You need a friend on the ground
As the economy of Africa continues to grow at a very impressive 6 per cent, according to the International Monetary Fund, in recent years south-south trade has emerged as a driving force behind this expansion.
Trade between Africa, Latin America, India and China has grown rapidly, in particular Brazil’s trade with Sub-Saharan Africa increased between 2000 and 2010 from $2 billion to $12 billion, and is expected to grow in the coming years, says the World Bank. “South-south partnering will play a major role in global knowledge, trade and investments in the coming years,” it says.
Meanwhile exports by African countries to their peers have surged by 32 per cent since the 2008 economic downturn.
South-south trade has become more sophisticated and complex, having “evolved over the past several decades from the simple paradigm of manufacturing a final product in one country and selling it in another, to a world in which products often cross several borders and accrue value addition in multiple international locations before going to market”, according to the International Chamber of Commerce survey Rethinking Trade and Finance 2014.
This exciting new development is largely driven by trade increasing substantially between developing countries, in turn driven mainly by commodities, over the last few years. But such rapid development means that corporates, financial institutions and governments have had to review the way they do business. They’re also having to educate themselves, and look at new ways of managing risk and extracting working capital from their business operations in a cash-conversion cycle.
Africa can be particularly challenging when it comes to risk management because African nations are at different stages of development. A risk management model that works for South Africa, for instance, may not be appropriate for Nigeria or Angola.
“Exporters and manufacturers have to consider country risk, currency risk as well as counterparty credit risk and hence look towards a solution provider that can help them manage these risks. The bank that can do this can add real value for its clients,” says Vinod Madhavan, head of transactional products and services (TPS) in South Africa for Standard Bank, Africa’s largest banking group by assets, which has more than 150 years’ experience of working in the continent.
“The way to assess and underwrite risk effectively is to know the corporate well. But you also need to be present in the market and have local expertise on the ground. There’s no substitute for this and we find that companies, especially those who might be new to doing business in Africa, really appreciate this.”
These are issues that Standard Bank Group has been able to help an increasing number of corporates and financial institutions to handle, thanks to its experience and its strong presence in African countries, led by its network of more than 1,200 branches.
We can offer our clients advice based on a deep understanding of the market and of the country, and on reliable information from a variety of sources
Hasan Khan, head of sales and head of Africa for Standard Bank’s TPS business, points out that when Ghana experienced balance of payments difficulties earlier this year, Standard Bank was able to take a longer, more strategic view than many other banks, looking at the longer-term economic cycle and adopting a more considered view of the risk there. He puts this down to Standard Bank’s deep level of market understanding, and its close working partnerships with clients and regulators.
“We work with stakeholders and regulators on the ground in-country rather than trying to do it remotely,” says Neil Surgey, global head of TPS for Standard Bank. “This approach and the fact that Standard Bank has been around for over a century and a half, gives us legitimacy, built over the years, by partnering with our clients.
“The clients appreciate the fact that we’ve been working with stakeholders, industry participants and regulators in a number of situations, ranging from market infrastructure developments to banking crises. This means that we can offer our clients advice based on a deep understanding of the market and of the country, and on reliable information from a variety of sources.”
Alongside risk management, another important issue for corporates and financial institutions is working capital financing. This is particularly relevant as a key trend in cross-border trade, given the sharp growth of intra-Africa trade, especially over the last 12 to 18 months.
Previously companies exporting to markets in Africa, felt obliged to obtain confirmation of their letters of credit from countries such as the UK and United Arab Emirates, before exporting or executing on the trade, but now they are getting confirmation from a tier-one bank in South Africa. This is more commonplace as companies develop relationships and start getting comfortable with their counterparties.
“Because Standard Bank is present in all these markets, we have an understanding of the supply chain of the client,” says Mr Madhavan. “It’s very likely that a client’s suppliers and distributors are also banking with us, so we have an overview of the total supply chain network. Clients find that because of this, we’re more likely to be able to meet their working capital financing needs.
“As always, when you’re trading in Africa, it’s about having a trusted bank with a really strong presence on the ground.”