Africa continues to grow in importance as a market for European corporates. But while enviable growth rates and positive demographics are generating strong opportunities, corporates and their banking partners still face considerable challenges on the continent due to Africa’s cultural diversity and its regulatory and political inconsistencies. Christian Nägele, Head of Sub-Saharan Africa Region at UniCredit, explains how a bespoke approach to international trade is required
With strong long-term economic fundamentals, a young and growing population, and soon-to-be fastest urbanisation rates in the world – Africa is on the rise. But for European corporates looking to make their mark, overwhelming diversity in geography, culture and market maturity threaten to derail strategies that ignore these complexities. To unlock the most promising opportunities, corporates should look to banking partners that have comprehensive correspondent networks, offer tailored trade products and services, and keep an ear to the ground to provide expert local market knowledge. And, with a little luck, they might find themselves at the centre of the next African economic “hot spot”.
Of course, entering new markets in Africa is a daunting prospect. A dazzlingly diverse continent of 54 countries, over 3,000 ethnicities and 2,000 languages, it is home to an array of political, economic, cultural and geographic disparities. Even more-developed countries with lingua francas such as South Africa and Nigeria resist comparison. Success in one market by no means guarantees success in the other, while economic integration efforts are still a fair distance behind other regions of the world. Only in East Africa, for example, are tourist visas valid across multiple countries. In every other region, individual tourist and business visas are required for each country – just one factor that hinders corporates operating on the continent.
Low levels of European trade with Sub-Saharan Africa, as well as the fledgling status of inter-African trade, mean that clear and consistent taxes and regulations are also lacking in many countries.Indeed, the less mature trading economies of Sub-Saharan Africa vary wildly in the reliability or stability of state institutions such as central banks, treasuries, regulators, law courts and public protection authorities. Aligning with the unique regulatory, market and cultural characteristics of their target markets is therefore vital for corporates looking to expand –a blanket approach to cross-border trade is not enough.
Expertise clearing a path forward
Corporates therefore need expert support, which is where banks can help. They can provide insider knowledge to monitor the progress of regulatory reform. They also understand local complexities and can help them develop strategies for managing risk and such obvious concerns as local currency liabilities.
Expanding into new African markets also invariably involves managing complex supply chains with unfamiliar parties across a fragmented continent. In such an environment, open account agreements are often insufficient as they require well-established client-supplier relationships within a robust legal framework, so trade finance solutions such as letters of credit become crucial to mitigating any risks.
And this isn’t just relevant to European companies mitigating counterparty risk in Africa. The strong brand recognition they enjoy at home may not extend to the African markets they enter, so a variety of guarantees such as performance bonds and prepayment bonds – as well as letters of credit and standby letters of credit – will be important for both sides to trade with confidence.
Smaller clients, meanwhile – and even larger ones, if they have no existing reputation or experience in a new region – may struggle to access local financing based on the strength of their credit profiles alone. In these cases, a partner bank with a wide correspondent network will be invaluable – working in tandem with local banks to secure otherwise unviable financing agreements.
Many banks are pulling out of such arrangements, shied by the rising costs of due diligence. Yet correspondent banking remains a crucial element of trade finance. Our policy at UniCredit, for example, is to maintain correspondent relationships with at least the top three banks in each of the major African economies where our clients operate – seeing this as essential to serving them in this region.
Invest early, win big
Indeed, growing in Africa – whether increasing import/export business, setting up a local subsidiary or entering new markets – is a priority for many corporates who recognise that, despite the challenges, the continent has vast potential. In particular, retail and automotive companies, along with infrastructure providers,are acting on rising demand. One example is the increasing preference for new, rather than second-hand, vehicles in many countries across the continent. German and Japanese auto companies already have factories in economic hubs such as South Africa for domestic consumption and overseas exports, but the opportunity is now there to sell their products right across the continent – provided they can negotiate the challenges.
Of course, while everyone wants the inside track on the next African economic “miracle” or “hot spot”, insights are hard to come by due to the constantly shifting economic, political and regulatory conditions. Angola and Nigeria have been recent success stories, for example, but low oil prices have reduced demand, taking swathes out of state reserves and drastically limiting the availability of foreign currency to pay for exports.
East Africa, more than any other region, is where we see the brightest prospects today. Ethiopia, for example, is attracting corporates with its strong growth, investment in infra structure and its large population.Meanwhile Rwanda – although smaller – has a fast-growing economy with an efficient transport and logistics network. While opportunities in the region – and the rest of Sub-Saharan Africa – may be at nascent stages today, early movers stand to benefit the most from any future growth. Along the way, support from a trusted banking partner with a historical regional presence, a strong understanding of different local customs, and a trusted network of correspondent banks will be vital to navigating the trading terrain and striking rich in these markets of promise.