Winning the Africa Marathon

by Geoffrey Gursel, Sub-Saharan Africa Sales Head, Treasury and Trade Solutions, Citi

Until very recently, Africa was considered the uncut diamond in the treasure chest of global growth. Over the past decade, GDP in the 11 largest countries in sub-Saharan Africa increased by 51%, more than double the speed of the growth of the world’s economy as a whole, and nearly four times that of the USA. Today, Africa’s immediate growth prospects may not shine quite so brightly for some industries, but it still offers enormous potential over the mid- and longer term. With currency and commodity volatility and regulatory uncertainty, however, treasurers have become more circumspect and cautious in their African strategy.

A wide variety of industries have been attracted to the unique opportunities for growth that Africa offers, with significant investment in the continent over the past decade. Given the disparities in the maturity and consistency of financial and physical infrastructure, legal frameworks and infrastructure across countries, establishing a business and driving growth has not always been easy. Today, however, existing challenges have been exacerbated by the rapidly changing regulations that governments are putting in place to protect their economies from the extreme volatility and sharp falls in commodity prices, particularly oil. Companies that are negatively impacted by low oil prices are taking a long-term view, and working with trusted partner banks to address short-term challenges. On the other hand, with more extreme market conditions than most forecasters had predicted, some companies are witnessing more favourable commercial opportunities than they might otherwise have predicted. In both cases, however, the speed of change is adding another level of complexity to their cash and treasury management activities.

A regulatory rollercoaster

Governments and central banks of heavily oil dependent countries such as Nigeria are rapidly implementing regulations to scrutinise in- and outflows, improve central bank visibility and security of funds, and introducing more stringent rules on business conduct. These include export/import rules and new signatory requirements, even for basic operating accounts. The aim is to maintain cash balances within the country to improve market liquidity, increase transparency and control over cash, and boost confidence and trust in financial governance.

It can be difficult for corporate treasurers to keep abreast of and compliant with these changes whilst also keeping the company’s liquidity and risk objectives in sight. This applies whether or not the company is a beneficiary or casualty of the ongoing fluctuations in oil prices: companies that are large consumers of oil, such as shipping and airlines are benefiting from low oil prices, but at the other end of the spectrum, governments and energy producers are facing tough times. Industries that do not have direct reliance on oil or other volatile commodities may also face an indirect impact, whether positive or negative, depending on their primary customer base.

The key issue for corporations and other institutions operating in the region is not only how the company itself should respond to extreme volatility, but more importantly, how governments are reacting. Firstly, treasurers need to be aware of national strategies, such as Nigeria Vision 2020 and Ethiopia 2030 to understand the overall direction of investment and economic policy. Secondly, they need to understand government decisions required to achieve these strategies. As we have seen, economic stability has become very fragile. With some governments, including the major oil-producing economies such as Angola, Algeria and Nigeria generating more than 90% of revenues from oil, and significant commodity reliance in countries such as Zambia, the fall in prices compromises their ability to service debt, and inevitably results in cuts to government spending on infrastructure and lower employment, further reducing income.

One of the ways that governments are dealing with this is by seeking greater visibility of incoming flows. This in turn is leading to tighter regulations on cross-border flows of all types, which is inevitably having a negative impact on liquidity and risk for many companies. Amongst energy companies, for whom the low oil price has the most immediate impact, we are seeing a number of projects delayed, and reductions in headcount as export prices drop. Similarly, producers of commodities such as copper in Zambia, are feeling the squeeze of the fall in prices and over-supply.[[[PAGE]]]

Taking a longer-term view

Despite economic turbulence and fragility, the story of growth in Africa is a marathon rather than a sprint, and companies recognise that the continent presents an attractive long-term proposition. It may not be an obvious time for companies with a high dependency on commodity or energy-related income to consider entering some of the hardest hit African markets for the first time, but companies that have already invested are not running scared. Instead, they are revising their short- to medium-term growth forecasts, working out the best way to navigate current uncertainties, and managing the impact of changing prices and currency devaluation. For example, in Zambia, copper is paid in USD, but as there is so little foreign currency available, there is little choice other than to settle in local currency. This is resulting in some companies becoming ‘long’ in local currency, which brings a range of challenges, not least trapped cash, tax and risk issues. Some companies are completely reworking their dividend strategies and holding off dividend payments, thus changing the working capital position of the local subsidiary.

Equipped for change

Whether a company is seeking to maximise growth or weather the storm, international companies with operations in Africa need an expert banking partner that can share their first-hand knowledge of evolving regulation and government policy, support timely compliance whilst supporting their wider liquidity and risk objectives. Over the past twelve months or so, treasurers’ priorities and demands have changed considerably. Cash management is now a high priority, and we have received an unprecedented number of requests for proposal over the past few months. The questions that treasurers are asking have changed, however. Rather than simply asking whether a bank is present in a country/ countries, they now want to understand the bank’s depth of knowledge of the regulatory environment, and its level of engagement with governments and policy makers. In addition, they need the bank to have the solutions in place to repatriate cash from countries such as Nigeria, Kenya and South Africa wherever it is possible to do so. As a result of the need for depth of coverage and engagement in each country, it is probably not feasible to appoint a single bank for Africa, but it is important to achieve clarity and consistency as far as possible, and appoint a bank that can advise and offer solutions at a pan-African level.

Leveraging rapid digitisation

Another key trend that is taking place in addition to, and in some respects prompted by regulatory change and market volatility, is the growth of digitisation and opportunities to automate financial processes. In the past, digitisation implied primarily a shift from paper-based to system-based processes, and structuring data that could be reported more consistently and systematically. Today, treasurers recognise that digital opportunities extend far further, with the ability to use data to create business intelligence and drive strategic decision-making. Different companies, and different countries, however, are at different stages in the digitisation journey, and in the past, treasurers have had to manage expectations internally about the degree of operational efficiency and visibility over cash that was achievable. Today, this is changing, and at a rapid rate, providing new opportunities to improve the quality and automation of treasury processes and decision-making.

As digitisation opportunities continue to increase, treasurers and finance managers need to make sure they keep abreast of developments

A first priority for treasurers in all industries and all sizes of company, for example, is visibility and control over cash. As a result, we are seeing a huge increase in uptake of our electronic banking solutions, including host-to-host connectivity to automate the flow of information and transactions as far as possible. This is part of a wider movement towards digitisation that is changing the cash management landscape dramatically, from governments and tax authorities through to small businesses and individuals. For example, even three years ago, tax collection was largely a manual and highly bureaucratic process. Today, a large number of tax authorities have worked with banks such as Citi to automate the process and therefore increase tax revenues. As a result companies can now make tax payments directly through CitiDirect. While this may appear a relatively basic capability compared with other regions, it is a significant step forward in aligning financial processes with global best practices, and has been achieved relatively quickly.

A related theme is the growth of mobile and tablet-based banking, not only at a retail level through mobile wallet solutions, but for managing corporate cash. With 4G often quicker and more reliable than Wifi in parts of Africa, mobile and tablet solutions are growing rapidly in popularity. As digitisation opportunities continue to increase, treasurers and finance managers need to make sure they keep abreast of developments, and work with their bank to identify ways to enhance visibility over cash and risk, and automation of financial processes.

A partner for Africa

Alongside digitisation, the movement towards treasury centralisation is emerging more strongly. Many companies are now looking to connect their financial activities into regional or global hubs, whether to support ongoing growth and territorial expansion in Africa, or to achieve cost and operational efficiencies. Foreign multinationals, for example, are establishing treasury hubs or shared service centres (SSCs) in Nigeria, Kenya or South Africa (‘inbound’ business). ‘Emerging market champions’, African companies in industries such as telecoms and mining, are also expanding across the continent (‘outbound’), and are seeking regional cash management solutions to achieve comparable liquidity and risk efficiency to their foreign peers.

Global banks have an important role in supporting the transaction banking requirements of both inbound and outbound corporations, but this is typically part of a broader relationship based on the provision of credit. Treasurers of inbound companies will only appoint an international bank if it provides comparable depth of solutions to local banks, and local finance teams as well as regional treasurers need to be convinced of its credibility. For outbound companies too, cash visibility has become as important a requirement as it is for their foreign peers, and we are seeing a notable increase in the sophistication of RFPs issued by African companies. While these companies remain a little more inclined to working with local banks, this is changing as regional cash management needs grow in importance.[[[PAGE]]]

For both inbound and outbound corporations, the right transaction banking partner can be instrumental in achieving the operational and financial efficiency that treasurers are tasked to achieve. While product innovation and geographic reach remain key characteristics of a partner bank, it has become more important than ever that banks have a firm grasp of fast-changing regulatory conditions, and the expertise to rapidly interpret, advise and flex solutions accordingly. Consequently, Citi’s services have never been in greater demand in Africa to support clients’ local and regional cash management requirements, and connect these into a global strategy. In addition, Citi continues to help clients understand and exploit the potential of digital tools and data to enhance visibility and decision-making, weather uncertainty, and leverage opportunities.