Treasury Today Country Profiles in association with Citi

No silver bullet: managing risk and return in Africa

Paraglider hovering over Cape Town, South Africa

Overcoming the challenges and reaping the rewards when entering a new territory requires knowledge and planning. EuroFinance’s ‘Effective Finance & Treasury in Africa’ event last week gave some valuable insights. Treasury Today offers a taster.

Rising national debt levels, a roller-coaster ride on the commodities markets, higher costs for international capital, trapped cash, expensive hedging, political uncertainty, regulatory divergence; it all adds up to a perceived level of risk that makes entering Africa, for many corporates, seem like a roll of a dice. And many do not take the risk.

For corporate speakers at EuroFinance’s ‘Effective Finance & Treasury in Africa’, the risks are real enough, all having first-hand experience of managing local operations, although, as one delegate reported, treasurers can’t fully mitigate risk in Africa, they must manage it. This requires a fully proactive approach and the right partners on the ground. If successful, trade in Africa can provide significant opportunities for corporate growth.

A ready market

Perhaps surprisingly, five of the ten fastest growing economies in the world are from Africa: Ethiopia, Guinea, Ghana, Libya and Ivory Coast. Furthermore, countries such as Zimbabwe, Angola and South Africa have all recently seen political transitions that could mark new beginnings. The Continental Free Trade Area (CFTA), which is currently being negotiated as part of the African Union’s Agenda 2063, demonstrates a willingness to progress and, all being well, will present to the world a unified market of 1.2bn people.

According to McKinsey, today’s African consumer- and business-spend has reached a total of around US$4trn. This is expected to grow to over US$5.5trn by 2025. And demographically, Africa is in a position to flourish. It has the world’s youngest working population and is set to have a workforce larger than that of China or India by 2035.

Of course, China’s connection with Africa is well known. It has been investing here, notably in infrastructure projects, for many years, demonstrating long-term commitment to the continent. With its massive Belt and Road trade route initiative reaching into parts of Africa, it is clearly mindful of opportunities beyond commodities trade and is now keen to plant industrial production in the region.

China is also cognisant of the massive youth demographic of Africa and has an eye on consumer expansion here. Although Kenya is a key focus as part of the planned maritime road project (with East Africa likely to be a major beneficiary), more African governments must now work towards forming an enabling environment for projects such as Belt and Road to be of wider benefit.

However, with all the work to do, it should not be forgotten that parts of the continent’s banking system have already shown the world how mobile banking can drive success (Kenya and Tanzania’s M-Pesa is the archetype), driven by a tech-hungry populace. Unencumbered by legacy technology issues that plague many more established markets, there is now an opportunity to take advantage of the many more banked individuals that digitisation has enabled, with financial sector innovation helping to drive consumer and corporate market growth.

Early involvement

The barriers to success for all stakeholders are not insignificant. The lack of any real standardisation of financial service or product offerings across the continent makes the task harder.

It is therefore preferable if treasurers are involved at the early stages of preparation for corporate entry into Africa. This ensures a real-world view can help not only place hard numbers on the plan but also help devise a strategy for handling the almost inevitable currency convertibility and transferability issues, manual processes and other risks.

In essence, treasurers have to be proactive in their response to risk management. Leveraging technology can help to gain wider visibility of cash positions. This can be achieved through centralisation, at least in continental regional clusters which are perhaps defined by ‘ease of doing business’.

Where cash is trapped, the normal standby of dividend pay outs can be very expensive; invoicing as much as possible in hard currency and settling offshore where possible is a good idea. If not possible, then finding a way to make local cash work harder is vital.

It can be beneficial to steer corporate processes to work in tandem with established trade infrastructures, such as the Economic and Monetary Community of Central Africa (CEMAC), East African Cross-Border Payment System (EAPS), West African Economic and Monetary Union (WAEMU) and the Southern African Development Community (SADC). Deploying shared services centres or regional treasury centres around these, and honing treasury policy with sufficient flexibility to recognise the increased risk and the benefits of on-the-ground decision-making, is also helpful.

Being agile

There is no one-size-fits all or ‘silver bullet’ solution for Africa. The key to success lies in deciding which parts of the business require agile decisioning and then making provision for this. To do this, it may be necessary to first streamline other country operations – and maybe centralise if it adds value to the rest of the business. This will allow treasury time to focus on the more challenging aspects of African trade.

From here it will be a steep learning curve. Given the pace of change in many African nations, particularly around regulation and politics, it is important to remember that even recent past experiences may no longer be relevant. For this reason, it is vital to keep an ear to the ground for change. Here is a genuine case where a trusted banking partner with a substantial footprint in the region will be a major advantage.

The corporate perspective

Next week, we will hear from the treasury team at MultiChoice about how they manage treasury operations across multiple African markets.