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Nigeria: Inflation And Austerity A Short Term But Necessary Concern In Nigeria.

Nigeria: Inflation And Austerity A Short Term But Necessary Concern In Nigeria.

Austerity and higher inflation is likely to be the challenges impacting Nigerian consumers over the next 18 months. This is notwithstanding the decision of the Central Bank to keep interest rates (monetary policy rate) at 13%. Concerns regarding potential foreign investor outflows and domestic investor confidence in local assets appear to have been behind the bank’s decision. However, this is likely to be temporary respite for consumers and investors in Africa’s biggest economy.

The National Bureau of Statistics (“NBS”) released the official inflation rate for June 2015, which was put at 9.2 per cent [the “street” rate is far higher]. The inflationary level released by the NBS is now above the upper limit of the Central Bank’s acceptable band of six to nine per cent. The austerity measures predicted to be put in place by the new administration such as the removal of the petrol subsidy is likely to take place during the course of 2016 causing a rise in inflation. Nigeria is a significant importer of consumer goods and the resulting pressure on the currency as a result of a falling oil price owing to a return of Iranian oil to the market are head winds Africa’s largest economy will have to tackle. This should undoubtedly cause concerns for those interested in investing in Nigeria’s middle class (and the related fast moving consumer goods industry).

Finally, the Monetary Policy Committee commented that the Naira was appropriately priced indicating an unwillingness to bow to pressure and permit the currency to float; at least  in the near future.

Kenya: Worrying Cold Headwinds

Kenya: Worrying Cold Headwinds

Fitch announced it had put Kenya’s credit rating on a negative outlook from stable, signalling a possible downgrade over the next one to two years if the debt situation deteriorates.

Kenyan bonds, which broke records in June 2014 by being the largest début by an African country when it raised US$2.75 billion from international investors, have lost more money for dollar investors than any other emerging market sovereign bond. In the first quarter of this year the economy grew by 4.9 per cent, below expectations for the country.

Fitch Ratings has revised the outlook on Kenya’s long-term foreign and local currency issuer default ratings (IDR) to negative from stable and affirmed them at ‘B+’ and ‘BB-’, respectively.

Kenya’s public finances have been on a steadily deteriorating trend since 2008, reflecting weak revenue performance, increasing infrastructure spending, and persistently high current expenditure.

The government last year raised $2.75 billion (Sh280 billion) by selling dollar-denominated sovereign bonds to global investors and looks to go back to the international debt market to finance a growing budget deficit. Exports are struggling, the tourism industry is weak, concerns over insecurity seems likely to stymie economic activity for many years, and imports show no sign of slowing down at a time when the shilling is in trouble. If that was not enough corruption real and perceived continues to plague the country.

Nigerian State Government Bonds: A Greek Style Default?

Nigerian State Government Bonds:  A Greek Style Default?

The economic situation affecting many Nigeria states today can in some respects be compared with that of Greece. Many Nigerian states are effectively bankrupt. Reportedly 12 of Nigeria’s 36 states owe their workers more than US$550 million in salaries and allowances. Perhaps, no more than 5 states are economically viable. A recent finance ministry official called Nigeria’s debt profile as “scary” and President Buhari reported that the treasury was empty.

In its annual report for 2014, the Debt Management Office reported that Nigerian states’ external and domestic borrowings amounted to US$10.967 Billion. These figures are unreliable based on 2013 borrowings and it has been difficult to obtain reliable information from certain states such as Bayelsa. The total amount for 2015 is likely to be far higher than the US$10.96 Billion reported by the DMO.

Only sixteen states are able to provide clear outlines of how the funds raised have been used. The Securities Exchange Commission was reluctant to approve new bond issues prior to the election for fear as to how those funds could be squandered by incumbents fearing a loss of power. Nevertheless, few governors can point to capital projects that represent the proceeds of debt borrowings.

Ironically, it has been the country’s growth allied with low yields in Europe and the US and stringent money laundering controls in those territories that has fuelled the growth in state debt. Supported by many banks that made significant amount of money in fees, Nigerian states took advantage of these factors to raise billions of United States Dollars in the past 5 years. The Nigerian economic growth story was strong. Debt prices were relatively low and rates high arising the attraction of yield hungry funds particularly pension funds, which had stringent asset allocation restriction and were put off by a poorly performing stock exchange.

The fall in oil revenues and the weakening of the Naira has had a detrimental impact on the ability of Nigeria’s states to meets its obligations as they fell due. States receive the majority of their revenue through an allocation of revenues from the Federal Government. As the price of oil has fallen so naturally has the allocation. To illustrate this further, the 2015 budget was passed on the basis of an oil price of US$53 per barrel. At the time the price of oil was US$68 per barrel. Brent Crude currently stands at just above US$52 per barrel. States have focused on using the smaller allocation to meet their debt service obligations rather than pay employees.

The immediate future appears rather bleak. The Nigerian government in July approved a $2.1 Billion rescue package. This would be repaid from the central government’s allocation to the states. However, with this allocation likely to be smaller rather than larger, an increase in demand for infrastructure a Greek style creditor renegotiation may not be too far away.

The Importance of Managing Relationships With Governments in Africa

South Africa: The Importance of Managing Relationships with Governments in Africa

The recent suspension by Minister Ngaoko Ramatlhodi, South Africa’s minister for mines, of the Glencore’s license to operate the Optimum coal mine and the subsequent conditional suspension of his earlier order focuses attention on one of the key challenges facing businesses operating in Africa over the next decade and that is the management of its relationship with governments and its various departments.

That is not to say that Glencore did not have a relationship with the South African government. By all accounts, it probably did. The conditional withdrawal came about after discussions with the government, after all. However, when a ministry threatens the economic interests of a company, it is an indication that the relationship is not all that it should be. As in any relationship parties should be aware that a party’s interests change over time and anticipation of government action is essential.

Glencore’s Optimum coal mine had been supplying the state electricity generator Eskom with coal at a price deemed by Glencore as below cost. The pressure on Eskom to turn around the nation’s electricity generation fortunes is immense. Load shedding has stymied economic growth and could result in an increase in the cost of borrowing if the situation worsens. Meanwhile, cost pressures on the company arising from the purchase of diesel for its aging generators is a serious concern. The acting CEO is one of the most respected black managers in a country, in which state owned enterprises are deemed to be mere tools of political patronage. The National Union of Mine Workers is a key ally of the government and needs to justify to its members why they should not join the rival more militant union, the Association of Mineworkers and Construction Union. Mine workers are concerned about the up to fifteen thousand redundancies recently announced by the large mining concerns in the country. Unemployment is already running at 25 per cent and the government has called upon mining houses to reconsider planned retrenchments.

On the other hand Glencore inherited a coal supply agreement agreed during the nineties with a low coal price escalation provision, thereby forcing the company to provide coal at a low price. This was evidently viable when coal prices were high and the company could rely on its export market. However, the slow down of the Chinese economy has caused a decline in coal prices.

The price of thermal coal was about R140/t in January 2011, compared with $62/t at the end of January 2015 and $42/t as of 3rd August 2015. This has forced the company to focus on its domestic contracts and consider retrenchments as a way of maintaining value for shareholders. It was the manner of those retrenchments that the Minister cited as the cause of the license suspension.

Irrespective of the terms of the coal supply agreement or the lawfulness of the Glencore’s redundancies, it is interesting when one of the largest mining concerns in the world is threatened by a government ministry and alarming when that threat is made public.

The old fashioned way of dealing with governments in Africa was for a company to engage an “old Africa hand”, normally a former colonial bureaucrat who had key relationships with the President and/or his family. Little was expected of regulatory knowledge or even technical know how. Contacts with the “big man” was deemed sufficient to push the interests of a company. Relationships with ministries was often left to spy agencies.

Today, in an environment in Africa where governments are become increasingly technocratic, managing relationships with policy and government decision makers is of the utmost importance. In some territories, senior officials are often more qualified than their European private sector colleagues and educated at some of the most prestigious schools in the United States and Europe.

Nevertheless, few ministries within Africa have an informal relationship with the industry for which it is responsible. Information is communicated in a formal manner and appointments with decision makers are often difficult or impossible to obtain.

Capacity continues to be a concern in the public sector at the lower level but this is slowly changing as governments cooperate and become more exposed to regulatory changes in other jurisdictions. obtain. Consequently, companies that may have started off establishing a relationship with government tend to ignore the need to manage the relationship and plough on regardless, put off by civil service and ministerial changes, bureaucracy, inefficiency and policy uncertainties.

One consequence of the financial crises in 2008 has been the growing harmonisation of regulatory standards and zealousness in collection and cooperation amongst tax authorities, thereby making it more and more difficult for companies to forum shop to avoid taxes. Ensuring that relevant tax authorities easily understand a company’s tax structure has however been a challenge, causing many companies to risk losing licenses rather than voluntarily provide information.

Investing resources in a “best friend” relationship with relevant government departments is important irrespective of the jurisdiction. Government should be kept informed of private sector thinking and strategies, particularly those that may impact existing government policy or sensitivities. Equally, the private sector must appreciate government and country specific sensitivities. They should be receipt of regular reports of potential policy changes in their area. This is more essential for foreign owned companies, which are more vulnerable to nationalist sentiments in policy.

Those companies that identify the technocrats and view a relationship with them as an equal but informed partnership will be successful in Africa.

7 Lessons Africa Can Learn from the Greek Debt Crisis

7 Lessons Africa Can Learn from the Greek Debt Crisis

For most of the 2000s, Greece experienced the fastest GDP growth of any Eurozone economy averaging 4.2 per cent. Rapid growth resulted in significant amounts of lending, which together with economic mismanagement and misfortune has given rise to the crises that has befallen Greece today.

Notwithstanding the fall in commodity prices, most economies in Africa will experience growth of more than 5 per cent in 2015; the most sustained growth since independence in the 1960s. Capital Investment in 2014 increased by 65 per cent to approximately $US 87 million1.

Global investor need for yield has permitted many African countries to tap into the bond markets for the first time. Some African debt is trading at levels close to Southern Europe, indicating a relatively low default risk. Overall debt levels in Africa are below 50 per cent of GDP (Greece has more than 200 per cent).

Other than the 14 economies that make up the West Africa and East African CFA zone (currencies which are pegged to the Euro and guaranteed by France), African states are not in any form of economic monetary union. Nevertheless, many in Africa are looking at the Greek crises with more than a casual interest. Some states have been there before and in all probability will be there again. So, what can Africa and those who invest and do business in the region learn from the ongoing crises in Greece.

  1. Learn from Joseph and the Egyptian Famine: Implement Counter Cyclical Measures.

This may seem obvious, but countries vulnerable to serious downturns seldom reign in spending during times of rapid economic growth and put in place a buffer to soften if not mitigate the impact of an economic down turn. Few countries in Africa can rely on significant tax revenues that normally accompany growth. It is therefore essential that austerity should not be a factor of saving during a downturn but cautiously implemented during periods of economic boom. Ghana which borrowed and enjoyed significant investment arising from the high price of oil, gold and cocoa is now experiencing power cuts, IMF led austerity measures and wondering where did all the money go.

  1. Capital Controls and State Intervention Can Be Useful Tools

Prior to the economic crises of 2008, state intervention was looked upon as anachronistic. Many African countries were encouraged to privatise state enterprises and to float their currencies to prevent over valuation and thereby promote exports.

The economic crises post 2008 has changed the economic narrative completely. Economic liberal economies from London, Amsterdam, Brussels to Washington rushed to nationalise companies from banking to the automotive industry to protect their economies.

Recently, Greece imposed capital controls by way of deposit withdrawal restrictions and the introduction of a prolonged bank holiday to keep banks closed and limit the number of banking transactions. It also closed the Athens stock exchange. These measures were justified on the basis of the need to protect the Greek financial system and the Greek economy in general from liquidity shortages.

Capital controls and state intervention to manage the currency is nothing new in Africa. Most countries in Africa have exchange controls in one form or another, Rwanda and Senegal being noticeable exceptions. For example Kenya has just recently restricted the amount banks can trade in foreign exchange to 10% of their core capital to support the Kenyan Shilling. South Africa’s exchange control restrictions have been eased considerably but bureaucratic controls still remain. Nigeria has reduced the amount of money Nigerians can withdraw from their local currency account when abroad.

The fall in commodity prices and the Greek debt crises indicate that these controls are likely to remain for the near future. In fact the crises has shown that capital controls proved to be an effective short-term economic lever to manage liquidity.

As many African economies come to terms with a low commodity price environment, it is likely that capital controls are likely to be more common in Africa. However, for private investors this growing trend and acceptability for capital controls should raise concerns. Capital controls restrict the ability for borrowers to make timely payments. Borrowers and lenders should ensure that this is taken into account in their loan agreements and in particular in the material adverse change and illegality provisions. A significant consequence of an increase in financial controls will be the effect on the purchasing power of the growing middle class for imported consumer goods.

Finally, it is important that investors closely monitor currency related information communicated by the central bank of economies to which they have a significant exposure.

  1. Choose Your Applicable Law Carefully

One of the questions posed to many lawyers regarding a Grexit was what would be the rights and obligations on the borrower or lender in the event of a Greek exit from the Euro or the EU. The answer often depended on the applicable law.

Local law is best for the borrower whereas New York or English law was better for enforcing the rights of any lender.

If a country applies a moratorium on foreign currency denominated payments, local law is unlikely to support a contractual obligation to pay in that currency. New York and English law would enforce the obligation subject to the provision on illegality.

Many local borrowers are reluctant to cede to the point of applicable law. This has been usually for sentimental reasons but as the Greek example shows, it is crucial consideration when structuring any deal.

  1. Understand Foreign Court Enforcement Can Be Difficult

Enforcing a judgement in Greece in the event of a Grexit and a moratorium on Euro currency repayments would be impossible against a borrower with no or insufficient assets outside of Greece.

It has been the custom for many state owned companies in Africa, municipalities and state governments to issue bonds to assist in budget gaps and take advantage of the interest for Africa debt. Some are often without sovereign guarantees. Nigerian states and municipalities are cases in point. The debt although at attractive rates is therefore unsecured. In similar circumstances where a moratorium on FX payments is in force, enforcing a foreign dollar denominated debt judgment against a local borrower or municipality would be difficult indeed.

  1. If You Don’t Have Systematic Significance – You Are At A Disadvantage

A general lack of regional and international economic integration means that a default by an African economy will not cause significant systematic risk to the others. This would be the case even in the event of a default by countries whose currency is the West African CFA Franc or Central African CFA Franc. The lenders may feel a few ripples and that would be all.

Germany did not agree to measures to stave off a further Greek default out of the goodness of its heart. The reason was the potential damaging impact to the Euro and the likely cost to many countries in the Eurozone arising from a Grexit. This coupled with the complexity of disentangling Greece from the Euro led Eurozone creditors to negotiate with a recalcitrant Greek financial team.

The Greek approach to negotiation is unlikely to be tolerated when dealing with African economies. African economies should be cognisant of this when dealing with the IMF or Western European lenders.

In addition, progress by the Economic Community of West African States and the East African Community to have a common currency may be slowed by mounting concerns of a lack of financial independence and financial contagion.

  1. Be Frank About The Economy: No Smoke and Mirrors

Concerned about falling outside of the Eurozone agreed debt/GDP parameters, Greece accepted cash up front from banks, entered into cross currency swaps and securitized cash flows from state assets. The effect was to characterise the money received up front as proceeds of a cash sale rather than debt. Thus granting a false impression of its economy to outsiders. Amazingly those responsible for managing the economy also believed these figures and based a budget on them.

Africa is improving in making available reliable financial information. Nevertheless, concerns have been raised over a number of statistics announced by governments. Doctoring economic statistics is an age old programme across the world. Nevertheless, Greece has shown that it is preferable to admit the truth and implement appropriate measures with the support of the international community than create an economy better suited to Alice in Wonderland.

  1. Give To Caesar What Belongs to Caesar: Collect Tax Revenues

This is probably one of the most important lessons to be learnt from the Greece debacle. Tax evasion and a lack of tax collection was rife in Greece. The government relying on debt attracted by a growing economy to square the budget circle.

In Africa, across the board, the percentage of taxpayers relative to the population is extremely low. Tax collection is expensive and corrupt. The tax rules are often opaque, contradictory and multi layered. More importantly many large tax registered companies operating in the region, use sophisticated techniques involving off shore service companies to avoid paying tax.

A lack of capacity within tax authorities in Africa is of significant concern. An efficient tax system is essential to create the buffer mentioned above. Africa needs to invest in capacity; the implementation of a streamlined tax system, more understandable tax rules and more accountability from tax havens and territories where multinationals have their head offices is required. On the other hand municipalities in Africa have to respond more pro actively to service delivery demands so at least residents feel they are receiving something for their taxes.

But obviously, all the efficient tax collection techniques in the world are of little use, if an economy is effected by the twin ills of corruption and waste. A challenge that all economies in the region have yet to overcome.

1Financial Times March 2015

Institutional Funding Opportunities in Africa

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Work and establishment mobility in sub-Saharan Africa

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With the rise of neo Afro nationalism, a question that is seldom raised but key to this continent’s economic development is the status of work and establishment mobility in sub-Saharan Africa – a region with a drastic skills deficit?

The Ghanaian authorities have recently confirmed the continued closure of foreign owned shops and the expulsion of the owners, the majority of whom are Nigerian. This order follows the passing of the controversial Ghana Investment Promotion Act that excludes foreigners from certain small-scale businesses in Ghana in contravention of the ECOWAS treaty.

In what has been the largest deportation of people from the country since the mass expulsion of Ghanaians in the 1980s; the Nigerian government meanwhile has quietly been deporting tens of thousands of citizens from Cameroon, Niger and Chad for what it argues are security concerns in support of its fight against Boko Haram.

Citing concerns over security and crime, the Kenyan authorities have arrested scores of migrants mainly from the West and Horn of Africa. However, affected foreigners have complained that the Kenyan police are merely using security concerns as a pretext for beatings and deportation which have increased in light of the Westgate shopping mall attack in 2013.

South Africa meanwhile has introduced new immigration measures for Zimbabweans, which could potentially mean many may be forced to leave either at the end of the year or upon the expiry of the new dispensation irrespective of how long they have been in the country.

Although the Southern African Development Community has been handicapped by a lack of interest from its member states, mainly South Africa, other regional blocks have gone some way to attempting to implementing free movement of persons.

Citizens of ECOWAS enjoy visa free travel within the region for up to 3 months, after which a permit is required. The East African Community has gone further and introduced the EAC passport, which proffers similar rights for up to 6 months. Citizens of certain countries in the EAC can even move without a passport and are treated as domestic students when studying in another member state country.

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Work and Establishment Mobility in Sub-Saharan Africa

With the rise of neo African nationalism  a question which is seldom raised but is crucial to  the economic development in sub-Saharan Africa  is the  question of work and establishment mobility in sub-Saharan Africa.  A region with a drastic skills deficit.

Work and Establishment Mobility in Sub-Saharn Africa

M&A Approval within the COMESA region.

COMESA merger control regime