Dealing with Challenging Markets in Sub-Saharan Africa
by Chris Paizis, Managing Principal, Barclays Africa
The African continent, much like any emerging market, faces a unique set of challenges particularly in the financial sector, which will concern investors, corporations and market participants. But these challenges aren’t new and can often have positive outcomes. For example, the electricity supply has been a huge issue in many Sub-Saharan Africa (SSA) countries and electrification levels have been very low, but I would see this as a long-term positive because investment in electricity can then lead to very fast growth.
These issues are part and parcel of dealing with frontier and emerging markets and it should be remembered that in Africa one has to look through financial cycles. We might have low growth now, but in two years’ time, that could be a very different story. While there are political and other risks, external factors like the drop in commodity prices are more likely to have an impact on markets as this reduces the credit quality of our commodity producing countries and associated clients.
In SSA, we have to live with volatility, and our clients, who have been on the ground for a long time, understand this and they are able to conduct business through the cycles to still make healthy profits and to service their own clients.
Nascent financial markets
The African continent, with the exception of South Africa, has very nascent financial markets, and one of the reasons for this is because regulatory frameworks around them haven’t been updated over time to take into account the needs of the developing financial markets sector such as the ability to trade under ISDA [International Swaps and Derivatives Association] documentation, which is globally accepted, and, for instance, what happens to financial market obligations in the event of a liquidation. Are liquidation laws appropriate? All of these issues have not really kept pace with developments and this is why SSA financial markets have not developed as fast as we would have liked. However, there has been a growth trend despite the lack of a strong enough regulatory framework.
Since the 2008 crisis, regulators in Africa have taken a more active role in their financial markets. For a very long time, South Africa has been a benchmark on the continent; however, not always for the right reasons. A good example is our exchange control framework, which we’ve had for many decades and which works well, partly because it’s been around for so long. Banks understand its implementation and clients understand what’s required. What we’ve seen in SSA in recent years is a knee-jerk reaction to adopting exchange control regulations, but some countries are doing this too quickly, too ad hoc and without the requisite administration around it, and that means it has been negative for some markets.
International investors want to get more involved in SSA because of the potential for high returns and the growth prospects, but they are finding it difficult because of, amongst other things, a lack of currency liquidity, and often they don’t know which banks to trade with on the continent. Outside of a handful of international and South African based banks, local banks are mostly little-known entities to international investors, so access to the markets has been quite difficult.