Africa FX special report: Citizens of the world

Elliot Wilson
Published on:

As Africa becomes more integrated into the global economy, international developments have a more direct impact on its own growth prospects.

Downloadable guide (PDF)

Investors have long faced extraordinary challenges when seeking to operate effectively and profitably in Sub-Saharan Africa. That has not deterred the most willful and stubborn investors, particularly those with a healthy attitude towards risk. Global energy and commodity majors have been operating in the region for decades. More recently, private equity firms have pushed hard into the region, with buyout firms ranging from KKR to Blackstone to Carlyle Group cutting landmark deals in emerging and frontier states. 

Yet Africa’s economies are now under genuine stress for the first time since the financial crisis, a fact that affects the thinking of any incoming and incumbent investor. This time, though, the pressures and tensions straining national budgets and injecting added volatility into sovereign currencies largely come not from inside the region, but from far outside its borders. This makes securing the best possible foreign exchange advice (as well as excellent pan-African financial advice) more important than ever before. 

Ten years ago, Africa’s financial sector was only loosely shackled to global markets. Now however it is "highly integrated", notes Adedapo Olagunju, group treasurer at Nigeria-based, pan-African lender Access Bank, a fact that can either help (in that the region is more easily accessible to global funds, and more accepting of the free two-way flow of capital) or hinder (as crises far from African shores are increasingly likely to reverberate around and negatively impact local markets). "With the advent of globalization and the complex interconnectivity of trade networks between countries, it comes as no surprise that the wellbeing of strategic countries is translated to their economic partners," says Olagunju. "Over the past decade, Africa’s involvement in global trade activities has grown exponentially as a result of a few factors and decisions that have fallen in pleasant places for the continent."

Undermined by global factors

Three factors are now working to undermine regional economies, budgets and currencies. They are, in no particular order: the looming threat of higher US interest rates, which is sucking capital back into Western-based and listed securities and assets; sloughing energy and commodity prices; and China’s increasingly troubled economy. All of these factors worry African leaders, but the latter in particular concerns Access Bank’s Olagunju. "China’s slowing economy may become a very big threat to the productive sector in Africa," he warns. "Africa’s economy is largely commodity driven and China represents one of the major buyers of these commodities. A slowdown in China means the foreign exchange earning potential of most African countries will be at risk." 

  This is not good for Africa, given that there
has been increased
volatility in some
African currencies

Adedapo Olagunju,
Access Bank

Adds Roosevelt Ogbonna, executive director, commercial banking, at Access Bank: "China is now a significant investor in Africa. In recent years, Chinese firms have proven willing to front construction costs and build factories and infrastructure, and then to get paid in kind for the commodities they extract. As their demand for local commodities wanes, it is really starting to hurt the region." 

Yet there is also room for optimism, adds Alan Cameron, chief Africa economist at London-based boutique investment bank Exotix. He hopes that a move toward a more freely floating exchange rate regime in Beijing (along with rising hopes that China may further open its capital account, in an attempt to stimulate its economy) will be a "boon for most African countries, many of which run bilateral trade deficits with China". 

Nor does the weak growth outlook in the eurozone help economies in Sub-Saharan Africa: rather, it is likely further to raise anxiety and contribute to investors favouring safety over risk. "This is not good for Africa, given that in recent times, there has been increased volatility in some African currencies, stemming from inconsistent regulation and government policies," adds Olagunju. 

Testing times

These debilitating global factors are unlikely to change any time soon. African markets have not been tested like this for some time; indeed, the closest that emerging markets have come in recent years to facing serious financial stress was in the second half of 2013. Then, the so-called taper tantrum, stemming from the US Federal Reserve’s decision to signal a wind-down in quantitative easing, briefly sucked capital out of emerging markets. Now, notes Angus Downie, chief economist at pan-African lender Ecobank, investors are "increasingly looking to invest in something 'safer’ in Western markets, creating a concerted sell-off in emerging and large frontier markets. Some of the hedge funds that are more risk-embracing are still coming into [African] markets, but they are doing so on a week-by-week basis." 

These stresses are leading to new rules being imposed by central banks and authorities both in Africa and beyond – regulations that affect corporates’ and investors’ FX reserves and needs. Access Bank’s Olagunju notes that as central banks from Washington to London to Beijing "continue to enact their own regulations to correct economic constraints", commodity-dependent African economies are being undermined. Perhaps no sovereign is under greater pressure than the region’s largest economy, Nigeria, where rules designed to suppress imports (in an effort to balance the nation’s books) are "starving companies of FX", notes Exotix’s Cameron. "In our view, [Nigeria’s] form of shock therapy does not qualify as forward-thinking," he adds. 

Unique challenges

So foreign corporates and investors seeking to put their money to work face a unique set of challenges. But this should not force them to stay away: risk, which is often connected in the region to fluctuations in exchange rates, can be mitigated if not eliminated with the aid of a sharp-minded financial services adviser. "Multinationals and corporations actively manage and hedge their investments in Africa through the use of derivatives," says Access Bank’s Olagunju. "Over the years, there has been significant increase in the use of derivatives as investments in the region continue to rise. The use of derivatives has also increased in sophistication as financial institutions try to structure bespoke products to meet the specific needs of these corporates." Companies will however continue to face a trio of challenges when investing in Sub-Saharan Africa. These are: difficulty in accessing market information; arbitrary and often erratic regulations and government policies; and a lack of market depth.