Multinational organisations, which have long relied on dollar- or euro-based funding when doing business in Africa, are increasingly adding local currency capital to their funding mixes thanks in part to the advancement of the continent’s financial markets, according to Standard Bank Group’s Investment Banking team.
This shift in strategy has been highlighted at Standard Bank’s recent 2020 Africa Investors’ Conference, which saw a surge in investor participation and interest despite being held virtually for the first time since its inception a decade ago, and despite the uncertainty and economic pain brought on by the Covid-19 pandemic.
“There is a greater recognition, including amongst South African firms with operations elsewhere on the continent, that local currency funding is an important component of a sustainable multinational strategy,” says Bill Blackie, Global Head of Investment Banking at Standard Bank Group.
An overreliance on hard currency funding for African subsidiaries – mainly the US dollar and euro – has become a pain point for many multinationals given currency volatility risks and difficulties in repatriating dividends or repaying loans from many of the continent’s markets. The Covid-19 crisis has exacerbated this issue, prompting more groups to consider tapping into local currency markets so as to mitigate financial risk.
“This shift comes at a time when many African financial markets are maturing, with far greater capacity than ever before to fund the day-to-day operations of multinationals operating in their markets,” Mr Blackie says. “Interest rate cuts amid the Covid-19 crisis are further incentivising corporate issuers.”
Nigeria’s Stanbic IBTC Bank’s Debt Capital Markets Team has arranged Naira-denominated issuances for 11 corporates and financial institutions since February – a significant jump compared to the same period last year.
Corporates are capitalising on an increase in liquidity in Ghana as well, while in East Africa, there has been an uptick in interest in local currency debt following a relatively quiet three years, with a particular focus on green bonds in the region.
Activity is picking up in Southern Africa too, including in Mozambique, and Standard Bank expects this momentum across the continent to be sustained into the second half of 2020.
For the time being, multinationals tend to rely more on foreign funding than local capital. Standard Bank believes there is scope to move towards a majority of funding in local currencies, with hard currencies used to fund large projects – such as mergers and acquisitions or major capital investments – while day-to-day operations are funded mainly in local currencies.
There is now sufficient liquidity for this to become a reality, with the depth of local currency markets having improved significantly thanks in part to interventions by regional banks, governments and stock exchanges.
“Local currency funding could become even more important as Covid-19 prompts a shift towards local supply chains, employees and goods and services,” says Megan McDonald, Head of Investment Banking, International, at Standard Bank Group.
“To manage foreign currency risks, multinationals should ensure they have effective hedging strategies in place.”
Standard Bank believes that African governments should also take advantage of improved local currency conditions to reduce risk by relying more on domestic capital markets.
Meanwhile, Standard Bank has also noted an encouraging increase in investor interest in Africa despite the Covid-19 crisis.
Compared to 2019, the number of investors who attended the 2020 iteration of the Africa Investors’ Conference was up 78%, while African corporate participation grew by 17%. Standard Bank hosted the event in partnership with Microsoft, which provided a secure platform developed specifically for the event.
The annual Africa Investors’ Conference is designed to connect institutional investors to leading policymakers and some of Africa’s most successful companies, with the aim of finding key opportunities for growth on the continent. The event was hosted virtually for the first time this year.
The surge in interest comes as global investors, armed with deep liquidity amid central bank interventions to prop up economies, become more astute and selective in their Africa strategies.
They are moving away from broad Africa strategies to become more granular in their approach, with a heightened need for information on specific countries, industries and companies. It is encouraging to see that global investors are more willing than ever to put in the time to better understand African opportunities.
Investors expressed particularly strong interest in Africa’s telecommunications and consumer goods sectors. This was also highlighted when Helios Towers tapped into the eurobond market earlier in June.
“The Covid-19 crisis may have hampered Africa’s near-term growth prospects, but global investors clearly understand that the continent’s long-term prospects remain firmly intact,” Mr Blackie says.