Navigating Africa’s banking and FX landscape
Chris Paizis, Head of Corporate FX and International Banking, Absa CIB, discusses the importance of local partnerships in the Africa banking and FX landscape
With Africa quickly emerging as a hotspot for international development and economic opportunity, many institutions and organisations from across the globe, large and small, are taking their first steps into the continent.
However, when it comes to Africa’s banking, trading and foreign exchange landscape, the lay of the land is quite alien to that which many organisations are familiar with from their experience in more mature, Western markets and territories. Different considerations and priorities are required, and institutions can often find themselves not knowing where to start. When it comes to business and treasury functions such as currency hedging, it can be difficult from the outside to ensure adequate protection against the distinct challenges of the African marketplace, and conversely to know that you’re making the most of the opportunities available.
Much like a physical trek through some of the continent’s wilder regions, a local guide can make all the difference - more than in any other global market, forming genuine partnerships and connections with local and regional banks, institutions and regulators is crucial to success.
Firstly, the issues of liquidity and volatility present a very different set of challenges to that which they pose in, say, the European or North American context. For instance, someone who usually trades in Euro/USD or Sterling/USD is used to an environment where pricing is very tight and movement typically small. But the volatility for a currency like the South African Rand represents a whole different ball game – the rate can easily move by 20 or even 30 cents in a single day.
In terms of the range of different hedging instruments available and the liquidity landscape for these across different countries and markets, there is tremendous variance. In South Africa, a relatively liquid market, you can transact in near any type of product and find offers quickly. But this is a market that, onshore and offshore, sees around $10 billion USD move through it every day. Go elsewhere and the picture changes dramatically – in Nigeria, for instance, the market is only around $150 – $200 million per day. This represents a tremendous difference in liquidity that means even BAU currency conversions and flows become quite difficult. Partnering up with a bank with local expertise provides a big benefit here in terms of enabling institutions to get a more efficient working model that suits particular business needs.
Another complexity worth noting in relation to liquidity is the question of what kind of multi-bank platforms are available to transact on. Many clients ask if they are able to use their normal aggregators like 360T and FX-All across African currencies, and what implication this carries in terms of efficiency of execution. The short answer here is that for very liquid currencies they are great platforms to use, but in less liquid currencies the equation changes. For these currencies you’ll get access to more and better pockets of liquidity through on-the-ground relationships with local and regional banks than what will be fed through a multi-bank aggregator.
As well as being useful for rooting out these pockets of liquidity in more niche areas, local connections and partnerships are a critical ingredient for ensuring that the process is made as seamless as possible – something that is only really possible for a bank that has a regional presence in the relevant area. South Africa itself is a country most banks can operate in without worrying about this aspect, so long as they are only looking for Dollar Rand exchange, something most are able to offer. But only local and regional banks can really offer the full package, i.e. hedging across multiple currencies.
The importance and centrality of these local connections to a successful pan-African currency hedging function means that, more than usual, carefully selecting the right relationships and partnerships is key. In Germany, for instance, you can happily deal with 20 banks with little vetting and be confident in spreading your business around. In Africa this is far less the case – it’s important to be very discerning about who to foster relationships with. What are their processes? What’s their standing? What range of products can they offer, and is it a good fit? Regional and local banks typically have lower credit ratings than their Western counterparts, and transparency levels aren’t always ideal. As well as underlining the benefits of working with a local guide, this also shows why it’s important to form true partnerships as opposed to just seeing these banks as distant counterparties, as may be more appropriate in other global markets.
This links to issues of security and political volatility, both of which, again, form quite a distinct set of challenges in Africa as opposed to other more established markets. Part of the reason why carefully choosing partners is important is the variety of sophistication on offer in terms of security and protection. Our clients trust us as an intermediary in part because of the robustness of our payment systems, and our embedded checks against risks such as money laundering and so on. Although there is a lot of current excitement about disruptive fintech newcomers (and any innovation to improve speeds and process on the technical sides are of course welcome), established regional banks have much more experience and substance on this side of things, in a market where the risks are greater than elsewhere.
In terms of political volatility, this is also clearly heightened compared with other regions of the globe. Changes in regime can often result in changes in currency regulation, and even where regimes are more stable rules can sometimes suddenly change in arbitrary or non-market-driven ways that will be unfamiliar to those used to navigating European or North American markets. This is yet one more reason why partnerships with local and regional banks and institutions can make all the difference – as well as providing greater visibility for these risks, being partnered up with local banks automatically gives better access to local regulators, which makes it a lot easier to do business locally and surmount any rules-based challenges.
While Africa’s FX and currency hedging landscape is complex and idiosyncratic, mastering it is central to any effort to capitalise on the astounding economic opportunities the vibrant continent has to offer. And there’s one clear thread running through the complexity – the distinct importance of forming deep partnerships with a network of local and regional banks and other financial and regulatory institutions. This, more than anything else, is the core ingredient of successful currency hedging on the African continent.
For more information on business topics in the Middle East and Africa, please take a look at the latest edition of Business Chief MEA.