Treasury Today Country Profiles in association with Citi

Treasury in emerging markets: focus on Africa

Two rhinos head to head

Africa is a continent on the move. In a world where significant growth is a rarity, Africa represents real tangible opportunities for large multinational corporates. But there are also challenges treasurers must face.

Perception and reality often diverge when it comes to Africa. The continent as a whole is often seen by outsiders as backward, inefficient and rife with corruption. But this picture is simplistic at best and misleading at worst. Africa, comprising 54 sovereign states, is home to a wide variety of business regimes and opportunities.

The shift to regional

Recent economic growth in Africa is surprisingly sturdy. Excluding continental heavyweights like South Africa, Kenya and Nigeria, average economic growth fell to 4.6% in 2009 before quickly rising to 5% in 2011. Regional hubs have developed in tandem with economic growth. It is simply no longer a case of ‘South Africa: ahead of the rest’. Times have changed. “Corporates now looking at Africa will often view the continent in terms of three regions,” says Andrew Daley, Managing Director of Corporate Banking Coverage and Corporate and Investment Banking at Standard Bank. These are southern Africa, east Africa and west Africa.

Of course, South Africa remains the top destination for business. It has a relatively advanced banking system, efficient exchange control environment and a high degree of domestic currency liquidity. But east Africa is not far behind. Underpinned by the economy of Kenya it has emerged as a treasury hub in its own right. Indeed, corporates are beginning to eschew southern Africa for other regions when it comes to setting up African head offices. General Electric, for example, moved its Africa head office from Dubai to Nairobi; and Coca Cola and Google have also based their operations in Kenya’s capital.

Furthermore, the revival of the East African Community – a regional intergovernmental organisation comprising of Kenya, Uganda, and Tanzania among others – hints at a future where regionally co-ordinated policy could take precedence over national. A common external tariff is already set in place with duty-free trade existing between member countries, for example. Future plans to establish a common monetary unit are ambitious, but nevertheless are indicative of a region growing in optimism.

West Africa is also emerging as an economic region. Thanks to its oil exports, Nigeria is set to overtake South Africa as the continent’s largest economy in the next five to ten years. And neighbouring countries look to gain on the back of strong cross-border trade flows.

“The treasury landscape has improved a lot as Africa has become more important to the rest of the world due to its mineral resources,” says Rudi Jordaan, Group Treasurer at Gold Fields, one of the world’s largest precious metals mining companies. “Similarly many African countries have become more open, democratic and market friendly, which means they are seeking to attract foreign investment and are making life a lot easier for investors.”

And with economic growth comes technology. The arrival of electronic payments and mobile technology, for example, has been transformational in Africa. Payments in the cloud not only allow the treasurer to ‘circumvent’ Africa’s poor infrastructure, but also change the structure of transaction cost substantially. For a continent that has long been dependent on physical cash flows, the emergence of electronic payments has led to large gains in cash traceability, immediacy of notification and information visibility.

But the real potential occurs when these developments fuse with the entrepreneurial spirit ingrained in African society. The continent may not be synonymous with business friendliness, but faced with economic hardship, Africans of all ages are forced to make ends meet – and often do so in innovative ways. The lack of widespread competition also means that higher margins are available for corporates that are willing to set up shop in Africa.

These are all advantages that astute corporates can leverage. But the African continent also suffers from a troubled past. There exists a wide range of challenges that the treasurer must take into account.

What to expect

Corporate treasurers have to deal with three main obstacles, according to Ireti Ogbu, Head of Cash Management for Africa at Citi. “The first barrier is political,” says Ogbu. “It is difficult to think of Africa without thinking of the political challenges.” Whether it is the Arab Spring in north Africa, or the troubles in Ivory Coast – or even the oil subsidies strikes in Nigeria – managing cash effectively is made even more difficult by political unrest.

Regulatory difficulties constitute the second obstacle. When it comes to regulation, Africa is a patchwork quilt. “We are dealing with highly regulated markets from a banking and exchange control perspective,” notes Ogbu. “From the perspective of Western treasurers there is a whole range of regulatory challenges that must be taken into consideration.” These restrictions could range from the widespread illegality of cross-border notional pooling to on-the-ground difficulties such as obtaining work permits for employees of certain nationalities.

This presents an immediate challenge to any corporate that wishes to set up and co-ordinate business operations effectively over a multitude of regulatory environments. Legal systems differ across Africa. This is partly due to various colonial histories and the trajectory each country took after independence swept across the continent in the 1960s. “West Africa, for example, has the benefits of a very clear history of English based law,” notes Daley of Standard Bank. But what is illegal in Nigeria, for example, may be common practice elsewhere, and vice versa.

Take cross-border notional cash pooling for example. “The underlying exchange control regulation in most countries in Africa is that goods and services have to accompany foreign exchange, this as a premise is at odds with notional pooling,” says Ade Ayeyemi, Head of Citi’s Global Transaction Services for Africa. “Notional pooling is a liquidity management solution that seeks to concentrate funds for maximising interest returns. This is just one example of the divergence between a lot of regulations and what treasurers want to achieve from a liquidity management perspective.” Some countries, such as Kenya and Botswana, are far less stringent about notional pooling than Nigeria, which maintains strict controls.

“We conduct our cash management activities with a centralised philosophy,” says Brian Howard, Group Treasurer at Dimension Data, a global information technology company with its headquarters based in Johannesburg. “That is, where geographies allow, cash pooling arrangements exist with global, regional and country banking partners. The group uses notional pools to centralise cash where possible; the reason being that this is the most economical structure for the Dimension Data entity to participate in.”

South Africa, for its part, thrives on its reputation as a business-friendly environment. “Although southern Africa still has exchange control regulations in place these have a very limited impact on business,” says Jordaan. “For example, there is no limitation as to the amount that a South African corporate can invest into one of the Southern African Development Community countries, though it does require SA Reserve Bank notification. While almost all African countries have exchange controls in place, South Africa has a very tradable currency, the rand, which is accepted in most countries unlike many other African currencies.”

Corporates looking to establish operations on the continent must therefore be aware of local regulations, both on a theoretical and practical level. This is particularly the case when it comes to investing capital, setting up companies and securing the various approvals that are required for business. But while such advice may work well on a national level, operating in several countries is a different story.

“We have had a number of clients who have come to us to say that they are having difficulty operating in many countries across Africa,” says Daley of Standard Bank. “And because these corporates have three or four different bank relationships in each country, they can easily run 40 to 50 different bank relationships. That is clearly inefficient.” A local banking partner with extensive reach on the ground is therefore advisable.

Infrastructure deficit

The third barrier that corporate treasurers must contend with is that of infrastructure, says Ogbu. “There is an ‘infrastructure deficit’ in Africa in terms of banking channels, electronic communication and distribution of goods and services.” Africa’s legacy of colonial mismanagement and poor post-war governments has left a mountain of debt with little fiscal room for large spending programmes. This has had an adverse effect on the infrastructural landscape. But a transition has started to occur. The past decade has seen strong foreign direct investment from the West. And FDI from China is now making large inroads. Sino-African trade has multiplied by a factor of 12 in the last ten years – amounting to $120 billion in 2011.

But the emergence of electronic payments and mobile technology has changed the dynamics of the infrastructural landscape. “In Africa there are many countries which are still focused around cash. But this is starting to change,” says Daley. “Take Nigeria for example. There has been a great push from the government in Abuja to reduce the amount of cash in circulation and turn physical cash into electronic cash. This has a significant upside, because if you see the transactions moving then they can be taxed, which obviously has great benefit for the wider economy in Nigeria.”

These advantages also stem to the corporate treasurer. Moving a physical cash flow into one that is electronic is bound to have significant visibility, efficiency and capital advantages. Changes to the cost of payments are also dramatic. The transition to an electronic format reduces associated physical costs such as counting, cleaning, transporting and security.

Given the prevalence of mobile phone technology on the continent, mobile banking is widespread. Indeed, the majority of African citizens can only access the internet via their mobile phone. Transaction costs are reduced dramatically when mobile phones are used for payment exchanges. One example is M-Pesa, a mobile payments transfer system based in east Africa. First launched in 2007, its membership ballooned to over 6m users by mid-2009. It is an example of technology adapted to the specifics on-the-ground in Africa, albeit in the retail space.

But other obstacles exist as well. Liquidity in many African markets, for example, is quite variable and dependent on a number of factors. Access to foreign currency can be quite seasonal – a consequence of reliance on cash crops as main exports. Furthermore, language can also be. “Mozambique and Angola are both Portuguese-speaking,” says Daley. “These countries can be a great challenge for corporates that have really only been working in the English-speaking world.”

Many foreign companies look at Africa from the perspective of where the best infrastructure and skills are located, according to Ogbu. “As treasuries become more centralised, they are looking for centres of excellence and have to depend on local staff and infrastructure.” This drive for centralisation has also led to the advent of shared service centres (SSCs). As a result, once disparate financial processes like general accounting, disbursements, collections and asset management have now become increasingly standardised operations across countries. Foreign companies moving into the Africa market therefore often favour banks that have both the geographic presence and the capacity to treat a client as a single entity and not on a country-by-country basis.

The next phase of growth

Corporates that wish to operate in Africa must find the ideal balance of attaining a workforce that is as well-equipped to deal with an increasingly globalised world as it is with local issues. But with a decade of foreign direct investment and consequent economic growth, this workforce is starting to appear. The past ten years have seen a dramatic increase in the middle-class and the size of individual economies. Africans who have studied abroad are starting to return home in large numbers. Their skills are now in demand.

This trend is propelling the next phase of growth: intra-African trade. No longer as dependent on trade with Europe and America, trade within Africa is beginning to take off as economies continue to develop. Take Nigeria for example. The country has historically exported oil while importing secondary products from western Europe or Asia. But as its economy becomes more self-sufficient it is expected to become less dependent on foreign-produced goods and services.

The developed world is no longer the importer it once was either. Instead Western governments and private households are deleveraging. As a result African economies are turning elsewhere, particularly to the East. The rise of emerging markets, particularly the BRICS economies – of which South Africa is a member – signals a shift in global spending patterns. The emergence of a ‘Southern Silk Road’ – intra-regional trade and capital flows between Africa, Latin America and Asia – could further wean Africa’s dependence from the West.


In recent years African governments have deregulated their markets and are competing for foreign investment. While the banking sector is not as advanced as in developed markets, there have been some strong improvements. But significant challenges remain. Africa still suffers from political risk, regulatory barriers and an infrastructure deficit. The emergence of electronic payments and mobile technology, however, has helped governments and corporates alike to adapt to this difficult landscape. And as Africa becomes more regional based, treasurers will no doubt continue their drive towards centralisation. Africa is a continent on the move.