A medical personnel holds a kit for the test for Coronavirus outside one of the emergency structures that were set up to ease procedures outside the hospital of Brescia, Northern Italy. Photo: Claudio Furlan/AP
A medical personnel holds a kit for the test for Coronavirus outside one of the emergency structures that were set up to ease procedures outside the hospital of Brescia, Northern Italy. Photo: Claudio Furlan/AP

Looking Ahead: Covid-19 likely to hamper any predictions of Africa's upturn

By Morne van der Merwe and Wildu du Plessis Time of article published Mar 11, 2020

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JOHANNESBURG – The coronavirus (Covid-19) has resulted in mass production shut-downs and supply chain disruptions due to port closures in China, causing global ripple effects across all economic sectors in a rare “twin supply-demand shock”.

With South Africa having just reported its first cases of Covid-19, Africa is beginning to feel its full impact and plans to control and manage the humanitarian challenges of the virus are underway across the continent.

Economically, the effects have already been felt – demand for Africa’s raw materials and commodities in China has declined and Africa’s access to industrial components and manufactured goods from the region has been hampered. This is causing further uncertainty in a continent already grappling with widespread geopolitical and economic instability.

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.

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.

Africa has come through a period of prolonged political and economic uncertainty, but signs of future economic improvement were pointing to a modest increase in mergers and acquisitions (M&A) activity in Africa over the next few years.

Covid-19 is likely to hamper this predicted upturn and result in increased short-term uncertainty in terms of how it will affect investment opportunities in Africa, the continent's productivity and consumer demand.

There are other transactional risks. If the virus spreads rapidly in Africa, countries might have to introduce similar measures to those taken in China where areas were locked down, factories were shut, quarantines enforced and travel bans imposed.

As such, these events could potentially be significant enough to trigger a change to the terms of an M&A transaction currently in progress, and deals could be delayed as a result.

Covid-19 conditions could also cause delays to M&A due diligence, necessary for a transaction to progress to finalisation. Further, the virus could qualify as a force majeure event causing more delays or terminations.

We are hopeful the rebound from Covid-19 will coincide with the implementation of the African Continental Free Trade Area (AfCFTA) in July 2020, which should provide an additional boost to deal activity in Africa in the coming years.

The AfCFTA is the first continent-wide African trade agreement, with the potential to facilitate and harmonise trade and infrastructure development in Africa.

This boost to the investment environment will be welcome after the additional uncertainty of dealing with Covid-19 impacts.

With Africa looking to benefit from new global and regional trade agreements, the forecasts had been pointing to a potential recovery in capital markets in the next few years, but this might be delayed as the uncertainty around the impact of Covid-19 in Africa reaches its peak.

Initial public offerings (IPOs) in the region are expected to decline because Covid-19 will have an effect on the underlying business case for IPO companies, which will impact on their ability to raise capital.

Morne van der Merwe: Managing Partner, and Wildu du Plessis: Head of Africa, Baker McKenzie, Johannesburg.

BUSINESS REPORT

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