At the start of the new millennium, much of Africa remained plagued by war, famine and corruption. Fast forward 19 years, and the region is blossoming. Yet the treasury landscape nonetheless remains challenging. David Bee, EVP Head of Global Markets at Crown Agents Bank, explains how technology could be the answer to the challenges facing the region’s treasurers.
Despite the World Bank’s macroeconomic predictions of decelerating global economic growth in 2019, regional growth rates in MENA and sub-Saharan Africa are still projected to rise. Sustaining such growth, however, will require unprecedented levels of foreign direct investment (FDI). Fortunately, in the current economic environment, Africa does not lack suitors.
China leads the pack, having invested around USD481bn across Africa and the Middle East between 2005 and 20181. And this represents merely the tip of the potential iceberg. The success of the Belt and Road Initiative (BRI) – China’s trillion-dollar, multi-country infrastructure project – hinges on African involvement. And President Xi Jinping in 2018 pledged a further USD$60bn of investment into Africa over the course of the next three years, in recognition of the region’s promise.
Once almost exclusively an extraction economy, Africa is now undergoing a manufacturing revolution. While this shift is in its infancy (SWIFT data in 2018 indicated that low-tech products and unprocessed natural resources still make up more than 80% of many African countries’ exports), increased FDI has provided many regional countries with the financial impetus to diversify into commodities production. Aside from deepening connections with international markets, this also constitutes a means by which to offset vulnerability to fluctuations in global commodities pricing, to which many African countries had historically been exposed. Indeed, the Volkswagen assembling plant established in Ghana in 2018 is symptomatic of the broadening in regional output. Such a move by the German carmaker would have shocked investors 20 years ago – in 2019, however, it is nothing more than a good-news signpost.
Yet for treasurers, transacting in the region is not without its challenges. Banking technology is rapidly increasing the ease with which payments are remitted across borders, but many innovations are still new,, and inconsistencies in financial infrastructure country-to-country are still rife. The myriad rules and regulations across the region’s markets require granular knowledge of local systems to navigate.
Investments in Africa inevitably result in a requirement to develop local supply chains that use local currencies to support on-the-ground activities. Yet sourcing such tender is far from straightforward. Some 41 currencies serve the region and many of them are rarely traded on the global market, limiting liquidity. To avoid trapped-cash situations, a clearing currency – often the dollar – can be utilised to process a transaction. But to access this solution, businesses are forced to either use a clearing bank, which drives up costs, or tap local central banks’ G10 currency reserves. This has the unintended effect of creating hierarchies in eligibility – such reserves are often only extended on transactions that are deemed essential.
Cash forecasting, where fluctuating exchange rates can frustrate treasurers, also causes problems.
Here, technology can help. Specialist online currency trading platforms (such as Crown Agents Bank’s EMpowerFX, which offers comprehensive access to more than 400 currency pairings) provide a solution for investors and central banks by eliminating the need to use a clearing currency. Integrated live news feeds and data analytic tools also help keep track of market volatility, enabling treasurers to better manage their exposures.
As banking technology in the region becomes more sophisticated, the focus is now on collaboration to leverage this to its advantage. Pan-regional initiatives are successfully utilising technology to expand their reach, moving ever closer to borderless banking. Key to this is reducing reliance on hard currencies. Afreximbank’s Pan-African Payment and Settlement Platform (PAPSP) –designed to facilitate clearing and settlements on transactions between African countries – does just this, and is due to be piloted in six nations from April 2019. Certainly, if there is widespread take-up, initiatives such as this should go some way towards easing capital flows across the continent.
The rise of monetary zones across the region and increasingly relaxed FX controls should all deepen regional integration. But specialist providers with broad currency offerings, and the digital capabilities to extend them, are key to unlocking Africa’s potential and lay the groundwork for future growth.
1 Data cited from China Global Investment Tracker