Looking to a Brighter African Horizon

If 2016 shows us anything, it is that volatility and uncertainty has become the ‘new normal’. When I last published an article in TMI a year ago, I emphasised that doing business in Africa was a marathon not a sprint, and that corporations may therefore take a long view when shaping their strategy. In 2017, this is even more important, and the trends, challenges and opportunities that characterised 2016 are likely to prevail for the year ahead. 

Strength amidst volatility

Unexpected political outcomes in the UK and the US resulted in uncertainty in developed markets, but even greater unpredictability in emerging markets. It is not yet clear, for example, how trade and aid to Africa will change under Donald Trump’s presidency, and how supportive the new administration will be of US corporations operating in Africa, particularly with regards to repatriation policies. Bearing in mind the reliance of commodity-producing nations in Africa on USD, and large FDI flows from USA to Africa, the continent’s fortunes are very vulnerable to future US policies, with these vulnerabilities exacerbated by economic and regulatory policy within the region. 

In this environment, we have seen a picture of ‘two Africas’ emerging. Half of the continent, Africa’s 23 commodity-producing nations, including Nigeria and Angola, have seen a sharp slowdown in growth and commodity exporters are finding it difficult to anticipate the end of the current cycle, which is being shaped by event risk to a degree rarely seen before. Some corporations and governments that depend on commodities have delayed investment decisions and realigned their growth expectations, exacerbated by the rising inflation. For companies that rely on low oil prices operating in these countries, the immediate prospects are more favourable; however, they need to consider the overall health of the economy, the regulatory environment and the level of infrastructure investment.

For the remaining 22 countries in Africa, however, growth remains highly respectable at an average of 6.5% in 2016 (source: IMF). Similarly, the IMF forecasts that countries such as Côte d’Ivoire, Ethiopia, Kenya and Senegal in West Africa, and Ethiopia and Kenya in East Africa could see growth of 6 to 8% over the next two years (source: IMF), amongst the highest rates of growth globally.

In this environment, corporations in all industries need to hold their nerve. Africa continues to offer huge potential for growth and opportunity, even if it is taking a little longer for this potential to reach fruition in some industries. We may now have reached the bottom of the cycle for many commodities, and governments and corporations alike will benefit from the efficiencies they have made during leaner times as revenues recover. With a growing urban population, a rapidly expanding consumer base and accelerating digitisation, Africa should remain firmly on corporations’ strategic horizon.

A changing banking landscape

In an environment of challenge and opportunity, treasurers need to understand and manage the changing dynamics of banking in Africa. For example, real-time payments are now live in Nigeria, Africa’s second largest economy, with Kenya coming shortly and more countries to follow. More rapid, secure and automated payment mechanisms are creating opportunities for new business models and faster working capital cycles, both in the B2B and B2C space.

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At the same time, however, treasurers are aware of heightened credit and country risk in some countries. Exits by international banks from Africa has caused particular challenges for foreign multinationals, and replacing these relationships has often been fraught with difficulty, both to manage domestic and cross-border requirements. For example, if a country’s credit rating is cut to sub-investment grade, so too is the rating of its local banks, which can severely limit the number of banks that meet a corporation’s counterparty credit risk criteria.

Navigating regulatory change

Changing regulation is also creating challenges. In Kenya, for example, the rapid collapse of two or three local banks quickly led to measures to protect consumers and businesses. Federal governments are also responding to the constrained economic environment in various ways, such as enforcing local resource regulations. For example, the black economic empowerment act in South Africa, which aims to direct economic activity towards local businesses and communities, is likely to be mirrored in other countries too. Similarly, the country’s interest rate bill that prevents banks from competing on interest rates is also designed to avoid erosion of the local banking sector. These measures serve an important social and economic purpose, but create difficulties for treasurers trying to keep up to date with changing requirements across each of the countries in which they do business, and adapting their cash and financing strategies accordingly.

Achieving global cohesion

Although there are market and regulatory issues that are specific to Africa, treasurers face market, credit, operational and regulatory risk in every region. Just as treasurers rely on a variety of tools to address these risks in other parts of the world, the opportunities to manage these issues are also evolving in Africa. For example, corporations are increasingly implementing cash pooling structures in permitted markets, while interest optimisation structures allow treasurers to leverage the value of funds and enhance yield on cash held in highly regulated markets. 

Although digitisation is a global phenomenon, the value proposition of both consumer and corporate digital initiatives is particularly compelling in Africa to empower citizens and businesses in Africa in new ways. Both local and international businesses are taking the opportunity to leverage emerging digital opportunities to increase efficiency and control, and drive new business models. While banks and telecom providers have pioneered mobile wallet solutions that have had a revolutionary impact in countries such as Kenya, banks are also working with a new and expanding generation of ‘fintechs’ to inspire and deliver on new ways of working, transacting and communicating.

However, digitisation can also create new opportunities for cybercriminals, particularly as many businesses are implementing digital technology for the first time, both foreign multinationals and Africa-headquartered companies, and may not have the necessary experience to balance automation with control. It is therefore important to ensure that skills and expertise acquired on digitisation projects in other parts of the world help to inform projects in Africa, and to leverage skills and solutions from partner banks, such as Citi’s MobilePass authentication solution to enhance security. Standardising processes, formats and controls is also essential to allow global visibility over liquidity and risk, which is the backdrop behind the growth of shared service centres in locations such as South Africa and Mauritius.

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Managing cash, mitigating risk

What is clear from our engagements with customers and the requests for proposal received over the past year is that treasurers are focused on simplifying their cash and treasury management to equip them for the challenges and opportunities ahead. This includes rationalising banks and accounts and ensuring that they have full visibility and control over transactions, balances and information. Efficient, secure bank connectivity also plays an important role in this. Treasurers wish to avoid having to maintain electronic banking systems in each country, which adds administration cost and operational risk, and instead are looking for their transaction and information flows to be integrated as tightly as possible. We have seen a high double-digit percentage increase in the number of companies implementing host-to-host connectivity over the past year, while multi-bank connectivity solutions such as SWIFT are also gaining traction to optimise transactions and information and manage bank risk more effectively. 

By embarking on these initiatives, they are better positioned to measure the impact of political, economic and regulatory changes, take action where necessary, and prepare their business for short-term volatility and longer-term opportunity. Africa’s potential remains undimmed, but treasurers need to understand and respond to regulatory changes promptly, leverage solutions to optimise liquidity, and manage bank risk through close relationships with trusted international banking partners with a long-standing commitment to Africa.