Africa’s problems are usually more publicized than its opportunities. Its volatile economy, political uncertainty, armed conflicts, government corruption, low productivity and lack of sound property rights and infrastructure are well-documented.
Nevertheless, there are many positives that should place Africa, as a business destination, on the radar for a corporate. There has been a gradual liberalization and relaxation of the regulatory and business regimes, which should help many African countries as they seek to attract investment. African economic growth has performed well compared to the rest of the world, it has an abundance of resources, and its middle class is growing and embracing technology. Furthermore, Africa is the fastest growing region in the world in terms of population—by 2050 more than half of the world's population growth will be from Africa, and one in three young people in the world will be African. This means more consumers.
Challenges for the treasurer in Africa
There are some unique challenges for a corporate treasurer in Africa. Unexpected events will always be an issue; for example, in June 2012, the Zambian government banned the use of foreign exchange, including U.S. dollars, to force companies to trade in the local currency. A treasurer must always expect the unexpected.
Although connectivity lags the rest of the world, the use of technology is increasing—African SWIFT volumes grew by 22 percent in 2014 versus 8 percent total growth worldwide. This increased connectivity facilitates the development of centralized treasuries.
However, a one-size-fits-all approach to treasury will not work in Africa, as banking practices, regulatory regimes and payment systems can differ from country to country.
Below are some of the more specific issues that will impact the treasurer:
- Although the risk of not being able to remit funds from an African country has reduced over time, there may be limited transferability of currencies beyond jurisdiction due to exchange controls. A good understanding of exchange controls is critical for the treasurer.
- There is a lack of depth (liquidity) in currencies and very high currency volatility.
- Extensive central bank reporting is required and central bank approval is often required, particularly if funds have to be remitted outside the country.
- Residency determines the ability to hold account types, and cash pooling may not be allowed.
- The largely cash-based system has security implications (e.g. cash in transit risks).
- The lack of available finance and underdeveloped capital markets can cause issues.
A special case: South Africa
South Africa, a member of the G20 and BRICS, and has a very sophisticated banking and financial system with deep liquidity in the local currency (South African Rand). The local stock exchange is one of the 20 biggest in the world.
Exchange controls continue to be relaxed, with banks acting as the authorized dealers (and gatekeepers) for the South African Reserve Bank. The bank will therefore want to understand the risk management strategy of the corporate so as to ensure exchange control regulations are adhered to and any speculative type trading has the required approvals.
In 2013, a treasury management company regime was introduced for exchange control purposes to encourage the establishment of group treasury management functions in South Africa and to further enhance South Africa’s position as a gateway into Africa. Initiatives like this, coupled with its Western-based financial system, mean that South Africa continues to be a popular choice for treasury operations. However, other countries, such as Kenya and Ghana, are becoming recognized as treasury hubs for East and West Africa.
Key focus areas for treasury
There are several key considerations for a treasurer with African operations:
- Good relationships with the central bank and banking partners are essential.
- Funding local subsidiaries can be an issue. If you are borrowing in local currency, it may be expensive and treasury may not be able to hedge due to a lack of derivatives for the required size and tenor. If borrowing in U.S. dollars or euro, it may create foreign exchange exposure.
- The repatriation of funds out of the country can be challenging given the ruling exchange control regulations.
- Getting visibility of and access to cash can also be a problem, given that systems and banks differ; collecting cash can be difficult in many countries.
Africa has many challenges for the corporate treasurer but they are all largely manageable. The key is to understand all the issues up front, and this is where having good banking partners is important. In addition, as banking systems across Africa become more sophisticated, the treasurer will be able to put more efficient cash and liquidity management structures in place—meaning treasury can support the corporate’s growth objectives even in the most challenging of environments.
Riaan Bartlett is a treasury and finance executive based in Pretoria, South Africa.
A longer version of this article will appear in a future edition of AFP Exchange.