Africa FX 2015 OFC.indd - Euromoney

September 2015

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Accessing Africa’s FX flows Published in conjunction with Access Bank

This special report is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge. Euromoney does not endorse any advertising material or editorials for third-party products included in this publication. Care is taken to ensure that advertisers follow advertising codes of practice and are of good standing, but the publisher cannot be held responsible for any errors. Euromoney Trading Ltd Nestor House Playhouse Yard London EC4V 5EX Telephone: +44 20 7779 8888 Facsimile: +44 20 7779 8739 / 8345 Chairman: Richard Ensor Directors: Sir Patrick Sergeant, The Viscount Rothermere, Christopher Fordham (managing director), Neil Osborn, John Botts, Colin Jones, Diane Alfano, Jane Wilkinson, Martin Morgan, David Pritchard, Bashar Al-Rehany, Andrew Ballingal, Tristan Hillgarth Advertising production manager: Amy Poole Journalist: Elliot Wilson Printed in the United Kingdom by: Wyndeham Group ©E uromoney Trading Ltd London 2015 Euromoney is registered as a trademark in the United States and the United Kingdom.

Contents

Growth present and future

Africa’s growth prospects and favourable demographics are strong incentives for investment, but the best FX advice is essential

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Still an appetite for African debt

The good times are not entirely over for issuers

Nothing but the best

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

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Citizens of the world

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

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

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Getting the regime right

Fixed or floating? Managed or not? The argument continues to rage within Sub-Saharan African central banks about how best to run and oversee a currency

Chasing the currency dream

Despite some successes with regional monetary unions, the prospect of a pan-African currency remains as distant as ever, with the euro offering a cautionary tale

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Economic overview

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

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SPECIAL REPORT : AFRICA FX · September 2015

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Still an appetite for African debt The good times are not entirely over for issuers EMERGING-MARKET TURMOIL stemming from a raft of global issues has dented bond issuance from Latin America to emerging Asia. Africa has been hit hard too, though the picture here is a mixture of good and bad. Issuance has declined as global investors put their capital to work in mature Western markets offering growth and higher yields. Internationally marketed SubSaharan African sovereign and agency bond issuance totalled $2.7 billion in the first nine months of 2015, against $5.9 billion in the same period a year ago. Yet there was good news, even in these darkening hours. While sovereign bond issuance declined over the period, volumes remained higher than those posted in three of the previous five years, according to data from Dealogic. Global issuance by African corporates also showed solid signs of life. Total bond issuance by regional firms topped $2.9 billion in the year to September 2015, against just $250 million in the same period a year ago. To many, this is a clear sign that global institutions are happy to snap up African sovereign and corporate debt securities. Big recent deals on the sovereign side include the Republic of Zambia’s $1.25 billion amortizing bond printed in June 2015 - the country’s third international sale in three years. The sale came despite a sharp fall in the price of the country’s staple hard export commodity, copper. And in February, the South African electricity utility Eskom printed $1.25 billion worth of 10-year notes that brought in $4.5 billion worth of orders.

Ideal conditions For years, conditions for regional bond issuance, both in local and hard currencies, were ideal. Rapid economic growth allied with near-zero US interest rates boosted risk appetite from offshore investors. Many saw the region as an easy way to divest their portfolio into assets bearing higher returns. African sovereigns rushed to raise funds in euros and US dollars, including first-time issuers such as Rwanda and Kenya. Almost all were over-subscribed: Ivory Coast was able to raise $750 million in dollar-denominated debt in 2014, despite defaulting on a similar obligation just three years earlier.

INTERNATIONALLY MARKETED CORPORATE BOND DEALS, SUB-SAHARAN AFRICA, BY YEAR* Year

Total issuance ($ million)

2012 2,730 2013 4,299 2014 250 2015 2,913 *Year to September 8

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Source: Dealogic

So what does the future hold? For sure, life has become more complex for Sub-Saharan African sovereigns, at precisely the time when many might have been looking to raise capital from investors to balance the books, invest in public services or pay down debt. Yet that doesn’t mean the good times are entirely over. Adedapo Olagunju, group treasurer at Nigeria-based Access Bank, says there is “still room for more Eurobond issuance in Africa, as most countries still have relatively low debt-to-GBP ratios”.

Going domestic This will require some careful financial planning by sovereigns. Issuing in the Eurobond market may prove on the surface to be a cheaper source of funding than, say, printing local bonds that bear double-digit yields. But long-term borrowing in foreign currencies will likely prove “more expensive than initially anticipated”, says Olagunju, especially in cases where inflation in a sovereign issuer’s homeland is running at a higher rate than that of the borrowed currency. “As a result, some African economies have now turned to their domestic markets to raise funds,” he adds. “This expected increased liquidity in local market will boost foreign investor participation, assuming that the local currency in question remains stable.” It is hard to predict the strength of demand for regional debt sales going forward. On the one hand we may, warns Alan Cameron, chief Africa economist at boutique investment bank Exotix, see a slow tailing off in US dollar-denominated issuance, except in cases where the “local markets are saturated and the need for financing is great”. Cameron expects to see sovereign prints completed this year in Ghana and Nigeria, though on the corporate side, sales are likely to be trickier. “With sovereigns trading at yields of 8-10%, the best that regional corporates can hope for is 12% – and earning a return of 12% on a hard currency is not easy to do,” he warns. On the other hand, notes Jean Claude Karayenzi, managing director at Access Bank in Rwanda, bond issuance is “gaining some momentum in some part of Africa. In Rwanda for instance, the government last year started to issue bonds dominated in the local currency [the Rwandan franc] on a quarterly basis with tenors of up to five years to finance major infrastructures projects.” Adds Roosevelt Ogbonna, executive director, commercial banking, at Access Bank: “Several pension funds and hedge funds will continue to focus on Sub-Saharan Africa. They may be increasingly selective, but Africa is still a big growth story. Smart-money investors will continue to put their money to work in these transactions, as African credits will remain a strong play for years to come. But the region needs to develop deeper local bond markets to make sure it continues to grow.

SPECIAL REPORT : AFRICA FX· September 2015

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Good FX

Nothing but the best Corporates, both foreign and local, are seeking increasingly sophisticated FX services and advice across the full range of African markets 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. 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 Jean Claude Karayenzi, Access Bank

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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

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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. Understanding risk is also key to developing a successful regional investment plan. Sometimes that risk is inherent in price: how the cost of FX services shifts, often seemingly arbitrarily, from one market to the next. Investing in any market requires foreign currency to be imported. “It is imperative that multinationals are able to manage attendant market risk, from the conversion of FX for local currency disbursement to the final repatriation of investment proceeds,” notes Access Bank’s Olagunju. Risks abound. Yet good advice help investors or corporates dodge the worst of them, and realize the considerable profits to be made. The shallow nature of most financial markets means banks historically have been severely constrained in their daily operations by central banks and local regulators. Lenders may aim to offer a wide variety of FX products, but are often forced to extend a far more simplified set of FX services. Good regional lenders, notes Olagunju, will seek to exhaust all product possibilities within the defined scope of spots, forwards and swaps. “What we have tried to do is to create cross-border FX products to ensure our clients are able to transact and execute FX-related transactions seamlessly across our subsidiaries,” he says. “This is where we feel the opportunity lies, and it’s an area we intend to continue to exploit.” Other risks exist, notably in terms of exchange rate and currency volatility, as well as processing costs. Volatility is inevitable, given the current account deficits and political instability that characterize most African economies, currently exacerbated by extraneous factors such as the US dollar’s strength and economic torpor in China. “This often encourages investors to hedge their currency needs with the use of derivatives, ranging from plain vanilla forwards, options and swaps to more complex derivative structures engineered to meet specific needs,” notes Olagunju. He points to the example set by the Currency Exchange Fund (TCX), a fund offering overthe-counter derivatives that helps corporates and investors to hedge against currency and interest rate mismatches fomented in cross-border investments between global investors and local borrowers, usually in less liquid frontier and emerging markets.

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“Without being on the ground, it’s very difficult to understand, let alone anticipate, economic and market developments” Alan Cameron, Exotix

Sentimental attachment Exchange rate volatility will remain high for some time to come. There is a “far greater sentimental attachment to exchange rates, at least compared to other emerging and frontier economies”, notes a London-based, Africa-focused analyst. “This is notably because a large volume of basic imported goods are relatively demand-inelastic, and the pass-through of exchange rate depreciation into local price increases is almost instantaneous. Also, given the limited local access to credit, exchange rates rather than interest rates are more widely seen as a barometer of economic health by the population. This has significant import for both political and economic policy formulation.” Transaction costs also vary widely from country to country across the region, with the cost of FX transfers often proving considerably lower in developed markets such as South Africa than in the likes of, say, Sierra Leone. This is in large part due to the floating exchange rate system favoured by the South African authorities. “There are no restrictions on foreign investors in terms of being able to put money to work locally, and then extricate it,” says Gaimin Nonyane, senior macroeconomist at pan-African lender Ecobank. “Whereas in economies with managed pegs in place, it is hard to offer smooth, reliable FX service. That kind of exchange-rate system does not facilitate trade, as it places so many restrictions both on invested capital and on investors.” There will of course always be risk when it comes to operating in these frontier and emerging markets. In the Euromoney Country Risk second-quarter 2015 survey of the world’s most stable markets, only one economy broke into the top-60, and that was South Africa in 56th place. It is still, says a prominent Nigeria-based investment banker, an “inherently risky” environment. “Political stability is changeable, so you have to invest with caution,” he adds. “But if you know the local operating environment, have a good financial partner, and get to know the pitfalls, it often encourages people to reinvest.” And the best financial service providers will increasingly pull away from the pack in the years to come. As well as giving its customers regular updates offering regional and market-specific economic updates, Access Bank organises regular workshops, seminars and forums for its clients, where the lender pitches its latest and best FX products. This is where clients come to learn where the risk and the opportunity lie, and where the profits and potential will be found in the years and decades to come.


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World FX

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

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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.” 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-

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currencies will remain, or become, increasingly prevalent going forward.

Hedge or not?

“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” Adedapo Olagunju, Access Bank

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 forwardthinking,” 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. Two more factors will continue to weigh on investors’ minds in Africa: whether (and how) to hedge local capital; and which

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Hedging is a tricky subject. Everyone talks about the importance of hedging capital or investments or assets in Sub-Saharan Africa. But as Exotix’s Cameron notes: “most investments in the region, in my experience, are basically unhedged. Either investors get comfortable with the risk by researching and understanding the host country, or they just don’t invest. In some other more limited cases, they may hedge their country exposure through that nation’s primary commodity export - for instance by hedging their positions in Nigeria by shorting oil.” A lot of portfolio investors in particular, adds Ecobank’s Downie, will “tend to avoid hedging onshore as it can be pricey”. Experienced bankers in the region will tell clients that there is “no hedge” in Sub-Saharan Africa that can entirely eliminate every risk - there never has been and likely never will be. Far-sighted and clear-minded corporates and investors usually, local bankers say, tend to treat their assets and activities in a specific African market as a “local” affair, ensuring that it is separated from, and entirely independent of, a parent group. By staying local and leveraging entirely in a specific, fastgrowing African market, you also significantly reduce your exposure to currency risk. Notes Access Bank’s Ogbonna: “Exposing yourself completely to a market for anything beyond 180 days, or at the most a year, doesn’t make any sense. In markets such as Ghana, even short-term hedges have been near-impossible, and that is one reason why we have seen large corporates with a big currency exposure to the market taking such a beating in the last two, three or four years.”

Currency conundrum Then there’s the currency conundrum. The US dollar remains the currency of choice for many if not most corporates and investors operating across Sub-Saharan Africa. Euros are important, too – but less so, given the collapse in credibility in recent years of the European economic and policy machine. Then there is China’s currency, the renminbi (Rmb), which is, notes Access Bank’s Olagunju, growing in importance as a global currency. Regional central banks are increasingly looking to diversify their holdings in favour of the Rmb (Nigeria is one; Zimbabwe another) to reflect the rising importance of China and its currency in regional and global affairs. Yet the future of the rise of Beijing’s currency, while heretofore meteoric, is not guaranteed. “The secrecy around the renminbi distorts its credibility as a reserve currency,” notes Access Bank’s Olagunju. “A key factor for determining a reserve currency is confidence in the value of that currency. Therefore, as long as the Rmb remains managed - pegged within a permissible trading band - the likelihood is that there will exist some hesitation in converting a large portion of country reserves into renminbi, regardless of increasing trading volumes between China and African economies.”


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Specific markets

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 lowestranked 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 thirdlargest (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. 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.

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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 SubSaharan 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”.

Increasing integration 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

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“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” Dolapo Ogundimu, Access Bank

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

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innovative banking services to the majority of the population.” 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.


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Currencies

Getting the regime right Fixed or floating? Managed or not? The argument continues to rage within Sub-Saharan African central banks about how best to run and oversee a currency AS AN INVESTOR, would you rather invest in a country with a floating exchange rate or a tight peg to a hard currency, or where a tender is secured to a hard currency with a looser peg, and which is ‘managed’ by the local central bank using a wide range of flexible financial tools? The issue matters deeply: it may be the most important decision facing corporates and investors when deciding whether or not to put capital to work in the region. Many central banks across Sub-Saharan Africa choose the latter route, allowing their currency to fluctuate within a tight trading band against a hard currency, usually the US dollar or, in western Africa, the euro. Others bind their currency to a stronger regional peer: the Namibian dollar, for instance, is pegged at par to the South African rand. To many authorities, the managed route is the most sensible option. “Most countries in Africa don’t have a flexible exchangerate regime, as their economies are structured to withstand shocks, so they run a managed peg where currencies can fluctuate within a tight band, allowing the central bank to interject sporadically to manage the peg,” says Gaimin Nonyane, senior macro-economist at pan-African lender Ecobank. “This allows companies to manage shocks, and to avoid big swings in the FX market, which would lead to foreign investors incurring major losses. Managed pegs help to reduce that exposure.” A few sovereigns opt for a floating-rate mechanism – Ghana, where Access Bank has a thriving domestic business, springs to mind, as does South Africa. These are historically strong and diversified economies (accepting that global gyrations have in recent times affected both countries) with open capital accounts. In theory, corporates and investors can put their money to work in either market whenever and however they like, safe in the knowledge that they can re-appropriate that capital any time. Each approach has its proponents and critics. Floating rate

mechanisms are attractive to foreign investors but could leave the host nation struggling if a currency tumbles in value against the likes of the US dollar, as has been the case through much of 2015. If a government then reacts by imposing sudden capital account restrictions, it would dent its image in the eyes of foreign investors. This outcome in one or more economies, given the global threat to local currency stability, is far from improbable.

Under pressure In a July 2015 report, Renaissance Capital warned that several regional currencies were under “significant pressure”, due to dollar strength and localized macroeconomic imbalances, notably the Kenyan shilling and the Nigerian naira. Conversely, it noted that the Ghanaian cedi and the Tanzanian shilling were undervalued. “In East Africa, we have seen most currencies depreciating at a faster pace in recent years,” says Jean Claude Karayenzi, managing director at Access Bank in the central African state of Rwanda. “Foreign currency inflows into the region have been affected negatively by the low prices of mineral and other essential commodities. On the other hand, we have seen a high demand for imported products, thus putting pressure on most local currencies and on our trade deficit.” Managed currencies have their own detractors. They typically exist in immature or underdeveloped markets, and can get expensive if a local currency slips sharply in value against the tender to which it is pegged. The fixed or floating debate will rage for years if not decades to come. What makes the argument relevant right now for Sub-Saharan Africa countries is that bilateral US dollar exchange rates have become the nominal anchor for expectations about inflation and a host of economic variables. “This creates a special role for central banks in terms of managing the value of their currencies against the dollar, regardless of where they may be trending in real effective

“Central banks need some wiggle room within which to work, and that is why in Nigeria, we are focused on maintaining a managed float” Roosevelt Ogbonna, Access Bank

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terms,” says Alan Cameron, chief Africa economist at Londonbased boutique investment bank Exotix. “With the deepening of markets over the last decade or so, the debate is not just about trade flows: in many of these countries, cross-border capital flows have become equal if not larger than the trade flows, and therefore are just as important in the determination of ‘fair value’ exchange rates.” The pressure on currencies across the region forces corporates and investors to give serious thought to whom they want to manage their foreign exchange needs. Local lenders might offer specific, small-scale solutions, but it’s the big regional lenders, such as Access Bank, that offer a range of services that fit each market, and can aid an institution seeking regional solutions to its regional currency needs and demands.

Regulation route The problem is most acute in major economies heavily dependent on oil revenues. (Nigeria for instance sources 98% of its export earnings from the sale of oil and gas.) “Over the past year, a lot of African currencies have come under pressure, especially oil dependent countries due to the continuing decline in oil prices,” says Adedapo Olagunju, group treasurer at Access Bank. “Consequently, these countries’ central banks have resorted to regulation to protect their respective currencies. To this end, regulation more than market forces has been the major determinant of the value of these currencies.” A case in point is Nigeria’s central bank. Its governor, Godwin Emefiele, has rejected calls to devalue the naira, as fears rise about the economic and fiscal challenges facing Africa’s largest economy. Emefiele’s plan, which involves restricting imports of food, cement and other goods in an attempt to boost local production, aims to raise the value of the naira and boost the country’s dwindling foreign reserves, which have fallen more than 20% since mid-2014, and are set to decline further. Nigeria’s FX reserves slipped to $31.3 billion at end-August 2015, according to data from the Central Bank of Nigeria, offering the country only five months of import cover. “The central bank has been under a lot of pressure to devalue the currency,” notes Access Bank’s Olagunju. “This has increased the anxiety of FX users both internationally and locally, thus increasing the request for FX hedging products from our clients.” The big picture here is that most of the region’s major economies either run a floating-rate mechanism, or opt for a variation on Nigeria’s ‘enhanced’ or ‘demand’ management strategy, which helps the country, to quote central bank chief Emefiele, “manage what we have and live with what we have”, while cutting its dependency on US capital flows.

Hard pegs to soft pegs But no single view on currency management or strategy is likely to win the day. A 14-year-old treatise on exchange rate regimes, penned by the current vice chairman of the US Federal Reserve board of governors, Stanley Fischer, continues to resonate today. Fischer wrote that nations would continue to modify and adapt their exchange rate regimes, moving from crisis-prone soft pegs to hard pegs or floating regimes, and predicted a continuation of

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Herbert Wigwe, Access Bank

that trend “particularly among emerging market countries”. He was right. Those who say hard pegs do not work often point to the countries that have laboured under them while riven by crisis (the list includes Mexico in 1994 and Turkey in 2001) as well as emerging markets that dodged trouble by avoiding or removing a pegged rate (notably South Africa in 1998). For those nations fully or mostly open to international capital flows (South Africa again springs to mind here, as does Ghana), pegs are “not sustainable unless they are very hard indeed”, Fischer cautioned. He added that a wide variety of flexible rate arrangements (and a good modern-day example here is Nigeria’s demand-management strategy) was “possible”. Roosevelt Ogbonna, executive director, commercial banking, at Access Bank, believes that, over the long term, pegged exchange rates “won’t work in Africa. Central banks need some wiggle room within which to work, and that is why in Nigeria, we are focused on maintaining a managed float. I strongly believe that managed currencies will be a strong focus across the region for the time being.” Angus Downie, chief economist and head of economic research at Ecobank, believes that while floating-rate mechanisms are “better”, countries “still need strong management from their central banks, including in many cases a peg to the euro or the US dollar, a situation that we have in place across western Africa”. But he also predicts that as the situation improves – as the price of oil rises and a more coherent picture of the precise timing and nature of US interest-rate policy emerges - “Nigeria will begin to move to something more free-floating with the naira”. This, though, will take time: the country remains too dependent on income from energy exports, while being undermined by a struggling power sector and an incoherent tax regime. “Nigeria needs to make stronger policy decisions, which are in the long-term interests of the economy,” Downie adds. So the fixed-or-floating argument will continue to rage. While a floating regime may be the best option for economies aiming to attract investment capital, it may remain unpalatable to many if not most emerging and frontier markets. “The erratic nature of short-term portfolio flows may be devastating to such economies, especially when such countries have not been able to accrue enough reserves to support the resultant volatility in their currencies,” says Access Bank’s Olagunju. “Each country should consider the peculiarities affecting their economy to determine how best to manage it.”

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Currency blocs

Chasing the currency dream Despite some successes with regional monetary unions, the prospect of a pan-African currency remains as distant as ever, with the euro offering a cautionary tale GETTING MONETARY POLICY right can be difficult. Many socalled mature markets struggle to create and calibrate the right monetary mechanisms. In Sub-Saharan Africa, the challenge is doubly hard, with monetary officials striving to temper inflation while stabilizing real exchange rates, as they seek to maintain a monetary policy regime that suits a sovereign’s needs. The challenge for key central banks across the region is how to coordinate monetary policy with their peers. While the world has focused – rightly – on Sub-Saharan Africa’s growth and outstanding demographics, it’s easy to overlook the extraordinary strides sovereigns have made in synchronizing monetary policy. Currency blocs have emerged that hold the promise that one day, all corporates will be able to trade across borders, in the same tender, boosting trade and invested capital, though serious challenges still remain.

Strength in unions The Common Monetary Area (CAR) has long proved one of the region’s strongest regional unions. Formed in 1986, it harmonizes monetary and exchange rate policies across South Africa, Lesotho and Swaziland. Namibia pegs its local dollar at par to the South African rand. The East African Community (EAC) is another venerable union. In November 2013 all five members of the EAC - Tanzania, Uganda, Rwanda and Burundi, as well as local powerhouse Kenya - signed a protocol that pledged to put a full monetary union in place within a decade, boosting commerce and bringing all five currencies under one roof. The Kenyan shilling is also rising in importance, having become widely used in South Sudan. “It could be that the Kenyan shilling becomes the regional currency hegemon in that area,” notes Angus Downie, chief economist at panAfrican lender Ecobank. “That would drive trade in the region, and increase trade flows into the EAC as well as beyond its borders.” The situation in west Africa is more complex. Here, two regional francophone blocs exist: one centred around Senegal, and including Ivory Coast and Benin; the other based in Cameroon and including Democratic Republic of the Congo. Both regions have their own currencies – the western and central African CFA francs, officially and respectively called the ‘Xof’ and ‘Xaf’ - each of which is pegged to the euro, trading

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“There is no reason why francophone Africa would seek to get rid of its peg to the euro, given that it affords control of monetary policy, and helps temper inflation” Angus Downie, Ecobank

equally and at the same rate across all constituent member states. This is unlikely to change for the foreseeable future. “There is no reason why francophone Africa would seek to get rid of its peg to the euro, given that it affords control of monetary policy, and helps temper inflation,” says Downie. “There are some people in the region who lobby for the removal of the euro peg, but that is a minority position that no one takes too seriously.” The remaining currency bloc-in-the-making is the West African Monetary Zone (WAMZ), a group of six largely anglophone nations including Nigeria, Ghana and Sierra Leone. Formed in 2000, the zone’s founding ambition was to introduce a single currency, the ‘eco’, by 2015, along with a unified customs union and currency union. That deadline has passed, and it remains difficult, believes Gaimin Nonyane, senior macroeconomist at Ecobank, to see the eco taking shape any time soon. “It’s been in the pipeline for so long, the

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chances of it happening are very low,” she says. “That’s largely because you have regional economic heavyweights such as Nigeria, who won’t want to give up or ‘share’ their currency with smaller countries. Nor will they want to lose control of their monetary policy.” This also ensures that long-held if vague plans to create a single western African currency, by blending the Xof, the Xaf and the planned eco, are unlikely to be implemented, for years if not decades to come.

On the slow burner Creating common currencies is very much a slow-burn project in Africa, for many reasons. For one thing, there remains “a lot of mistrust politically between African countries,” notes Roosevelt Ogbonna, executive director, commercial banking, at Access Bank. Companies and institutions can operate “very well and very successfully across the region” particularly those that best understand the complexities of operating cross-border and cross-currency, he adds. Companies and institutions from Access Bank to Nigerian conglomerate Dangote Group to South African telecommunications firm MTN operate a slew of local operations, profitably and successfully, across the region. Then there is the disastrous model provided by the single European currency, which remains a cautionary tale of the dangers of haphazardly gluing together vastly different economies, cultures and financial systems. Had the euro succeeded, few in Sub-Saharan Africa doubt that regional currencies would have moved several steps closer. Yet the euro’s failings merely forced African sovereigns to retreat from, rather than advance toward, true currency blocs. “African countries took at look at the experience of the euro, and the lack of buy-in by several members when the project began to get seriously stressed,” notes Access Bank’s Ogbonna. “It’s easy to do things when markets are good, when things are going well, but it’s how you operate under pressure that matters. Germany loved the euro when it was sailing along smoothly, but then they were asked whether they really wanted to bail out Greece and other eurozone governments.” Adds Adedapo Olagunju, Access Bank’s group treasurer: “It will be uncanny if Africa ignores the current problems facing the eurozone. While the pros of a single monetary zone outweigh the cons in theory, recent events show that the fundamental requirements for a single currency bloc have to be adhered to otherwise the results may be catastrophic.” Alan Cameron, chief Africa economist at boutique investment bank Exotix, believes that currency blocs would likely struggle, were governments forced to relinquish sovereignty over fiscal matters to a central authority. “This is particularly so in East Africa, where fiscal policy has become an important tool of central government, and the discovery of natural resources - oil in Kenya and Uganda, gas in Tanzania - will make sharing all the more difficult,” Cameron says. “In our view, the best the region can hope for is the progressive

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elimination of tariff and non-tariff barriers to trade, along with the freer movement of labour and capital. But a central fiscal authority is out of the question at this point.”

Different stages African sovereigns face a further challenge here. The region is carpeted with economies in different stages of development. Some economies boast oil and gas; others don’t. Some speak English; others favour French. To maintain a single currency bloc effectively, each member state would have to be able to support a single currency supported by a commodity of their choice, whether oil reserves, gold, or foreign exchange reserves in the form of euros or, more likely, given the fading powers of the single currency, US dollars. They would then need continually to support these reserves via the implementation of disciplined fiscal and monetary policies. None of this would be simple. Indeed, some believe that regional singlecurrency blocs would struggle to survive almost as soon as they were formed. “One could literally see various reasons why the WAMZ currency bloc would have fallen apart [by now], considering the various economic peculiarities facing each member country,” says Access Bank’s Olagunju. Many believe a single African currency, or even a slew of strong, regional currency blocs, to be as far away as ever. On the surface, this is a pity. While the lack of a coherent regional monetary policy has, ironically, probably kept the region bound together (on the basis that currency unions would likely have fomented painful differences between member states, and imbued bitterness among ‘stronger’ member states forced potentially to prop up resentful ‘weaker’ ones), there is no doubt that a unifying currency would benefit the whole region. “If Sub-Saharan Africa was truly working toward a single currency, it would definitely encourage foreign companies and investors to take a much longer-term investment policy in the region,” believes Ecobank’s Nonyane. The lack of a coherent position on collective currencies, she adds, is what ensures that many investments across the region, outside specific industries such as oil and gas, remain so short-term in nature. Yet some remain hopeful, if only for the clear and undeniable reason that Sub-Saharan Africa remains the world’s great and perhaps sole remaining untapped growth market. All the commodities in the world are here, along with a fastgrowing, aspiring workforce determined to build a better life for itself. As more manufacturers push into the region, and as corporates, backed by investment capital, build, process and distribute finished goods and services, the clamour for a more coherent position on a regional currency or currencies will only rise. That is what makes Access Bank’s Olagunju believe that a single-currency bloc in Sub-Saharan Africa remains a “viable project, considering all of the clear and obvious benefits with regards to free trade, market access, and economies of scale”.

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