Africa FX special report: Nothing but the best

By:
Elliot Wilson
Published on:

Corporates, both foreign and local, are seeking increasingly sophisticated FX services and advice across the full range of African markets.

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Downloadable guide (PDF)

Foreign exchange is changing apace in Sub-Saharan Africa. Not long ago, FX was a simple affair in most of the region’s markets, and a fairly uncomplicated offering even in most of the more advanced economies. All that is changing. Foreign firms and investors entering Africa, as well as local firms looking to grow regionally and globally, are seeking increasingly sophisticated and consistent levels of FX service. Succeeding in Sub-Saharan Africa, which contains a majority of the world’s fastest-growing markets, is no longer an afterthought for multinationals. In the decades to come, profit, for carmakers and banks, technology firms and fast moving consumer goods makers, will be found in one, more or all of the region’s 46 sovereign countries. 

Even within Sub-Saharan Africa, the quality of foreign exchange service ranges from first-class in South Africa, Nigeria and Kenya - developed and liquid markets with increasingly excellent financial talent and advice - down to third-tier on the poorer sovereign end of the spectrum. It’s hard to see sparklingly good FX service being offered by local lenders operating in frontier markets such as Gambia or Malawi for years if not decades to come. Even the best regional banks struggle to offer the same, consistent level of FX service across all markets.

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  Some regional banks
use swap mechanisms
to facilitate their customers’ transactions

Jean Claude Karayenzi,
Access Bank Rwanda

So it remains vital to remind investors, keen to put money to work in the world’s most exciting economic area, why they need to understand the quirks of Africa’s FX markets. And why securing the best possible advice is the key to success. "Local presence and market knowledge is essential," notes Alan Cameron, Africa economist at London based boutique investment bank Exotix. "There’s so much about the local investment landscape in these frontier markets that just doesn’t meet the eye, or the mainstream media, so without being on the ground, it’s very difficult to understand, let alone anticipate, economic and market developments."

Jean Claude Karayenzi, managing director at Access Bank Rwanda, points to the inherent advantage of retaining a strong presence across the region. He notes that in the East African Community, a monetary and economic union spanning five nations in the eastern half of the continent, including Kenya, Tanzania and Uganda, "some regional banks use swap mechanisms to facilitate their customers’ transactions and close the gap on foreign currencies shortages or risk". 

Finding the best

In very simple terms, it remains vital to procure the best FX advice from a financial service provider that knows the region from cover to cover, and which has offices outside the region, as well as relations with other lenders across Sub-Saharan Africa. The region is packed with potential, particularly for foreign corporates looking to put their capital to work on the ground. This makes it vital for companies to secure professional help in determining how best to get capital in, and then put it to work. 

"It’s extremely crucial to get great FX advice," says Roosevelt Ogbonna, executive director, commercial banking, at Access Bank. "We are a region that is highly dependent on foreign direct investment - there is huge growth potential, but not enough capital to take advantage of the opportunities that exist. Also, we are a big producer of primary raw materials, but we don’t have a developed manufacturing sector. So the upshot is that sophisticated FX services are essential, in order for governments to manage their balance of payments, and for importers to manage their cash and hedge against currency risk and fluctuations." 

Yet with currency risk rising across the region, there is no hedge yet invented, he adds, that can entirely eliminate risk. "A lot of investors into Sub-Saharan Africa aren’t willing to take currency risk here, so they are dealt with as local operating units that aren’t dependent on parent groups in the UK, the US, or Hong Kong for leverage, but which leverage directly from local markets. That eliminates some but far from all the currency risk."

Adedapo Olagunju, group treasurer at Access Bank, which also has a thriving London office, notes that the lender offers foreign investors and corporates a set of products that "successfully caters to their cash and risk management needs across the entire investment chain. We offer the entire product suite, ranging from access to the US dollar-Nigerian naira spot market, to both plain-vanilla and structured FX derivatives including options and swaps." He adds that having a serious presence across the region "offers significant advantage in terms of offering FX services to multinationals with operations across Africa, due to the ease with which transactions can be executed between subsidiaries".

Looking for liquidity

Liquidity will always, in even the smallest African market, be of paramount importance, whether investors are short, long or very long on the region. And what investors and corporates need changes as the region develops, and as investors seek to find ways to get their capital into the region, put it work and then, when necessary, extricate or redeploy it. "For institutional portfolio investors, the key motivating factor in liquidity terms is the ability to make the next redemption; for private equity investors, it’s about planning an orderly exit; and for corporations, it’s about managing working capital, ensuring access to imported inputs, and being able to repatriate profits," notes Exotix’ Cameron.