Local understanding and perspectives on the risk of doing business in a region or country are essential in driving corporate business programmes. “A correct understanding of risk in Africa – along with an appreciation of the growth potential yet to be unlocked by trade; both cross-border and intra-Africa, provides global corporates with a new lens through which to identify and access African growth,” argues Vinod Madhavan, Head, Transactional Products and Services, Africa at Standard Bank.
Africa - growth slowing, but still huge potential
Currently a large number of the world’s high-growth emerging markets are in Africa. Forecasts for 2016-2020 place Africa as the second fastest growing region in the world (at a CAGR of 4.3%), just below Emerging Asia.
However, this is down on the growth highs achieved during the heights of Africa’s commodity super cycle. This has led many commentators to conclude that Africa’s growth story is tailing off. “Nothing could be further from the truth,” asserts Mr Madhavan. “Africa’s future potential remains far larger than its past achievements - especially when one considers the growth potential latent in the continents current low levels of intra-Africa trade. Currently hovering around only 12%, these intra-African trade levels offer great headroom for growth.”
Africa is not a high risk region
Global perceptions of Africa as high-risk, however, often prevent businesses from correctly identifying opportunity on the continent. This is exacerbated by perceptions that trade in Africa is also complex and high risk. However, the numbers paint a different picture of African risk.
The 2015 ICC Trade Register study, conducted amongst 23 banks around the world jointly accounting for 60% of global market share, for example, reports that:
- export Letters of Credit as well as Performance Guarantees in Africa and the Middle East have the same default rates as the Americas
- default rates in purpose specific loans and trade finance deals amongst African and Middle Eastern countries is 1.04%, lower than in the Americas
- import Letters of Credit in Africa and the Middle East have only slightly higher default rates than in Asian and Pacific countries.
Driving SME growth
Separate research shows that an increase in the availability of finance for cross-border trade drives a disproportionate increase in SME growth. For example, a 2013 Asian Development Bank survey found that a 15% increase in access to trade finance enabled firms to hire 17% more staff while production increased by 22%.
Standard Bank believe that, since SME’s are the biggest drivers of employment, any increase in access to trade finance should rapidly expand Africa’s middle class, driving consumption and growth for generations to come.
Exploiting African growth opportunities
Asian corporates have been quick to recognise Africa’s growth opportunities. Chinese and Indian corporates in particular have approached African risk and opportunity with confidence, leveraging Asian centres of excellence in risk mitigation, such as Hong Kong and Singapore, to manage this risk.
The challenges for global multi-national corporations in Africa are:
- developed world risk models along with the unintended consequences of compliance produce a high view of African risk
- Africa is yet to develop the kind of sophisticated local or even regional risk mitigation and insurance industries that would enable global corporates to distribute their risk exposures locally - through continent-wide risk mitigation programmes using regional counterparties as they would in Europe or Asia.
Standard Bank have found that these global MNCs currently manage African risk by spreading this amongst their partner banks in their home markets, who will only manage risk for their existing or home-based clients operating in Africa. Moreover, this will typically only be offered on either a specific entity or counter party basis in Africa.
Standard Bank’s differentiators
Standard Bank believe their key differentiators in the Africa region are that they:
- are present on the ground across the continent, so it is able to work closely with African corporates, insurers and other businesses to identify and assemble competent risk mitigation counterparties/techniques in local markets – or at least across regions. “Since we know these businesses intimately we are confident and able to underwrite and place risk for longer tenors in the local market,” says Mr Madhavan.
- have a sector focus approach. As opposed to looking at corporates in Africa exclusively through, say, a geographic lens, “Understanding that MTN and Shoprite in Nigeria face very different risks because they operate in different sectors, provides an additional lens through which to assemble appropriate local risk mitigation solutions,” explains Mr Madhavan
- remain optimistic about Africa as it is seeing the growth from the inside. Not having this inside view means that many observers conflate risks, “allowing the very real opportunities presented by Africa’s growth in trade to be missed, through exaggerated constructions of risk,” says Mr Madhavan.
CTMfile take: The importance of local and regional cash management banks is growing. Africa cannot be understood from afar.
- This item appears in the following sections:
- Cash & Liquidity Management
- Cash & Liquidity Management in Middle East & Africa
- Evaluating Banks' Overall Performance
2012 ICM Survey Results: Middle East & Africa
The numbers for full service branch countries and those with direct access to the clearings in the Middle East & Africa are given below.
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