2016 marked a year of mixed fortunes in Africa, described as “multi-speed growth” by the International Monetary Fund (IMF). Commodity exporting countries, most notably the regions’ largest economies of Angola, Nigeria, and South Africa, continued to experience economic constraints because of stagnant prices. Conversely, around half the countries in sub-Saharan Africa that benefit from lower commodity prices, including Cote d’Ivoire, Ethiopia, Kenya, and Senegal, continued to perform well, with 2017 growth rates estimated at more than 6% per the IMF.
Furthermore, the fortunes of oil-producing nations will undoubtedly improve as we return to the upward part of the cycle. Thus, while the short term brings challenges for corporations in some industries, Africa continues to offer enormous opportunities. Key to successfully leveraging these opportunities, however, is to optimise liquidity and risk management in an environment of ongoing market, regulatory and geopolitical change and uncertainty.
Towards the final frontier
One treasury client recently referred to Africa as the ‘final frontier’ in their treasury management strategy. In many respects treasury priorities are the same in Africa as any other region; not the least of which are optimising liquidity and managing risk, including market, regulatory, credit, sovereign and operational risks.
While these risks are familiar, treasurers often have fewer tools available to them given the diversity of currencies, capital and liquidity controls, and different levels of market and technology sophistication across markets. For example, trapped cash and US dollar (USD) shortages in some countries remains a significant challenge. This is one of the factors that is leading to a growing number of multinational corporations (MNCs) setting up trading hubs and invoicing centres as a way of optimising cash and liquidity management, and reducing the incidence of trapped cash.
Risk management also poses challenges, particularly as the value of many currencies declines against the USD. The cost of hedging may be very high, such as in Nigeria, and hedging instruments are less readily available than in more developed markets. However, the potential financial losses could be even heavier, so treasurers are actively focused on this area. In many cases, corporations are looking at financing African investments from outside of the region and funding on an intercompany basis, again to minimise local cash and risk.
Similarly, techniques such as supply chain finance (SCF) programmes are becoming increasingly important in an environment of tightening credit to provide surety of supply, reduce costs and manage working capital. Banks such as Standard Chartered are extending these programmes deeper into the supply chain in traditionally higher-risk areas such as primary agriculture production, and supporting clients in their efforts to automate supply chain activities wherever possible.
Innovation and acceleration
While market and regulatory constraints and fragmentation create challenges, technology is creating enormous opportunities to help overcome them. The sophistication and automation of clearing systems, banking technology and solutions in both the retail and commercial space, such as mobile wallets, is growing rapidly, to the point that they are ‘leapfrogging’ technologies in developed markets.
For example, the M-Pesa mobile phone-based money transfer service has revolutionised payments and collections in countries such as Kenya, Tanzania, Democratic Republic of Congo, South Africa, Mozambique, Lesotho and beyond for consumers and small businesses. Other mobile wallet schemes have also emerged in countries such as Nigeria, Uganda, Rwanda and Zambia. Just as importantly from a corporate perspective, mobile wallets are integrated into electronic banking solutions such as Standard Chartered’s Straight2Bank to enable corporations and institutions to use mobile numbers and beneficiary names in the same way as account numbers for both payments and collections.
This is making it easier for corporations to manage and accelerate their financial supply chain, streamline transaction and information processing, and achieve visibility over cash. At the same time, there has been a substantial increase in the number of treasurers who are seeking efficient, secure and consistent bank connectivity through host-to-host connections or SWIFT.
As well as seeking to achieve consistent transaction and information processing across the region, across all payment and collection methods, this is in part driven by a growing awareness of bank risk. With a combination of both local bank failures in countries such as Kenya, and international bank exits, most companies need to balance contingency and efficiency by working with a combination of local and international banks. However, treasurers typically aim to sweep cash from local banks to their accounts with international banks wherever possible, both to manage their bank risk and leverage efficient connectivity to provide visibility and control over cash held in-country.
Centralisation and optimisation
Efficient bank connectivity is just one way in which treasurers are seeking to integrate and their activities in Africa into a wider treasury and cash management framework. The need to standardise treasury policies, processes and controls, as well as technology, applies whether cash and treasury management is managed within the continent, such as through a shared service centre (SSC) or regional treasury centre (RTC), or from a centre located in another region such as Europe or Asia.
Africa is proving an increasingly attractive region in which to locate SSCs or RTCs; although at this stage the remit of these centres is restricted to Africa. Dubai, South Africa and Mauritius are currently the favoured locations for these centres. Treasurers and finance managers decide on the most appropriate location for their SSC or RTC based on a range of factors:
Dubai is often preferred amongst contracting, trading and oil/gas sectors, and centres here typically cover both Middle East and Africa. There is also a trend amongst African corporations – particularly those headquartered in Tanzania and Nigeria – to locate their treasury function in Dubai, which offers a liberal regulatory environment, over 20 free trade zones offering zero corporate tax rates, and seven double tax treaties with African countries. Education, quality of life and international communications are also strong.
South Africa is often selected as a treasury or SSC location among MNCs that have a strong base in the country. Treasuries typically operate as service centres with liquidity and financing structures organised through offshore entities as regulatory restrictions and relatively high taxes make it inefficient to concentrate liquidity in South Africa. However, the country has a well-developed network of 18 double tax treaties in Africa, with access to a well-educated workforce and good communications across the continent and beyond.
Mauritius is typically chosen by African and international businesses that have a footprint predominantly in Africa. Holding companies and centralised supply chain centres are the most common structures, taking advantage of low taxes and a large number of double tax treaties in Africa. A conducive regulatory environment also make it ideal for RTCs, although the financial markets are not currently as deep as Dubai or South Africa. New locations such as Ghana are also emerging, however, a development we expect to extend across a growing range of countries.
Wherever a corporation chooses to establish a financial SSC or treasury centre, the demands in terms of cash and treasury management cohesion, both across Africa and with other regions, effective risk management, and operational efficiency and control remain the same. With technology creating enormous opportunities to enhance payments, collections and cash visibility, as well as improving the flow of information related to transactions, treasurers have greater means to achieve these aims than ever before. By doing so, they position their organisation to meet the challenges ahead, and leverage the huge potential that Africa offers.