Regional Focus

Sub-Saharan Africa: regional insight

Published: Nov 2016

With increasing levels of investment in Sub-Sharan Africa, many treasurers here in Asia Pacific are now having to deal with the nuances and local market realities that are present in this part of world. Here, we take a detailed look at these are and what constitutes best practice in Sub-Saharan Africa.

The rapid growth of countries in Sub-Saharan Africa (SSA) has been one of the global economy’s success stories over recent years. Two-thirds of the region’s countries boast more than ten years of sustained growth, whilst a quarter have enjoyed more than 20 years of continual GDP growth – and this looks set to continue.

Real growth in SSA countries was forecast by the IMF to be above 4% in 2015, a faster pace than all other developing regions – except China. That pace of growth is below the 4.4% annual average growth rate of the past two decades, though. But, unlike previous resource-dependent booms, growth is now more diversified. The rapidly expanding middle class and its increased spending, for instance, have made SSA appealing to consumer goods firms. Between 2005 and 2015, consumer spending grew at nearly three times the rate of average SSA GDP growth.

Also, over the past decade or so, SSA has experienced a marked shift in trade flows from traditional partners (predominately in Europe, North America and the Middle East) to faster growing Asian countries. China is now Africa’s largest trade partner, representing about a quarter of SSA’s trade from just 2.3% in the 1980s.

Market realities

That said, it has been argued that macroeconomic indicators are insufficient at capturing the reality in each market – especially when it comes to industry-specific data. Perception and reality often diverge when it comes to Africa. In a Harvard Business Review article, for instance, it was suggested that whilst Angola’s market size and spending potential look good on paper, operating there may be very challenging without prior experience.

Akin to the region’s physical landscape, the markets of SSA vary greatly from country to country. Corporates could be unaware of which of the countries retain the greatest prospects for their business and whilst they offer great potential, failure to understand the nuances will cause problems for corporates.

Therefore, according to Patrick Gutmann, Group Head, Transaction Services Group for Ecobank, “having access to local knowledge is an important aspect of creating efficiency in the treasury environment.” He adds that in as far as regulation and business practices in SSA are concerned, not everything can be found online. By appreciating eyes, ears and relationships on the ground are necessary to circumnavigate the challenges and opportunities, corporates can hope to combine available data with knowledge of the operating environment in each market.

Hit the ground running

Firstly, it is worth noting that action is underway already. The value of merger and acquisitions (M&As) targeting SSA companies reached a record $41.4bn in 2015, the lion share of which (86%) went into South Africa. Nigeria, Kenya and Angola also attracted billions of dollars of M&A investments into energy and power sectors. Indeed, countries are attracting investor attention as the continent’s natural resource sector further develops. Additionally, the Global Competitiveness Index (GCI) identified numerous SSA countries – including Mauritius, South Africa, Rwanda, Botswana, Namibia, Kenya and Seychelles – as having scores comparable to the averages set by other emerging regions. Increased infrastructure spending has been supporting the countries in lowering operating costs – highly encouraging for commodity exporters, for instance.

It would be wrong to ignore the challenges, however. Barriers to economic development include:

  • The lack of job creation in line with development.
  • Poor infrastructure, especially electricity and transport.
  • Limited supply of skilled labour.
  • Socio-political challenges.

Headwinds also come in the form of plummeting commodity prices and volatility globally. What’s more, the increased participation of low-cost emerging and developing countries in global trade, combined with the fall in commodity prices, has accentuated the need to prioritise competitiveness-enhancing reforms.

Concerns in specific countries include the South African Central Bank’s defence of the rand, which is reducing the availability of hard currency in the country, subduing growth potential. In fact, local African currencies across the continent have been fluctuating against the dollar recently, causing many a corporate headache (chart 1). “Treasury departments need to have the skills to deal with currency volatility,” says Artemis Galatis, General Manager, ACTSA (Association of Corporate Treasurers of Southern Africa). “The peaks and troughs can be far greater in emerging currencies than in sterling or USD.”

Chart 1: African local currency fluctuation against the USD

Jan 2015 to date

Chart 1: African local currency fluctuation against the USD

Source: Standard Chartered Research

As a result of some of these challenges, author of the aptly named ‘Africa: rich but poor’, Joseph Amamoo, laments the fact that Africa has an abundance of resources which remain unexploited. “You get situations in villages where there may be diamonds in the ground but the people, with limited education, do not know they’re there. Even if they did, they don’t know how to mine them, nor do they have the machinery to do so,” he says. “You need foreign investors to help in a joint effort to exploit these resources for the benefit of both sides.” Amamoo clarifies, however, that corporates cannot expect conditions to be the same as in developed countries. Power outages and untreated water, for instance, are common across SSA.

Nonetheless, there are strengths – a burgeoning and young labour force which is expected to increase dramatically just as the rest of the world starts ageing, for instance. Additionally, as Amamoo highlighted, there are untapped resources. For example, the agricultural sector represents an opportunity for growth: the region holds more than 60% of arable land globally yet only 15% is under cultivation. In a recent Citi Online Academy webinar, titled ‘Getting a Grip on Africa’, Peter Crawley, Managing Director, Treasury & Trade Solutions Head, Sub-Saharan Africa at Citi estimated that in terms of global resources, SSA holds around 18% of gold, 42% of diamonds, 65% of cobalt reserves, 95% of platinum, 8% of natural gas and vast amounts of oil.

Leapfrogging old technologies

In terms of adapting to local variances, treasury expertise has developed in accordance with different needs, which are perhaps uniquely prominent in the region; for example, when dealing with buyers and distributors that operate largely in cash. “The prevalence of physical cash is a challenge that corporates who embark on a journey on the continent will have to handle effectively,” says Gutmann.

Mobile has emerged as a solution to this challenge. It is well known that Africa leads the way when it comes to mobile money accounts – only 34% of adults in SSA had a bank account in 2014, but 12% have a mobile money account, according to the World Bank’s Financial Inclusion Database. “Because mobile banking has taken hold in many countries, there is a natural infrastructure from which to create less of a cash-based payment environment – and to eliminate the inefficiencies associated with handling cash,” says Gutmann. “Corporates can now leverage mobile infrastructure both in terms of making payments out into areas that otherwise might not be reached and accepting funds through a mobile wallet.”

Indeed, the arrival of electronic payments and mobile technology has been transformational in Africa, allowing the treasurer to ‘circumvent’ Africa’s poor infrastructure without being hamstrung by legacy technologies. For a continent that has long been dependent on physical cash flows, increasing digitisation has led to large gains in cash traceability, immediacy of notification and information visibility. Citi, for instance, has seen a 29% increase in host-to-host connectivity since 2012, with 20% of those clients using XML file format. This is supported by increased sophistication in the back end clearing of central banks. Nigeria, where advances in payments infrastructure has resulted in widespread uptake of NIBSS Instant Payments, was highlighted as an example in the webinar by Geoffrey Gursel, Director, Treasury & Trade Solutions Sales Head, Sub-Saharan Africa at Citi.

What is less known perhaps is that Africa could leapfrog into a new era of power generation, responding to climate change related hazards prominent in the region, resolving some internal issues (such as power outages) and providing a competitive edge. The Africa Progress Report 2015 presents the case that “utility reform, new technologies and new business models could be as transformative in energy as the mobile phone has been in telecommunications”, as demand for modern energy is set to surge. In particular, renewable energy – including solar, geothermal and wind power – is making some remarkable advances in Africa, the report notes.

Banking landscape

However, sustainable power will not be the panacea to Africa’s struggles. The banking sector plays a huge part in ensuring corporates can indeed operate in, invest in and finance such projects. Whilst acknowledging that the maturity of the banking sector across SSA can differ significantly, Gutmann says: “It is fair to say that across the continent, all of the countries are seeing significant development creating efficiencies within their banking landscape.”

Whilst in the past the reliance on local banks led to corporates having a large number of banking partners, the increasing adoption of SWIFT and host-to-host has resulted in a desire to have fewer banks, minimising the cost and administrative burden. For Philip Panaino, Regional Head, Transactional Banking, Africa and Middle East, Standard Chartered, technology has afforded treasurers regional advances in support. “If you are operating in SSA with global banks, you will have access to similar capabilities, platforms and technology found internationally,” he says.

What’s more, sophisticated technology won’t always be the reserve of the international banks. “The traditional challenge that local or regional banks in SSA do not have the same level of technological capabilities as multinationals in Europe or the US are used to is closing,” says Gutmann.

Ecobank invested considerably in infrastructure to support the use of less manual processes in its cash management system, Omni, explains Sonya Crites, Head of Cash Management Products at D+H, the solutions provider which worked with the bank. The single uniform online banking platform allows a treasurer visibility and transparency into all of their accounts across Ecobank’s entire footprint. They can also integrate other non-Ecobank accounts into that offering. “To give clients access to the entire Africa footprint through a single portal is quite powerful,” says Gutmann.

But whilst technology is allowing regional strategies to become a reality, local knowledge is a necessity for business operations. The questions treasurers must answer, such as whether to use SWIFT, mobile, TMSs, online banking platforms and so on, are eased by knowledge of each market and the risks to mitigate – particularly when it comes to regulation. Challenges include the widespread illegality of cross-border notional pooling to on-the-ground difficulties such as obtaining work permits for employees of certain nationalities. Exchange controls are particularly problematic as most countries don’t allow the free movement of funds cross-border. The underlying exchange control regulation in most SSA countries is that goods and services have to accompany foreign exchange, but this is at odds with notional pooling, the method treasurers would typical turn to in order to manage liquidity, concentrating funds for optimal interest returns.

In South Africa, stringent exchange control regulations shielded the economy somewhat from the credit crunch in 2008. “As a result, corporates in the country are less sceptical of banks. It is a trusting environment,” says Galatis. On the whole, she says, whilst on the face of it corporates may feel regulation is restrictive, SSA regulators are “listening to their needs and trying to accommodate wherever they can”.

Panaino concurs: “If clients experience challenges or queries around industry frameworks and regulation, we proactively engage regulators on the clients’ behalf. In 90% of the cases, we have achieved a flexible and sensible evolution on various complex issues, demonstrating the merits of facilitating two-way flow of communication between the public and private sectors.”

The silver lining

Treasurers of large multinationals in SSA are those weathering the current storm the best, despite the region’s varying rules, according to Citi’s webinar; Gina Schoeman, South African Economist, Citi spoke of listed companies in South Africa enjoying economies of scale, allowing them to perform better than SMEs. The metrics can reflect a slightly cloudier view, though. But whilst Citi predicts stagnated growth of 0.3% for 2016, the outlook over the longer-term moves “in the right direction”, says Schoeman, reaching 1.8% by 2018. This highlights that the African growth story is a long-term game. Potential remains attractive, but making it to that prosperous point depends upon a corporate’s ability to adapt to the current environment.

According to Frontier Strategy Group’s Sub-Saharan Africa Resilience to External Shocks Index, adaptation could be the key to success. Indicative of this, Google won a Treasury Today Adam Smith Award in the ‘Harnessing the power of technology’ category by implementing a scalable mobile payment solution, despite Africa’s diverse peculiarities and infrastructural inadequacies.

In fact, Panaino says that nuances “are what make Africa vibrant and exciting”, and it is this which has driven corporates to establish the region’s own set of treasury best practices, and support “the progression of the sector as a whole, encouraging the uplift of skills and expertise”.

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