This issue’s question
“What are the current trends in treasury management in Africa?”
Idrees Kolabhai, Head, Cash Management, Transactional Products & Services and Brendon Bouwer, Head, Liquidity Management, Transactional Products & Services, Standard Bank:
Corporates continue to focus on bolstering their balance sheets, increasingly so with the expectant increases in rates in the US and European markets. At Standard Bank, we have been strong advocates for corporates to better their cash conversion cycle, placing less reliance on term overdrafts and moving towards just-in-time funding to support their working capital lifecycle.
We continue to see consistent themes, but we are also seeing new themes emerging in the African context. Given the often slow and unreliable performance of correspondent banking models, having a single regional banking partner on the continent with a wide geographic footprint and extensive branch infrastructure and local clearing access has become critical.
Internal liquidity management has become a key source of funding, with companies looking to diversify their funding sources. Trapped cash is a reality for many businesses operating in Africa. Restrictive exchange control regimes mean that businesses can’t move money between their various operations easily. This presents challenges for the operation of regional and global treasuries, especially the repatriation of funds to parent companies abroad. While it is legislatively possible to remit funds in many African markets, businesses often have long waiting periods when sourcing foreign exchange in the domestic market.
Cash forecasting remains a concern. As is the case in markets across the world, it is critical for treasurers to have sight of their cash balances in order to optimise their working capital balances and manage their liquidity risk. Given the real-time nature of modern business, treasurers need intra-day liquidity information, enabling the management of cash flows, credit facilities and working capital quickly and responsively across multiple accounts and subsidiaries. Despite the growth of mobile banking in Africa, the continent remains reliant on cash as both a medium of exchange and store of value.
Corporate centralised payment factories and treasury centres have evolved to regional treasury centres with local payment presence. Businesses setting up in Africa can’t simply import the payment structure that they operate in their more developed markets. Instead, they need to understand what will work as a payment system in that particular country or region – and then be guided in terms of operating in these cash-based trading environments. To be effective, the regional treasury centre needs to be located in the region it supports and close to the key business operations in that region. Direct access to regional trade blocs like Southern African Development Community (SADC), West African Monetary Union (WAMU) and East African Community (EAC) provide an invaluable advantage to treasuries located there.
The digitalisation of traditional business channels has brought about unprecedented levels of access, automation and optimisation to corporates and their treasuries. The demand for Africa to be part of the digital revolution is as strong, with treasurers demanding tools and services from African banks to support their own digital journeys.
Geoffrey Gursel, Director – Citi Sub-Saharan Africa Treasury & Trade Solutions Sales and Implementations Head, Citi:
With the downgrade of South Africa, coupled with several bank failures over the past 18 months and wider geopolitical risk through major elections, comprehensive reviews of counterparty exposure limits will continue to be a major trend throughout 2018 in Africa. While there are brighter economic forecasts for core markets like Nigeria and into West Africa, continued close management of FX and commodity risks remain critical, with certain industries managing exposure to oil prices closely.
Centralisation and automation are not entirely new to Africa and will continue via rationalisation of banking partners and accounts, but the physical locations of where to structure centralised payment hubs or SSCs is changing to new locations like Senegal, Côte d’Ivoire and Kenya. Automation is no longer just about cost efficiencies, it is now an enabler to effectively manage liquidity and risks in locations previously not considered.
The increasing number of centralised payment structures in Africa will inevitably evolve in 2018, with XML V3 now a standard and simplification a core objective with treasury teams being asked to do more-with-less. These new emerging treasury hubs, coupled with improved Central Bank policies and 2020/2030 visions, are helping to ensure the corporate sector buys into the economic future of the country – and this ties directly in treasury decisions.
The specific pressures, and therefore risk management priorities of corporates working on the continent, will have to be aligned to the digital adoption of the market as well, of which Nigeria and Kenya are good examples of upgrading their payment infrastructure to true real-time and the working capital efficiencies that organisations can benefit from. How treasurers in Africa adapt and maximise those enhancements that will increase STP and automation will also raise further questions on the understanding and readiness of cyber fraud. What are the ongoing roadblocks to protect the corporation in Africa? What role does your bank need to play in your internal playbook in the event of an attack? These types of questions are becoming more commonplace in Africa as organisations begin to implement contingency planning for specific cyber take-overs.
The continued evolution of the treasurer or treasury in Africa has to keep abreast with the new data-driven analytics that banks can offer now on the continent. Real-time visibility isn’t enough. It is real industry benchmarking, with examples like applied machine learning techniques to analyse clients’ payments data for outliers and enable clients to take action. Managing the associated risks with doing business in Africa will always be on the treasury KPI. But in Africa in 2018, if your bank isn’t being your catalyst for treasury innovation, you need to act on that. And fast.
Andre Olivier, Treasurer – Rest of Africa and Andrew Mills, Group Treasury Manager, Multichoice:
When one refers to or thinks of Africa, it is generally the great unknown of this ‘dark continent’ that causes one to lump it into a single homogenous land (country). The truth of course is that Africa is a continent with a populace of over 1.2bn people living in 54 countries, making it a truly diverse place. African economies are equally diverse. The largest 12 economies make up over 80% of the continent’s GDP.
One of the great inhibitors to free trade and flow of cash in and out of many African states is exchange control – a mechanism which many countries use to manage the value of their currencies. Many central banks also still manage their currencies actively. However, the overdependency on foreign export proceeds, primarily from commodity-based revenue, to fund large import requirements has forced some fiscal and monetary challenges. Nigeria and Egypt are the most recent cases in this regard, with both having shown a positive effect of moving to free-floating or adopting a managed float, although Nigeria continues with a dual exchange rate. Foreign currency liquidity remains a key risk however, with forward cover often acting as a means of securing currency and not only a hedging method – and generally at a steep premium. The availability of effective hedge instruments, particularly in times of illiquidity, also remains a challenge, with treasurers often having to resort to quasi-hedges.
Nevertheless, these reforms have generally been well received from the investor community, resulting in increased foreign portfolio flows and foreign direct investment, enabling greater economic transformation, diversification and growth. Nevertheless, undiversified revenue streams, generally low tax collections and political will to implement budgets effectively continue to hamper structural growth.
Despite this, there are many multi-national companies operating throughout Africa who bring the need for some level of sophistication in treasury management. Given the low GDP per-capita across Africa, many collections-based businesses use relatively low-tech solutions which are often cash-based. These require extensive branch banking networks in order to be close to the customer. The notable exception to this is Kenya, where the electronic wallet – m-Pesa – has flourished and very much revolutionised banking in that country.
For large businesses, there is a trade-off to be had between the use of local banks, which often have very weak credit ratings, if any rating at all, and the use of banks with a strong international reputation who also operate in Africa. The former may indeed offer a wider footprint compared to the latter but with elevated risk, particularly around capital security and visibility.
One of the most basic tenets of treasury management would be concentration of cash – ensuring that your cash can be controlled from a single point to extract maximum returns. Given the exchange controls in many African countries, cash pooling across regions is often not possible, but within countries there are banking solutions that enable cash sweeping across various banks so that cash can be concentrated to a single point. Sweeps can be automated or manual, zero-balance or target-balance, so the system can be as sophisticated as you want it to be. Using SWIFT messaging for payments and balance and transaction reporting is generally feasible but very market and bank dependent. Many still have a very underdeveloped banking infrastructure where simple operation execution may be a challenge, but others like South Africa are mature and conform to international standards. Increasingly though, the influence of international and regional banks and indeed cross-state collaboration, is contributing to the development of the financial sectors in the markets with increasing availability for products and services.
Corporate treasury on the continent has undoubtedly responded to the ‘VUCA environment’ it operates in by being a strategic partner to the executive and helping it navigate the often volatile and unpredictable markets. Leveraging technology to provide valued-add through treasury management systems is no longer considered a nice-to-have but seen as an essential part of treasury’s armour.
From the ‘Africa Rising’ narratives at the turn of the decade to one of ‘Rebalancing’, the now seasoned treasuries across the continent are ready to embrace the next chapter of this exciting frontier, alive with possibilities.
“How can treasury best define the company’s optimal capital structure and what steps can it take to achieve this?”
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