A Sleeping Giant with One Eye Open

by Helen Sanders, Editor

For the past decade, Africa has been feted as a nascent economic powerhouse whose wealth of natural resources, infrastructure investment, increasing productivity and growing international trade offered enormous attractions for foreign investors. Across a very short time, however, governments of commodity-reliant countries have been forced into crisis management mode, battling against headwinds that are battering their currencies and economies.

The battle for African economies

While foreign investment has declined, however, particularly from China, and some infrastructure projects put on hold, few corporations are turning their backs on Africa. In particular, they recognise that while the short term may be difficult, and therefore growth expectations need to be revised, the attractions that first drew them to the continent continue to exist. Peter Crawley, Head of Treasury & Trade Solutions, Sub- Saharan Africa, Citi outlines,

“Africa has been dealt a difficult hand with a combination of commodity price pressure and China’s economic slowdown. Together, these factors have resulted in a fall in the rate of growth, together with the effects of currency devaluation, constraints on the availability of foreign currency and heightened counterparty risk following the recent collapse of several banks, such as in Kenya. Even so, growth remains higher than in many economies around the world. Overall, growth rates of 6-7% have fallen to 3-4%, but inevitably, this is not consistent across countries or industries. Looking at Nigeria and South Africa, which together account for more than 50% of GDP, Nigeria has been heavily hit by falling oil prices, while in South Africa, the economy continues growth, albeit slowly and in ‘pockets’. Conversely, countries such as Tanzania are beneficiaries of lower oil prices with the resulting resilience to growth rate declines.”

Inevitably, while some companies (as well as countries) will benefit from lower commodity prices, the impact of the collapse in the price of many key commodities cannot be underestimated. As Philip Panaino, Regional Head, Transaction Banking, Africa, Standard Chartered emphasises,

“With 36 of the 48 countries in sub-Saharan Africa (representing around 80% of the population and 70% of GDP) reliant on exports of one or more commodities, and therefore suffering the effects of the economic headwinds, there are few companies that do business in Africa that are not having to adapt their operations.”

Furthermore, the economic and regulatory situation remains challenging for all organisations, particularly as a result of currency devaluation, foreign currency and liquidity constraints and a fast-changing regulatory environment as governments implement measures to protect their economies. Philip Panaino, Standard Chartered continues,

“Realistically, current market challenges are forcing all companies to boost their efficiency irrespective of where they are headquartered, and whether the impact of depressed commodity prices has a positive or negative effect on the business. All companies face liquidity, FX and regulatory challenges, and the difficulties associated with lower GDP growth.”

Emerging regional champions

These difficulties are inevitably not restricted to foreign corporations, but also affect African companies expanding across the continent. Peter Crawley, Citi explains,

“Foreign multinationals operating in Africa are focusing increasingly on managing risk, and have recalibrated their growth expectations. Companies headquartered in Africa that have experienced considerable growth over recent years are now seeking out growth opportunities and dealing with slower growth rates. In South Africa, for example, where growth was 2-3%, this is now less than1%, with price increases also coming through, creating a particularly challenging business environment for companies that operate largely within the continent.”

However, as Philip Panaino, Standard Chartered suggests, more challenging trading conditions are prompting regional corporations to pursue comparable levels of treasury efficiency as their foreign peers,

“The gap between foreign multinationals and regional champions is narrowing as larger African companies adopt more efficient processes and technology. As employees move between organisations, there is greater cross-pollination of ideas and expertise on maximising efficiency and reducing costs.” [[[PAGE]]]

A defensive position

Treasurers are accustomed to dealing with economic and market stress, as the global financial crisis emphasised. A characteristic of the current situation in Africa, however, is the extent to which governments are being forced to protect their economies and currencies. Given the number of countries involved, and political, economic and cultural differences between each of them, governments are taking different approaches to tackling the problems with which they are faced. The challenge for treasurers, therefore, is to understand and keep up with regulatory changes in each of the countries in which they operate. As Peter Crawley, Citi describes,

“The way in which governments and central banks deal with economic stress inevitably impacts on the private sector. As the value of commodity exports falls more quickly than the value of crucial imports, such as manufactured goods, a growing trade deficit has emerged. Governments are taking different approaches to tackling this problem. In Nigeria, for example, the government has issued specific directives on foreign currency priorities, controlled imports and encouraged domestic substitution. In contrast, Zambia is managing the situation created by the collapse of copper prices through interest rate policy and currency devaluation. Clients are therefore becoming increasingly dependent on Citi to provide advice and information on new policies and how to recalibrate their strategy and operations.”

It should not be assumed, however, that regulatory changes are necessarily negative. Rather, many of the developments introduced by governments are designed to increase market transparency and trust. Philip Panaino, Standard Chartered notes,

“Government policy is also driving digitisation of corporate payments such as introducing online tax systems to improve tax revenues. Similarly, measures such as implementing standard reference rates, such as in Nigeria, can be effective in promoting market consistency and transparency.”

Treasury priorities

During this period of stress, treasurers – as always, obviously – are holding their nerve. Philip Panaino, Standard Chartered says,

“For treasurers, the themes are the same as ever, namely: liquidity; FX risk; trapped cash and visibility & control; however, the priority and severity of the issues has increased.”

Looking first at liquidity, for example, he continues,

“In some countries, such as Nigeria and Angola, the liquidity ‘crunch’ created by a scarcity of USD and restrictions on cross-border flows of currency has made it more difficult to externalise funds as well as import goods.”

This in turn leads to the problem of what to do with cash that is ‘trapped’ in-country. Peter Crawley, Citi comments,

“Currency constraints are placing even greater pressure than in the past on trapped cash. Treasurers face the dilemma of what to do with cash that can’t be repatriated or used to fund investment projects to avoid erosion of value. Citi’s interest optimisation solutions are therefore proving a valuable means of harnessing the value of cash to offset deficits and generate a return on cash.”

Philip Panaino, Standard Chartered expresses a similar view,

“Trapped cash has always been an issue for companies doing business in Africa, and this will continue. Some countries are ‘easier’ than others, such as Kenya, but ongoing challenges mean that treasurers are increasingly reliant on their banks to come up with innovative liquidity management solutions, such as enabling treasurers to view funds held with multiple banks, and pool cash whether physically or notionally wherever the opportunities exist.”

While in the past, particularly in commodities-related industries, companies settled transactions in a ‘hard’ currency such as USD, lack of foreign currency availability means that there may be no choice but to accept local currency. If these receipts exceed local payment obligations, and there are no immediate plans to invest in the country, treasurers need to consider how to maintain the value of cash given the significant impact of currency devaluation in countries such as Zambia and South Africa. As Philip Panaino, Standard Chartered states,

“The dilemma for treasurers is how to safeguard their earnings from the effects of currency devaluation. Eight of the ten worst performing emerging market currencies over the past year have been in Africa, emphasising the scale of the issue; for example, the Zambian kwacha lost 40% of its value during 2015.”

Keeping sight of cash

Given the liquidity and risk management challenges, and the need to respond to fast-changing regulatory and market conditions, it is essential to keep an accurate and up-to-date view of balances and exposures across the region. Philip Panaino, Standard Chartered discusses,

“Web-based electronic banking now enables treasurers to engage with their banks far more easily and quickly than in the past, so the challenge for banks now is how to use improved connectivity to deliver better visibility over information. For example, we have introduced artificial intelligence to our Straight2Bank platform to enable treasurers to actively forecast and manage their business and cash flow. This is particularly important in challenging, highly volatile markets, and allows treasurers to take a more active, forward-looking approach to liquidity management.”

Peter Crawley, Citi adds,

“We are seeing strong uptake of host-to-host and tablet/mobile channels for bank communication, with ongoing double digit growth and no signs of a slowdown as treasurers and finance managers seek reliable, timely and convenient access to information on cash and risk.”

The added challenge in Africa is that many companies need to work with a panel of banks to provide the coverage they require, which makes it more difficult to collate information in a consistent and timely way. Increasingly, using SWIFT for bank connectivity is becoming a feasible option (see the article in this edition by Robert van der Zee, Treasurer & Deputy Director of Finance, World Food Programme) and in other cases, banks are able to provide balance information on accounts with multiple banks through their systems.[[[PAGE]]]

Managing counterparty and supply chain risk

Furthermore, the ability to operate on a ‘bank neutral’ basis is an essential element of an effective counterparty risk management strategy in the current climate. Some foreign banks terminated their operations in Africa, not necessarily due to a perception of higher risk but as part of a wider global strategic review as the cost of regulatory compliance increases. At the same time, there have been both corporate and banking casualties of the current period of economic and market stress, and corporations need to manage their risk by diversifying their banking activities.

Similarly, treasurers are conscious that their suppliers and customers are experiencing similar challenges to themselves, and often more acutely, particularly those that do not have revenues from other regions to tide them through the current period of stress. To help overcome this, and increase supply chain resilience, Peter Crawley, Citi observes,

“There is a growing focus on supporting the supply chain, resulting in unprecedented demand for supply chain finance as liquidity has become more constrained.”

The technology catalyst

Supply chain finance is a solution that is difficult to envisage without the major strides that many countries in Africa have taken towards digitisation, including electronic financial processes and payments. Furthermore, as costs, risk and constraints on growth continue to dominate, the more that treasurers can harness technology to provide visibility and control over cash and risk, and facilitate business models that reflect changing consumer and business behaviour and expectations, the more value they can offer their organisations.

In particular, treasurers need to keep up to date with the digital agenda in Africa as it continues apace, despite and to some extent fuelled by the economic challenges and constraints that this inevitably places on projects such as infrastructure development. Peter Crawley, Citi emphasises how far-reaching the digital agenda has become, with unprecedented opportunity to use digital technology to create transparency, trust and efficiency,

“While many industry segments are experiencing a period of stress, we have not seen a slowdown in the pursuit of the digitisation agenda. In Nigeria, for example, the government has pushed ahead on its biometric ID project for banking services, despite economic pressures, to enhance trust and transparency in the financial industry. We are seeing a considerable focus on instant payments, such as Kenya’s real-time interbank switch, as well as a proliferation and improved regulation of mobile payment schemes. Many countries have introduced electronic tax collection to avoid queues, reduce errors and omissions, and avoid fraud and corruption, therefore increasing tax receipts. Some countries are exploring the case for digital currencies to understand the impact for them.”

A key driver of the digital agenda is to reduce the number of transactions that are settled in cash, which is even more difficult in Africa given relatively low levels of financial inclusion and lack of bank infrastructure in remote areas. In this context, mobile money solutions are the most likely means by which transactions can be converted from physical to digital means. Philip Panaino, Standard Chartered demonstrates,

“Africa is the world’s youngest continent with the fastest-growing population. The workforce and consumer base is very young, and while there is still a long way to go, literacy rates and disposable income levels are at their highest level. With a surge in the use of smartphones across the continent, policy makers, banks and telecom companies are creating a mobile ecosystem to facilitate transactions, increase financial inclusion and enable consumers to access financial services such as equity market trading, insurance services and a range of other opportunities. Furthermore, migrating to mobile technology is an essential part of the ‘war on cash’. With 60-70% of GDP in cash transactions, the risks associated with crime and corruption, and costs of transporting, storing and distributing cash are enormous. Consequently, there is significant motivation to promote electronic payments, and mobile technology is a key enabler of this.”

As yet, adoption remains ‘patchy’ as despite the oft-quoted success of M-PESA in Kenya and other parts of east Africa, mobile wallet solutions are by no means universal, and at very different levels of maturity so far. The growth of mobile payments offers enormous benefits to corporations doing business in Africa, both as a means of collecting cash more efficiently, cost-effectively and securely and paying suppliers and employees. Leading banks are both responding to, and anticipating this by offering mobile payment capabilities through their electronic banking solutions, using mobile phone numbers in place of bank account instructions, and enabling payments to be processed through the same channels and with the same processes as other payment types. Peter Crawley adds,

“Banks are also playing an important role in supporting clients in their own digitisation strategy, and we are seeing more RFPs that include sections on mobile solutions. For example, direct to market clients such as in the fast-moving consumer goods industry are looking to Citi to support collection methods that provide a viable alternative to cash, such as mobile payments, while others are looking to accelerate and create transparency in the financial supply chain. These alternative, potentially disruptive solutions are not necessarily appropriate in every country or for every company, depending on their supplier and customer profile, but the shift to mobile payments and collections is a very positive way of reducing cash in the system, and these are gaining traction as a result.” [[[PAGE]]]

A crucible for innovation

There is no doubt that Africa will weather the current economic headwinds and emerge from the storm better equipped to pursue future growth, with greater government and market transparency, more efficient payment and collection practices and dynamic business models. While there have been some organisations that have discontinued their operations, this is the minority, as Philip Panaino, Standard Chartered explains,

“Despite the difficulties of doing business in Africa in the current climate, and lower growth rates, Africa remains an exciting and dynamic continent with opportunities to generate returns that exceed average GDP growth. While some banks have closed their African operations, this is typically part of a wider global strategy as the cost of compliance increases, rather than being driven by a perception of particular risks in African markets. Conversely, others, such as Standard Chartered, continue to increase our investment on the continent, recognising the growth opportunities and supporting clients as they develop their African strategies. Amongst other industries, we are not seeing companies contracting their business or exiting markets in Africa, but some are delaying projects until more favourable economic conditions return to allow a better return on investment.”

As economic downturns in other regions have proved, innovation often flourishes during these periods, and Africa is no exception. From technology start-ups in South Africa to the digital agenda pursued by public and private sector alike, African economies are likely to emerge more resilient, energetic and diversified than ever before. Treasurers will continue to anticipate and prepare for change, both positive and negative, particularly in areas such as liquidity, risk, regulatory compliance and digitisation. Peter Crawley, Citi concludes,

“Looking ahead, we expect to see governments extending their digital agenda from tax collections into areas such as social security, utilities, pensions etc. to increase public sector efficiency and transparency. Secondly, supply chain finance is likely to evolve significantly, not only in leveraging larger companies’ credit quality to benefit smaller suppliers, but into a wider integrated payables conversation.”

Digitisation will continue to offer ever-increasing opportunity to enhance operational and financial efficiency, and transparency over cash and risk. Similarly, treasurers need to engage with banks, vendors and the front line in their own business to identify and deliver on the potential to build business models that reflect the diversity, complexity and geographic extent of both B2C and B2B markets in countries in Africa.