Day One: Martyn Davies (Deloitte) and EXIM Bank of India

Day One- January 13
Johannesburg

Morning Meeting: Martyn Davies and Hannah Edinger of Deloitte

The SAIS team kicked off the South Africa research trip in Johannesburg with a visit to Deloitte. We had the opportunity to speak with Dr. Martyn Davies, the Managing Director of Emerging Markets & Africa, as well as with Hannah Edinger, the Associate Director within Emerging Markets & Africa. This meeting served to give us an introduction to the impact that both China and India have had on the African continent and in South Africa in particular.

Davies emphasized that in terms of China’s engagement in Africa, the “demand side engagement,” exemplified by the boom in commodities prices, was far more important to the continent than “supply side engagement,” exemplified by economic aid packages. While India has played an important role in the region due in part to the significant diaspora communities present in East Africa, China’s recent engagement has largely overshadowed India’s role.

Chinese Engagement with South Africa

The first Chinese trade delegation to South Africa in 1993 brought about unimpressive results. Following the end of Apartheid, South Africa continued to maintain significant economic ties with Taiwan, and it was not until 1998 that South Africa established diplomatic ties with the PRC. Few would have predicted at that time that by 2008 China would become the continent’s largest trading partner.

Throughout the 1990s and early 21^st century, the PRC continued its engagement with South Africa; Davies argues that the South African government wasted this honeymoon period. In the early 21^st century, China’s economic boom carried over into global commodity prices, and helped to stimulate growth within commodity-driven economies in Africa. As China’s economy began to rebalance away from export-oriented industrialization, global commodity prices steeply declined, and exposed structural weaknesses within African countries. The continent largely failed to diversify away from commodities during the past decade, and now faces substantial challenges for future economic growth.

The other form of Chinese engagement in Africa comes from economic aid programs, the overall effect of which appears to be exaggerated by both the Chinese donor and African recipient governments. Much of this aid has followed a set program, where sovereign guarantees on loans are utilized by Chinese agencies like the China Export-Import Bank. Unfortunately, countries like Angola have relied on commodity exports in order to service debt agreements with the PRC. As commodity prices fell, these countries have been forced to renegotiate their debts with China. Thus, although China does not seem to have significant political ambitions on the continent, it has been able to gain leverage over countries from these loan agreements.

At the same time, Chinese infrastructure projects have also given the country a new negative image in several African countries. A lack of emphasis on sustainable infrastructure has led to an anti-China backlash in countries like Botswana and Rwanda, from a botched airport and convention center project, respectively. However, it should be noted that this is not necessarily the fault of Chinese companies; often contracts are arranged so that Chinese contractors are obliged to simply complete construction of roads, and leave maintenance to the local governments.

The success of China’s economic reforms has also created a misperception that the CCP has successfully achieved economic growth through socialism and state-directed development. This has encouraged a variety of government leaders, including the Zuma administration, to focus on utilizing SOEs in order to drive further growth, instead of relying on the private sector and market reforms.

Indian Engagement with Africa

The Indian government benefits from a strong diaspora in East Africa and in South Africa. However, Indian engagement has been largely overshadowed by China in recent years. Companies like Tata have long had a presence in the country, and continue to be invested in mining companies as well as financial services. Although Indian firms have made some headway in areas like pharmaceuticals, Davies argued that on the whole, Indian engagement has been put on the backburner.

-Tyler Makepeace
MA Student, China Studies Concentrator, SAIS

Afternoon Meeting: Export-Import Bank of India

Following a morning meeting with Deloitte, our group met with Mr. Ashok Kumar Vartia

from the Export-Import Bank of India (EXIM Bank) to discuss export investment opportunities and the role of the EXIM Bank in facilitating, financing, and promoting Indian international trade and investment throughout Africa. The EXIM Bank of India was established in 1982 by an Act of Parliament and is the primary financial institution in India for export and import financing of both goods and services. It is fully owned by the Government of India and provides a range of financing opportunities to promote India’s international trade.

The EXIM Bank has a growing presence in Africa with two of its seven international offices located on the continent and plans to open a new office in Abidjan, Ivory Coast to focus on West Africa. Mr. Vartia presented the group an overview of the EXIM Bank’s corporate activities including the Bank’s development, structure, mandate, and asset size. Managed by a group of 18 Board of Directors and around 300 employees, the Bank has evolved from its original “product-centric approach” consisting predominately of export credits and export capability creation to its current “customer-centric approach” involving a comprehensive range of products and services covering all stages of the export business cycle. This approach also includes a buyer’s credit under National Export Insurance Account (NEIA) which extends credits to overseas sovereign governments and state-owned entities for the import of goods and services from India with attractive financing terms. The Bank did not seem overly preoccupied with the reliability of these sovereign guarantees, even given falling commodity prices.

Export finance represents the largest share (55%) of the Bank’s total loan portfolio. Export opportunities are growing in importance for India and both loan assets and borrowing have increased consistently over the past six years. The EXIM Bank raises the majority (51.4%) of its resources from foreign currency borrowings (primarily through bonds), while domestic rupee borrowings contribute to 39.6% of its capitalization. In addition to loans, the EXIM Bank relies on Lines of Credit to promote exports of goods and services from India. These credit opportunities have overwhelmingly been supplied to exporters in Africa (58.1%) and Asia (37.8%). Mr. Vartia displayed a positive outlook regarding the growth of Indian export-oriented companies and India’s future investments in Africa.

During the Q&A session, Mr. Vartia stressed the Bank’s role as a niche organization in financing predominately well-established companies looking to expand their business and increase exports. While the EXIM Bank also plays a role in capitalizing smaller companies, their role is typically aimed at more risk-averse medium-sized Indian companies. He asserted that Indian companies have found success on the African continent, particularly in the pharmaceutical and IT industries. He cited as an example India’s role in significantly reducing the cost of HIV medication (bringing the price down from over 10,000 USD a year to under 2,000). He also mentioned that while South Africa has dominated investment and development in sub-Saharan Africa, that falling commodity prices and a faltering South African economy are now creating new opportunities elsewhere on the continent, including in Botswana and Zambia. Africa has therefore been more successful in attracting more investment over the past five or six years. Mr. Vartia concluded by comparing the competitiveness of Chinese and Indian exports to Africa. He believes that Indian products retain a more positive image with a reputation for better quality. He concluded that while China’s public state-owned enterprises have dominated in Africa, that India’s private companies are poised to outperform Chinese private enterprises thanks to higher quality products and a more sustainable business plan.

-Alyssa Teddy
MA Student, Energy Resources and the Environment (ERE) Concentrator, SAIS