Sub-Saharan Africa has had relatively little exposure to ‘toxic’ assets presently destroying the balance sheets of international banks and sending OECD economies into a downward spiral. This could potentially boost the continent’s image as an attractive investment destination.
GTR asks a group of African specialists to what extent Sub-Saharan Africa could be seen as a safe haven for investors seeking good returns.
Participants
- Sadia Ricke, deputy global head of natural resources and energy financing, Société Générale, Paris
- Jean Talbot, head of commodity structured finance, energy, commodity finance, BNP Paribas, Paris
- Arjuna Balasingham, head of structured trade finance, Africa, Standard Chartered Bank, London
GTR: Is Sub-Saharan Africa a safe haven for investors?
Talbot: In many respects, Africa can be seen as such. This is a paradox as Africa was a ‘forgotten’ continent (forgotten by investment bankers save for North Africa and South Africa) generating high country risk and low potential (due to low income, weakness of local capital markets).
But some weaknesses have turned out to be an advantage: lack of a capital market also means less systemic risk and small exposure to ‘toxic’ assets.
The traditional country risk analysis has been quite misleading as major macroeconomic risks as well as corporate and banking defaults emerged mostly in OECD countries.
Parallel to that, in Africa, which is supposed to be an adventurous and risky territory, bankers paid great care and attention in risk assessment and structuring based on in-depth due diligence and not relying upon ratings, which are not available anyway.
As far as returns (for bankers) are concerned, the differential between the OECD and Africa has lowered during past months as the spreads paid by OECD corporates and banks have increased more than the Africa’s. But this is probably temporary as it is due to the current economic downturn.
Balasingham: Standard Chartered has been operating in Africa since 1863 and the region remains a core part of the bank’s strategy.
For lenders familiar with the African market, there are plenty of opportunities to originate transactions with good quality borrowers with better security, tighter structures and increased returns.
Ricke: Until the financial crisis, clearly fundamentals had improved for natural resources-producing and exporting countries (namely for oil and metals) and thus represented attractive targets for investors.
Furthermore, there was a lot of interest on the part of natural resources-hungry countries such as China, India and to some extent Russia, looking to ensure a secure supply of commodities.
On the importing side however, skyrocketing prices for key commodities such as fuel and foodstuffs were making things difficult for some countries such as Senegal and Burkina Faso.
Ricke: The financial crisis means increased selectivity pushing investors and banks to choose the best assets with tighter structures which ensure a good risk/reward return whether the project or deal is in Africa, Latin America or elsewhere.
In particular, we should keep our eye on projects sponsored by large corporates and the increasing importance of export credit-backed lending as well as development bank and multilateral agency direct lending as a means to fill the need in Africa through risk-mitigated structures.
Also, Africa will likely continue to attract ‘state’ sponsor investors from Asia, for example, in countries such as Sudan and the Democratic Republic of Congo (DRC).
Balasingham: Investors from other emerging economies like China are likely to be taking a longer-term strategic view on the continent, particularly in the resource-rich countries. They would see this as an opportunity to increase their investment activities with a view to securing long-term strategic commodity supplies from Africa.
In this regard, Standard Chartered has a dedicated team to serve our clients’ trade and investment needs on both sides of the China-Africa corridor.
The majority of the global inflows of debt and equity have been directed to oil and mining sectors and could be hit by lower prices and the financing constraints faced by some companies, notably the
junior ones.
Some projects in infrastructure could also be scaled back as official development and donor flows are likely to be less available. However, the investment from cash-rich majors and from emerging economies coupled with the positive long-term potential of Africa provides reasons for optimism.
Bottom line is, Africa has always received only a small portion of the global debt and capital flows (even during the boom period) and this situation is not likely to change soon, global slowdown or not.
GTR: What areas of the trade business are seen as ‘safe’ and why?
Talbot: Safest deals are those relying on strong and clear economics: pre-export finance, oil and gas reserve-based lending, strategic import financing, working capital facilities secured by receivables and inventories.
Ricke: The ‘safer’ areas in commodities relate to secured and structured finance in general. Clearly, trade finance business on strategic flows is still acceptable and quite safe, be it on the import side where crucial local needs for key commodities have to be met, or on the export side where exports of strategic commodities are often the sole source of hard currency revenues for a country.
ECA, development bank and multilateral agency involvement are other ‘safe’ solutions given the current financial context and strong demand in the export finance market.
GTR: Is the outside risk perception of Africa changing for the better?
Balasingham: Yes, risk perception is changing for the better as something fundamental has changed in Africa. GDP growth has outperformed world growth since 2001 thanks to higher political stability across the region, commitment to reforms, fiscal consolidation, debt reduction (following official debt relief) and monetary stabilisation.
Generally, news flow from Africa is not as negative as it was in the past. There is now a better understanding of risks in Africa as more and more countries are being rated by credit agencies.
Ricke: Risk perception should be viewed on a country-by-country basis in Africa as the degree of volatility of the economic and political environment varies greatly. However, overall one can say that the perception has shifted more positively for those producing and exporting countries where high commodities prices have improved their respective economies’ fundamentals.
Angola serves as the best example. It has made significant strides both on economic and political levels as evidenced by the recent open legislative elections validated by the international community and the doubling of oil production within the last four-to-five years along with active development of other natural resources sectors such as diamonds, gold and uranium.
Talbot: African corporates, states and banks were not directly affected by the sub-prime crisis. However indirect effects will affect them through global economic downturn. The impact of commodities price fall is mixed as many produce some but many are net oil importers.
In the long run (beyond the current crisis), we have seen structural positive changes across the continent: more stability in a majority of countries, better macroeconomic governance, emergence of pretty good local corporates and banks (an effect from privatisation).
GTR: How does the present financial climate change the way trade business is conducted and structures undertaken in African trade?
Ricke: One good specific example where we are seeing a change is with respect to pure trade finance business. In the last couple of months, we have seen a return to basics, with a shift from practices such as cash against documents to classic trade finance letters of credit, particularly for soft commodities through our own local network.
Balasingham: There has been a significant increase to pricing and a push towards RWA efficiency for banks, which means tighter structures and better security.
Talbot: There is a comeback to more structured and secured financing facilities with assignment of receivables (even when local) and inventories, pledge of assets.
GTR: How much are legal and regulatory issues a barrier to trade in the region?
Ricke: Not much, as legal regulatory frameworks are derived from French and English law. We have not seen any creeping nationalisation and expropriation situations unlike what has been seen in Latin America for example. However, some countries have undergone global reviews of licenses previously granted to companies.
Balasingham: Legal and regulatory issues to a certain extent represent a constraint to trade but the lack of infrastructure (unreliability of power supply, ports congestion, poor road network, and so on) probably create another barrier.
GTR: What about corruption? How does that affect your everyday job?
Talbot: BNP Paribas has very strict rules regarding the fight against corruption and money laundering. It has a strong impact on our day to day activity as we comply to stringent legal obligations regarding due diligence about our customers and their transactions.
Ricke: Corruption is not specific to Africa and we take a very diligent and vigilant approach when reviewing counterparties. The key is to work with creditworthy and ‘KYC’-compliant counterparts coupled with structures that control flows of funds and commodities.
Balasingham: This is a global phenomenon – not something unique to Africa. Granted there are a few hotspots in this respect, but if the Corruption Perception Index published by Transparency International is any guide to go by, many African countries appear to have made significant progress in this area.
Standard Chartered endeavours to transact with clients globally (not just Africa) who conform to the bank’s standards of governance and disclosure. The evolution towards greater transparency is a gradual process that requires engagement and dialogue and our bank believes in facilitating this change by continuous interaction. Standard Chartered is committed to working with each of its clients across the globe to promote international standards of disclosure and governance and this commitment is exercised in the context of the overall client relationship and individual transactions.
GTR: How common are local currency deals in African trade deals?
Ricke: Local currency deals for SCF or structured trade finance businesses are not very common due to the fact that the currencies of international trade transactions are primarily dollars or euros with the denomination of corresponding financings following suit.
The very purpose of these types of transactions is to attract hard currency payments offshore, transforming payment risk by a counterpart into a performance risk by such counterpart thus mitigating most transfer risk and non-convertibility issues. Deals done in local currency by the SG Group are granted by our local branch network in Africa.
Talbot: As for commodity cross-border transactions, we do not see many African currency deals. What we can see however are financings in dollar or euro given to African commodity importers (such as refineries, distributors) which are secured by local cash flows in local currency; in which case we team up with a local bank to act as local agent to collect local receivables, convert them in FX and transfer such FX to our counters.
