Challenges in Sub-Saharan Africa

by Michael Ketz, Senior Manager, Capital Markets Division, Lex Kriel, Associate Director, Capital Markets Division and Paul Verhoef, Associate Director, International Tax Department, Deloitte

Although Sub-Saharan Africa has witnessed a substantial improvement in informational efficiency, economic growth and, in some instances, political stability, managing financial risks for corporates on the continent still remains a high priority. Despite attempts to formalise and improve the local equity, interest rate and currency markets, progress is often slow in this region, and is further hindered by legal, regulatory and other market factors. Illiquidity in these markets is exacerbated by the fact that banks are not willing to warehouse substantial illiquid risks and there are almost no secondary markets to lay these off.

Multinational corporations (MNCs) looking to expand their footprint in Sub-Saharan Africa will be faced with typical financial risk management and hedging constraints, as well as atypical operational and administrative risks. In addition, in this environment skilled resources are most often scarce and expensive. Currency risk, in particular, is a topic of much debate in this region, especially since Africa has managed to attract an increasing amount of foreign direct investment (FDI), while FDI has been declining worldwide.

It has been suggested that equity markets encourage and stimulate economic growth by attracting foreign investment that, in turn, creates liquidity. Currently there are 29 formal stock markets in Africa, but unlike South African financial markets, the majority of African countries’ markets are in their infancy; are illiquid and have little or no market depth. Stock markets in Nigeria, Botswana and Zambia can be considered relatively liquid, in comparison to other African countries, with instruments exhibiting tenors of at least one year and occasionally longer. Ghana, Kenya and Uganda have operational but less liquid markets. Derivatives in these regions are therefore scarce or non-existent.

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