Winning the Africa Marathon
by Geoffrey Gursel, Sub-Saharan Africa Sales Head, Treasury and Trade Solutions, Citi
Until very recently, Africa was considered the uncut diamond in the treasure chest of global growth. Over the past decade, GDP in the 11 largest countries in sub-Saharan Africa increased by 51%, more than double the speed of the growth of the world’s economy as a whole, and nearly four times that of the USA. Today, Africa’s immediate growth prospects may not shine quite so brightly for some industries, but it still offers enormous potential over the mid- and longer term. With currency and commodity volatility and regulatory uncertainty, however, treasurers have become more circumspect and cautious in their African strategy.
A wide variety of industries have been attracted to the unique opportunities for growth that Africa offers, with significant investment in the continent over the past decade. Given the disparities in the maturity and consistency of financial and physical infrastructure, legal frameworks and infrastructure across countries, establishing a business and driving growth has not always been easy. Today, however, existing challenges have been exacerbated by the rapidly changing regulations that governments are putting in place to protect their economies from the extreme volatility and sharp falls in commodity prices, particularly oil. Companies that are negatively impacted by low oil prices are taking a long-term view, and working with trusted partner banks to address short-term challenges. On the other hand, with more extreme market conditions than most forecasters had predicted, some companies are witnessing more favourable commercial opportunities than they might otherwise have predicted. In both cases, however, the speed of change is adding another level of complexity to their cash and treasury management activities.
A regulatory rollercoaster
Governments and central banks of heavily oil dependent countries such as Nigeria are rapidly implementing regulations to scrutinise in- and outflows, improve central bank visibility and security of funds, and introducing more stringent rules on business conduct. These include export/import rules and new signatory requirements, even for basic operating accounts. The aim is to maintain cash balances within the country to improve market liquidity, increase transparency and control over cash, and boost confidence and trust in financial governance.
It can be difficult for corporate treasurers to keep abreast of and compliant with these changes whilst also keeping the company’s liquidity and risk objectives in sight. This applies whether or not the company is a beneficiary or casualty of the ongoing fluctuations in oil prices: companies that are large consumers of oil, such as shipping and airlines are benefiting from low oil prices, but at the other end of the spectrum, governments and energy producers are facing tough times. Industries that do not have direct reliance on oil or other volatile commodities may also face an indirect impact, whether positive or negative, depending on their primary customer base.
The key issue for corporations and other institutions operating in the region is not only how the company itself should respond to extreme volatility, but more importantly, how governments are reacting. Firstly, treasurers need to be aware of national strategies, such as Nigeria Vision 2020 and Ethiopia 2030 to understand the overall direction of investment and economic policy. Secondly, they need to understand government decisions required to achieve these strategies. As we have seen, economic stability has become very fragile. With some governments, including the major oil-producing economies such as Angola, Algeria and Nigeria generating more than 90% of revenues from oil, and significant commodity reliance in countries such as Zambia, the fall in prices compromises their ability to service debt, and inevitably results in cuts to government spending on infrastructure and lower employment, further reducing income.
One of the ways that governments are dealing with this is by seeking greater visibility of incoming flows. This in turn is leading to tighter regulations on cross-border flows of all types, which is inevitably having a negative impact on liquidity and risk for many companies. Amongst energy companies, for whom the low oil price has the most immediate impact, we are seeing a number of projects delayed, and reductions in headcount as export prices drop. Similarly, producers of commodities such as copper in Zambia, are feeling the squeeze of the fall in prices and over-supply.