Africa is the second fastest growing region in the world, just behind Asia. Companies are looking to expand there as it shows itself to be a promising environment for business – if they can overcome the challenges. Those challenges, as they translate into the treasury domain, were a hot topic at the event, with regular mention of regulatory pressures and the political uncertainties that many African countries face.
The current economic outlook
The short-term outlook for Africa is quite bleak. Twin deficits weigh on some African currencies, which are at a historic low and are vulnerable to further depreciation. It was suggested by one attendee that there will come a time when Kenya must “bite the bullet” and depreciate. Despite a possible downgrade by Moody’s, financial flows are expected to remain strong, but debt finance will remain a major source of capital.
It was noted that external debt in Africa has tripled since 2006, the vast majority from China. The IMF has identified 20 countries that are in or near debt distress. The concern of what China will do if African countries can’t afford to repay weighed heavily on the attendees’ minds, with Sri Lanka as an example of possible outcomes. In 2017, Sri Lanka handed over the strategic port of Hambantota to China on a 99-year lease to chip away at its US$8bn debt to state-controlled Chinese firms.
Longer-term growth in Africa, though, looks positive. It’s estimated that some countries look set to experience 8%-10% growth in 2020, though it was noted that this will only happen if they continue to tackle corruption and keep on schedule with other reforms. Overall, the outlook for Africa was described as “dynamic but vulnerable”.
Covid-19 in Africa
However, a key topic of discussion was the dangers of the coronavirus on African countries – not just because of struggles with healthcare, but because China is the continent’s main trading partner. With China the worst affected country by the virus, supply chains are being impacted across the globe – and Africa is feeling the strain.
There are 11 African states thought to be most at risk from the virus, especially from a decrease in commodity exports, and it was mentioned by one attendee that many African countries rely on China for over 20% of imports. Indeed, China is Africa’s biggest crude oil importer, and many of the smaller economies, such as Angola, could suffer drastically from a drop in business.
The general consensus
A benchmarking survey was carried out with the attendees, to establish some opinions about the continent. When asked what the main challenges were in Africa, ‘managing trapped cash’ came out on top, with 52% of the vote. Completing the top three was ‘geopolitical risk’ (23%) and ‘lack of automation’ (11%).
Voting on factors to consider when selecting bank partners had ‘footprint and coverage’ receive 59% of the vote, while ‘credit rating’ and ‘support on FX liquidity’ drew with 44% each. The event also held country/region specific roundtables, facilitated by treasurers. Key areas of concern for many were releasing trapped cash and the regulatory hurdles that various countries have.
With plenty of currencies and therefore plenty of currency controls in Africa, it’s easy to see how cash can become trapped. It was listed as the main concern for the South Africa roundtable, and the participants discussed their main challenges and solutions. Moving money out of the country is hard, owing to the strict South African Reserve Bank (SARB) controls. An ideal situation was wistfully discussed, with liberalisation of regulation at the forefront. However, that’s unlikely to happen and so business must find other solutions.
For some, the solution was to just keep growing in the area – reinvesting cash into the business in South Africa, thereby removing the need to release the cash. Another similar option discussed was intra-Africa spending, spreading the costs around the entire continent and not just one country.
One fintech had even considered buying a bank to make it easier – but of course that isn’t an option for everyone and can cause more problems than it solves if there are a particularly high number of regulatory controls for the company. Another solution included saving the trapped cash until the year-end and using it for any dividends – though this is sometimes impossible owing to strict regulation in some countries – whilst one attendee suggested the answer lies in a strong investment strategy.
When overcoming various regulatory challenges in Africa, it was suggested that having strong senior management engagement can help, as can having a locally incorporated legal entity. Other regulations that can heavily impact treasury are those around hedging. Hedging in Africa is notoriously difficult, largely due to the expense of doing so with exotic currencies, but also because of the tight controls put in place by the authorities.
Strong banking relationships were noted as a key success factor when hedging, often acting as a ‘gatekeeper’ to the regulators. The benefits of an international bank versus a local bank was a big discussion point, and it seemed that there was no consensus.
One attendee noted that they use global banks which have a strong local presence, whilst another noted that local, or even regional banks often have a better understanding of and more leverage with regulators.
With some pessimistic short-term outlooks, the hope for treasurers was clear: that the medium to long term holds up significantly better. But, for the moment, the summaries were as follows:
When it comes to South Africa specifically, “It’s not a particularly problematic region, but because it’s such a big part of the overall African economy, it matters.”
When it comes to Africa as a whole, it has “lots of opportunities but not always easy to operate in”.