Corporates set their Sights on Fast-growing sub-Saharan African Economies

Sub-Saharan Africa has continued to record strong economic growth over the past decade in the face of a weakened global economy. There are two main engines of growth spurring this positive economic development: the commodities boom and an emerging African middle class.

Certainly sustained global demand for commodities, which is heavily driven by China’s robust appetite, has ensured that Africa continues to be a major exporter of natural resources. In addition, trade with France, the UK and the US has reinforced sub-Saharan Africa’s impressive growth, and significant steps forward are also being made in intra-regional trade, which will improve the competitiveness of some African countries.

Moreover, growth is also being strengthened by the rising consumerism of the growing African middle class – a result of stability-orientated economic policies and higher living standards. The biggest implication of this development is for consumer goods and services. Many of these are imported, making a compelling case for doing business with Africa.

The opportunities for corporates are not limited to the consumer goods sector – there is also enormous business potential in the provision of much-needed manufacturing and processing capabilities, as well as expertise, to help transform some African economies from being extractors of raw materials to becoming producers of value-added goods.

However, there are also appreciable risks which accompany these opportunities in sub-Saharan Africa, especially with respect to compliance and counterparty risk. For this reason, corporates need an international banking partner with local expertise and an ‘on-the-ground’ presence to reduce their risk exposure and help take advantage of the excellent opportunities.

Capturing the Opportunities

The strong growth trends seen in sub-Saharan Africa as a whole are even more pronounced in fast-growing countries, such as Nigeria and Angola. Indeed, both are good examples of African economies that have begun the process of moving up the production value chain, opening up business opportunities both locally and further afield.

Take Angola, for example, which is taking steps to diversify its economy away from oil in order to reduce its exposure to oil price risk. Oil accounts for 97% of exports and 80% of government revenues in Angola. Yet despite its abundant supply of the raw material, the country currently only has one oil refinery which has long forced it to import a significant amount of refined oil and thus exposed it to oil price risk. Therefore, huge investment is needed to improve its oil refining capacity.

The country’s gradual transition from extractor to producer of refined oil will rely not only on significant imports of capital goods, but also foreign expertise and services. Indeed, it is already anticipated that such imports needed to boost the country’s exploration and development projects will drive down its current account surplus to 7% of gross domestic product (GDP) this year, from between 9% and 12% of GDP between 2010 and 2012.

An increase in consumer goods imports is also likely to contribute to this importing trend, as is the government’s moves to reduce its reliance on oil revenue. Indeed, last year the Angolan government launched a public investment programme to channel funds towards the areas of road construction and energy.

Nigeria is also a country seeing change happen in terms of the development of value-added industries. For example, in the agricultural sector, construction of the world’s largest fertiliser plant is currently under negotiation. The plant is designed to turn Nigeria into a key exporter of fertiliser, optimising the use of its arable land that is rich in hydrocarbon, but which is currently underused resulting in Nigeria importing most of its fertiliser needs in order to produce food locally. The planned gas-to-urea fertiliser plant is due to be completed in 2015 and will cost approximately US$1.2bn, which will be privately financed with foreign companies bidding for the contract.

Keeping the Risks in Sight

Indeed, many corporates have already recognised the opportunities generated by sub-Saharan Africa’s economic renaissance and are building a presence on the continent. Of course, in doing so, there are also risks to consider – just as there are substantial risks involved in doing business with any emerging market.

One such risk regards the local business environment. In this respect, patience can be a virtue for corporate clients attempting to break into the African market. While investment in marketing and human resource (HR) is required in order to break into a mature market, such as Germany, in Africa what corporates need to invest is time in order to avoid unethical business practices. Ultimately, a long-term business approach in Africa is required for a successful outcome.

Credit and counterparty risk is also a critical consideration when seeking to do business with Africa, given that corporates cannot always easily obtain credit information about their foreign trade counterparties. In this regard, letters of credit (L/Cs) are one of the safest ways to mitigate this risk. This trade finance instrument is useful as corporates can pass the ‘unknown’ risk on to their own advising or confirming bank. The bank can then leverage its local expertise based on its correspondent banking relationships.

For this reason, using an international bank with a global correspondent banking network remains one of the best ways for foreign corporates to reach into strategic emerging markets. Corporate clients do not simply need a bank that has a branch located directly in the country, but one that has considerable reach into the region and an in-depth understanding of the local regulatory, political, and market conditions. Therefore, those banks with an ‘on-the-ground’ presence are the ones best-placed to advise on the local risks.

Indeed, having an international partner bank on side with the local expertise necessary to navigate the risks means that corporates can feel comfortable in taking on the specific challenges that sub-Saharan Africa poses and seize the vast opportunities offered by the prospering region.

18 views

Related reading