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Trade 25 March 2021

How investors harnessed local markets to manage credit and liquidity risks during Covid-19

Mark Kalil, Executive Head, Syndicate Africa at Standard Bank, shares how the bank supported investors manage their credit and liquidity risks by engaging with local African markets.

The last twelve months has brought challenges and opportunities to managing credit and liquidity risks in Africa.

The unwelcome combination of Covid-19 and negative oil prices prompted many multinationals and institutional investors in Africa to return to the drawing board. Staving off risks of sovereign default and maintaining optimal liquidity suddenly became the priority. As a result, businesses which had previously been able to rely on solid credit facilities from primary markets pivoted towards local African markets.  

Fortunately, these markets are vibrant, receptive to external flows, and full of excess liquidity. Multinationals have embraced these new pastures, in particular those with strong balance sheets. Many have flocked to local markets in Ghana and Nigeria, taking advantage of treasury bills which have commanded low yields, as a cheap way to raise financing.

For example, in Nigeria, approximately NGN1.2 trillion ($3.1 billion) worth of debt instruments was issued in 2020 compared to an estimated NGN573 billion ($1.5 billion) the prior year. The affiliates of multinationals issuing domestic commercial paper notes included Guinness Nigeria Plc (Diageo), Nigerian Breweries Plc (Heineken) and Total Nigeria Plc (Total SA). In total, approximately NGN130 billion ($370 million) was raised by these three corporates, with Stanbic IBTC Capital Limited acting as an arranger on these transactions.

While motivated out of necessity, this strategy of tapping into local bonds and commercial paper markets, thus spreading liquidity risks, is positive for all parties.

Overcoming the challenge of the unknown

Adapting to local market conditions, particularly when operating from afar, is not straightforward. Early-stage risk profiling by on the ground experts to direct financing is vital. Our local market teams have helped businesses set up listed bond programs to secure funding through these markets. This activity is ongoing. Clients are not just wary of the continuing need to spread risk but are also increasingly realising the opportunities of local markets and the excess liquidity on offer.

Another challenge to overcome is physical distance. Multinationals tend to be reliant on relationship managers working at the coalface to build trustworthy and productive relationships. This in-country expertise is difficult to replicate.

We make a concerted effort through our relationship managers to help businesses understand the regulatory challenges, no more so than when managing forex flows. There are several moving parts at play here, as local central banks closely monitor capital flows to prevent large-scale capital flight. In Nigeria, for example, investors require a Certificate of Capital Importation to enter the local markets.

While cumbersome at first, regulatory reforms such as these are positive and encourage healthy development of local currency bond markets. Recent research from the IMF[1] has shown that local currency bond markets almost doubled between 2011 and 2019. This illustrates how these markets are operating robust financial systems and are taking on ever greater importance globally. Coupled with the newly operational African Continental Free Trade Area, Africa is increasingly representing a conducive environment for capital inflows in local currencies.

Forging a new local status quo

As the pandemic gives way, a relative normalisation of markets is to be expected, but it would be naïve to think that we will return to the pre-pandemic status quo. At Standard Bank we deem it our responsibility to help drive growth in these local markets, just as much as the continent’s traditional powerhouses. We are urging institutional investors and multinationals alike to make more habitual use of the financing conditions on offer in these local markets. These environments are fast becoming a critical source of funding for financiers, and pleasingly, we are seeing international players consolidate these moves made in the pandemic.

Similar to how the global financial crisis brought us increased regulation and better liquidity management through Basel III, Covid-19 is leading us to more prudent, sustainable approaches to managing credit and liquidity in local markets. Pioneering these strategies in the long term will ensure Covid-19 was just a blip for investors, rather than a full-blown disaster.