In the aftermath of the global financial crisis, as well as in response to the tightening balance sheet requirements resulting from Basel III and the on-going euro crisis, many European banks are looking to deleverage their risk weighted assets (RWAs) and to apply a stricter focus on their core markets closer to home. But these turbulent times also call for banks to form partnerships in so-called non-core markets, such as in sub-Saharan Africa.
Sub-Saharan Africa in Figures
The attractiveness of sub-Saharan Africa as an investment destination has increased during the last decade, thanks to the region’s strong economic growth averaging 5% per annum, almost twice the growth of the two previous decades. The region’s momentum is partly explained by the rising demand for the continent’s vast natural resources from industrialised and emerging nations, mainly from China and India.
Only a quarter of the growth achieved between 2000 and 2007, however, is explained by the natural resources boom. The transport, telecommunications and retail sectors together contributed another quarter, fuelled by a rising middle class and the rapid pace of urbanisation of African countries. However, the region still remains small in absolute terms. The collective gross domestic product (GDP) for sub-Saharan Africa was US$1.1 trillion in 2010, smaller than the Brazilian or Russian economies. Nonetheless, economists expect that seven out of the 10 fastest-growing economies between 2011 and 2015 will come from this vast region, which consists of important sub-regions, namely western, eastern, central and southern Africa.
Among all those regions and its countries, the Republic of South Africa does not only represent a huge market for European companies and their products by itself, but can also rely on a strong financial system. This is not only relative to its emerging market peers but also in absolute terms when compared to developed markets.
The Local Banking Sector
Johannesburg as the country’s financial hub and gateway to the rest of sub-Saharan Africa is also home to UniCredit’s presence in the region, which has been in operation for nearly 40 years. It acts as a catalyst for the bank to accompany its core clients into the region by forging strong ties to the country’s local banks.
With the South African Reserve Bank (SRB) as a strong custodian of the local currency and a rigid regulator of the banking system, local banks have, based on an Anglo-Saxon banking culture, built strong franchises within the country and also on the African continent. This is evidenced by market caps on the one hand, which are on a par or even above of some of its European correspondents. Standard Bank (€17bn) and First Rand (€13bn) are leading the pack, followed by ABSA (€11bn) and Nedbank (€8bn). On the other hand, merger and acquisition (M&A) activity and other expansionary strategies in the banking sector from South Africa into the rest Sub-Saharan Africa further emphasise growth perspectives in the region.
Standard Bank’s presence in Sub-Saharan Africa stretches to 17 countries and the bank is already strongly represented in Nigeria, the second largest economy after RSA. Nedbank has entered into a co-operation agreement four years ago with Ecobank, which has operations in 35 countries across western and central Africa. Through the merger with Oceanic, Ecobank became Nigeria’s third largest bank in terms of branches and the fifth in terms of assets. First National Bank (FNB) has recently launched its retail banking operations in Tanzania and is now represented in the eight countries in sub-Saharan Africa; it is also looking to expand to Nigeria and Ghana. South Africa’s second largest retail bank, ABSA, is present in four countries in the sub-Saharan region under its own brand.
The solidity of the South African banking sector was corroborated by its resilience during the recent financial crisis, as well as during the current European turmoil. South Africa’s financial and banking regulators have been very effective in shielding the country’s financial sector, which remained profitable while their counterparts in the European continent and the US had to be saved by their governments.
The African Financial System
Exchange controls, as well as prudential lending limits and mandatory lending reserves, act as protection for the South African financial system in times of international financial markets volatility. Currency risk is also mitigated through the closed South African rand system, for example all rand transactions have to be cleared and settled in South Africa through registered banks and clearing institutions. Furthermore, South African banks have a low dependence on foreign currency funding.
Thanks to the strong fundamentals of the South African economy and the commitment of the SRB in controlling inflation, the South African rand (ZAR) is one of the most traded emerging market currencies. Its internationalisation is underpinned by its participation in continuous linked settlement (CLS), where foreign exchange (FX) transactions are settled immediately, thereby lowering the risks of transacting across time zones. The International Monetary Fund (IMF) sees the ZAR as one of the potential emerging market currencies to become a global currency.
South Africa’s strong fundamentals have led to an increased demand for ZAR-denominated financing, particularly for the import of capital goods. While in the past, UniCredit financed local banks with short- and medium-term syndicated and club loans in US dollar, it now also forms partnerships with them to create platforms for South African importers to purchase capital equipment in their home currency through long-term financing contracts, which are secured by European export credit agencies (ECAs).
Partnerships recognise the ability of South African banks to source ZAR-funding at competitive rates and their ability to take on South African corporate risks. European banks like UniCredit can, in turn, bring to the table extensive experience in how European ECAs work, the structuring of transactions with the respective ECA-legislative in mind, and the administration of transactions through acting as agent for the lending consortia including South African banks.
As South African banks have registered with the EU ECAs through their mainly UK-based subsidiaries, they have become eligible to act as lenders under the respective schemes. However, while at least the big ECAs, such as German Euler Hermes, have explicitly recognised ZAR-denominated export contracts as eligible for their export guarantee cover, South African banks are battling to come to grips with the structural characteristics of the ECA products and sometimes administrational peculiarities, including the language of application forms. UniCredit, for example, has forged a network of co-operation and framework agreements with developmental institutions and commercial banks across the country, and is ready to extend this to the growing economic hubs in sub-Saharan Africa.
Export Finance Opportunities in the Sub-Saharan Region
Opportunities exist in the energy and transport sectors, including the new drive into renewable energy such as wind and solar energy projects, that are predestined for ECA covered financing through aid (for example offered by the Austrian ECA, OeKB, via UniCredit’s hub in Vienna – see box).
With regard to bio-fuels and mining, the German federal government offers so called ‘untied’ loan guarantees if the financing is linked to the project sponsor entering into a contract with a German off taker for the delivery of specific natural resources. In that case, it is not the export of German manufactured capital goods that forms the prerequisite for the AAA-guarantee but the flow of strategic commodities and raw materials to Germany’s high-tech industry. Euler Hermes itself has acknowledged the importance of the African markets for German trade by recently signing a co-operation agreement with Cairo-based Afreximbank.
As South African corporates are increasingly diversifying their trading partners and investment destinations to leverage off shifts in world trade, co-operation between South African banks and its correspondents, such as UniCredit, can be extended to new markets such as central and eastern Europe (CEE) with important emerging countries such as Poland and Turkey. Here, a European correspondent bank can act as an ideal gateway for South African multinationals and South African banks can act as a gateway for the European bank’s core clients into Africa.
As the European sovereign debt crisis is far from over, EU countries are cognisant of the importance of trade with sub-Saharan Africa, a region of more than 50 countries, among which are some of the fastest growing economies in the world. While European banks are grappling with the fallout of the crisis they are committed to serve their core clients. What better way than doing it together with their South African partner banks?
And Then There was Light in the Region of Fatick in Senegal
Ever-present electricity, working traffic lights and functioning street lighting even in the most faraway provinces are services that are currently either poor or altogether lacking in Senegal. By supplying photovoltaic (PV) street lamps and mini central PV stations in the total amount of €3.2m for the region of Fatick, the Austrian company Elektro-Merl will not only improve people’s living standards but will contribute sustainably to Senegal’s share in renewable and clean energy.
Precisely through the long-term effects of the project on Senegal and its people, namely fostering economic growth and lasting development, the qualification for an Austrian ‘soft loan’, provided by the Austrian ECA, OeKB, was achieved. The respective soft loan agreement with a tenor of approximately 19 years . It was the very first soft loan with Senegal within OeKB’s sub-Sahara ‘basket’. It was concluded in November 2011 between UniCredit Bank Austria as lender and the Senegalese Ministère de l´Economie et des Finances acting as borrower under said financing.
Exkursus Soft Loans
Soft loans are tied aid credits for certain countries projects for which no financing on market terms is available. Soft loan terms are characterised by low interest rates, long repayment terms as well as long grace periods. With these parameters the concessionality level required by the Organisation for Economic Co-operation and Development (OECD) of at least 35% or up to 50% (depending on the World Bank classification of the recipient country) can be achieved (for further information, please see OeKB’s homepage.
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