Recent events have jolted South Africa, but the country’s role as a finance hub for Africa certainly remains intact, writes Kevin Godier.
As financial markets in the northern hemisphere have recoiled from the sub-prime fallout, Africa’s largest and most developed economy has been hit in early 2008 by rolling power cuts that have shut the country’s largest mines, darkened houses, and halted thousands of businesses in their tracks.
As GTR went to press, the potential domino effect of the situation looked set to curtail or suspend a number of major industrial projects, with consequent impacts on the local banking sector.
JPMorgan Chase has warned that the power crisis will slow the expansion rate of South Africa’s economy down to just 3.7% this year, the lowest in half a decade after GDP growth rates of between 5-6% over the past five years have underpinned strong earnings growth for local banks.
Of course, the South African government’s failure to build new power stations, and the country’s anticipated electricity shortages until 2013, has opened new trade and project finance business angles.
“Eskom is addressing the problem of new build power projects now, and has disclosed that its infrastructure spending projections for the next five years have increased to R300bn,” says Simon Sayer, managing director, structured trade and export finance at Deutsche Bank London.
Eskom’s capex programme envisages 1,155MW and 2,421MW of fresh capacity being added in 2008 and 2009, with additional capacity to be added incrementally out to 2013.
This covers “everything from new build coal-fired power stations, some gas-fired open-cycle power stations, de-mothballing power stations that had been closed down, some pumped storage hydro schemes, a nuclear programme and some renewables,” observes Sayer.
Having already tapped a €114mn Hermes-backed export credit facility, advised, arranged and provided by Deutsche Bank, to assist in financing Siemens turbines for the 740MW Ankerlig plant, due onstream in 2009, “Eskom will seek rand financing” for its new requirements, says Sayer. “The rand is one of the currencies that export credit agencies have indicated that they would be prepared to support.”
Crossing the border
Strong rand lending appetite is expected when the huge 2,400MW Mmamabula power project in Botswana seeks the equivalent of over US$7bn in debt financing in the last quarter of 2008.
The coal-to-power project “will be at the forefront of all the coming baseload in the southern Africa region,” says Anand Naidoo, director, investment banking division, at Absa Capital, which has advised the sponsor, CIC Energy Corporation.
The blast of global publicity that accompanied the power shortages has undoubtedly changed external risk perceptions of South Africa, as it prepares to host the next soccer World Cup, in 2010.
“When Eskom turned the power off, it affected people and businesses all the way up to Zambia,” underlines Ian Henderson, director at Texel Finance. “There are now new concerns about the social, economic and risk environments, which have made people look differently at the southern African region. Some counterparties are obviously seen as presenting newer, different risks, and so are triggering more requests for credit and non-performance type cover. Some forms of lending are likely to move away from corporate-style facilities to a more structured basis.”
In South Africa itself, the volatility of the local currency remains a key concern for both importers and exporters, as is South Africa’s large negative trade balance. Analysts also point to its rising political risk as Jacob Zuma, the ANC ruling party’s president-elect, prepares himself for a corruption trial in August.
Another jolt has come in Kenya, where the deadly violence that erupted after the late 2007 elections have ramped up risk perceptions concerning Sub-Saharan politics, although bankers say that trade payments have continued.
“Without making light of a tragic and potentially volatile situation, the Kenyan flare-up was probably more over-played in the press than on the ground, where strife was quite localised,” emphasises Dwight Snyman, co-head, structured trade and commodity finance (STCF) at Rand Merchant Bank (RMB).
The change on the risk barometer has come at a time when the growth and opening of South Africa’s economy in the 21st century continues to be mirrored by the country’s banking community.
Showcasing this trend, Industrial & Commercial Bank of China (ICBC) announced in early February that it had received approval to buy a 20% stake in South Africa’s biggest lender, Standard Bank Group, for a sum reputed to top US$5bn.
As the African continent opens increasingly to world trade, ICBC’s entrance should enhance South Africa’s role as a centre for a considerable number of trade finance deals that support both export and import activities.
“Pricing for trade finance is getting keener as new banks have come in competing for business,” says Steve Meintjes, Nedbank’s head of customised trade. “People have also come to understand the risks much more in markets such as Mozambique, which is almost a province of South Africa, and Angola, which is a very good market now.”
Meintjes also singles out Ghana, Cote d’Ivoire, Kenya, Malawi, Nigeria, Tanzania, Uganda and Zambia as regular destinations for South African goods and commodities.
“All the banks compete with each other to cover this trade, including the global banks that are used by many multinational companies.”
Nedbank is increasing its presence throughout the African continent, adding to its branches in Lesotho, Malawi, Namibia, Swaziland and Zambia, which allow payment flows from these countries to remain within its network. Current plans involve opening representation in several east and west African locations.
The environment is “highly competitive”, concurs Brad Greenfield, general manager, commercial international banking, Absa Corporate and Business Bank. “The four bigger banks, Absa, Standard Bank, First National Bank and Nedbank, are competing across all segments, and still account for at least 80% of the trade business market share. As there is little product differentiation in the market, the banks compete primarily on price and service,” he says, adding that Absa has representation in Angola, Mozambique and Tanzania, and through Barclays has a presence in countries like Mauritius, Kenya, Botswana and Uganda.
“There is lots of competition in both South Africa and the wider regional market,” agrees Valerie Kodjodiop, managing director of the BNP Paribas (BNPP) office established in Johannesburg in 2005. BNPP aside, Kodjodiop cites ABN Amro, Barclays, Calyon, Citi, Deutsche Bank and HSBC as other major international banks fighting for South African business.
“Some foreign banks have entered the South African market since 1995, but seem to target particular niche markets and have not notably tried to acquire bigger market share,” contends Greenfield.
“The bigger foreign trade banks are Citibank, HSBC and Standard Chartered. Other banks like Mercantile Bank and Bank of Athens, on the other hand, seem to be targeting particular sections of the population. Absa has also extended its offering such as Islamic banking to include niche markets in Africa and South Africa.”.
“All banks are starting to realise that reliance on the traditional instruments is decreasing annually and the market requires different types of products or derivatives,” he suggests.
According to Kodjodiop, “local banks have some clear advantages, primarily in their cost of funding for the rand-denominated financing that dominates the market.” Exchange controls have also helped to prevent most local banks from exposing themselves to the woes of the sub-prime market, she adds.
South Africa’s money laundering rules provide another business filter, stresses Meintjes.
“Although we follow our clients, we are still very much looking for new business, and use global trade as a cutting edge to win this. But we have to be wary on any importing or exporting companies not known to us, and it is always a condition that they must look at their relations with their clients.”
The so-called Bric (Brazil, Russia, India, China) markets were a key focus in 2007 for Nedbank’s trade finance to markets outside Africa. “China was the big one, especially on the import side, and that’s stayed very much the same.”
“Quite a significant number of Absa’s big import transactions are for capital machinery,” says Greenfield, linking this pattern with South Africa’s drive to gain capital investment projects fuelled by the Fifa Soccer World Cup.
Investment banks also see opportunities in South Africa’s mining sector, particularly where black economic empowerment (BEE) is presenting opportunities for the unbundling and restructuring of companies.
“BEE has thrown up opportunities where companies have had to change their ownership to include BEE ownership and this can present advisory and structuring as well as financing opportunities for the new equity and debt coming into the sector,” notes Sayer.
Corporate and investment banking is the strategic route being pursued by BNPP, which is working on co-generation projects with Eskom in an advisory capacity, and is also looking to structure several carbon finance deals.
“We’re offering an investment banking approach in which everything from project finance through to derivatives is provided in-house under a commodity and infrastructure finance business model able to cover the entire Sub-Saharan region,” says Kodjodiop.
She adds: “We are here not to compete but to complement by adding value in specialist areas. We also want to take advantage of the south-south trade trends by supporting South African counterparties involved in French-speaking West Africa, where we have a strong branch network.”
In the structured trade and commodity finance (STCF) market, notes Snyman, RMB is also using a wide span of instruments to structure deals, mainly in Africa, Brazil, into Asia and in South Africa, which is traditionally an exporter of minerals.
“Five years ago, RMB was almost exclusively a debt house, whereas we are now bringing a greater equity orientation to bear across all asset classes. There is now more of an investment banking approach across the whole bank, which has underpinned a move into apparently slightly more risky assets, but only where we can fully quantify and understand these, and price appropriately.”
Snyman explains that the upward global pressure on debt margins, which is related to funding issues globally, since late 2007, has vindicated this strategy.
He observes: “Where we are having a small but growing success is in financing some of the logistics chain in, for example, chrome ore and other commodity flows to Asia, by linking with other partners in a ‘merchanting’s process akin to physical trading. We are not just lending money, but trading in partnership with our clients, and deploying in-house logistical skills in addition to financial structuring skills to bring down the logistical price mark-up, thus creating extra margin for ourselves and our partners.”
Complementing its Asian business, approval has been granted for RMB representative offices in both Shanghai and Dubai, which will focus primarily on the wider emerging market financial institution markets in the greater Gulf/Asia region. Approval for a Brazilian representative office is expected “in the first quarter,” adds Snyman.
To take advantage of the market opportunities, Nedbank set up a team in London in early 2007 to build a sustainable STCF business. The target is to support the trade flows to and from Africa of a client base of Western European traders, producers and manufactures. The London team focuses on tapping the whole supply chain and recently financed Brazilian sugar into east and west Africa.
Nedbank London also has a strong focus on developing a pre-financing expertise for cocoa, cotton, coffee and other predominantly soft commodities.
“Our team in Johannesburg is very active in developing and pursuing the local end of the business in Africa,” says John Vowell, director and head of STCF at Nedbank in London. “Our team in London will increase to three members this year, and the business book is planned to increase substantially.”
Vowell comments: “We welcome the smaller STCF deals, in the US$5mn-US$15mn bracket, because although they seem to have been neglected by the market they offer Nedbank greater partnering opportunities. These smaller bilateral transactions require a high level of project monitoring and transactional management, but usually reward you with higher returns.”
An import logistics skill-set is increasingly vital for Nedbank, according to Vowell. “Some traders that we talk to now want to take the product as close to the end-user as possible, to maximise profitability. So, for example, if we are pre-financing the sale of Brazilian sugar to Togo, Ghana or Kenya, we now look to support the client to arrange the vessel, get involved with local logistics and structure the collateral management so that the client can make a far larger profit.”