Talk to any multinational doing business in Africa, and the chances are they’ll say managing cash and initiating payments across 50 countries and 40 currencies is the biggest challenge. In a landscape characterised by FX and local currency controls, dwindling hard currency inflows and a raft of costs and inefficiencies, they must navigate a new level of complexity to achieve working capital optimisation.

Staying on top of complex regulation is one of the biggest challenges, explains Marion Reuter, Standard Chartered’s Regional Head of Transaction Banking Sales, UK/Europe, who says Africa is a key region for many of the bank’s clients. Regulation includes currency controls which often make it difficult to open non-resident bank accounts for a European entity or move funds out of a country – and includes countries where doing business is seemingly easier than others like South Africa. “It’s very difficult staying on track with all the regulation. At Standard Chartered we stay close to regulators and have people in country,” she says.

Many countries also have country-specific currency controls, continues Desiree Pires, Head of Corporate Sales, Markets also in Europe. Issued by central banks, they aim to regulate capital flows to help countries navigate FX shortages. Controls can take a number of forms and could include central bank approvals for any cross-border flows or additional documentation and restrictions on some types of transaction.

“This can have consequences on a company’s ability to access cash in country. For example, it might not be able to repatriate funds and make payments for goods or services cross-border,” adds Reuter. It can also consume huge amounts of time and effort in terms of understanding, keeping on top of developments, and general risk management.

The process is also complicated by a lack of transparency which makes it difficult for companies to see how much liquidity they actually have as this is across different banks. “They want to get funds out, but they don’t know where to start,” she says.

Solutions

One of the biggest risks of trapped cash comes from significant depreciation in the local currency. Any devaluation will erode the value of the cash that might be trapped in country, but it is possible for corporates to hedge this risk.

Traditional FX hedging solutions are not available in all countries because many lack a liquid forward market. However, non-deliverable forwards are being offered by banks in an increasing number of currencies and could be used to hedge an exposure. Pires and Reuter are also seeing a growing FX options market in some emerging market countries, including Africa. In certain cases, these may be an attractive solution from a cost perspective when compared against the cost of rolling forwards, especially given the potential for significant currency moves in these markets.

Corporates also have other options away from traditional hedging. Longer-term, companies could consider agreements with suppliers or customers requesting payment in chosen currencies that reduce the risk of trapped cash, or can be used to offset and reduce net exposures, suggests Pires. MNCs can also navigate the problem by keeping funds in a stable currency. But this is complicated by restrictions on opening non-resident accounts.

The role of local banks

Working with local banks can also help. A mix of local and international banks can support MNCs sourcing additional pools of liquidity in certain markets, although it does depend on the underlying requirement. For example, whilst more than one bank may help with FX liquidity, multiple local banks from a cash management could result in process inefficiencies and increased operational risks.

Partnering with different banks involves bringing different account statements into one system and there will be local banks that are not on Swift. “They can’t send structured MT940 messages which makes it difficult for treasury systems to pick up the information in an automated way,” says Reuter.

This means that even though technology like ERPs support corporates doing business in the region, sometimes it doesn’t.

Still there are digital solutions. For example, it’s possible to automate cross-border currency payments that reduce the administrative burden for treasury and avoids having multiple currency accounts, especially for minor currencies. “Africa is increasingly becoming more advanced on the tech side, and this should be on peoples’ radar,” says Pires.

Another trend they see is that companies are setting up regional treasury centres to manage Africa more regionally where also the Middle East and especially Dubai are upcoming locations. This works well in combination with a team on the ground.

“From a FX perspective the combination of a centralised and devolved treasury function works well,” explains Pires. The local team play an important role meeting documentation and central bank requirements that require people on the ground with an oversight of the local market. The centralised team based in the Middle East can then take decisions on the materiality of the different risks in the context of the group as a whole, leveraging group wide relationships. “It’s not a question of one versus the other, but of them both being closely aligned,” she says.

Dubai is close enough for people to travel back and forth to Africa and has the talent, concludes Reuter. “In the past, most MNC’s based themselves out of South Africa but now we see more out of the Middle East, especially Dubai which has become a hub for regional treasury centres that manage Africa.”