treasury opportunities and challenges in...

Treasury opportunities and challenges in Africa

NIGERIA’S GDP

USD488 bnSOUTH AFRICA’S GDP

USD384 bn27%

LARGER THAN SOUTH AFRICA’S GDP

IN 2012

NIGERIA’S GDP

2


In 2013 the growth rate in Sub-Saharan Africa exceeded four per cent, while countries such as Nigeria, Tanzania, Ghana and Angola all saw their economies expand by six to eight per cent.

South Africa has long been the main economic powerhouse of the African continent, but a number of other countries are showing signs that they may finally realise their potential. For example, Nigeria’s GDP after rebasing in 2014 is now an estimated NGN80 trillion (USD488 billion), 27 per cent larger than South Africa’s 2012 GDP of USD384 billion. Moreover, half of the 20 fastest growing markets in the world over next 20 years will be in Africa, according to the International Monetary Fund (IMF).

Key investors in Africa include private equity funds as well as leading corporates from South Africa, other parts of Africa, India, China, Europe and the US. Leading multinational corporations as diverse as Vodafone, IBM and Starbucks have announced major expansion plans in the last 18 months, joining Indian and Chinese corporations which have been making heavy investments in recent years. Most companies are focusing on key countries such as Nigeria, Mozambique, South Africa and Ghana.

This increased investment in Africa means treasurers now need to upgrade and improve their African treasury management processes to support the growth of their businesses. A key requirement is to manage currency positions more effectively on both investments and trading flows, at a time when many currencies have been losing value against US dollar. Protecting the balance sheet, trading profits and dividends tends to be a challenge for treasurers in highly regulated markets – particularly those in which high interest rates and FX controls have historically made it difficult for corporates to hedge their positions. Likewise, restrictions on intercompany lending and capital controls in many markets can lead to trapped cash and present challenges for companies looking to manage liquidity across different markets.

Introduction

The opportunities in Africa have never been greater. The region has a rapidly increasing middle class of over 300 million and vast natural resources, while the growth rate in many African countries is now similar to that of the tiger economies of Asia.

3

Diagram 1

Common treasury trends

BankConsolidation

Centralised Procurement/Invoicing

Increased Focus on Supply Chain

RiskManagement Focus

Centralisation of Treasury & Payments

• Increased focus on bank counterparty risk

• Focus on 2-3 collections banks for key markets

• Multi channel collections strategy – mobile, POS, direct debits

• Provision of enriched data to drive reconciliation efficiency

• Core payments bank – SWIFT, SAP, Oracle etc

• Tightening credit, surety of supply and need to reduce costs making supplier finance propositions key

• Banks being asked to offer solutions to higher risk parts of the supply chain e.g. primary agriculture production

• Demand for automation of supply chain activities

• Centralisation of treasury function for Africa in regional hub

• Initial focus on centralisation of reporting and payments

• Increasing use of Mauritius, Kenya and Dubai to service payments

• Liquidity concentration in Mauritius and Dubai

• CentralisationofAfricanprocurement in Mauritius, Dubai, Switzerland and Singapore

• Increasingnumberofbilateraltax treaties now in place between African countries and Mauritius

• Managing foreign exchange and interest risk more actively with many currencies devaluing against the USD

• Counterparty risk management both in terms of banking partners, supplier and buyer risks

• Operational risk mitigation by process centralisation

While there are significant challenges, the financial sector is developing rapidly to meet these challenges. Treasurers, meanwhile, are taking steps to mitigate these risks and improve efficiency as outlined in Diagram 1.

This white paper will discuss some of these trends in more detail and explore how corporates are managing their treasury operations within the region.

Treasury centre locationsMost African groups still manage their treasury activities within the region out of their headquarters, but this is changing fast. Many groups, especially from South Africa, Kenya, Tanzania and Nigeria, are creating international treasury centres in Mauritius and Dubai to overcome restrictions in their home markets. There are also examples of large South African companies setting up international treasuries as far afield as London and other European locations. This trend is being driven by strict onshore currency regulations as well as by the broader availability of international financial services and more favourable tax environments offshore.

International groups from Asia, the US and Europe manage Africa from a variety of locations depending on their experience of the region, the size of their operations and the focus of their businesses. Most corporations still manage Africa from a treasury based in either Europe or Asia. Groups with significant operations and/or a particular business focus on African growth are increasingly establishing some level of treasury operations in Dubai, Mauritius or South Africa.

4


Mauritius is an increasingly popular location due to its business-friendly tax and regulatory environment and its well-developed banking sector which supports effective FX and liquidity management.

When choosing a location for a pan-African treasury function, companies should consider various factors, including the tax and regulatory environment, cost base, infrastructure, availability of resources, financial markets, banking landscape and the social and business environment. Companies should also consider whether the treasury centre will cover just Africa, or both Africa and other regions such as the Middle East.

Mauritius is an increasingly popular location due to its business-friendly tax and regulatory environment and its well-developed banking sector which supports effective FX and liquidity management. A number of popular liquidity management structures can also be used including multi currency notional pooling. The island nation has a number of double tax treaties with both African and non-African nations. While Mauritius does not have as many double tax treaties as South Africa or Dubai overall, the number of treaties that it holds with other African countries is comparable to the number held by South Africa.

Dubai is normally used by corporations with significant Middle Eastern operations, typically in the contracting, oil and gas or trading sectors. However an increasing number of African corporates are also establishing treasuries and trading hubs in Dubai which only manage operations in Africa.

Dubai’s financial sector is well developed and there is good liquidity and depth in the market. Dubai is not as deregulated as Mauritius but has the advantage of having no corporate or personal taxes with the exceptions of financial institutions and the oil industry. It is also an excellent transportation hub for both people and goods.

The drawbacks include a limited number of double tax treaties with Africa as well as higher operating costs. Another disadvantage is the absence of notional pooling, due to legal uncertainty over the right of set-off and enforceability of cross guarantees which are critical to underpinning these structures.

Diagram 2

Profile of key regional treasury locations

Mauritius

SouthAfrica

Dubai

• Typically used by European/multinational firms who leverage strong South Africa presence as regional head office to drive pan-African business

• Treasuries operate as service centres since liquidity structures and financing are often organised through offshore entities• Relatively restricted regulatory environment, making it inefficient to concentrate liquidity back to South Africa. High taxes

not conducive to RTC operating as a profit centre although South Africa has a well developed network of 19 double tax treaties with African countries

• Access to well educated staff and direct flights to many countries in Africa

• Typically used by African and international firms with footprint predominantly in Africa • Holding companies and trading hubs are the most common structures, taking advantage of low taxes and 17 double

tax treaties with African countries• Conducive regulatory environment makes it ideal for regional treasury centres (RTCs)• Financial markets not as deep as Dubai or South Africa but developing quickly• Limited flights makes it less accessible for direct travel to multiple African countries

• Treasuries based in Dubai are predominantly from the contracting, trading and oil and gas sectors and typically cover both Middle East and Africa

• Trend for African corporates (especially from Tanzania and Nigeria) to move treasury to Dubai• Liberal regulatory environment. Over 20 free trade zones offer zero corporate tax rates for 15-50 years, 100% foreign

ownership allowed, no withholding tax, etc. Seven double tax treaties with African countries• Well educated staff, attractive place to live, direct flights to many countries in Africa

5

South Africa, meanwhile, is popular amongst corporates with a large operational base in South Africa and many are already using the country as their main regional headquarters for Africa. Proximity to the business is often a key driver for the location of the treasury. While the South African based treasury centre may manage the region, some banking services may need to be sourced or performed in other locations. For example, a regional liquidity management structure may need to be based in Mauritius or elsewhere due to significant exchange control regulations in South Africa that make efficient cross-border liquidity management challenging. Companies in South Africa can set up notional pooling and sweeping structures in South Africa but the residency status must be the same for all participants i.e. it is not possible to mix resident and non-resident accounts. Therefore, they may look to offshore locations for these structures such as Mauritius or London.

New regulations in South Africa have recently made it easier for corporates quoted on the South African stock exchange, and with holding companies established in South Africa to conduct intercompany lending with their Africa subsidiaries. However, South Africa’s other regulations and high taxes may limit its appeal.

A high level comparison of the three locations based on factors commonly used to evaluate locations for treasury centres is provided below. These are based on The Global Competitiveness Report 2013-2014, published by the World Economic Forum.

Funding considerationsOne of the key challenges for a treasury centre in Africa is the funding of local entities. Companies must always consider optimal tax and return on capital issues when capitalising group entities. In Africa this becomes even more important due to the often highly regulated environment and prevailing trend for currencies to devalue against the US dollar.

Diagram 3

Comparison of key selection criteria

REGULATORY ENVIRONMENT

Transparent policy making and legal framework efficiency

Efficiency of legal framework in settling disputes

Burden of government regulation

Number of procedures to start a business

GOOD MARKET EFFICIENCY

Low corporate tax rate

Low withholding tax rate

High number of double tax treaties

FINANCIAL MARKET DEVELOPMENT

INFRASTRUCTURE/TELECOMMUNICATIONS

AVAILABILITY OF HIGHLY SKILLED PROFESSIONALS

Pay and productivity

Reliance on professional management

Availability of research/training services

Quality of management schools

Quality of the educational system

91-100% 81-90% 71-80% 61-70% 51-60% 41-50% 31-40% 21-30% 11-20% 0-10%

Legend ● UAE ● Mauritius ● South Africa

Less Favourable (Bottom Percentile) Favourable (Top Percentile)

SA

SAM

SAM

U

U

U

U

U

U

U

U

U

U

U

M

M

M

M

M

M

M

M

M

M

M

U

SA

SA

SA

SA

U

SA

U SA

SA

SA

SA

SA

M

SAMU

SA

Data source: The Global Competitiveness Report 2013-2014 by World Economic Forum, country ranking is used to convert into ranking percentile. Tax rates are sourced from Deloitte International Tax Highlight 2014. The highest rate is used as 100% benchmark

6


In a number of African countries, such as Angola, Mozambique, Ghana, Nigeria and Tanzania, it is very difficult to repatriate excess cash or make use of profits in any way other than by paying dividends. With high levels of withholding tax on dividends it could be costly to over-capitalise a local unit. On the other hand, thin capitalisation rules, withholding tax on intercompany interest and other regulations might make it equally costly or difficult to fund the entity with intercompany loans.

As a result, many corporations favour locations such as Mauritius for their African holding companies. This enables them to access relevant double tax treaties with the African nations where their operations are based and reduce the impact of withholding taxes on loan interest.

Using local funding can also be expensive with high levels of interest on local and foreign currency loans, especially in the highly regulated markets. Even in some less regulated markets, such as Kenya, interest rates are relatively high on US dollar facilities. As a result, the use of off-shore funding in the name of the local entity, where regulations allow, is on the increase.

In addition to overdraft facilities, many corporates use a range of different trade financing products to cover their working capital needs, including import/export loans, export letters of credit (LC) discounting and inventory finance.

Risk management challenges in AfricaAny treasury has to manage a number of different risks, but this process can be more challenging in Africa than in other regions. The main risk for treasuries covering Africa, in our experience, is managing the devaluation of currencies in highly regulated markets such as Angola, Mozambique, and Ghana.

When managing currency risk, treasurers need to consider not only their investments in local currency but also future dividend payments and trapped cash. The risk of losing value on assets is concerning. Some countries, such as Angola, have experienced a sudden currency devaluation. For example, the Angolan Kwanza was pegged to the USD but then sharply devalued by 30 per cent over a short period of time in 2009. Other currencies, like the Ghanaian Cedi, have a more linear devaluation trend against the USD.

Diagram 4 shows how African currencies generally devalued against the USD over a five year period from a common base in 2007.

Diagram 4

Key exchange rates in Africa

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2007 2008 2009 2010 2011 2012

KES

NGN

ZAR

TZS

UGX

ZMW

GHS

BWP

Sustained volatility over long periods

Some volatility can be attributed directly to political or economical instability

External market participants can disrupt the markets through speculation or lack of understanding

Shallow liquidity, a feature of most African FX markets although improving, increases the chance of disruption

Standard Chartered is pleased to offer its expertise to guide clients with market colour and seamless execution

Even in some less regulated markets, such as Kenya, interest rates are relatively high on US dollar facilities. As a result, the use of off-shore funding in the name of the local entity, where regulations allow, is on the increase.

7

Other risks at the forefront of the treasurer’s mind in Africa include counterparty risk, liquidity risk, interest rate risk, operational risk and country risk:

•Counterparty risk arises from having to use a range of local or regional banks for collections, deposits and access to local funding facilities. These banks may have lower ratings than would be accepted in other regions, leading to regular policy exceptions and increased risk

•Liquidity risk arises in countries like Ghana and Egypt where there is a lack of hard currency. As a result, even when a corporation has to make a valid overseas payment, the treasurer may be required to wait for an extended period of time to obtain the required hard currency. Liquidity risk may also arise when it is difficult to source local working capital at a reasonable cost, thereby constraining the growth of the business

• interest rate risk is a concern because interest rates on local currency are very high in some markets due to inflation and devaluation pressures. High interest rates are often used as a means of fighting inflation by encouraging corporates to keep some of their liquidity in the local currency. Interest rates can increase significantly without much notice, which can have a significant negative effect on corporates funded in local currency unless their positions are hedged

•Operational risk tends to be higher in Africa due to the extensive use of cash in some markets such as Nigeria. Other risks arise from electronic banking platforms with weak security standards and high staff turnover in some markets due to a lack of experienced workers and strong competition for experienced staff from both international and local companies

•Country risk arises from the impact of political turmoil on local operations, together with the risk that access to funds is frozen or lost due to operational failure of clearing systems and/or the failure of banks or other financial counterparties. The evolving regulatory environment can also force a corporation to change the way it manages funding and liquidity overnight, for example if a country enacts emergency measures due to capital flight or political turmoil

Common risk mitigation strategiesinvoicing Many corporations invoice in hard currency wherever possible. However, regulations in some markets stipulate that all invoicing needs to be done in local currency, as is the case in Ghana. In other cases buyers may not be willing or able to pay in local currency, which is typically the case when dealing with government entities.

In a number of countries, local entities that are exporting goods and/or commodities are allowed to keep their hard currency export proceeds offshore for a limited amount of time, after which they have to repatriate the funds and convert them into local currency. However, for some countries such export proceeds kept offshore cannot be invested during this time limiting the attractiveness of this option.

Country risk is much more difficult to manage in relation to receivables. However by selling against a LC locally, and confirming the LC with a foreign bank, companies can mitigate the risk for specific receivables.

moving cash overseasCorporations that do not intend to re-invest profits locally, or have temporary excess cash, typically try to move funds offshore into a hard currency. Key objectives are to reduce currency risk, use the cash to fund other entities or invest funds in order to increase returns. This can be done relatively easily when the cash is sitting in countries with favourable regulations such as Kenya, Botswana, Uganda, Mauritius and Zambia.

High interest rates are often used as a means of fighting inflation by encouraging corporates to keep some of their liquidity in the local currency.

8


The best way of covering risks such as counterparty risk, liquidity risk and operational risk is to use a strong international bank where ever possible. This not only reduces counterparty risk but also provides access to a consistent set of services supported by robust systems and operating processes across multiple markets.

However, in highly regulated markets there are not many options available. The most common methods of moving cash offshore are by paying dividends, management fees or royalty payments. In these cases, withholding tax is often simply seen as a cost of doing business. Another common way of reducing trapped cash is by shortening the payment terms for intercompany payables (payment leading).

Companies selling goods into Africa from other regions, in local currencies, often discount their invoices so that they can convert the local currency to hard currency as soon as possible.

Hedging currencies and interest ratesWhen it is not possible, practical or desirable to move cash out of the country, companies can use hedging instruments such as forwards and swaps to gain protection against currency devaluations. While these instruments are available in most markets, a lack of market liquidity and high interest rates are prohibitive in some cases. Some corporations use local currency loans to offset local assets and/or future local currency flows as a natural hedge, but local currency loans are often not available for offshore entities in regulated markets. High interest rates may also make such structures less attractive.

The derivatives markets in many African countries are small (if they exist at all) and often illiquid. However there are markets where hedging instruments are available for both foreign exchange and interest rate exposures.

regional bankingThe best way of covering risks such as counterparty risk, liquidity risk and operational risk is to use a strong international bank where ever possible. This not only reduces counterparty risk but also provides access to a consistent set of services supported by robust systems and operating processes across multiple markets.

Managing liquidity in Africaregulatory landscapeIn a highly regulated region like Africa, a solid understanding of local regulations is essential. Due to various restrictions, one of the most common issues for the treasurer is trapped cash. This, in turn, causes multiple issues such as devaluation risk, counterparty risk and the inefficient use of surplus funds leading to low yields.

Most countries have strict regulations around foreign exchange and intercompany lending. In addition, transfer pricing is coming under increasing scrutiny from local tax authorities and penalties for breaches are becoming more common. This is particularly important when looking at cross-border transactions that involve either a cross-border intercompany loan as part of a centralised sweeping structure or a trading transaction between a procurement hub and a local subsidiary. Thin capitalisation rules also need to be considered.

In a fast changing regulatory climate it is important to work with a bank that has a strong local and regional presence, has the platforms to support advanced liquidity management structures, and which can be tapped for market insights at both the local level and the central treasury level.

9

regional liquidity structuresDespite the regulatory hurdles, in-country sweeping structures are often allowed not only for single entities but also for multiple entities, as long as those entities have the same residential status. Notional pooling is not available in most countries in Africa and regulation is often silent or negative regarding the concept.

Cross-border pooling solutions can only be established for operations in a few countries like Kenya, Botswana, Zambia, Mauritius and Uganda due to regulatory constraints. Even so, it is important to note that some of these markets have certain documentary requirements for cross-border transfers.

By converting local currencies into US dollar via spot transactions or swaps, companies can sweep balances to or from a concentration pool based in Mauritius, for example. The US dollar balances are pooled together to create one easy to manage position. These funds can then be used elsewhere in the group to fund other entities.

When creating pan-African liquidity structures, companies must evaluate all liquidity management structures carefully to ensure compliance with local regulations and tax laws. This may need to be undertaken by each entity depending on the corporation’s legal structure. We recommend that clients take tax and regulatory advice from external legal and accounting firms when considering such structures.

Cash management in AfricaWhile the existence of many different clearing systems and banking practices can impact the efficiency of in-country business operations from a day-to-day cash management perspective, the implementation of a number of initiatives has eased this process.

This included the creation of currency unions with extended clearing systems across national borders such as:

• The West African Economic and Monitory Union (WAEMU) which uses the West African CFA Franc (XOF) and incorporates Niger, Mali, Senegal, Guinea Bissau, Côte d’Ivoire, Burkina Faso, Togo, Benin.

• The Central Africa Economic & Monetary Community (CEMAC) which uses the Central African CFA Franc (XAF) and incorporates Cameroon, Central African Republic, Chad, Equatorial Guinea, Republic of Congo, and Gabon.

Diagram 5

Regulatory landscape for liquidity structures

Mauritius, Botswana, Kenya, Uganda and Zambia

• Lowtomoderatelyregulatedcountries• Liquiditystructuresarepermittedlocallywithsomerestrictiononpooling• Regionalparticipationgenerallypossible

Easy to moderate

South Africa, Lesotho, Swaziland and Namibia

• Moderatelyregulatedcountrieswithrestrictionsoncross-bordertransactions• Efficientexchangecontrolregimes/administration• Domesticliquiditystructuresareallowedtosomeextent

Moderate/efficient

Cameroon, Congo, Gambia, Côte d’Ivoire, Mozambique, Tanzania, Nigeria and Ghana

• Moderatelytohighlyregulatedcountries• Cross-borderactivitiesrestricted• ShortageofUSD/EURliquidityfromtimetotime

Moderate to difficult

Angola, Malawi, Zimbabwe,Ethiopia, Egypt, Algeria and Morocco

• Complexexchangeregulatedcountries• Cross-borderactivitiesrestricted• Shortageofforeigncurrencyfromtimetotime

Very difficult

10


Some corporations are already taking advantage of these clearing systems to concentrate their outgoing payments in a single location for each region, such as the Côte d’lvoire for the WAEMU region and Cameroon for the CEMAC region. However, these monetary zones are not yet harmonised when it comes to tax so great care must be taken when creating any structure covering multiple countries within these regions.

In addition to the monetary unions there are also initiatives to further develop the single markets covering EAC and SADC, thereby creating future opportunities for further rationalisation of cash management practices in Africa:

•South African Development Community (SADC) including Angola, Botswana, Democratic Republic of the Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe.

•East African Community (EAC) including Burundi, Kenya, Rwanda, Tanzania and Uganda.

EAC has just implemented a cross-border real time gross settlement (RTGS) system which allows payments between Kenya, Uganda and Tanzania in each country’s local currency.

SADC is also implementing a common RTGS clearing system initially limited to high-value cross-border transactions in the common monetary area using the South African Rand (South Africa, Namibia, Swaziland and Lesotho). Low value electronic credits will follow in July 2014 and debits in June 2015.

Diagram 6

Common markets and clearing zones

WAEMU

CEMAC

SADC FREE TRADE AREA

EAST AFRICA COMMUNITY

* Also part of SADC FREE TRADE AREA

CENTRAL AFRICANREPUBLIC

BURKINAFASO

MALI

CAMEROON

GABONEQUATORIAL

GUINEA

GUINEA BISSAU

SENEGAL

MALAWI

ZIMBABWE

BENIN

TOGO

NIGER

COTED’IVOIRE

SOUTH AFRICA

NAMIBIABOTSWANA

LESOTHO

SWAZILAND

MOZAMBIQUE

TANZANIA*

ANGOLA

ZAMBIA

DEM. REP. OF THE CONGO*

MAURITIUS

KENYAUGANDA

RWANDA

MADAGASCAR

CHAD

BURUNDI

SEYCHELLES

11

Financial inclusion with mobile moneyThe fact that a large part of the African population still remains unbanked, coupled with poor access to formal banking infrastructure in remote areas, poses tremendous operational difficulties for corporations with consumer oriented businesses or suppliers in rural areas.

Traditionally this has resulted in the need for extensive cash handling, which creates obvious risks and inefficiencies. However, with the advent of mobile money systems in countries like Kenya (where 80 per cent of the population have an M-Pesa mobile money account), payments and receivables can be converted to a cashless process for the corporate. This includes full integration to the corporation’s ERP system for payment initiation and reconciliation via electronic banking solutions.

Africa has the highest mobile money penetration rate in the world, according to a report released in 2014 by GSMA, an association representing some 800 mobile services companies worldwide. The report found that at least 52 per cent of all live mobile money services take place south of the Sahara. At least nine African countries, including Kenya, have more registered mobile money accounts than bank accounts.

The services provided vary from country to country depending on the maturity of the market and the suppliers of the service. Mobile money services typically start with person to person (P2P) payments and then evolve to cover consumer to business (C2B) and business to consumer (B2C) transfers.

Kenya offers an even more extensive mobile money ecosystem including bank to wallet, wallet to wallet, and wallet to bank services. These services enable value to move freely and seamlessly between bank accounts and mobile wallets, rather than mobile money users having to rely on a cash transaction with an agent to receive physical cash or top up their mobile wallet. These services also support international remittances.

The success of mobile money across Africa is driving central banks to assess and regulate mobile money in a more holistic manner. The continuing development of mobile money across Africa is expected to facilitate further efficiencies in corporate cash management in the near to medium term.

Diagram 7

Mobile money

Corporation

ENHANCED SECURITY

EXTENDED REACH

CASHLESS TRANSACTION

IMPROVED SPEED

Consumer

MobileCollections

MobilePayments

12


Enhancements in banking technology and the development of SWIFT capabilities enable corporates to create payment hubs and thereby centralise their payments, receivables reconciliation and invoice handling.

Shared service centresMany corporates in Africa operate on a decentralised basis with the finance function in each country handling accounts payable (AP) and accounts receivable (AR) locally. In contrast, most large corporations in other regions have created shared service centres (SSCs) to handle these types of activities.

Companies which manage these processes locally are often prone to issues such as lack of control, inefficient processes and a lack of standardisation and automation. In addition there tends to be a high staff turnover in many markets due to a lack of experienced staff, increasing trading volumes in fast growing markets, and competition from new companies entering Africa. In order to address these issues, many corporations have decided to fold their African AP and AR operations into an existing SSC or to create a new dedicated SSC covering Africa.

Enhancements in banking technology and the development of SWIFT capabilities enable corporates to create payment hubs and thereby centralise their payments, receivables reconciliation and invoice handling.

Operational risks can often be mitigated through the use of a centrally held payment platform where authorisation levels can easily be monitored and managed. Some corporations leverage the flexibility of these systems by having authorisers at both the central and local level, thereby minimising the risk of fraud, for example.

South Africa is the most popular location for SSCs in Africa for several reasons: 1) multinational companies tend to have their largest operations there; 2) South Africa has strong government incentive schemes for SSCs; 3) South Africa has a good pool of qualified staff covering all the major language groups in sub-Saharan Africa, and; 4) its close proximity to other African markets. Other common locations are India, UAE, Mauritius, Ghana and Kenya. With many markets requiring physical supporting documents to be presented to the bank before payments can be executed, it is important to establish processes whereby the SSC or payment hub informs the local entity of payments before they are released to the bank.

When carrying out services on behalf of different entities in Africa, it is also important that internal charging mechanisms are vetted by tax advisors as transfer pricing has become very topical. Authorities are closely monitoring these fees and applying severe penalties when groups breach local rules.

13

Trading hubsCorporates in Africa are increasingly centralising procurement and creating internal trading hubs that generate significant value to the organisation from an efficiency point of view – particularly when those hubs are dealing with African entities.

Typically a trading hub would procure externally on behalf of local entities and on-sell the goods or material to local entities in either foreign currency or local currency depending on policies and regulations. In some groups, the trading hub also procures the finished goods or commodities from local entities and on-sells to group entities in other countries, to the global sales organisation, or directly to major clients.

Many African and international groups are creating offshore procurement centres in Mauritius, Dubai and Switzerland where they also often co-locate a treasury function for the group or the region. Commodity hedging and FX risk management are typically managed from these centres.

When operating a trading hub for Africa it is important to investigate carefully all possible tax and regulatory consequences that might arise, such as transfer pricing, permanent establishment exposure and indirect tax/VAT issues.

The use of a trading hub goes beyond procurement processes and can have significant positive effects for the treasury:

•Centralising foreign exchange by optimising the selection of internal invoicing currency

•Centralising working capital needs into one entity where possible, which makes facility management more effective

•Using invoice or payment leading and lagging to minimise cash levels in regulated countries and fund entities in a cost effective way

•Reducing the cost of imports by issuing import LCs out of a less costly country (the trading hub), followed by an internal invoice to the final destination country

Diagram 8

Centralised trading hubs in Africa

GOODS

GOOD

S

CENTRALISEDTRADING

HUB

MATERIALS / GOODS

Trading hub buys the material/goods...

... Trading hub sells andinvoices the local entity

Imported goods or goodsmanufactured locally are sold

by local sales entities

Trading hub buys thegoods from the localmanufacturing entity...

Trading hub sells the goods to other sales entities around the world

And receivespayment

LOCAL ANDINTERNATIONAL

SUPPLIERS

Local Sales Entity

ManufacturingEntity

LOCAL ANDINTERNATIONAL

CUSTOMERS

... while the goods are shipped directly to sales entities in other countries

Local sales entitydelivers goods

Flow of funds

Physical movement

... while goods are physically delivered to the entity in Africa

GO

Offshore Sales Entity

14


about the author Olle Malmgren is based in Dubai, covering the Middle East and Africa for Standard Chartered’s Treasury Solutions team. Olle has more than 25 years of treasury experience and joined Standard Chartered from Bank of America in London, where he headed up the inbound US commercial banking team within transaction banking, as well as being responsible for treasury outsourcing sales. Olle brings practical experience from multiple aspects of treasury, having worked as Treasury Manager for Whirlpool covering Europe, Asia and Africa. He was also responsible for selling, implementing and managing treasury systems, in-house banking and payment factory solutions for Wall Street Systems, covering many Fortune 500 companies. Olle also has a solid international banking background, having held a number of management roles within transaction banking and corporate banking in Europe, Asia and the Middle East while working for institutions such as Bank of America, J.P. Morgan, SEB and SHB.

Treasury management in emerging markets is always a challenge and that is certainly true in Africa. Although there have been significant improvements in communication, banking technology and product capabilities, it is important for corporates to work with banking partners that have a strong country network and comprehensive product capabilities. Partner banks should also be able to provide insights into the local market and regulatory environment in order to support efficient in-country cash management as well as regional liquidity management.

Africa presents many challenges – but there are also a number of areas where a treasury can make a real difference by adopting a more active approach to managing cash, FX and liquidity management. Treasurers should pick some quick wins, such as account rationalisation and regional cash visibility, and then graduate to more complex projects such as common payment hubs and cross-border liquidity solutions. With focus and a project based approach it is possible to overcome many of the challenges.

Standard Chartered has a long tradition of banking in Africa and with our extensive branch network and product range in all areas of banking, we are well suited to be your regional partner in Africa. Our dedicated treasury solutions advisory service, provided by a team of experienced ex-treasurers and bankers with an average of over 20 years’ experience, can also provide in-depth advice and share best practices on any of the topics covered in this paper.

Conclusion

This material has been prepared by Standard Chartered Bank (SCB), a firm authorised by the United Kingdom’s Prudential Regulation Authority and regulated by the United Kingdom’s Financial Conduct Authority and Prudential Regulation Authority. This material is not research material and does not represent the views of the SCB research department. This material has been produced for reference and is not independent research or a research recommendation and should therefore not be relied upon as such. It is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC neither has it been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It is for information and discussion purposes only and does not constitute an invitation, recommendation or offer to subscribe for or purchase any of the products or services mentioned or to enter into any transaction. The information herein is not intended to be used as a general guide to investing and does not constitute investment advice or as a source of any specific investment recommendations as it has not been prepared with regard to the specific investment objectives, financial situation or particular needs of any particular person. Information contained herein, which is subject to change at any time without notice, has been obtained from sources believed to be reliable. Some of the information appearing herein may have been obtained from public sources and while SCB believes such information to be reliable, it has not been independently verified by SCB. Any opinions or views of third parties expressed in this material are those of the third parties identified, and not of SCB or its affiliates. While all reasonable care has been taken in preparing this material, SCB and its affiliates make no representation or warranty as to its accuracy or completeness, and no responsibility or liability is accepted for any errors of fact, omission or for any opinion expressed herein. SCB or its affiliates may not have the necessary licenses to provide services or offer products in all countries or such provision of services or offering of products may be subject to the regulatory requirements of each jurisdiction and you should check with your relationship manager or usual contact. You are advised to exercise your own independent judgment (with the advice of your professional advisers as necessary) with respect to the risks and consequences of any matter contained herein. SCB and its affiliates expressly disclaim any liability and responsibility for any damage or losses you may suffer from your use of or reliance of the information contained herein. This material is not independent of SCB’s or its affiliates’ own trading strategies or positions. Therefore, it is possible, and you should assume, that SCB and/or its affiliates has a material interest in one or more of the financial instruments mentioned herein. If specific companies are mentioned in this communication, please note that SCB and/or its affiliates may at times seek to do business with the companies covered in this material; hold a position in, or have economic exposure to, such companies; and/or invest in the financial products issued by these companies. Further, SCB and/or its affiliates may be involved in activities such as dealing in, holding, acting as market makers or performing financial or advisory services in relation to any of the products referred to in this communication. Accordingly, SCB and/or its affiliates may have a conflict of interest that could affect the objectivity of this communication. You may wish to refer to the incorporation details of Standard Chartered PLC, Standard Chartered Bank and their subsidiaries at http://www.sc.com/en/incorporation-details.html. This material is not for distribution to any person to which, or any jurisdiction in which, its distribution would be prohibited. © Copyright 2015 Standard Chartered Bank. All rights reserved. All copyrights subsisting and arising out of these materials belong to Standard Chartered Bank and may not be reproduced, distributed, amended, modified, adapted, transmitted in any form, or translated in any way without the prior written consent of Standard Chartered Bank.

Committing our expertise to power your ambition

Apr

201

5

Local service on a global scaleWith a presence in 70 countries and a unique footprint covering Asia, Africa and the Middle East, Standard Chartered’s business combines global capabilities with deep local knowledge to provide innovative products and services to meet the diverse and ever-changing needs of our corporate and institutional clients in the world’s most dynamic markets.

Your partner for the long runBuilding on a rich banking heritage of over 160 years, Standard Chartered is committed to providing a working partnership that builds your business with value-added and strategic solutions that reflect our longevity and unparalleled success. We are committed to our clients, employees and communities at all times.

Dedicated to sustainable successAs a leading international bank, our success is built on teamwork, partnership and the diversity of our people. With a long-term strategy to build a sustainable business, Standard Chartered leads by example in helping to develop emerging markets and ensuring we make a positive impact on society and the environment.

The right capabilities for your needsTransaction Banking Corporate Finance Electronic Solutions Financial Markets Principal Finance Global Research

Angola

Argentina

Australia

Bahamas

Bahrain

Bangladesh

Botswana

Brazil

Brunei

Cambodia

Cameroon

Canada

Cayman Islands

Chile

China

Colombia

Côte d’Ivoire

Egypt

Falkland Islands

France

Gambia

Germany

Ghana

Guernsey

Hong Kong

India

Indonesia

Iraq

Ireland

Italy

Japan

Jersey

Jordan

Kenya

Laos

Lebanon

Macau

Malaysia

Mauritius

Mexico

Myanmar

Nepal

Nigeria

Oman

Pakistan

Peru

Philippines

Qatar

Saudi Arabia

Sierra Leone

Singapore

South Africa

South Korea

Spain

Sri Lanka

Sweden

Switzerland

Taiwan

Tanzania

Thailand

Turkey

Uganda

United Arab

Emirates

United Kingdom

United States

Uruguay

Venezuela

Vietnam

Zambia

Zimbabwe

treasury opportunities and challenges in...

Documents