Cash Management Opportunities and Challenges in Africa
The MTN Group is a South African telecommunications company operating in 21 countries throughout Africa and the Middle East. The 16 African countries in which it operates (including the head office in South Africa) are Botswana, Swaziland, Rwanda, Uganda, Nigeria, Cameroon, Ghana, Cote d’Ivoire, Liberia, Repblic of Congo, Sudan, Benin, Guinea Republic, Guinea Bissau and Zambia.
The treasury is currently decentralised due to the rapid and ongoing expansion and diversity of the MTN Group. MTN does not have 100% ownership of all operations, although it does have management agreements and board representation in almost all of them. Consequently, each country’s operations are responsible for managing their own treasury function and cash management. The opportunities and challenges facing the MTN operations in Africa in terms of cash management are broad and vary from country to country. The widespread existence of exchange controls and local market circumstances necessitates individual country responses to elements of cash management.
The larger operations, including South Africa and Nigeria, manage this through risk management policies and mechanisms, and the smaller operations through hands on involvement of senior management within the operations. The more recent introduction of a group treasury policy and reporting guidelines, as well as stronger centralised treasury structures in Dubai and South Africa, will ensure that this is done within consistent parameters.
A significant portion of cash management occurs at the holding company level as MTN’s strategy is the optimisation of local balance sheet structures through gearing. Dividends and management fees received are, therefore, held by the holding companies unless required for the repayment of holding company debt, dividends or new investments and bridge loans. The holding company treasury functions are divided between MTN Holdings (South Africa) and MTN Dubai (UAE) which have dedicated treasury operations as follows:
The South African operations and holding companies rely on the MTN Holdings treasury for all facilities and risk management functions including:
MTN’s non-South African holding companies, including MTN Dubai and MTN Mauritius, rely on the MTN Dubai treasury function including:
Volatile currency movements, access to foreign currency and the significant size and forex requirements of a corporate such as MTN make this an important focus area for the group. Nigeria has significant liquidity of US dollars due to the oil-based nature of the economy as well as the strong growth in various sectors. Ghana more recently had some hard currency shortages, rectified through interest rate adjustments and the situation has now improved. Guinea Republic has almost a hyperinflation environment making the currency vulnerable. Opportunities do, however, exist as natural hedges are used for funding due to the strong local currency cash streams generated by the businesses.
In countries where the currencies are free floating against the dollar there are different challenges. For instance, in some countries the currency is influenced by the central bank, whose policy for a strong or weak currency and its ability to support this policy through use of reserves can be material. In other instances, economic strength underpins the currency. As a result, arbitrage opportunities exist due to high local interest rates. Returns in local currency are usually significantly higher than they would be in hard currency. Stable currencies such as the Nigerian Niara therefore offer significant opportunity for returns. Currencies do, however, remain vulnerable.
MTN is also very committed and involved in local markets. As mentioned previously, funding is not done from the developed markets but as much as possible at a local level. This, together with its strong cash flow, has enabled it to be part of the financial sector development and define products and push boundaries. This has given MTN the opportunity to ensure well priced, locally funded operations that ensures matching of local currency earnings with its liabilities.
MTN has led the way in many of its fund-raising in Africa, in terms of tenor, pricing and product offering. MTN Nigeria recently raised US$2bn, US$1.6bn in local currency and US$400m. The offering was oversubscribed indicating great interest by both regional and foreign banks in Nigerian assets. As part of the transaction, core relationship banks were given specific corporate business opportunities, although MTN uses as many of the financial institutions as possible for cash collections.
Due to the unsophisticated markets, cash management and investment products are limited although, as mentioned previously, with sound returns. Some markets offer term deposits but these are generally limited to six months. Some banks still offer no interest on current accounts so very often the only avenue for cash is overnight call.
Hedging products (swaps/fras, FX forwards) are just not available. Governments and banking regulators in some jurisdictions are now embracing more sophisticated products as a result of increasing pressure from corporate, both local and international, and their own aspirations. The rate of change is also increasing with world class benchmarking and strong regulation in many of the markets.
South Africa’s banking system is highly sophisticated and very well regulated. The banking industry is made up of four very large local banks (Standard, FirstRand, Nedbank and Absa (a subsidiary of Barclays Bank), and a number of smaller banks, such as Investec, PSG and Capitec. There are also a number of foreign banks, for example Citibank, Standard Chartered and Royal Bank of Scotland. As a result of the large number of financial institutions, the competition is fierce and the service levels very high. The corporate market is well served by these banks and product offerings are sophisticated. Banks routinely offer both zero balancing and notional pooling as cash pooling products. Same-day value on cash receipts and transfers is standard. Hence, cash pooling is common place and most products/banks make real-time information available electronically. This enables MTN to manage its cash very efficiently.
In most of Africa there is no such thing as same-day value offered by banks. For example, in Cameroon, the minimum time it takes interbank transfers is 48 hours; there is therefore no motivation for offering/seeking a cash pooling mechanism and more challenging to forecast short-term cash balances. Cash pooling in Nigeria and most of MTN’s other African operations is in its infancy but the expectation is that it is just a matter of time before it is available. Some cross-border cash pooling is possible but MTN does not make use of these at this point in time.
In most African countries, the central banks are very actively involved in the day-to-day operations of the banking and corporate markets resulting in highly regulated, albeit evolving, markets. The result is usually an onerous documentation process for the acquisition of foreign currency for remittance cross border. Payments are usually limited to payments for actual imports of goods or services or settlement of dividends. In Cameroon, foreign currency accounts are forbidden. On the contrary, both South Africa and Nigeria allow foreign currency accounts although there are strict rules attached to these accounts. The MTN experience is that as long as regulatory processes are adhered to, remittances for imports, dividends and management fees are relatively straightforward although currency speculation is generally not permitted at all.
The positive aspect of exchange controls is that they have partially shielded the African countries from the recent credit crunch. Foreign disinvestment (in stocks and bonds) has been remitted which has weakened the currency (particularly in South Africa) but this has been limited due to the restrictions imposed by exchange controls on foreign investments by South Africans.
The telecommunications industry is a capital intensive business with large infrastructure programmes and consequently large amounts of physical outflows. On the cash collection side, pre-paid contracts account for significantly over 95% of revenues resulting in large physical cash collections. To manage counterparty risk across all operations, MTN limits the amount of cash placed per bank which can result in placing funds at less attractive interest rates. Counterparty risk is evaluated both by country and by bank across all operations, and this process is evolving rapidly in light of the recent credit squeeze. Specific circumstances, such as in Rwanda where the capital reserve requirements for banks are very low reducing single obligor limits, results in MTN Rwanda being forced to place funds at uncompetitive interest rates.
Bank charges attached to remittances can be very onerous. For example, in west Africa the currency (CFA) is fixed to the euro but all foreign currency availability is unpredictable and banks add enormous margin costs to the price of euros (despite the fixed rate), justifying this by the rarity of the currency.
Due to MTN’s size in the local market, it often cannot raise enough local currency financing for its expansion plans and is forced to access cross-border funds. Due to the extreme dependence on commodities or certain agricultural crops, such as cocoa and coffee, there are liquidity cycles which need to be taken into consideration. The markets, however, are equally hungry for good local currency assets and liquidity.
The recent credit crunch has had an impact on liquidity in Nigeria which, although not severe, has see the Central Bank of Nigeria (CBN) take some action in the form of expansion of its discount window operations, acceptance of more products as security and the extension of borrowings to 360 days from a previous maximum of overnight. It is an indication that the African continent is increasingly (although slowly) becoming part of the global financial marketplace.
Effective cash management is also made more challenging in most of Africa as availability of foreign currency (particularly US dollars and euros) can vary. In addition, priorities are often of national or political importance. Thin markets also lead to disinformation, as large corporates can easily inadvertently cause, or be accused of causing, volatility.
Technological infrastructure can be an obstacle for corporates in doing financial transactions efficiently and punctually. Simple transactional banking and real-time communication is only just taking shape in many African countries. Access to very expensive and less reliable satellite links is required should a centralised treasury function exist to ensure that communication among operations is timely and reliable.
There are both opportunities and challenges in Africa. Although Africa remains an interesting and challenging continent to effectively manage the operational and risk aspects of treasury, there has been an increase in the number of financial institutions, both local and international, in the various countries to support corporates such as MTN. The increasing banking sector and associated products is due to the significant opportunities most of the countries present as growing economies. Equally important is the willingness and desire of many African governments and financial regulators to improve the financial systems and processes. The evolution of cash management in Africa, therefore, is progressing well.
MTN is a member of The Association of Corporate Treasurers of Southern Africa (ACTSA) founded in 1988 and celebrates its 20th anniversary this year. The main aim of ACTSA is to promote the high standard of professionalism of corporate treasurers by providing a forum for the promotion of common interests and to support the industry as an umbrella body. ACTSA organises workshops and co-hosts seminars for its members to encourage the consistent development of professional expertise in this field. ACTSA also aims to provide both its members and potential members with ongoing networking opportunities, exposure to international treasury practices and creates opportunities for the discussion of current industry-specific issues. It provides a level of internationalisation through its overseas affiliation with the ACT (UK) and IGTA (the International Group of Treasury Organisations). ACTSA currently has 62 corporate members representing 455 affiliates, 155 individual members and 3 professional members.