by Christian Nägele, Head of Sub-Saharan Africa Regional Office, UniCredit
UniCredit has a long heritage in Africa, having established an office in South Africa as early as 1972. Since then, the bank has expanded the scale and scope of its activities enormously to reflect both the growing importance of the continent to its home market customers, and the international expansion of African corporations, particularly those headquartered in South Africa. While many countries in Africa have demonstrated impressive growth rates in recent years, with considerable opportunity for the future, corporations together with their banks, still face sizeable challenges.
Scale and diversity
While entering any new market brings difficulties and unknowns, these are exacerbated in a continent of the sheer size and diversity as Africa: 48 countries, more than 3,000 ethnic groups and 2,000 languages. Even though most cross-border business is conducted in English, French or Portuguese, there are key cultural differences between countries that speak these as their native language, let alone countries in Africa where these sit alongside a huge number of other languages and dialects. While South Africa and Nigeria are the biggest markets economically in Africa, for example, it is almost impossible to compare the two, whether politically, economically or culturally. Similarly, the distances across Africa cannot be underestimated: it takes around six hours to fly between Lagos to Johannesburg, only a few minutes less than between Lagos and Frankfurt.
Integration efforts are also at a very early stage when compared with other regions, particularly Europe. Although there are currency unions in west and central Africa, it is only now in east Africa, for example, that tourist visas will be valid across Kenya, Uganda and Rwanda. Apart from this limited area, tourist and business visas must still be sought for each country, adding further to the obstacles for multinational corporations doing business on the continent.
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Variations in regulatory and trade maturity
Not only is Africa characterised by its cultural, lingual and geographic diversity, but there are also considerable differences in the political, tax and regulatory environments. Given that trade with sub-Saharan Africa, with the exception of South Africa and to some extent Nigeria, is still low, and inter-African trade in its infancy, there is a lack of certainty and consistency within countries in some cases. This is sometimes difficult to understand for European corporations that are accustomed to home markets with highly developed trade, customs and tax regulations. To put this into context, however, despite high growth rates, the entirety of sub-Saharan trade with Germany, excepting South Africa and Nigeria, is of a comparable size to Germany’s trade with Egypt. Similarly, growth of 1% in Germany is equivalent to 100% of Tanzania’s GDP and 80% of Kenya’s. South Africa is a notable exception, and represents a flagship for sub-Saharan trade. As one of the top 40 economies in the world, equivalent in size to Singapore or Denmark, the country has a regulatory environment that is consistent with Europe, and a mature banking sector.
One of the associated issues of relatively young trading economies is the variation in the reliability or stability of state and regulatory institutions such as state treasuries, central banks, regulators, courts of law and public protection authorities. We place a lot of emphasis on understanding the challenges in each market in which we support our clients, scrutinising public bodies and the political appetite for reform, spending time with trade bodies and at the Italian, German and Austrian embassies to maintain on-the-ground insights, and share this intelligence with clients to help inform their investment strategy. In South Africa, for example, these state institutions are well-established with a high degree of integrity, transparency and accountability.
A bespoke approach to international trade
As a result of the level of diversity – and, in some cases, lack of maturity – in regulatory infrastructure and institutions across countries in Africa, there is no ‘one size fits all’ approach to cross-border trade, and companies need to respect the regulatory, market and cultural conditions in each case. UniCredit supports clients in their trading activities in Africa in a variety of ways, adapted to meet unique conditions in each market in which our clients operate, from closely integrated correspondent banking relationships and sophisticated trade finance solutions. For example, we maintain correspondent banking relationships with the top three to five banks in each of the major African economies in which our clients do business, and we continue to increase these relationships as clients expand their geographic footprint.
This contrasts with the strategy employed by other banks, some of which have been exiting or reducing their correspondent banking relationships. There are undoubtedly some challenges when doing business in sub-Saharan Africa, particularly compliance with know your customer (KYC), anti-money laundering (AML) and anti-terrorism financing regulations (FAFT, OFAC, UN, EU), but it is essential to maintain the highest possible level of customer due diligence. Consequently, we perform rigorous due diligence both when setting up a correspondent banking relationship and on an ongoing basis. This takes time, so we work closely with our clients to understand their future aspirations in Africa and plan our strategy accordingly.
Managing supply chain risk
The differences between South Africa and other parts of Africa also shape the way that clients conduct their supplier relationships and therefore the financial solutions that they require. For example, clients doing business with suppliers with whom they have a well-established relationship within a reliable legal framework are less likely to require trade finance instruments. Instead, they generally trade on an open account basis, therefore requiring payment and collection solutions appropriate to the market. In other cases, however, trade finance instruments such as letters of credit are vitally important to facilitate trade relationships. This is not simply a case of European companies managing the risk of counterparties in Africa: while a European company may be a household name at home, they may be largely unknown as they expand their business in Africa, so we provide a variety of guarantees, such as performance bonds, prepayment bonds etc. as well as letters of credit and standby letters of credit.
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Deepening the corporate presence in Africa
In South Africa in particular, companies are expanding beyond their import/export business and setting up local branches and subsidiaries. This leads to a range of additional transaction banking requirements. To address these evolving needs, we have set up co-operation agreements with leading local banks in key markets to whom we introduce our clients. This introduction provides a level of reassurance to both local bank and client alike as they can develop a level of trust more quickly. In some cases, particularly where clients are smaller and therefore their balance sheet may not speak for themselves, it may be more difficult to access local financing, so we use our knowledge of the client to guarantee local banking facilities and therefore provide the support that they need at times that are often critical in their strategic journey.
From a currency risk perspective, volatility and currency constraints inevitably create difficulties for many companies, particularly since the slump in oil and other commodity prices that has restricted the availability of foreign currency in some markets such as Nigeria. Therefore, while some companies will be in a position to settle transactions with counterparties in Africa in USD or EUR, this is not feasible in many cases, so we help clients to manage local currency liabilities and the resulting FX risk.
Early investment for future value
Despite some of the difficulties of doing business in Africa, many companies are expanding rather than reducing their presence on the continent, recognising its enormous future potential and strong growth rates. In some cases, this means moving from import/export business to establishing a local entity; in others this involves growth into new countries, either through organic growth or M&A. Retail companies, infrastructure providers and automotive companies in particular are actively leveraging increasing demand. In the past, for example, German and Japanese auto companies established manufacturing facilities in South Africa for domestic consumption and foreign exports, while local market demand in the rest of sub-Saharan Africa was primarily for second-hand vehicles. This is changing, and there is now a growing market for new vehicles in countries such as Nigeria and Ethiopia as well as more widely across the continent. Despite the slump in oil and other commodity prices, there is still demand for mining and extraction equipment as governments, local and foreign investors look ahead.
Companies in all industries that are seeking international growth opportunities often ask us where the next ‘hot spots’ in Africa will be. The reality is that apart from South Africa which is better established as an African economic hub, the markets that appear the most promising continue to change in line with economic, political and regulatory developments. Nigeria and Angola have been notable hot spots, for example, but the drop in oil prices has reduced demand and led to a decline in the availability of foreign currency to pay for exports. Today, therefore, we are seeing the greatest potential in parts of East Africa, such as Kenya, Tanzania, Ethiopia and Rwanda. Companies are attracted to Ethiopia, for example, as a result of its large population, rapid growth and investment in infrastructure, while Rwanda is smaller in size and population but has a rapidly growing economy with efficient logistics. While opportunities may be embryonic today, whether looking at east, west or southern Africa, companies recognise the need to invest early to benefit from future growth, supported by an expert bank such as UniCredit that can support them throughout the journey.
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Christian Nägele Christian Nägele is Head of UniCredit’s Sub-Saharan Africa regional office in Johannesburg. His prior experience includes positions at both Deutsche Bank and China Construction Bank, while, following 10 years at the head office of Commerzbank, he was tasked with building up the bank’s risk management and corporate banking activities in Johannesburg. Throughout his career, Christian Nägele has developed considerable expertise in international wholesale banking products, including debt capital markets, structured trade and export finance, and transaction banking services. |
