Johannesburg
“A correct understanding of risk in Africa – along with an appreciation of the growth potential yet to be unlocked by trade, both cross-border and intra-Africa – provides global corporates with a new lens through which to identify and access African growth,” says Vinod Madhavan, Head of Transactional Products and Services, Africa at Standard Bank. Corporates remain ever-interested in high growth emerging markets. Currently a large number of the world’s high-growth emerging markets are in Africa. Forecasts for 2016-2020 place Africa as the second fastest growing region in the world, just below emerging Asia.
Impressive as these figures are, they are down on the growth highs achieved during the heights of Africa’s commodity super cycle. This has led many commentators to conclude that Africa’s growth story is tailing off.
“Nothing could be further from the truth,” asserts Madhavan. “Africa’s future potential remains far larger than its past achievements – especially when one considers the growth potential latent in the continent’s current low levels of intra-Africa trade. Currently hovering around only 12 percent, these intra-African trade levels offer great headroom for growth.”
Global perceptions of Africa as high risk, however, often prevent businesses from correctly identifying opportunity on the continent. This is exacerbated by perceptions that trade in Africa is also complex and high risk.
The numbers, however, paint a different picture of African risk. The 2015 ICC Trade Register study, conducted amongst 23 banks around the world jointly accounting for 60 percent of global market share, for example reports that export letters of credit as well as performance guarantees in Africa and the Middle East have the same default rates as the Americas; default rates in purpose specific loans and trade finance deals amongst African and Middle Eastern countries are 1.04 percent, lower than in the Americas, and import letters of credit in Africa and the Middle East have only slightly higher default rates than in Asian and Pacific countries.
Separate research shows that an increase in the availability of finance for cross-border trade drives a disproportionate increase in SME growth. For example, a 2013 Asian Development Bank survey found that a 15 percent increase in access to trade finance enabled firms to hire 17 percent more staff, while production increased by 22 percent.
Since SMEs are the biggest drivers of employment, any increase in access to trade finance should rapidly expand Africa’s middle class, driving consumption and growth for generations to come.
“This is the grand prize that global corporates and financial institutions should keep in mind when assessing African risk,” explains Madhavan.
Asian corporates have been quick to recognise Africa’s growth opportunities. Chinese and Indian corporates in particular have approached African risk and opportunity with confidence, leveraging Asian centres of excellence in risk mitigation, such as Hong Kong and Singapore, to manage this risk.
This is not to say that the rapidly developing intra-African trade opportunities presented by the continent have been lost on developed world corporates. “At a strategic level, developed world corporates are very keen to do business in Africa,” observes Madhavan. Their challenge, however, is two-fold. Firstly, developed world risk models along with the unintended consequences of compliance produce an inordinately high view of African risk. Secondly, Africa is yet to develop the kind of sophisticated local or even regional risk mitigation and insurance industries that would enable global corporates to distribute their risk exposures locally – through continent-wide risk mitigation programmes using regional counter-parties as they would in Europe or Asia.
Instead, developed world multi-national corporates currently manage African risk by spreading this amongst their partner banks in their home markets. This means that large banks from the developed world, for example, will only manage risk for their existing or home-based clients operating in Africa. Moreover, this will typically only be offered on either a specific entity or counter party basis in Africa.
“This makes risk mitigation programmes generally more expensive, less comprehensive and, ultimately, increases counter party risk for many developed world corporates seeking to do business in Africa,” explains Madhavan.
Since Standard Bank is present on the ground across the continent it is able to work closely with African corporates, insurers and other businesses to identify and assemble competent risk mitigation counter parties/techniques in local markets – or at least across regions. “Since we know these businesses intimately we are confident and able to underwrite and place risk for longer tenors in the local market,” says Madhavan.
An added layer of confidence is afforded by Standard Bank’s sector focus approach. As opposed to looking at corporates in Africa exclusively through, say, a geographic lens, “Understanding that MTN and Shoprite in Nigeria face very different risks because they operate in different sectors provides an additional lens through which to assemble appropriate local risk mitigation solutions,” explains Madhavan.
Standard Bank remains optimistic about Africa as it is seeing the growth from the inside. Not having this inside view means that many observers conflate risks, “allowing the very real opportunities presented by Africa’s growth in trade to be missed, through exaggerated constructions of risk,” Madhavan says.