Corporates doing more business in Africa are increasingly looking to centralise treasury operations. Here we look at the various locations where it’s best to do this and how liquidity can be managed across this vast continent.
In recent years, the corporate world has intensified its focus on the growth opportunities offered by the African continent. This is highlighted by the fact that foreign direct investment into Africa reached $60bn in 2014 – five times its 2,000 level – according to the World Bank’s 2015 Doing Business report.
But whilst Africa presents opportunities for multinational businesses, its complex and highly fragmented markets also present unique challenges for treasurers. As a result, treasurers of companies investing heavily in Africa are now looking to upgrade and improve their treasury management activities on the continent. To this end, many are considering establishing a regional treasury centre (RTC).
Reasons for centralising
The vogue for setting up RTCs in Africa is fairly new as, to date, the majority of multinationals operating on the continent have been able to successfully manage their regional treasury operations from head office, or a regional hub in Asia, Europe or the Middle East, assisted by on-the-ground finance managers in the market.
But, with the increased volumes of business now being done on the continent, and many African markets being regarded as some of the most challenging to operate in, this is becoming a more challenging task.
We have already seen how RTCs have benefited corporates in another notoriously diverse region, the Asia Pacific (APAC). For the most part, the benefits RTCs have afforded in Asia also translate to the Africa continent. By being close to the market, treasury is better able to manage currency positions, protect the balance sheet and manage the complexity brought on due to restrictions on intercompany lending and capital controls in place in many of the markets.
The Singapore of Africa?
When building an RTC – in any region – there are a number of considerations that will determine the choice of location. These include: the regulatory environment, cost base, infrastructure, availability of resources, financial markets, banking landscape, fiscal benefits and the social and business environment. In Africa this is no different. But due to the complexity of the region, it is even more vital to get right.
Similar to Asia, there are a few stand-out locations for corporates. Interestingly, one popular choice is outside the continent: the Middle East (Dubai). South Africa, the region’s second largest market and a big profit centre, also provides an option for many multinationals. The other increasingly popular contender is Mauritius.
“Mauritius is based in a strategic positon between Asia and Africa and has many of the aspects that corporates are looking for when establishing a treasury centre,” says Mathieu Mandeng, CEO, Standard Chartered Mauritius. These include:
Easy access to the financial markets.
Well-developed financial sector.
Ease of doing business.
The free flow of capital.
Stable regulatory environment.
Stable political environment.
Talented and bilingual workforce.
Access to professional services.
Quality of life.
Although it can be said that both South Africa and Dubai also offer these benefits, Mandeng argues that Mauritius holds the advantage for key reasons. “Dubai and South Africa each have their own merits and advantages as Regional Treasury Centres, as does Mauritius,” he says “Both countries complement each other in terms of advantages to investors. At the end of the day, it remains the client’s choice as to which jurisdiction meets the specific needs of his business.” Mauritius remains a popular choice for RTCs, given the local government’s commitment to securing Mauritius as a globally recognised International Financial Centre.
Dubai, on the other hand, has a much more liberal regulatory regime, but doesn’t have the same number of economic agreements with Africa as does Mauritius.
“These factors make Mauritius, in my view, the optimal country in which to establish a RTC in Africa,” adds Mandeng. “And as a result of the benefits we see about 20% of our clients already operating an RTC out of the country, and this is a growing number.”
Best practice liquidity management in Africa
Of course, the overall purpose of any RTC is to ensure that treasury is managing its cash and risk in the most prudent fashion. “Corporates that we work with have been fairly successful in meeting their centralisation objectives in Africa from Mauritius, but it has not always been easy,” says Youvraj Madhub, Head Transaction Banking Designate and Head of Corporate Sales, at Standard Chartered Mauritius. “The regulatory framework is not easy to navigate, as previously discussed, and this means that there are challenges along the way.”
Madhub says that, where possible, corporates are looking to create a pan-African liquidity structure and sweep their cash back into a concentration account in Mauritius – this can then be connected to a global liquidity structure. However, at present this can only be done (easily) from Botswana, Kenya, Uganda and Zambia – the low to moderately regulated countries in the region.
Trapped cash therefore is an issue on the continent. In cases where cash cannot be swept back, corporates instead opt to use interest optimisation to maximise their return on cash and ensure they have full visibility over their cash balances. Again, for Madhub, the advantages of a regional treasurer being based in the market provides the expertise and flexibility to be able to manage this issue effectively.
A centralised future
For both Mandeng and Madhub, the future of treasury in Africa will be continuing centralisation. Mauritius will most probably be at the heart of this. “Mauritius isn’t standing still and has many initiatives under way to ensure the country remains the location of choice for businesses looking to springboard into Africa,” says Mandeng.
These include the banking industry working with the central bank to further develop the banking ecosystem and the overall financial services infrastructure. The government has also recently created the Ministry of Financial Services which works to ensure that the country’s financial system has good governance and continues to meet international standards moving forward.
“All these moves look to consolidate Mauritius as an emerging international financial centre of repute, excellence and substance and a regional treasury hub of choice,” concludes Mandeng.
Read more about treasury management in Africa in the upcoming edition of Treasury Today.