RISK MANAGEMENT | 25 MARCH 2021

Open Borders, Open Business

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As borders reopen after the Covid-19 lockdown, what opportunities are there for South African businesses in Africa, and what role does foreign exchange (FX) play in helping those businesses grow?

In his 2021 Budget Speech, South African Finance Minister Tito Mboweni said that National Treasury’s Budget “takes seriously our commitment to the continent of which we are a part”. He added: “Though we face many difficulties, we must not lose sight of our place in the world, as well as our potential and responsibilities.” For businesses across the country, it was a reminder that – as the Covid-19 vaccine rollout continues – borders are starting to reopen and opportunities for international trade are returning.

Samantha Singh, Africa strategist at Absa, believes that many of those opportunities lie not over the ocean but across the border and throughout our continent. “African economies have a lot of trade that could happen post-Covid, but that would have to coincide with growth momentum,” she says. “There are certainly opportunities in Africa. The challenge lies in reducing some of the red tape. Some countries – especially the major regional players – already have agreements with one another on things like import duties, but across the broader continent there is still a lot that needs to be done to facilitate freer trade and greater integration.”

The African Continental Free Trade Area (AfCFTA) agreement, part of which came into effect at the beginning of 2021, could go a long way towards achieving that. As Minister Mboweni pointed out, AfCFTA “presents the opportunity to deepen our trade and financial linkages with the continent”.

Understanding FX risks

FX is a key part of any business’s cross-border journey. Whether you’re an SME or a major corporate, getting your FX strategy right puts you in a position to optimise your import and export balance sheets. Getting it wrong, however, could have very expensive consequences. While an understanding of the local market conditions is vital, a clear view of the macro issues – including FX controls and monetary policies – is also important.

“When we talk about the FX risks we encounter during periods of global crisis, one of the things we worry about is the FX availability in commodity-producing countries,” says Singh. “Look at Nigeria and Angola. Both are oil markets, but while Angola has adjusted its currency prices, using the kwanza as a shock absorber on the balance of payments, Nigeria only saw small moves in its currency, and there we’ve seen FX backlogs.”

Singh says that those examples highlight the value of bringing in expert assistance. “Absa provides comprehensive advice,” she says. “As a pan-African bank we have first-hand experience in and in-depth knowledge of African markets because we’re already present in many of them. From a research perspective we can offer our insights around exchange controls and where we see FX going in those various territories.”

Looking beyond the Southern African Development Community (SADC)

Singh is quick to point out that, as the old saying goes, Africa is not a country. “Not all African countries are the same, and not all markets can be painted with the same brush,” she says. “During the early months of the pandemic we saw resistance to the global slowdown in some East African currencies. Those soft-commodity-producing countries that are more diverse in the structure of the economy and trade haven’t been hit as badly as the hard-commodity-producing countries. Then again, many African countries rely on things like tourism receipts, and those held back during the crisis. As movement between countries and continents regains momentum, some of that should increase too, improving FX liquidity in those markets.”

The easiest international markets to access tend to be the ones that are closest to home. SADC countries, and those in the regional customs union, naturally see more business from South Africa.

“However,” says Singh, “we have also seen South African corporates expand into West Africa, and Nigeria specifically. So there is definitely opportunity outside of the SADC region for business and trade to occur.”

Post-Covid intra-Africa trade is waiting to happen, Singh concludes. “AfCFTA was overshadowed somewhat by the pandemic, but it’s an important step towards free trade across the continent,” she says. “Initiatives like that will aid in boosting cross-border trade amid the after-effects of Covid-19. And as businesses and borders open again, some of those developments, which were already being planned before the onset of Covid, could be pushed forward a lot quicker.”

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