If suppliers were to offer African companies payment terms of 30 days after delivery of goods and services, rather than demand payment in cash in advance, this could release more than USD 33.5bn of additional working capital to be put to more productive use in 2018, according to Euler Hermes.

In 2015, Euler Hermes estimated that if a payment term of 30 days were to be granted on the share of imports paid in cash (cash in advance), then it would free up over USD 40bn of working capital for African companies.

Since then, the trade picture has changed; a commodity shock hit resource-rich African countries and slashed their exports revenues, reducing further their capacity to finance imports even further. This contributed to the -22% fall in African import values from USD 800bn in 2014 to USD 623bn in 2016.

“Taking into account the new trade picture, our estimate stands at USD 33.5bn of working capital freed up for African companies in 2018. Lower imports combined with lower payment terms (64% of imports are paid in advance) explains this result,” Euler Hermes Chief Economist Ludovic Subran said.

Euler Hermes expects imports to grow at a +8% annual rate in this region. Should suppliers lengthen their payment term by 30 days, this would free about USD 45bn by 2020. The parallel development of trade finance is key to seize this great opportunity for the African continent.

This huge amount of money wasted each year is a clear argument to develop domestic production capacity, since imports come with a cost due to low DSO. Here are a few examples (chart below):

• Oil exporters (Algeria, Nigeria, Angola, Libya…) account for USD 14bn wasted in cash vaults as a result of short DSOs, with Algeria (USD 5bn, 3% of GDP) at the top of this ranking. Republic of Congo for instance would free up the equivalent of 11% of its GDP (USD 0.9bn) with longer DSOs.
• In fast growing East African economies, greater DSOs would also be a non-negligible growth boost. In Kenya for instance, it would free USD 1.6bn (2% of GDP), and about the same amount in Ethiopia.
• Potential gains are weaker in value in West Africa (USD 0.4bn in Senegal, 0.7bn in Côte d’Ivoire) but range from 2 to 2.5% of GDP. On the contrary, it means that these gains are lower in relative terms in countries with the highest income level: South Africa (0.4% of GDP), Morocco (1% of GDP).

The world is suffering from too long DSO in many places, but African figures show some divergence.

Stéphane Colliac, senior economist for Africa at Euler Hermes, said: “Big players are often bad payers, when small players have no opportunity to pay late. It is especially true in Africa: there is a paradox when we see that key State Owned Enterprises are able to postpone their payments by several years (e.g. in Angola or in the past in Egypt) while others have no other choice than cash payment. As an example, Moroccan main corporates have 84 days of DSO but 30% of the transactions (those involving smaller ones) are still paid in cash.”

Additional Cash Flow freed with higher DSOs (USD bn)

Source: Euler Hermes

Euler Hermes is the global leader in trade credit insurance and a recognized specialist in the areas of bonding, guarantees and collections. With more than 100 years of experience, the company offers business-to-business (B2B) clients financial services to support cash and trade receivables management. Its proprietary intelligence network tracks and analyzes daily changes in corporate solvency among small, medium and multinational companies active in markets representing 92% of global GDP. Headquartered in Paris, the company is present in 52 countries with 6,050 employees. Euler Hermes is a subsidiary of Allianz, rated AA by Standard & Poor’s. The company posted a consolidated turnover of €2.6 billion in 2017 and insured global business transactions for €894 billion in exposure at the end of 2017.

Further information: www.eulerhermes.com, LinkedIn or Twitter @eulerhermes.

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