Will Africa continue to rise? Five issues high on the agenda of CEOs

Africa globe 600x300

The announcement by Barclays Plc that it will sell down its stake in the Johannesburg-listed Barclays Group Africa serves as a blow to the “Africa Rising” narrative. The upbeat story on the back of strong economic growth has been widely told and well received over the past decade. However, amidst a slump in global commodity prices and slower growth in key trading partner China, sub-Saharan Africa is facing many challenges in 2016.

Indeed, South Africa-based Shoprite – the continent’s largest fast-moving consumer goods (FMCG) company – said in February that the group has observed slower growth in most of its markets. Comments by enterprises like Shoprite and Barclays are valuable in gauging the challenges currently faced by leaders of multinational enterprises. The following five issues are currently high on the agenda of African executives.

1. Home-country obstacles

The returns for Barclays Plc on the controlling interest in Barclays Africa Group are “significantly below” the 17% return on equity reported by the latter in its combined domestic market. This is due to accounting consequences of the purchase of the group in 2005 as well as additional capital requirements. These requirements, in turn, are associated with recently introduced regulatory burdens, specific and particular to Barclays Plc as a UK-headquartered and globally significant financial institution. In effect, Barclays Plc is now carrying a larger portion of risk than it is able to gain in benefits.

Regulatory challenges where headquarters are located can quickly stifle an enterprise’s potential for benefitting from African markets. In the case where the home country does not have in place e.g. tax agreements with the destination economy, administrative challenges can mount. A positive example in this regard is South Africa signing a value-added tax (VAT) agreement with its small neighbours Lesotho and Swaziland during 2013. The new pact simplified refund and payment procedures that, in turn, improved the clearing speed of traded goods at border posts.

2. Currency risks

By the end of February, the Angolan kwanza, Malawian kwacha, Mozambican metical, South African rand, and Zambian kwacha had all depreciated by more than 35% against the US dollar compared to a year earlier. Capital controls are another problem. In the face of weakening currency valuations, some countries with managed exchange rates have limited the volume of available cash, and placed limits on how much money can exit the country’s borders.

The Dangote Group (Nigeria’s largest company) said during February that it was struggling with a constricted supply of foreign exchange in its home market. The official exchange rate of the Nigerian naira is almost unchanged from a year ago, though on the black market it has depreciated by 60% due to hard currency shortages. South African fashion retailer Truworths announced during February that it had closed shop in Nigeria due to official limits on imports and profit repatriation.

3. Growth is still dependent on commodities

Members of the East African Community (EAC) have made strides over the past decade in diversifying their economies. However, the majority of African states are still very dependent on the export of a limited number of commodities. For example, economic heavyweights Nigeria, Angola and Egypt are dependent on oil and gas prices that are currently at their lowest level since the global financial crisis.

Even the EAC countries – and other diversified economies such South Africa and Tunisia – are linked to the weak commodity price issues due to their close trade ties with China. The world’s second-largest economy has over the past year seen a marked slowdown in its previously rapid economic growth pace, which is adversely affecting its demand for imports. This has weighed on the value of many non-oil commodities.

4. Drought is everyone’s business

The current El Niño is turning out to be amongst the worst on record. For sub-Saharan Africa this means exceptionally dry conditions translating into small food crops and poorer quality livestock. The latest assessment by the Famine Early Warning Systems Network (FEWS NET) points to abnormal dryness in Southern Africa and seasonally dry conditions in East Africa at present – some areas are seeing the driest conditions in decades.

The associated rise in food costs is affecting many industries. Retailers are facing challenges to maintain profits, while at the same time passing on the cost increase to consumers who can ill-afford costlier food. Factories dependent on soft commodities – wheat, corn, cocoa, etc. – as inputs are in the same boat. On a positive note for workers dependent on a morning coffee to jumpstart their productivity, the Africa Fine Coffees Association expects low coffee bean prices this year due to output growth in Brazil.

5. Government debt

Weakening currencies and under-pressure fiscal revenues will weigh on African countries’ ability to service their debt obligations, especially US dollar-denominated bonds. The yields on African Eurobonds can be pressured higher by weakness in government finances, slower economic growth, higher inflation and depreciation in local currencies. This inflates the cost of servicing offshore debt and requires governments to either borrow more money or divert expenditure away from other points, such as education and healthcare.

Private sector companies are exposed to a deterioration in government finances when authorities are unable to make payments for goods and services supplied by these enterprises. A country’s deteriorating debt matrix could also translate into a weak sovereign rating that, in turn, adversely impacts a private company’s creditworthiness.

Mitigating these challenges

Companies operating in Africa are facing high soft commodity prices and currency weakness, both of which are contributing to notably higher producer and consumer prices. In contrast, mineral commodity prices are low and government revenues in many economies is under pressure from this global phenomenon. However, to be frank, these conditions are nothing new to African people, and the past two decades have shown that there are strategies to mitigating these challenges.

The challenge for corporates operating on the continent is to learn from past experiences and seek expert guidance when times are tough. Creative corporate structuring, currency hedging, revenue base diversification, futures markets and pre-emptive interaction with authorities are just some of the options on the table. The key to mitigating risks is being proactive and open to new ideas.

Christie Viljoen is an economist in the financial risk management unit of KPMG South Africa, specialising in supporting clients with African market entry. This article was originally published on KPMG Africa’s blog.