As Africa becomes less of a curiosity and more of a potential source of big profits, GTR Africa gathers its experts on the continent to discuss trade and trade links in the region.
Roundtable Participants
- Charles Morrison, partner DLA Piper
- Peter Jones, managing director, GreenCapital Advisors
- John Vowell, director, structured trade commodity finance, FBN Bank UK
- Bernie de Haldevang, head, financial and political risk, Aspen
- Rupert Cutler, associate director, special risks, Miller
- Paul-Harry Aithnard, head, research, Ecobank
- Jorim Schraven, manager, financial institutions Africa, FMO
- Tony Uzoebo, director, business development, Zenith Bank
Law firm DLA Piper kindly hosted the GTR Africa editorial board’s first roundtable meeting at their London offices.
Morrison: Is trade increasing or decreasing, are there evident obstacles to trade? What is happening?
Vowell: From the bank’s point of view, the traditional vanilla trade finance businesses this year has done very well. The bank has increased volumes, and in our business – structured trade and commodity finance – we broke through the US$2bn turnover mark in October.
We find that there are big demands financing trade flows in and out of Africa, and we are approved in 20 countries in Africa supporting our clients, and have not yet saturated the market. We do not have the geographical footprint like some of our competitors financing the region, but we are certainly chipping away at trying to develop our expertise in supporting clients in more and more Sub-Saharan markets.
Morrison: If you had to see something getting in the way of that rosy picture, what is it?
Vowell: We enjoyed our best period when there was a credit crunch last year, when the big banks had liquidity issues. We did not suffer from that; we had good liquidity, and we were able to secure a number of mandates.
As a relatively small bank in the UK, we were able to join the banking groups of some of the largest commodity trading companies active in the region who had suffered due to some of these bigger banks cutting back on their uncommitted facilities. So we benefited from that and were able to step in and provide good liquidity and fairly straight-forward commodity trade finance solutions. 80% of our portfolio is bilateral business which demonstrates our success to date.
“The banks are far more rigorous regarding credit now. And it’s not only in Nigeria, stricter rules now apply right across Africa.”
What would maybe hinder us from growing further is if the world just improved and got back to a situation pre-2007, where you had low volatility around the world and fairly stable markets. We need a little volatility.
Schraven: From our perspective, there has been an increase in trade. Demand for trade finance is still increasing in the smaller countries. What we do see in Nigeria particularly is that demand has dropped off a bit.
The bigger confirming banks have kept up reasonable limits, but you do see that as a consequence of their credit crisis that business is down in general. On top of that, a lot of liquidity has flooded into the market from the CBN. These types of measures have resulted in a lower demand for standard trade type products in that economy.
Morrison: Asides from Nigeria, what is happening in other regions?
Schraven: In Ghana it looks like demand is picking up briskly at the moment; there’s a lot of interest there. What I am wondering is to what extent it is anticipation or optimism? It seems that they are expecting oil to start flowing, and on the back of those expectations, banks are coming in with requests for limits.
Aithnard: There is a paradox with respect to local banks because trade volumes are increasing but their revenues are not.
Banks remain reluctant to significantly increase their funding capabilities locally.
Morrison: Why is that?
Aithnard: The risk world has completely changed. Before 2007 and 2008, people were ready to take risk. The banks are far more rigorous regarding credit now. And it’s not only in Nigeria; stricter rules now apply right across Africa. Banks are not comfortable with the risk on some transactions.
De Haldevang: Where is that different from say, five years ago, when interest rates on local bank loans were in the low to high teens depending on which country you were in?
When you have exporters and manufacturers putting up long-term assets to borrow short term to finance trade and banks charging those sorts of rates, then that is a killer for any economy.
From what you are telling me, there is no difference. We are just calling it liquidity now, rather than credit risk.
Aithnard: I think the main difference is that, five years ago, bank lending was restricted by a lack of liquidity in the system. Right now, there is a plenty of liquidity; the banks simply are unable to lend aggressively because they are adhering to stricter credit policies.
Uzoebo: The best way to carry out a minimal risk investment in Nigeria is to look at government-issued papers, and that is why you see most of the issued government bonds and treasury bills are oversubscribed.
“The biggest problem I have had was the lack of willingness of banks to lend to entrepreneurs and manufacturers.”
In terms of trade, I am from the Zenith Group focusing mainly on Nigeria and any African country where we have a footprint on improving and increasing trade finance facilitation.
Our subsidiaries in the various countries are equipped with the right resources in managing the various trade structures available within their environment.
In Nigeria the ability of the government to borrow locally has signified the depth of the market. In Nigeria, external debt is about US$4.5bn, but internal debt is nearly US$22bn. The government borrows regularly from the local system via the banks, and the success can be as a result of excess liquidity within the system.
Jones: The biggest problem I have had was the lack of willingness of banks to lend to entrepreneurs, businesses and manufacturers in-country to support their intra-Africa trade and their export trade into the developing markets.
Vowell: We have seen more and more medium-sized borrowers from numerous countries in Africa coming to us in London for bilateral facilities. These names we have known for a while as off-takers and we’ve seen them in the supply chain, and they are now asking if we would provide them with a bilateral facility.
Even though that process takes a lot longer for those indigenous borrowers, we are able to take them through the process; they sign up to a 65-page document from hell with four pages of CPs and a rigorous security structure.
We have also seen the larger clients in Sub-Saharan Africa coming to us for bilateral facilities for big amounts. Most of the big African commodity traders already have existing syndicated facilities, but those syndicated facilities are often too restrictive in allowing them to move goods through Africa. Clients now expect banks to finance in multiple countries and multiple commodities across Sub-Saharan Africa. In order to support their cross-Africa supply chain they need facilities that are fairly flexible.
Morrison: Why is there still a problem with going inter-bank?
Jones: Local banks in my experience deal with the very large corporates, and other than that, they are looking at retail. They are not looking at the smaller companies. The example I give is of an abattoir in Lusaka who decided to get into the business of using skins and importing skins to produce leather products, and so imported equipment from Italy.
You can take those skins and produce leather, and he was approved supplier of both BMW and Mercedes in South Africa for use as leather upholstery. But he could not get commercial funding, and the funding he did get from PTA Bank was very expensive. How do these businesses hope to grow, survive and expand, which is exactly what you do need in Africa?
“One commodity in particular, where I feel there are tremendous opportunities in terms of structured trade, is cotton.”
De Haldevang: I think there is another point too, about risk. A lot of the local banks have a massive amount of bad debt, often from politically motivated lending. How do you fund that bad debt, other than putting up interest rates for everybody
Jones: Even in the international banks, the guys who are on the ground behave in exactly the same way as the local banks. You can deal with the London office on a big deal and there are no problems at all, but if you try to do something locally, it is too difficult.
De Haldevang: That is particularly heinous when you look at the local subsidiaries of national banks or international banks that have not got the local debt problems that the local banks have, but still charge those sorts of rates.
Cutler: It is also because the international banks are still focusing on the bigger deals. We are seeing an increase in real trade flows, not just values, but a lot of those people are self-financing. We are seeing more trade flows in than we were a year ago. It has probably picked up in the last eight or nine months, but as yet, when we get to areas where they need to get financed, a lot of them cannot get any finance.
Morrison: Is the conclusion we are coming to that part of the reason is the lack of resources? Is there a knowledge gap locally to provide these structured products?
Uzoebo: On the knowledge gap I would not really agree with my colleague, in the sense that we have to look at the local environment, for each country and what is obtainable.
Vowell: There has not been a transfer of expertise in structured trade commodity finance from the western banks to local banks. I am sure Ecobank is good at what it does, and they are probably a very good example of how it can be done. Even in FBN, in my world, we have a specialised structured trade and commodity finance team at FBN Bank (UK), however I haven’t got a counterpart at FBN, Lagos.
We are doing 50% of our business in oil into West Africa; huge volumes. We are dealing with all the top traders in Europe and some of the biggest soft commodity traders. Locally, we should equally be dealing with all the top traders in Africa, and we are ticking those off as we go; we are still new, but we will get there.
Uzoebo: It cannot work locally, because on structured trade, no matter how you look at it, you are looking at a foreign exchange issue. Most of the local banks can finance structured trade locally. If you ask them to raise a large amount in local currency, they will. If you then ask them to raise US$1bn tomorrow, it becomes an issue.
That is why we depend on foreign institutions to help out with this problem. The knowledge issue is managed locally. Whatever structure we put in from London, there are people in the local banks that understand and manage these structures.
This has enabled the creation of value-added chains within the local market.
Vowell: We were looking at a deal with a client this morning for US$6mn facility into tanks into Mozambique. If that rolls 12 times a year like they say, every 30 days, that is a nice transaction. We are not chasing the US$200mn or the US$1bn business, because what we are trying to do is understand how our client works across these multiple opportunities across Africa, and trying to tap into all of them.
Aithnard: I have to agree with you. There are fantastic opportunities in structured trade within Africa, despite the currency risks. One commodity in particular, where I feel there are tremendous opportunities in terms of structured trade, is cotton. In my opinion, the cotton market looks like cocoa in the 1990s. Currently, the prices are reaching record highs. Export-wise, production is declining.
You have the same scheme in terms of production as in cocoa, so why are we all chasing Cocobod as a structured trade opportunity, when you can chase massive volumes coming from countries like Benin and Burkina Faso on cotton?
De Haldevang: It is still the same as it was 10 years ago or five years ago, when if you wanted to go from A to B in Africa, you actually had to leave the continent to come back in. To get from Kenya to Libya you have to go to Amsterdam, unless you are feeling adventurous and take a succession of internal African flights, which might take just as long.
The reality is that there is no infrastructure for intra-African trade, and we are at an interesting stage. We are seeing that the concentration of global power is shifting away from the US and more to emerging markets. This is a massive opportunity.
Vowell: I do not think infrastructure is the issue; the commodities get to port. What we lack is banks. The skill set has been lost because credit committees are restricting business promotion managers and not allowing them to ply their trade and follow a well established STCF business model.
Morrison: But the concept is the same, because one would have thought that structured deals are the way forward for commodities?
Vowell: Less banks want to do it because it is hard work from a marketing perspective and requires a fairly complex middle-office transaction management function. A lot of banks in this field prefer to simply participate in the various trader revolving credit facilities or the large trophy syndications.
One of our priorities is to develop a commodity client base in Europe and Africa supporting African trade flows providing bilateral facilities.
Cutler: There is also an issue that the South African banks still have currency controls, so if they are going to do finance, they have to do it offshore in Africa or in London. They can still have a problem in doing anything that is not rand-denominated.
Aithnard: Yes, it is an issue. And we are trying to address this through our alliance with Nedbank. For a specific commodity financing deal, Ecobank would look to finance the local currency component whilst Nedbank would provide the foreign currency element. For non-Rand opportunities, Nedbank would look to leverage their London platform.
Vowell: Unfortunately, where the banks have pulled back from putting those structured deals into place in Africa, the trading companies have stepped in. They go into the general syndication market with a revolving credit facility, and use that money to do all the things banks should be doing – but are not – in all the countries sourcing commodities.
In the Democratic Republic of Congo (DRC) four years ago, you had the classic ‘traders taking the money in the suitcase’ and taking out copper building up track records with the various smelters before the deal becomes bankable.
Traders tend to initiate the unbankable deals, and you need to ask yourself at what point do these transactions become bankable?
Banks try to put a structure around them, but traders opened the way, and you should be following the trader. There are also local indigenous companies that you should be looking at and following.
Schraven: That is part of the issue. The most important reason it is not happening – and yes, maybe knowledge is part of the answer – is probably incentives.
You start adding all the different incentives up and looking at the alternative things you can put your money into. You look at the other kinds of costs of a structured deal; you need to have a certain transaction size that is often not there. There is a whole host of incentives for banks to put their energy into other things.
You can get securities in other ways more cheaply. Companies do not have that many alternatives than their local bank, so their negotiating power to force a structured deal with a lower funding cost is not that great. If you start adding all these things up, you will get a pretty good explanation for why there is not that much happening on this front. In many countries there is still Basel I, so the capital relief on all these structures is not that great. There are just too many alternatives for banks to busy themselves with.
Indeed, T-Bills had reasonably high rates in the past, although that is now changing, so that is going to be an interesting trend.
Vowell: That is true.
Schraven: The one positive there is that we have recently seen that change. There is a lot more liquidity in the system, and T-Bill rates have plummeted across the continent. The positive note is that armchair banking has become that much more difficult.
There is more capital in the system, so there is certainly an incentive to start looking for some return again, perhaps to push into some of these medium-sized companies that were being left out because now there are no returns elsewhere.
Morrison: The local legal community has come on leaps and bounds over the 20 years I have been practising in Africa. The quality of lawyers locally is way beyond what it was before.
But I think if you were to ask a Barclays, or an FBN or Ecobank sitting in any of these countries, east or west, “is it any easier than it was 10 years ago to recover your money, if you have to make demand or enforce your mortgage through the courts?” I think they would say it is no different.
If anything, there are many new restrictions and it is worse, and I think that remains a significant problem.
Schraven: It is a good point, but can you blame them? The legal system is not capable in many of these countries of even understanding the sophistications behind structured finance. FMO’s approach has been to keep it simple, to really just get the simple things done properly first and build up from there. You need to take steps first before you can start running. That is where we stand. I do see progress, I do see a positive picture there, but I think developmentally, you have to walk before you can run.
Aithnard: There is room for improvement. But the trend is today positive. Policy and governance are being dictated more and more by professionals in Africa. I am more optimistic now than 10 years ago. From the governance perspective, we should expect continued improvement; Africa has learnt from the mistakes of the past.
Policymakers are more exposed to the international community now. Some countries have raised bonds internationally. So there is a need to comply with international standards. This is radically different from the situation in the 80s and 90s where the main regulatory pressure was coming only from IMF and World Bank.
“This does not explain why you, as a local bank, will not support your exporter of agricultural produce when the buyer is Tesco.”
Jones: It still does not explain why local and international banks operating in Africa do not support exporters who are exporting outside Africa. The smaller medium-sized companies just do not get support, end of story.
Aithnard: I will try to explain, from my perspective, why they don’t. You need both sides to finance a commodity trade transaction. And usually, the foreign side seems to be the most problematic. One issue that the international banks have – and I think it is a mistake – is that, when presented with a transaction, they will inflate the sovereign risk and the issuer risk and ignore the transaction itself.
That is a key point. For example, according to its books, a company may not appear to be in the strongest of financial positions. Instead of inflating the issuer risk, why do banks not focus on the transaction itself, and structure the deal in such a way that they can secure at least some of their floats?
It is what some local banks are trying to do. In weighing up a deal, you should focus less on the perceived issuer risk and more on the risk/reward profile of the transaction.
De Haldevang: That is why you have an ATI. With an ATI, the transaction is secured and prioritised and you do not need to worry quite so much about the issuer alone.
Aithnard: You do not always need to go that deep. Public sector transactions, such as road financing, or crude and refined oil importing, are usually based on some levies that the government raises directly. You could put in place covenants to secure these flows, thus mitigating the risk.
Jones: This does not explain why you, as a local bank, will not support your exporter of agricultural produce when the buyer is Tesco. It is really basic stuff.
Uzoebo: Let us look at the issue of capitalisation and how much business it enables the regional banks in Africa to carry out. Apart from the Nigerian banks, and recently Ghana now, most of the West African banks are not well capitalised.
So how can they carry out these transactions? It is not feasible. Gradually, you can see the new process whereby Nigerian banks are going into various West African and other African countries. They are moving faster than the other banks in the continent.
As the expansion continues, we will hopefully in the near future see more structured trade finance programmes within regions and within Africa.
Morrison: How do you see the influence of the Chinese and trade between China and Africa developing?
Uzoebo: For some African countries, the Chinese offer the best thing since sliced bread; fewer conditions and more funding. But they are coming to Africa for one thing – natural resources and not necessarily development.
“China states that it is not interested in having political influence in Africa and it is hard to see how that position can be sustainable.”
The question to ask is what do they need and what do they think Africans lack? What is the role of the Western world in this situation? The major concern is that for each government, how do they manage it? Do they use that to develop the country, or do they use it as a political initiative?
Aithnard: I think Africa knows what the Chinese want, but what Africa needs to do is to define its own agenda.
De Haldevang: If the Chinese are manufacturing, they will import the supplies and equipment from China even if available locally, often to guarantee quality.
There is still a bit of euphoria about these huge sums of money coming in, without the consequences of that coming through. China states that it is not interested in having political influence in Africa and it is hard to see how that position can be sustainable.
When you put that sort of money into a country, you do not want the next government to say: “We actually now do not like the way you are doing this, we want you out”. They will have to become politically interested, and they have demonstrated it in quite a few countries by now that they are. It would be naïve of us to sit here and pretend that there are not consequences from this sort of foreign direct investment and debt going into Africa, and that the consequences might not necessarily always be in Africa’s favour.
Jones: China is just an economic colonialist. That is all it is to them, no question. It is the way they behave and the way they operate.
Uzoebo: I look at Nigeria as a typical issue. Let us take, for instance, the oil and gas scenario. The Americans want our oil. The Russians/Europe want our gas and the Chinese need both. Hopefully one day Nigeria will soon have the construction of a gas pipeline direct to Europe/Moscow. The Chinese through SINOPEC have recently acquired the oil and gas upstream assets of Addax in Nigeria and they are also planning on building a new refinery.
Their need for resources has made them a bit bullish in the method they use in acquiring these resources. Most importantly, with a large foreign reserve and a growing economy, they can afford to remain bullish.
De Haldevang: Africa potentially undermines itself by not grappling with the leverage it actually has. Africa must speak more as one; you have all the tools among the regional integration institutions, with the African Union and the Economic Community of West African States (ECOWAS), the Common Market for Eastern & Southern Africa (COMESA), the Community of Sahel-Saharan States (CEN-SAD), Southern African Development Community (SADC) etc.
These institutions are there, but they are not actually talking for Africa, they are still rather parochial, looking at each country or their own region. That is a crucial question for Africa. Otherwise, in five years time, we will be sitting around this table and you will be saying the same things that you have been saying about the UK and the US about China.
Schraven: We should also look at ourselves. The current picture is that Europe comes to Africa wagging its finger to give money away, and China comes on its knees to take resources home. The Africans love the Chinese for it, and we should take that message and change our strategy.
Cutler: It’s back to trade: all that has happened is that the whole world has realised what resources Africa has, so you have investments from the Russians, Brazilians, the Chinese, and everybody else. All it is a way of co-ordinating it, which is why we are seeing more business with trade going on. GTR
