34 countries have ratified it so far, including most of Africa’s major economies (South Africa, Kenya, Nigeria and Ghana, for example).

“A total of 41 countries (including South Africa, Egypt and Mauritius) and customs unions (the East African Community, the Economic Community of West African States, the South African Customs Union and the Central African Economic and Monetary Community) submitted their tariff offers, and were ready to trade at the beginning 2021,” she noted.

Subban explained that the AU had called for other countries to ratify the agreement and submit their offers by the end of June 2021, although there had been some concern from poorer countries who relied on the income received from trading tariffs and were therefore hesitant to lower them.

However, efforts to protect the most vulnerable countries included tariff protections for domestically sensitive products.

A further boost to the success of the agreement, came in the form of an announcement in late January from the African Export-Import Bank, in which it noted it would fund a $1 billion adjustment facility to allow countries that had lowered their cross border tariffs to offset their losses. AfCFTA member countries are set to be able to draw from the fund by the end of 2021.

“Overall, AfCFTA has provided a strong impetus for African governments to address their infrastructure needs and trade logistics systems, as well as overhaul regulation relating to tariffs, bilateral trade, cross-border initiatives and capital flows.

“Both domestic and foreign trade are set to benefit from reforms to regulation and trade policies that enhance competitiveness and improve the ease of doing business across the continent. Accessing the new facility on offer from the African Export-Import Bank will further encourage African member states to fully embrace the benefits of free trade,” said Subban.

According to Baker McKenzie’s recent research with Oxford Economics –  AfCFTA’s US$ 3 trillion Opportunity – there are now unprecedented opportunities for Africa, and its trade and investment partners, to reap economic benefits on the back of the possible improvements in transport infrastructure, reduction of red tape for cross-border dealings, renewed funding and improved liquidity. AfCFTA will provide the opportunity for African countries to diversify their economies, scale production capacity and widen the range of products made in Africa, in particular boosting the production of manufactured goods (and the potential for multinational companies to set up manufacturing plants in the continent).

“Closer integration of neighbouring economies is a potential avenue for creating scale and competitiveness through domestic market enlargement, thereby promoting development, and boosting foreign investment through greater efficiency. As such, the integrated free flow of trade brought about by AfCFTA is considered to be an essential element of Africa’s pandemic recovery,” Subban added.