Out of Africa: managing the minefield of macro and geopolitical risk

With Chinese economic growth stalling and fears that UK voters will support a ‘Brexit’ weakening sterling, investors are unsurprisingly seeking out new emerging markets for opportunities.

A recent study from the Gordon Institute of Business Science (GIBS), which two years ago launched the Dynamic Market Index (DMI), predicts that the African economy will grow between 2% and 3% above the global average over the next five years. This growth is expected to be fuelled by Africa’s growing middle class; triggering inward investment, merger and acquisition (M&A) activity and the emergence of more private equity firms in the region.

This is hardly surprising. History tells us that when economies emerge, consumption of goods and services increase and people’s purchasing patterns begin to reflect those in the West.

However, for global corporates with commodity and currency exposure to Africa, this situation hasn’t exactly played out the way that the market was initially anticipating. According to ratings agency Fitch, emerging markets are expected to slow by 0.4% this year. Africa’s growth trajectory in particular has been halted by falling commodity prices in China – the region’s biggest trading partner. The worst-affected are the oil producers such as Nigeria and Angola, which have been hit hard by the fall in the global price of crude. Bearing this in mind, how exactly should global corporates go about managing their commodity and currency risk exposure to the region?

Two types of risk exposure

To answer this question, it is important to firstly break down risk exposure into the following key areas: macro and political. At a macro level, corporates should be constantly evaluating how stable and how well run the region’s economy is – from hikes in interest rates to inflation levels.

When a corporate is buying commodities and running production a local currency such as the rand (ZAR), its treasury department needs to know what their exposure is and how it this automatically translates to their key base currency exposure – which could be the dollar (USD) or sterling (GBP) – essentially giving the treasury team a clear and transparent view into their exposures.

Macro risk is, of course, closely linked to politics. Due to its political culture, Africa will always be subject to volatility, as decisions to shock markets could be made spontaneously by government officials. This includes any future decisions to nationalise key industries. Hugo Chavez had made a habit of this in Venezuela. However, it is not just about policy decisions, firms also need to closely consider events such as unexpected terror attacks.

Take the Ivory Coast, the world’s largest exporter of cocoa, which is currently struggling to keep its economy stable following the Al-Qaeda attack on March 13 at the Grand Bassam beach resort. Terrorist attacks of this nature can have a detrimental operational and logistical effect on businesses exporting goods out of the region. In the wake of a terror attack, it is even more important for a corporate to have full visibility into the supply chain process to see its positon and volumes at any given time.

Of course, in order to manage this risk complexity, these firms will know that they need to protect their margins by entering into hedges – although this is easier said than done. In order to hedge correctly, they must have a consolidated view of their exposure to the physical commodity and financial exposure, while automatically calculating historic volatilities and correlations.

As Africa faces an unpredictable economic future, the situation is clear: a more complex political environment with higher levels of economic uncertainty equals greater potential risks.

For corporates to manage the current situation and prepare for future challenges in other emerging markets, they must shore up their approach to risk management by ensuring they cover both physical commodity and currency exposure. Then, and only then, will they be able to get a fully aggregated view of positions and risk, as well as potential profit and loss – regardless of what the macro and political landscape might be at the time.

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