Africa FX special report: Horses for courses
The range and diversity of African markets means that investors must tailor their expectations on FX services to the local realities. Good advice is the key.
Foreign exchange differs wildly from one country to another, and one region to the next. You would expect that, of course: unlike, say, a can of Coca-Cola or an iPhone, there is no uniform, global sense of ‘what’ a complex financial service is or should be. But FX in particular has always been a moveable feast. A Fortune 500 corporate based in New York or Munich would expect one level of FX service; a rising enterprise based in Kano or Kinshasa, however excellent their internal management, would likely expect another.
That same divergence is found across Sub-Saharan Africa’s 46 sovereign states. Foreign exchange advice in big, developed and liquid markets is increasingly world-class. At the other end of the spectrum, in economies that struggle even to be considered ‘frontier’ markets –such as the Democratic Republic of the Congo (DRC) or Malawi – FX is a completely different concept, far simpler and more rudimentary. In these markets, it’s hard to imagine finding good local FX services for years if not decades to come. Even the best regional banks struggle to offer a consistent level of FX advice across all nation states.
Again, this should not be a surprise. Sub-Saharan Africa is, like every region, dotted with nations that are either impoverished or powerful. A country could be rich in terms of resources, demographics and future potential, yet may struggle in economic terms to tie its shoelaces together. In the World Bank’s 2015 Doing Business report, seven of the 10 lowest-ranked countries were on the African mainland, including Angola and the DRC. South Africa ranked 43rd, just four places above the tiny but well-run central African state of Rwanda. Yet consider that the region’s largest (Nigeria) and third-largest (Angola) economies were rated among the very hardest countries in which to do business in this year’s report, with Angola ranked 181st out of 189 nations.
It is imperative now for the Ghanaian economy to be restructured
This convoluted discrepancy between one nation and another – there is for instance rarely any correlation between an economy’s overall wealth and its economic or financial sophistication – means that the overall quality of FX advice varies wildly. “South Africa, Nigeria, Kenya have quite developed and liquid markets with the requisite market infrastructure and talent to drive the FX process forward,” notes Adedapo Olagunju, group treasurer at pan-African lender Access Bank. Yet Nigeria’s central bank, under extreme pressure to shore up its currency since the start of the year, introduced “administrative and demand management measures, which make it difficult to get a market determined rate for the naira”, he adds.
Looking for a hedge
Nigeria is a compelling example of how even a powerhouse economy can be undermined by global factors – and how well-meaning authorities, striving to balance the books, make decisions that massively affect the range and quality of FX services that can be offered and received. With the naira tumbling in value against the US dollar over the past year, investors have increasingly looked to repatriate capital or to protect against further currency volatility. “Anxious local and international investors and corporates working in Nigeria have massively increased their overall demand for FX hedging products,” says Access Bank’s Olagunju.
He adds: “Of course, whatever FX strategy we currently adopt is derived from various factors, including anticipating the policy direction of the central bank and expected government policies, as well as paying close attention to events in the world economy. Over the past year, a lot of African currencies have come under pressure, especially oil-dependent countries struggling in the face of lower energy prices. Consequently, the central banks of these countries have resorted to regulation to protect their respective currencies. To this end, regulation, more than market forces have been the major determinant of the value of these currencies.”
Olagunju says Access Bank, which has offices in seven Sub-Saharan African countries, as well as a bustling London office, deliberately set out to create consistent cross-border FX products. The bank, he says, aims “to ensure that our clients are able to transact and execute FX-related transactions seamlessly across our subsidiaries”.
Africa’s overall financial services industry continues to develop and change apace: this is a hugely different place to the world that existed 10 or 20 years ago. Africa is no longer the preserve of ‘suitcase bankers’ flying in from London, Hong Kong or New York. It is increasingly integrated with the rest of the world, creating huge opportunities for corresponding banking services and mutually beneficial partnerships between financial institutions across the region.
Yet a host of barriers still exist. Financial regulations differ from one market to the next, as do tariff and non-tariff barriers to trade. Olagunju calls these “the greatest impediments to regional trade”, along with poor transport networks and cumbersome import and export procedures within Africa. One might add corruption and a lack of state spending on public services to this list; conversely, political and structural stability has increased markedly over the past decade, even as it falls in parts of the Middle East and Europe.
Elsewhere, the picture is just as mixed. In Ghana for instance, Access Bank ensures that it keeps its clients updated on new and improved FX services, as well as emerging risks and opportunities, via sales brochures and a weekly newsletter. Head of Ghana operations Dolapo Ogundimu says Access Bank has “deployed online banking solutions in order to meet foreign investors’ security needs, and rolled out and on-the-ground FX service provisions such as Access FX and Access Trade. We have also strengthened our money-transfer business, which now serves as a trusted, reliable and sustainable source of foreign exchange.”
This is a good start. But more, Ogundimu adds, needs to be done by the Ghanaian government, to facilitate the free flow of investment into the country. Ghana has become a reminder of the importance of building on earlier structural gains. The first African nation to escape colonial rule, it profited from its considerable natural resources (notably cocoa beans and gold), before striking oil in 2007. Yet as the wider region found its footing, Ghana seemed to falter; economic growth slipped to 4.2% in 2014, according to the World Bank, down from 14% just three years before.
“It is imperative now for the Ghanaian economy to be restructured, to create the sort of sustained earnings that will improve and stabilize the country’s balance of payments position,” warns Ogundimu. He adds that Ghana should, for the time being, emulate the Nigerian model by discarding its full floating exchange rate mechanism, and replacing it with a modified floating rate buttressed by occasional intervention by a judicious government.
The right partner
For the time being, companies seeking liquidity in Ghana should, he adds, “partner with a bank that has the required scale, status and financial muscle to meet market demands”. He points to Access Bank, which has thriving links to Ghana’s three main economic and financial partners (East Asia, the Middle East, and the UK), as a prime example. “Locally,” he adds, “the bank has built a wide branch network spanning 44 locations across Ghana’s 10 provinces, through which it provides innovative banking services to the majority of the population.”
Some negotiate well and get paid in foreign currency, otherwise they agree on a certain convertible rate
Jean Claude Karayenzi, Access Bank
In other countries, a simple service such as providing foreign currency to corporates and investors is a mainstay of the banking sector. This is certainly true in Rwanda, says Jean Claude Karayenzi, head of Access Bank’s local operations. “In Rwanda, the FX market is liberalized, meaning that any currency brought into the country can be transferred to any other jurisdiction, anywhere in the world, without restrictions or limitations.” But how can investors who want to be involved on longer-dated investments - for instance, infrastructure projects and telecommunications deals –hedge against the various risks a region and a nation presents? The answer is simple, says Karayenzi. “Some negotiate well and get paid in foreign currency, otherwise they agree on a certain convertible rate determined by each local central bank.”
Tapping in to local knowledge
The manifold risks involved in operating across Sub-Saharan African borders are unlikely to be dispelled in the short term merely through good demographics and a continued uptick in economic growth. Perhaps the best thing that any investor or corporate can do is to look for the best advice possible, then transplant that knowledge, with the aid of their main financial services partner, into a specific local operating environment.
Access Bank’s Ogbonna points to the regular round tables that his employer holds for clients. The first was held in 2008, and involved the bank inviting FX experts from all over the world, including specialists at foreign lenders such as JPMorgan Chase, to its headquarters in Lagos. Since then, they have taken place every year, proving wildly popular among customers. “It has been essential in terms of educating our customers about how FX works, not just here but around the world,” he says. “Some of our clients aren’t that sophisticated, so our workshops help explain what long-term global trends have the greatest systemic impact on them and on their local markets – such as how China’s economic slowdown was likely to affect their business.” The message here is clear: you may not get the best FX advice possible in every African market. So why not find the best advice available, offered by experts such as Access Bank, and then follow it to its source.