Africa is now consistently outpacing most of the rest of the world’s growth – gross domestic product (GDP) growth over 2012 was 6.7% compared with an average 2.3% for the world. Africa hasn’t only grown more quickly, but the growth has also proven more resilient, with 11 of the 20 fastest growing economies in the world over the next few years predicted to be in Africa: Angola, Democratic Republic of the Congo, Ethiopia, Gambia, Ghana, Mozambique, Rwanda, Sierra Leone, Tanzania, Uganda and Zambia.
Such growth provides enormous opportunities for multinational corporates (MNCs). The natural resource sector has historically been the foundation of African economies and this sector still has much to offer – for example, development of natural gas production in Mozambique. However, a range of sectors are now relevant for international investors with forecasts that consumer spend is to exceed US$1 trillion across the region by 2020. Given the vast opportunity, Africa is now an integral part of any corporate’s emerging markets strategy.
Getting the Right Advice
Most companies that have successfully established themselves in the African market have faced challenges, be they related to logistics, banking, regulation or in-country set-up. What most treasurers will attest is that Africa requires a long-term view along with experienced and present partners.
Factors around tax, licencing, local regulation, local practices and the talent pool all need to be considered from the outset. Banks have a key role to play here, along with the legal firms, tax consultancies and government agencies. The central challenge in developing an Africa strategy is the variability in each country’s business and regulatory environment. This particularly highlights the role of banking and other partners with genuine local presence, experience and insight.
Treasurers face common issues such as cost-effective financing, global account visibility, effective management of liquidity and management of the working capital cycle. They are looking for banking partners who can address these issues ‘locally,’ but still endeavour to provide as much standardisation as possible along with links into global IT platforms.
Developing Treasury Operations in Africa
A key focus for treasurers is the need for visibility and control of cash in the different markets across Africa which, in order to achieve, requires consideration of a number of factors.
There is no standard cash management environment available across Africa due to different currencies, currency controls and regulatory environments in each jurisdiction. Although there has been a degree of liberalisation, most countries still apply some form of exchange controls and these can vary significantly in terms of impact. From the outset corporates need to ensure that their return expectations factor in these restrictions – this means that legal incorporation, contractual structures, etc. need to take specific exchange controls into consideration. Similarly, communication with local authorities needs to be up to date so that changes in regulation are known about in a timely manner. Banks on the ground can help direct this, particularly where they have well-established local relationships.
Most sub-Saharan African countries will have local internet banking solutions, allowing local treasuries to have visibility on in-country balances, make payments and take in receipts. As sophistication of treasury operations in Africa builds, the priority requirement is often to have a solution that also allows local payment platforms to ‘speak to’ a corporate’s global cash management platform, which will depend on a specific bank’s IT channel infrastructure. Where needed, however, banks are fast investing in the required IT upgrades to meet these connectivity requests.
Given that the ability to move money freely can be constrained, it often makes sense for treasurers to avoid having cash trapped in any one location in excess of operational needs. This emphasises the need for companies to plan meticulously before moving cash into any country, ensuring there is a good understanding of both the level of commitment required and the nature of cash flows which are likely to arise over time.
Looking at individual currencies, foreign exchange (FX) markets remain comparatively illiquid – the South African rand (ZAR) being the stand-out exception with ZAR/hard currency spot transactions estimated at US$4.5bn equivalent daily. There is therefore potential for hedging, albeit variable – the key consideration again being to work with financial institutions (FIs) that are embedded in the local markets and who are active participants in these limited volumes.
Barclays is seeing many leading multinationals centralise their FX trading either at a parent treasury level or at a regional treasury level in order to enhance control and build cost efficiencies. As an example, a number of US multinationals have Europe, the Middle East and Africa (EMEA) treasury hubs in Switzerland. These treasuries will often prefer to transact with a single dealing contact in any particular bank, rather than have to call several contact points for pricing across currencies.
Managing Increasing Trade and Working Capital Flows
Trade with Africa and intra-Africa has been growing enormously. In 2012 around US$600bn of imports went into Africa and over US$600bn of exports came out. Trade with the world is not only growing quickly, it’s also increasingly reflecting ties with the fastest-growing regions of the world. When it comes to financing trade opportunities, there are a number of well-established solutions available in the trade suite, for example, letters of credit (LCs).
However, as part of the efforts to optimise cashflow, multinationals are now paying much more attention to the working capital cycle. The accompanying challenge is also to grow sales in an environment where distributors/buyers often have limited access to financing. In response to these challenges in Africa, products such as receivables financing and distributor financing are now evolving rapidly. Central to delivering such solutions is the ability to understand and have appetite for the risk of a corporate’s intermediary distributors or end-buyers who may well be more in the small to medium-sized enterprise (SME) space rather than just the larger corporate arena.
The broader trade suite also has application in major project tenders where there is a requirement that bid bonds accompany such tenders. These are often infrastructure-related, for example, railways, ports, roads and energy supply. As such projects become larger, the quantum of such financing requirement will become greater. Issues such as the credit standing of the bond providers and available expertise to structure and syndicate such facilities will become more prominent. Africa’s infrastructure deficit remains a key agenda item for governments in the region and there is an increased urgency to see this remedied. It is clear to all constituencies that reliable and adequate infrastructure is the key enabler in attracting investment.
It is worth noting that export credit agencies (ECAs) are playing a significant role in facilitating the import of mainly capital goods in relation to this African infrastructure build-out. These agencies are looking to support their country’s export industries but also to contribute to the development of emerging countries. Banks act to structure such financings working closely with the ECAs.
The Role of Retail
A sometimes ignored element in the expansion or establishment of business in Africa is the retail requirement of corporates to ensure their employees are supported with personal banking arrangements. A new greenfield project can potentially lead to an entirely new ‘town’ expanding around the project site and this site is often in more remote locations.
The challenge is for banks to adapt their retail offering so that personal financial services can be brought to such sites, for example, for payroll implementation. This challenge extends to the set-up of customised remote branch banking, possibly on-site automated teller machines (ATMs) and consideration around how innovation such as mobile banking can be integrated into these services to provide both efficiency and security.
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