Trade in Africa has long been touted as the big corporate opportunity. But what does it take to be successful in a diverse continent? In this two-part Insight, we look at the challenges and solutions treasurers need to address.
For such a vast area, trade in Africa to date has been relatively simple to define. For most of its 54 countries, says Thabo Makoko, Head of Transactional Services, Absa, it has been a mix of importing finished goods and exporting agricultural and mining commodities. But this is a picture that is beginning to morph into something more complex and beneficial for all parties.
Whilst the current import/export balance continues, nations such as Ghana, Kenya, South Africa, Mozambique and Uganda, and many others, are by varying degrees, developing their manufacturing capacities and starting to export finished and semi-finished goods, he notes. There is a notable upswing in the importation of big-ticket goods such as cars, along with clothing, electrical goods and ‘aspirational’ consumables too.
A treasurer from outside the region wanting to understand and appreciate the continent, needs to grasp two key facts, says Makoko. Firstly, Africa has a population of 1.3bn, rising at around 32m annually. Secondly, the countries that define the continent have between them a widely differing mix of cultures, currencies and regulations, each characterised by varying degrees of economic nationalism and liberalism.
One of the main observations is that although just 30% of the adult population is banked, a large proportion of the remainder is still economically very active. The reason is simple: the direct and indirect costs of banking are a significant negative for many in environments where infrastructure necessary to enable access to regular banking is under-developed (access to roads, power, internet). All of these challenges may drive up the total cost of banking and this is a problem for business.
Treasurers with interests in Africa will be part of an organisation that is either trying to sell or buy something, or, for humanitarian concerns such as the UN, distribute money. With so little of the population banked, there is an immediate challenge in reaching people.
Another (seemingly contradictory) issue is the proliferation of banks in many countries (Kenya has 40+, Nigeria 18+, Ghana 10+) where the value propositions differ greatly. With some domestic players focusing solely on certain regions, rather than delivering a nationwide service, if a business wants to reach a particular part of that country, it will have to work with the dominant bank in that region. The first treasury challenge is therefore being forced into multiple banking relationships just to execute the business basics.
However, the impact of the African trade environment is felt fourfold by treasurers, notes Makoko. Firstly, most will almost certainly face liquidity challenges; visibility of cash can be difficult, especially with multiple banks to work with.
Secondly, the dynamic nature of regulation is hard to keep up with. The authorities can issue circulars on a regular basis, seemingly moving the goalposts and at times reversing previously communicated decisions. “For a treasurer sitting in Europe or the US, it seems uncoordinated; it can certainly be difficult to pick up regulatory trends across multiple countries,” warns Makoko.
Of course, a foreign business seeking to invest in the continent needs to know upfront how to extract value from its overseas activities – by repatriating funds or paying dividends, for example. But with such regulatory ‘dynamism’ across the board, he advises all to “stay close to the regulators”, making a point of understanding the “ever-changing framework” in which they operate. “If you don’t, you can quickly find yourself in trouble.”
Although it is part of doing business here, and what all successful businesses understand, many companies underestimate the cost of compliance. “It is vital not just to build appropriate relationships but also to appear to be highly transparent and compliant,” says Makoko. “It is critical to engage with regulators and help them to understand what it is you are trying to achieve but also make sure everything is documented fully.”
A third issue is the lack of systemic integration between countries. Sending funds from Burundi to Gabon, for example, is surprisingly complex. Money may have to leave Africa and be channelled through a European partner bank before reaching its beneficiary. In this example, frustration can arise because correspondent banking relationships between some countries simply do not exist. It’s tempting to judge but, Makoko adds, “there is history and context to this”.
The model where international companies have come into the continent to buy raw materials, extracted it, produced their goods and imported back a finished product, has created relationships where African countries are urged to look outwards, he explains.
Chocolate trade is case in point. Many African countries do not produce cocoa but Ghana does. Ghana sells raw cocoa to European companies, that import the finished product to African countries, yet Ghana has also started producing finished products which are not sold in other African countries. African countries could buy cocoa or the complete product from Ghana, but existing trade structures prevail, and the banking systems reflect this. “This is starting to change,” says Makoko. “For example South African, Egyptian and Nigerian companies have been investing in different parts of the continent – and that trend is spreading.”
The driver for this change is the rise of entrepreneurship, he believes. Spotting a neighbouring market and responding to it makes economic sense over and above reaching out to far flung opportunities. It’s often easier to build intra-Africa relationships, and this is resulting in increasing volumes of intra-Africa commercial travel.
Technology is a major facilitator too. The launch in 2004 of the Central Bank of West African (BCEOA) real-time gross settlement system (RTGS) removed the need for complex correspondent banking relationships, contributing to the integration of the economies of BCEAO member states.
The East African Cross Border Payment System (EAPS) went live in 2013 doing the same for its members. The same year, the Southern African Development Community (SADC) rolled out in four countries with the Integrated Regional Electronic Settlement System (SIRESS) and today, some 40% of all Southern regional payments traverse this platform.
These platforms are having some effect. Markets such as Botswana and South Africa are becoming strong trade partners, notes Makoko. But still there are huge opportunities for the taking. The development of Intra-Africa trade and changing the culture embedded by historical precedent will require neighbouring countries to trust each other in delivering quality products on time and at a competitive price.
It hasn’t helped that the various RTGS in Africa are not currently interoperable. However, this may be about to change. The Common Market for Eastern and Southern Africa (COMESA) is a free trade area with 21 member states. It has been operative since 1994 and is now talking about the creation of an “open trade hub”. It’s a mammoth project, and whilst Makoko estimates that it’s only about 20% there, “the conversation is clearly in the right place”.
In the final part next week we look at some of the solutions that can help businesses and treasurers successfully navigate trade in Africa.