Is Africa equipped to deal with the turmoil that continues to encroach upon its financial sector? Members of GTR Africa‘s editorial board gather to discuss.
- Paul-Harry Aithnard, group head, research, Ecobank
- Rupert Cutler, managing director, financial and political risks, Newman Martin & Buchan
- Bernie de Haldevang, head of financial lines, Aspen
- Jean-Louis Ekra, president, Afreximbank
- Razia Khan, regional head of research, Africa, Standard Chartered
- Joe Mensah, chief executive officer, Ghana International Bank,
- Tony Uzoebo, executive director, business development, Zenith Bank
- John Vowell, director, structured trade and commodity finance, FBN Bank (UK)
- Jorim Schraven, manager, financial institutions, FMO (Chair)
Schraven: When considering the euro crisis, Basel III, and declining growth outside of Africa, what are the most important global developments bearing down on African access to finance and trade finance?
Ekra: From our perspective, we could see that all those events have affected Africa’s access to finance indirectly. For instance, we saw our pipeline of transactions growing from an average of US$3bn a year before the 2009 financial crisis to about US$10bn to US$12bn during the financial crisis; currently it is about US$18bn. Essentially, this is because we operate through trade finance intermediaries, who normally would have had access to other trade finance lines and, because they do not have this access, they come directly to us.
We have not yet felt any real impact from Basel III because it is not clear how those rules are going to play out, but clearly the financial crisis and the ensuing liquidity crisis has definitely had an impact on the African trade finance market, both on availability and also on price.
Before the crisis, Afreximbank went to borrow on the Eurocredit market at a margin of approximately 100 basis points (bps) over Libor. During the crisis it went
up to 600bps. Now, it is going down again to the 275 to 300bps region. That is the impact that we have felt.
Schraven: Razia, perhaps you could give us your view on how macroeconomic trends are affecting finance?
Khan: I think one of the big concerns right now is that it is a shock that we are yet to see. I think, increasingly, we are hearing more and more anecdotal evidence of asset disposals by some European banks.
Maybe, as a recap, we should look at what happened during the 2008 crisis. At that time, the total amount of cross-border lending to Sub-Saharan Africa as a region was probably smaller than just about any other region, if we go with the BIS statistics. However, what was really interesting was that if we compared the peak of the cycle, around the second quarter of 2008, to the trough of the cycle, around the end of the fourth quarter of 2008, the largest peak to trough decline was actually experienced in Sub-Saharan Africa.
On the one hand there is the narrative that Africa is relatively immune from what is going on elsewhere and that it does not account for a great share of cross-border lending anyway, and on the other there is the reality that when risk aversion strikes, we do tend to get much more of a pull back in Africa.
I suppose that the difference is that, if we are looking at the total quantum of cross-border lending for which the data is available, there are really only two countries in Sub-Saharan Africa that feature at all heavily.
The majority of cross-border flows seen in Sub-Saharan Africa are centred on South Africa and Nigeria. Hence, analysts will watch these two banking sectors very closely. What will tighter availability of offshore liquidity mean for the expansion of Nigerian banks in the sub-region?
What will the lack of participation from European banks – relative to what we have seen traditionally – mean for the South African banks? Everyone will be looking at euro area risks, and what they mean for the financial sector, very closely. It is a big concern. I do not think that in the macro sense we are likely to see the growth picture in Africa being the point that causes the concern, but there is no question that Africa is likely to be caught up in what is happening generally.
Aithnard: I fully agree with Razia. I am not expecting any impact on macroeconomic growth in the short term. Africa will remain one of the fastest growing regions going forward but that is not to say that the region will be totally immune. The reality is that Africa has already been heavily affected by the crisis in terms of the performance of its currencies.
Of the 18 middle African currencies in which Ecobank quotes and trades, 12 are underperforming year-to-date against the US dollar. The Kenyan shilling, the Ugandan shilling and the Tanzanian shilling have all depreciated by almost 20% relative to the US dollar this year. Many countries are experiencing underlying GDP growth of 10% but this to a degree is being undermined by local currency weakness relative to the US dollar.
The next stage, similar to what we experienced in 2008, will be a lack of liquidity in the system caused by the scarcity of dollar funding and the increased costs of financing trade to and from Africa. I would tend to agree with Jean-Louis that we have not yet seen the impact of Basel III on Africa, which will be significant, especially in terms of capital needs and with respect to how banks categorise their trade finance activities in their books.
Mensah: I agree with the earlier speakers on the impact of the financial crisis on Africa in terms of availability and pricing. But while we have seen reduced appetite for African assets and a lack of availability of trade lines and, where they are available, a hike in pricing, I see it in another way. For African institutions like my own,
I see this also as an opportunity. We have seen some opportunities with very good margins. With the hike in prices we have seen the opportunity to go in there and take advantage because there has been a void. But unfortunately, we have not had enough capacity. If we had, this would have been an opportunity for African institutions like ourselves to go in there and fill the void. But we did our bit and created some growth for ourselves.
de Haldevang: We talk about global effects and global impacts on Africa and there are some events happening in Africa that are having global effects as well, so I think we should also turn this around the other way. In one corner of Africa, piracy is affecting a huge amount of shipping; with about 50,000 crossings per year and 400 ships attacked every year – 10% of which are taken.
This has a significant impact on the cost of trade through that region and is a disruption. There have been elections virtually throughout the whole of Africa in the past two years or so, plus some less scheduled regime changes in certain other parts, though not necessarily in Sub- Saharan Africa.
Oil wealth is beginning to flow into some countries that have not previously had oil earnings: Uganda and Ghana being two of them, and there are some issues about the stability of the Ugandan regime. These things have national and international repercussions, not least in terms of additional oil that is coming into the market and how western governments react to these events. So I do not think hat we should focus purely on what is happening externally.
Cutler: Africa itself, as a major commodity exporter, has other opportunities including exporting to Brazil. One of the issues is that both Africa and Brazil have poor infrastructure, there are new ports being built but they have yet to meet demand.
Globally there is a lack of funds; there is only so much money to go around, and with banks having to be more careful with how they lend that money, there is going to be demand from various parts of the world chasing the same capital base. Basel regulatory requirements, the financial situation and internal credit committees mean appetite for most risk will drop because people just cannot lend more than they could before.
Vowell: I have vivid memories of 2008 because our team was set up in 2008 and we benefitted from the lack of liquidity in the market. We experienced the big
AA/AAA-rated banks pulling away from trade and leaving a lot of the top-quality corporates and traders in an uncertain position. Do you remember those banks? Wewould not have got a look in at all and we were able to benefit from that.
We were, with our African focus, able to go and sit at the table of some of the big trading companies and offer them what I would call fairly straightforward structured trade solutions in Africa and we got good mandates.
I hope it happens again next year, because it is in our interests, as African banks, I think, to take advantage of the situation. At FBN UK, we do not rely on interbank liquidity; we are pretty much reliant on our deposit base, our support from the central bank and our large corporate depositors. So we are not restricted by the interbank market liquidity tightening. We have a lot of very good liquidity today. We have the appetite to take risk in Africa. We have partners like Afreximbank and the Africa Finance Corporation (AFC), who we work with on some of the big deals that never come to the press in places like Zimbabwe.
I think there is no downward pressure on pricing; I think we are insulated against downward pressure. We will see the opportunity to increase pricing next year.
I think you have to look back at 2008, when Standard Chartered did Cocobod at Libor plus 400 bps. This was the last time we participated. Today it is Libor plus 65bps. So I just think it gives us an opportunity also to price risk properly. Unfortunately, Cocobod pricing does not reflect the risk.
It has gone beyond that; it is just a deal that everybody wants to be involved with in order to tick the box of doing a deal in Africa. We see next year, hopefully, as a year where we can defend pricing, increase our portfolio and develop our business. Basel III has not taken effect in Africa; I agree with that. I think European banks are going to withdraw and reduce their exposure to trade and it gives other banks – African banks – the opportunity to develop their business there.
Uzoebo: If we look what Africa contributes to the rest of the world, it has less than 3% share of the world trade compared with a share of world population of over 14% – you can say that is skewed. Our contribution is quite small; our main trading partners are the Europeans and the Americas, and we are now seeing the development of new trading partners from Asia.
These new trading partners will gradually close the gap that will exist if Africa witnesses any reduced trade from the main trading partners. Even with the ongoing European crisis affecting the major European banks, Africa will still have new counterparties from other continents to continue to work with due to so many improving factors within the continent.
Let us look at China and Africa. The Chinese have continued to be aggressive and bullish, but not in a structured form, in the way it trades with Africa. However, as the world becomes an efficient global village, you are going to see the Chinese conforming to structured trade patterns in line with the rest of the world.
The ongoing European crisis will affect Africa in the short term. Unlike the 2008 crisis, this will bring about a new quest for African commodities by new trading partners.
We are seeing Africa growing from strength to strength with regards to democratic institutions and putting in place enabling and regulatory environments that are focused on continuous growth within each African country and region. The strengthening of financial institutions and the increasing supervision by the Central Banks are gradually improving growth in many African countries.
I hope that this moment will be an awakening moment for African countries to improve on regional trade and infrastructural development.
de Haldevang: How will the African banks deal with the issue of tier one capital and Basel III? That is not just an effect on the western banks. You mention the aggressive stance of China. While China may appear to be aggressive it predominantly takes a long-term view and acts in self interest. It is not aggressive for the sake of being aggressive. It has a clear vision and plan of execution.
The European banking sector is under significant strain at the moment but I do not think it is as easy to suggest that African banks can just fill that void. There is room within the African banks to do a lot more. The way that some domestic African banks seem to operate is that they compensate for overdue loans by making a blanket increase in margins through raising domestic lending rates to levels that make them expensive.
You might argue that it is forgivable for purely domestic African banks to have those sorts of margins but it is less forgivable for banks that have a bigger base or principal earnings or their domicile elsewhere and, perhaps, are being more opportunistic in their charging structures. I think one of the big problems is the differential between the interest rate on the same type of lending within Africa and the outside.
So if there is anything that is going to kill the growth of the African banks, competition is, and will remain, a key issue. The Kenyan central bank has just announced a 5% base rate hike, for example. There is great potential for non-African banks to come into the market and lend at attractive rates, competitive to African banks, and I can foresee a time when things begin to sharpen up.
Schraven: So what are the differences between now and 2008? I think on the positive side, there is confidence that Africa will continue to grow, China is playing a very active role and we have got local banks that are ready to take up at least some of the slack that we expect to come from the European banks shortening their balance sheets. On the downside, there is a shock yet to come from the European banks reigning in.
We have got local issues that were not there last time, such as elections, piracy and terrorism. I also see, from a development point of view, that development aid is certainly going to be cut quite substantially.
Khan: A lot of people are saying that what we are seeing is the same crisis that never really went away. Of course, last time we essentially had a financial crisis, we had the sovereigns stepping in and using their own balance sheets to try to put everything right again, and this time around we have got a sovereign crisis that is translating into a financial sector crisis.
Now, the problem for a region like Africa is that, on the basis of headline growth at least, Africa seems to have got through the last crisis OK. This was partly because of the countercyclical policy response that was put in place. The crisis happened at a time when African economies had been growing very strongly. Fiscal policy was generally in good shape. Central banks could afford to cut interest rates, as debatable as the stimulus from lower interest rates continues to be.
This time around, things are different. The policy space is that much more constrained, so if we are hit by new external shocks, it is not immediately evident that many governments are going to be in a position where they can afford to ramp up fiscal spending further.
We have seen a recovery in general GDP growth rates; we have not necessarily seen a big structural rise in the amount of revenue that can be collected in any economy. I think the room for further increases in fiscal policy and spending or further expansion of fiscal policy is very limited.
One of the successes the last time around, of course, was that the IMF was able to step in and boost FX reserves through their SDR injections. Foreign exchange reserves and external liquidity ratios were generally in a much better place then.
Consider the route that we have seen in African markets in the very recent past in September/October 2011, across East Africa, Nigeria as well. Central banks have been forced to put in place new regulations, have cut net open positions, and have drawn down on FX reserves to defend currencies. Monetary policy has also needed to be tightened.
Nigeria, in October, saw the policy rate increase by 275 bps. Kenya, yesterday, [November 1] was up 550 bps in one go. Uganda went up 300 bps. There is little room for easing, given the inflationary environment.
So, yes, in one sense, the fact that we had got through a severe crisis in 2008, the worst that the global economy had seen in 50 years, has given everyone a sense of confidence that maybe Africa can do it again.
The uncertainty factor also matters. If you remember, back in late 2008, there was huge uncertainty about which troubled financial institutions would survive – you just did not know what the next day held. I think there is the sense of confidence that this time, because the risks are at least thought to be better known, everyone is in that much of a better place and is better able to deal with it.
Policy makers showed resolve in dealing with the last crisis and the hope is that they may just come through again. At the same time, if you are thinking through what can be done about the risks that are evident, it is not a very comforting picture at all. There just are not any easy solutions available.
de Haldevang: Razia, you say that the risks are known, but we do not know what the risks are if the euro collapses, which is something that we have to face. We do not know what the outcome of that would be. The worst case scenario is the dissolution of the EU. We can’t predict what the repercussions will be.
Khan: In that sense, there is still a great deal of uncertainty. This time around people have a sense that if it comes to it, policy makers will somehow get their act together and protect the large financial institutions with systemic importance from going under.
There is still a sense that Africa did weather the shock of the last financial crisis and there is still this optimism about the basic underlying growth momentum that it is not going to turn around the last 10 years in Africa entirely. Progress has been made that had taken Africa to a different place and that positive growth trajectory continues even in more difficult climate.
Ekra: Notwithstanding the environment, the fundamentals are much better compared to years ago. And it is where these fundamentals are not right – that is where the crisis is. We should not fool ourselves. We should look at the case of Greece, for example. There are structural adjustments that are required and, unless they go through those adjustments, there is simply no way that they are going to get out of that crisis.
Africa was in a similar situation in the 1980s after the debt crisis and it was the 1990s when it became obvious that we had to go through it. It took 20 years of implementation of structural adjustment programmes for Africa to get to the point where we are now, with reduced debt ratios, reduced fiscal deficits, which are things that a country has to have if it wants to weather a crisis. For me, it is irrelevant whether Greece is getting out of the euro or not, because they are going to find that, even if they get out of the euro, there is no way that you can manipulate the currency the way you want and just get out of a crisis.
de Haldevang: The issue is not whether they get out or not, which I think they undoubtedly will; it is how quickly the rest recover from what the external damage is.
Schraven: We have been talking about the trends and the headwinds that are coming Africa’s way. What is going to be the impact on the African economies of the crisis this time around?
Vowell: It was like watching a slow-moving train come towards you in 2007 and 2008. We then had a collapse in commodities pricing. We have not seen that yet. That has not followed through in today’s market. So we still have strong cocoa prices and good sugar prices, we have reasonable prices around copper, so I fear that if this crisis translates to a deep reduction in the price of commodities, I think we will see real pain in Africa.
Regarding a lot of the traditional financing that banks do in many of the countries in West or Sub-Saharan Africa, the comfort at the moment has been that prices have been well-supported and that has supported the transactions that we have all been doing. We have seen it with cotton. I think it was mentioned that cotton went up to US$2 plus and now it is back to US$1.16. It has been very turbulent; the three-year average has been about US$0.50.
I am grateful that the whole crisis has not yet translated into lower commodity prices for those countries that depend on them, for example, the Ivory Coast for cocoa, or Ghana. If the cocoa price was to fall 40%, what would that do to next year’s Cocobod transactions or even to this year’s? I think we need to look at those risks and, going forward, we would almost anticipate this translating into some form of correction in pricing.
We do deals with local traders. The guys in Ghana, the guy who wants to import sugar, store it for 90 days and sell it – local rates are 24-26% – can take advantage of some of our facilities at single digit over Libor. Should we increase the rates? I am not sure.
We see pain already in some of these destinations where we finance a lot of commodities in storage in many of these countries where people are suffering because the local banking options are closed for their trading business. Already, they are closed because they are too expensive and I wonder how this will translate into commodity prices and how it will affect those markets.
I am not so worried about the European banks’ situation. We benefit if they scale back their African footprint because of the current crisis in Europe. I am more concerned about where copper prices are. In 2008, the cost of refined sugar fell below the cost of production. We had some weird situations going on. It is going to be longer than a year before we get through this situation. We are only just beginning now. It is always a bit of a tailwind for Africa; it does not always get immediately affected; I think there is always a bit of a delay.
South African banks suffered in 2009 – they did not suffer in 2008. We have got a little bit of a delayed reaction yet and it will be interesting to see what happens in Q1 and Q2, but commodity prices are key. We have to hope that those stay strong.
Schraven: What about Kenya? It is clearly a country that is suffering from some of the internal trends that have been identified: elections, piracy, terrorism and so on.
Aithnard: Kenya is being influenced by a combination of global and local factors. In terms of local factors, economic challenges and fiscal deficit need to be addressed. Looking globally, one of the negative aspects for Kenya is inflation, which is going to remain high in the coming months.
So we may see the Kenyan shilling remaining under pressure for some time. At the same time, and this applies to many African countries, not just Kenya, this provides a massive opportunity to address some of Africa’s structural challenges.
Cutler: Is that not partly linked to political will? In South Africa, for example, if you view it from abroad, there have been some odd decisions by the current government, such as not letting the Dalai Lama visit, no direction on the Libyan uprising when it was offered, and no clear response to the extreme views of Julius Malema, who has generated significant support for nationalising the mines. As a new Bric member economy and being an African economic powerhouse, it appears that South Africa is still fighting the politics of 20 years ago and not really addressing the issues going forward. If you nationalise the mines, who is going to run them?
Who is going to invest in them? Are you going to lend to them?
Schraven: In the last crisis, it appeared that South Africa was shielded to a large extent externally because of the exchange rate regime that it had. It still had an issue in 2009, but that was mostly internal. How is it going to pan out in South Africa this time around?
Aithnard: This crisis is going to force African countries to reconsider some of those policies. In South Africa, for example, the foreign exchange restrictions do create challenges for intra-African investment and the current crisis presents an opportunity to address some of the bottlenecks. If recessionary pressures continue to depress Africa’s trade with the developed world, the continent is likely to react by tapping into underexploited opportunities such as intra-African commerce, which, at just 12% of Africa’s total global trade, is far too low.
Ekra: That was a debate we were having with Pravin Gordhan, minister of finance of South Africa, a few weeks ago in New York. Now clearly, if we are saying that Africa is the next frontier for investment, in a country like South Africa, 10 hours from Europe, 10 hours from Latin America, 15 hours from Asia, why would you want South Africa to look at Europe or America for their market? They should look at Africa. What Africa needs are infrastructure investments, and they have the means to lead that.
Once they do that, there will be an increase in intra-African trade. That is a solution. The diversification of African trade is a olution for Africa to get out of where we are. You would diversify exports away from commodities. You would diversify partners away from the countries that are growing very slowly.
With the crisis there is this opportunity to ask what we did wrong before. Should we not revisit our own strategies? This is the time for South Africa to look at it differently, to look at the role that they should play in the continent.
Mensah: There were high hopes a few years ago that South Africa was going to be the engine of growth on the continent and we all looked up to South Africa and Nigeria – the giants. South Africa was slow to get off the mark and it has been a bit disappointing.
However, of late there have been some green shoots in that area. Let me take an example from West Africa. In Ghana, South African companies moved into the goldmines with a lot of investment. South African banks have been getting into infrastructure in Ghana’s nascent oil sector. They have provided infrastructure for the oil and gas sectors in the western region. Nigeria has also played its part. There has been a lot of Nigerian investment in Ghana in several areas such as infrastructure, telecoms, finance, and so on.
Cutler: Part of it is that inter-African trade is growing and will continue to grow, but the European, American and Chinese markets for certain products are premium markets and they have an established middle-class who will spend their money. African economies are developing and we see that in demand for insurance products, where imports change from basic rice and sugar going in, expanding into electronic white goods such as televisions and refrigerators. Angola is a good example of this, where 10 years ago there were very little electrical goods going in; it was just basic products.
Companies that trade with lots of different countries give the flexibility to sell the appropriate product to the specific marketplace and broaden their customer base. Companies, farmers and countries will always trade because they still need to buy raw materials, food and everything else and therefore the role of strong and effective banks and insurers will remain key.
Schraven: There is a general sense that this time around may not be the same as 2008, and that the capacity of Africa to deal with the current crisis, particularly on the fiscal side, may not be the same either.
In terms of how these trends will affect the major African economies, the situation varies:In Nigeria, much will depend on what happens to commodity prices and, if they drop substantially, the country will feel the pain. We were most sceptical about Kenya, which may be facing a perfect storm, where internal trends combine with external trends.
For South Africa, it could be an opportunity, if they care to take it, to reassert their role on the African continent and take a leading role in financing infrastructure.