Africa FX special report: Growth present and future
Africa’s growth prospects and favourable demographics are strong incentives for investment, but the best FX advice is essential.
Sub-Saharan Africa’s foreign exchange market changes every year. It grows and matures, in lockstep with the broader region. Corporates and investors strive to adapt, seeking to hedge themselves against local and international currency risk, and to secure enough working capital to operate in single markets as well as across the wider region.
South of the Sahara, Africa is awash with currency unions that promise each year to become more coherent. Regulation is a moveable feast, either helping or hindering individual markets. In Nigeria or Ethiopia, firms are being “starved of FX in an effort to suppress imports”, notes Alan Cameron, chief Africa economist at London-based Exotix. Currencies float freely (Ghana) or are managed carefully (Nigeria) by central banks wary of the volatility undermining all emerging markets. Good currency and overall FX management is essential: where it is lacking, the results can prove disastrous.
Specific currencies prevail. The Nigerian naira and South African rand are favoured in Africa’s western and southern reaches, as is the Kenyan shilling in some parts of eastern Africa. Hard currencies of choice remain the euro and the US dollar, while China’s Renminbi (Rmb), notes Adedapo Olagunju, group treasurer at pan-African lender Access Bank, “is growing in importance as a global currency. As more trades are executed between China and African nations, central banks’ FX reserves will increasingly diversify into the Renminbi”. In January 2014, Nigeria’s central bank said it would boost its Rmb holdings to 7% of total FX reserves, from 2%, marking the continuation “of a global shift away from the US dollar toward the Rmb”, adds Olagunju. “The weakening Renminbi also poses a threat to the US dollar’s dominance. A weaker currency means manufactured Chinese goods will become cheaper, and business between China and the rest of the world could double its current volume in the short term.”
By any measure, Sub-Saharan Africa is one of the few corners of the world offering both current growth and decades of future growth. Eleven of the world’s 20 fastest-growing economies are here: in its latest Regional Economic Outlook, the International Monetary Fund predicted “another year of solid economic performance”, with regional gross domestic product expanding by 4.5% in 2015, against 5% in 2014, boosted by strong private consumption growth, particularly in low-income countries.
The growth potential in Africa continues to
Adedapo Olagunju, Access Bank
Moreover, there are fewer places in the world with a better and healthier set of demographics. In 2010, Sub-Saharan Africa accounted for 10% of all global workers; by 2100, that share is projected to rise to 37%. It is also home to a slew of exciting corporates with the foundations and the excellence to become regional and even global players, from Kenya-based telecoms pioneer Safaricom and South African media firm Naspers to Nigerian conglomerate Dangote Group.
Seeking out the specialists
Little wonder global and regional corporates and portfolio investors are turning to regional financial services specialists such as Access Bank, which also has operations in the Democratic Republic of the Congo, Gambia, Ghana, Rwanda, Sierra Leone and Zambia as well as the UK, for expert advice. And despite the turbulence roiling the emerging world, investors remain as committed as ever to the region, notes Roosevelt Ogbonna, executive director, commercial banking, at Access Bank. “Smart investors with a focus on the emerging world, from pension funds to private equity firms to hedge funds, will continue to put their money to work in the region,” he says.
Of course, Sub-Saharan Africa is imbued with perils and pitfalls, just as it remains a vast repository of profit and potential. China’s ongoing slowdown is worrisome, while in the US, the Federal Reserve’s decision about when to hike interest rates continues to play on investors’ minds, influencing their views on investing in emerging and frontier markets, while injecting added volatility into emerging-market currencies. In July 2015, Renaissance Capital warned that African currencies were under “significant pressure”, because of dollar strength and local macroeconomic imbalances. Of the eight regional currencies analysed by the emerging market-focused investment bank, eight, including the naira, were considered “especially vulnerable”.
This makes securing the best FX advice more important than ever, as investors look to partner with financial institutions able to offer products catering for their cash and risk management needs across the entire investment chain. “The growth potential in Africa continues to remain strong, supported by its population and the potential to increase output using technology,” says Access Bank’s Olagunju. “We expect that this will be the rationale for investors with a longer-term perspective to increase their flows into the continent.”