South Africa has long been regarded as a regional linchpin for Africa, spearheading investment and trade into the continent. But does it still continue to play this role?


Panel participants

  • Shannon Manders, deputy editor & supplements editor, GTR (moderator)
  • Gregory Havermahl, head, structured trade & commodity finance, Rand Merchant Bank
  • Sekete Mokgehle, head of global structured trade & commodity finance, Nedbank Capital
  • Rupert Cutler, managing director, financial and political risks, Newman Martin and Buchan
  • Megan McDonald, director, head of structured trade finance, Standard Bank
  • Jorim Schraven, manager, financial institutions, FMO


Taken from a panel presented at the 2012 GTR Africa trade & export finance conference in Cape Town.


GTR: South Africa’s FDI inflows have been pretty volatile for the past couple of years, and economic growth predictions have been trimmed. What challenges does the country face in this regard, and what strengths can South Africa rely on?

Cutler: When we talk about growth on the rest of the continent, you could say that it comes from a very low base. To be critical of South Africa’s growth is fair, but if you look at where there is very little growth at all, and there is a shortage of capital, South Africa remains very strong, and has very strong trading links. Many of you may know that South Africa’s biggest trading partner is nowhere in Africa: it is Europe, at over 31%. Its nearest, largest trading partner is Zimbabwe at 2%. You could argue there is a long way to go, and there is an infrastructure challenge with the flows of both products and raw materials in and out of the country.


GTR: Is South Africa doing enough in terms of taking advantage of the trade opportunities that are available?

Mokgehle: I think the quick answer is yes. For those who have followed the country’s news and particularly the speech given by the minister of finance recently, you will have noticed special emphasis being placed on expansion of infrastructure investment. This is because the country in earlier years almost ignored infrastructure investment. But it is imperative now, especially given the poverty and state of the country. However, infrastructure investment remains a catalyst for trade growth, and as a result South Africa is positioning itself for trade opportunities going forward.

Possible other points to raise include the improvement in the competitiveness of the industry. Investment in technology, encouraging enterprise development, as well as supporting agricultural industry, are other factors that point to the country’s seriousness about remaining competitive.

Much has been spoken about the rate of GDP growth. 2012 will probably see South Africa reaching, say, 2.7%. It is a small number compared to its Sub-Saharan counterparts, who start on maybe 5.5-6%. That rate of growth might be small, but it is off a bigger base compared to its counterparts. As a result, yes, it will remain a powerhouse of the African continent. There is always talk that other countries – for example Nigeria, Ghana – might in future take first place in terms of the biggest economy, but my view is that South Africa will remain the entry point to Africa.

Indeed, there is still much to be done. I do not believe that South Africa adequately benefited from the commodity boom of previous years, and as a result, this direction of infrastructure investment needs to really ensure that the country goes in the direction of being very competitive. There are a lot of examples that one can point out, all amounting to the fact that the country is big enough to take advantage of this growth opportunity.

Havermahl: I will probably differ slightly and say no, I do not think South Africa is ever doing enough; there is a lot of pressure for it to do more.
However, I think if you look at corporates, they are probably the same as their counterparts across the rest of the world. They are hoarding cash. These are uncertain times and they are not sure what to do with it, so they are certainly not going to put it in any large way into African economies at this stage. I think they want to; it is their strategy to do it, but there is this ‘wait and see’ approach as there is across the globe.

It is happening, but it is happening slowly. I think you will see it occurring more in the coming years as there is more certainty and as they get more comfortable with it. I think it is gaining momentum.

Is it enough? No. Is it more than it was two or three years ago? Certainly yes. You are seeing people get more comfortable and you are seeing that expansion starting. It is just a slow process that is starting to gain momentum, but it is happening.


GTR: Christine Lagarde from the IMF said back in January that South Africa would be smart to forge new trade links on its own continent in order to survive the crisis. How successful has the country been in developing its own trade links?

McDonald: If you look at exports from South Africa to some key African economies, it tells an interesting story. When you look at exports from South Africa to Mozambique, you see a growth trend. According to the South Africa Revenue Services’ website, in 2009 those exports were R3.5bn; in 2011 the figure comes in at R7.5bn. Quite a lot of growth has happened there. When you look at Nigeria, it is a similar story: R15bn in 2009, growing to R22bn in 2011.

If you look at those figures, you would probably answer the question in the affirmative, and say: ‘Yes, South Africa is forging new trading links on its own continent.’ However, when you delve a little bit deeper, there are probably some questions that arise out of that, one being trade with the East African region. When you look at Kenya and Tanzania, the figures do not reflect a growth trend, so clearly there is a challenge and an opportunity there.

Real growth has been seen in certain areas, but I think there is a lot more room for development for South Africa to forge links with the other African countries.

It is something that we are seeing from our client base in South Africa. They are all looking north of South Africa’s borders in line with general growth trends in GDP. Certainly our client base in South Africa is seeing opportunities and coming to talk to us about expanding into Africa. We are seeing more expansion and more requests for finance into Africa also as a result of some of our clients pulling back from expanding into Europe, for obvious reasons.

We are also seeing our clients using structured trade finance facilities a lot more, in line with some of the challenges around Basel II and Basel III. We are finding structured trade finance facilities a lot more attractive, given that we can look to the underlying commodity as collateral, which often results in better pricing and bigger credit appetite.


GTR: How are South African banks themselves looking to develop their own intra-Africa trade lines?

Havermahl: I think there is a big move in this area. Most of your top banks – not just your South African banks, but your top banks in Africa – are very focused on growing in Africa. There was a time when South African banks fancied themselves as being international players. I think with the exception of one, they will all now be big fish in a smaller pond in Africa, and that is clearly a big focus. I think we are going to see a lot of development here.

It is a good time because there is a fair amount of opportunity now, with global liquidity squeezes. You see large European banks who have a very active role in global trade – the kings, really – focusing their efforts elsewhere. It does not mean that they are moving out of those jurisdictions, but they certainly have other priorities as regards to capital and the availability of liquidity.

It gives an opportunity for South African banks, I think, and they clearly have a focus to grow there – particularly with the lifting of exchange controls. It goes back to getting South African banks to view particularly the banks in Africa no longer as a counterpart but more as a client. You are not just servicing South African corporates, you are servicing global clients in Africa.


GTR: What are banks doing to service their clients in other Sub-Saharan countries?

Schraven: We have a different perspective on what the South African banks are doing in the region. Through our trade finance programme we offer a programme where we share confirmation risk with confirming banks. When you offer that kind of product, you tend to get three types of calls from your potential partners. The first one is, ‘we are relocating our business elsewhere,’ ie, ‘we are running for the door.’ The second one is, ‘we are very exposed to a particular name or a particular client; can you take some of the limits?’ The third one is, ‘we have small limits; can you help us to do bigger business?’

On Sub-Saharan Africa, I have found South African banks do not tend to make the first type of calls at the moment; we get that from the French banks. We do get quite a bit of the second and the third type. I think in the southern part of Sub-Saharan Africa we get a lot of the second call from the South African Banks, ie, ‘we already have a lot of exposure, can you help us do even more?’. I think a little bit more up north and east, especially in East Africa, we are starting to get the third type of call. Basically, ‘we are edging into the market, can you help us?’

As for the South African banks, I think the big change we have seen is in terms of increased local presence. We can also see Standard Bank starting to move even into Francophone Africa, which is where we have not seen much of the other three yet. Certainly we are seeing the financial sector in South Africa branching out into the African continent.


GTR: Where are the new hot spots, or new frontier markets? What are your perceptions of places like South Sudan, Angola and Zimbabwe? We often hear news about banks scouting for deals in these places. Rupert, how are risks in such countries being mitigated?

Cutler: I think one of the key opportunities is transparency and enforceability. Unfortunately at a lot of the frontiers, the opportunity is there but the risk is also quite high. Either, as in South Sudan, they do not yet have a sophisticated or strong constitution – it is completely unproven – or, in other situations, people change the rules to suit the politics, or to suit the economy. One cannot blame people for that, but that has to be taken into account.

Through the export credit agencies, and through the private insurance market, some of that risk can be mitigated, but at the end of the day, if it is a bad deal, it is a bad deal. You actually have to visit the risk, and take some time to structure it and understand it. I think the opportunity in anything, whether it is bank-financed, insured or just run on a corporate balance sheet, is: does it make sense? It may be a ‘bad country’, but is it a good deal in a bad country? That is where the opportunities are.


GTR: Jorim, what is your take on places like the Democratic Republic of Congo (DRC) and Zimbabwe?

Schraven: If you are looking for the next frontier, I personally think the DRC still has some way to go. Perhaps it is helpful to contrast the DRC with Zimbabwe, because when you do that it gives you a few lessons about how to look for the next frontier. Africa as a whole was seen as a frontier before; now it is moving beyond the few countries that across the board have been improving particularly in the southern part of Sub-Saharan Africa.

If you look at the DRC, one of the key issues is that you have growth barriers across a whole range of sectors, and they are quite complex. If you look, for example, at governance, they have over 40 ministerial posts. In terms of infrastructure, they have about 3,000km of paved road in a country four times the size of France, which has more than a million kilometres of paved road. They have the longest clearing times in port and education levels are poor – amongst the lowest literacy rates in the continent. You will find it quite problematic to hire qualified people there. And there is of course a language barrier for the Anglophones among us. The issue with the DRC is that besides the fact that it has amazing resources, ranging from diamond rock to arable land, as well as fresh water resources, the barriers are complex and range across a whole range of different areas.

If you look at a country like Zimbabwe, it is a bit different. There the infrastructure is comparatively good; it has the highest education levels in the African continent – a 99% youth literacy rate. If you look at institutions in Zimbabwe, you can definitely find quite a few that are competent and well run. You just have a very high political risk situation, which is one major barrier to doing business there – but it is one, and if it is resolved, I think it can take off quite quickly.

Similarly, I think, in Ivory Coast you have a massive security issue, but many of the other barriers are certainly not as severe as in a place like the DRC. If we are looking for the next frontier, it is really about scouting out those countries where, if they solved one or two key problems, things would go very well. Those are probably better candidates than the ones that have issues across the range.


GTR: Greg, what are your thoughts on Angola?

Havermahl: I think Angola is similar to the DRC. I think we do not actually pick frontier countries; they pick themselves. If they have sufficient resources and they are producing, they will need a solution. Clearly it is a lot more difficult to provide a solution depending on the difficulty of doing business in that particular country. However if they are producing a commodity I believe solutions will be found, and they will go in. It will just be the level of who goes in. You might not necessarily see the financial institutions and the banks going in, but you would see the large global traders go in, and they will use their RCF lines to initially enter the market until it develops enough and then they get enough confidence to bring in other levels of financiers.

Angola is not the easiest, again, from a language perspective, but it is a market you cannot ignore. If you look at where Angola and Nigeria will be 10 years from now, if you look at their projected GDP growth, they are the largest economies on the continent. You cannot ignore them.

Again, it is a matter of your risk appetite and where you enter those markets. If you are new to it, you will not go and do five-year-plus infrastructure finance, but you might be comfortable doing financial institution trade-backed risk.


GTR: In terms of the deals being closed, who’s taking on the real risks?

McDonald: I think South African banks are quite well-positioned to take on that risk. That comes from a few factors. One is that liquidity for South African banks is still very good, so there are deep capital markets in South Africa for rand-based funding, and the banks are funding themselves, making good use of that mechanism. There is a lot of term funding available.

Then, of course, for South African banks to raise dollar-based funding, we have seen a lot of interest out of Asia. A lot of Asian banks like the African growth story and want to invest in South African banks. They are well-poised to fund corporates and other companies accessing African risk. For us, liquidity is not an issue compared to some of the challenges that our counterparts, for example in Europe, are facing. We have obviously seen European banks deleveraging and having conversations with us about taking over some of the positions that they have with respect to some of their African clients.

We see that as a wonderful opportunity, not to shove our European colleagues aside, but to work with them, to assist them, and to get to better know and understand some of the clients that they have been speaking to, and also to use the on-the-ground expertise that we have at Standard Bank, through our various offices in Africa. A lot of those solutions are dollar-based solutions, but also local currency solutions, and I think the combination of being a South African bank with access to liquidity, together with the ability to fund in local currency in some of these countries, is definitely an advantage.

We are also seeing more club deals. We are seeing South African banks, European banks and Asian banks coming in and wanting exposure to Africa, but not taking on the big, chunky tickets on their own, which is what we used to see. We are seeing a lot more collaboration, and we think that is a trend we will see going forward between banks.

There is a healthy appetite for Africa. We get requests every day from Asian banks, as I said, European – all sorts of organisations looking to take African bank risk, and they obviously use South African banks with expertise in Africa to help them understand that risk.


GTR: How is all of this filtering through to the types of trade deals that are being closed?

Havermahl: I think the South African banks in particular have led with the chin in pure lending transactions, as they have gone in and found their feet and learned the ropes in Africa. That is very much changing now to move towards advisory, arranging – not underwriting, oddly enough. I do not think there is a lot of appetite for underwriting – and distributing. That is the way it is moving now as they get more comfortable and more experienced in Africa.

I think the other thing to note is the way that structures are changing: the role of what I will call indigenous companies are playing on the continent. We see, particularly in the soft commodities arena, large growth in these trading companies and they are becoming multi-jurisdictional. They do not want you to fund them in one country; they want a facility that covers them over several countries, and not in one currency. We all want to go in there with hard currency loans, but that does not really suit them. They want a combination of hard currency and local currency, and then vary the local currency for countries in which they are purchasing commodities.

Ideally, you can match these facilities with an export and an import leg so that you end up matching your currencies. Those are two of the big things that I see changing. It is multi-jurisdictional, and it is not just one currency.