Africa & Asia: Bankable Partnerships
By Kelvin Tan
Afro-Asian ties have come of age and grown in sophistication, moving to real partnerships based on shared commercial realities.
During my travels in Sub-Saharan Africa, Southeast Asia, India, China, South Korea and Japan over the past five years, I have witnessed the incredible rise of the Africa-Asia story. This relationship has moved beyond the initial handshake made during a study-trip or in a business forum many years go, to real partnerships based on shared commercial realities.
While trade and investments between both regions entail high risks, the rise in cross-border deals indicates the a growing number of corporates are prepared to make adjustments in their risk-reward perspectives.
Allow me to elaborate on how Afro-Asian ties have come of age, and have grown in sophistication.
Asian companies can acquire a stake in an African company with significant market share. Malaysia's National Oil Company, Petronas, holds 80% of South Africa's Engen, which owns a refinery with a capacity of 135,000 barrels a day and a network of over 1500 service stations. Together with Moroccan institutional investors, Singapore's Wilmar International Ltd secured a controlling, majority stake in Cosumar SA, Africa's third-largest sugar producer and Morocco's sugar monopoly, thus making major headway into the sugar business in Africa.
Japanese auto giant Toyota bought a controlling 98% stake in CFAO, a pan-African French company that manufactures and distributes automobiles, consumer goods, electronics and pharmaceuticals. In a similar vein, Japanese telecoms giant NTT acquired South Africa's Dimension Data in a $3.2bn deal, giving the firm access into African markets. This year, an estimated 150 Japanese companies will attend a Japan-Africa summit in Kenya, forming the largest sized business delegation in Japan's history to Africa.
International Container Terminal Services Inc. (ICTSI) of the Philippines, which owns and operates 25 terminals in 18 countries, formed a 60:40 joint venture with a local partner to build, manage and operate a new terminal along the bank of the Congo River in Matadi in the Democratic Republic of Congo. Matadi port is approximately 150km upstream from the Atlantic Ocean and a strategic shipping port for the nearly land locked country of 80m.
Two members of the Africa South-east Asia Chamber of Commerce—a "by-invite-only" private sector grouping of African and ASEAN corporates headquartered in Singapore—have joined hands to develop a 3000ha township in Tanzania. It will be developed by a joint venture between MAC group, a Tanzania-based conglomerate, and Hyflux, Singapore's pioneer in desalination and water treatment.
Wings Group from Indonesia set up a detergent manufacturing plant in Nigeria, with the support of loans fro International Finance Corporation (IFC), a multilateral agency under the World Bank Group which supports private sector investments. With two manufacturing facilities in the country today, Wings has a 50% share of the cleaning products market in Nigeria, despite competing against global giants like Unilever and P&G.
For its new transshipment container terminal in Lomé, Togo, Hong Kong's China Merchant Holdings (International) Company tapped on IFC to successfully mobilise €225m ($247.8m) of debt from the African Development Bank, including development financial institutions from Germany, France, and the Netherlands.
New era in Asia-Africa banking
Historically, the companies keen to do more between both regions have been faced with a financing conundrum of sorts. Asian banks with robust balance sheets do not understand African risks; while African banks, who understand these risks, lack the financial muscle of their Asian peers.
For instance, a trade transaction between both regions is typically routed via European or Middle Eastern counterparties. For traders, especially small and medium-sized enterprises, this has resulted in unrealistic pricing for letter of credit transactions.
New ventures and partnerships in banking and finance however are rapidly transforming the way cross-border deals are being finance.
In 2013, prime minister Shinzo Abe pledged $32bn in terms of support to Africa's development projects. Japan is home to the African Development Bank's only office in Asia and is the third largest shareholder in the institution. Japanese commercial banks are now gradually stepping up their direct relationships with African financial institutions.
At the Third India-Africa Forum Summit in New Delhi last year, Indian prime minister Narendra Modi offered Africa a concessional credit of $10bn over five years. Under this programme, India's Exim Bank will extend Lines of Credit (LoC — or concessional loans) worth $240m to Kenya and Tanzania. Currently, active Indian LoCs to Africa stand at around $18.65bn. The programme also includes a $100m India-Africa Development Fund, and a $10m India-Africa Health Fund.
The New Development Bank (NDB), headquartered in Shanghai and founded by the BRICS nations of Brazil, Russia, India, China and South Africa, is moving into its operational phase. Headed by KV Kamath, one of India's most accomplished business and banking leaders, the NDB recently announced it will be providing South African power utility Eskom with $180m for projects in renewable energy.
Meanwhile, the Green Climate Fund, headquartered in South Korea, has accredited a slew of African institutions to manage and disburse funds for its projects and programmes dedicated to climate change. These entities include the African Development Bank, the Africa Finance Corporation (Nigeria), the Environmental Investment Fund of Namibia, and the Cetnre de Suivi Ecologique (Senegal).
The Industrial and Commercial Bank of China (ICBC)—China's largest bank by assets—took a significant stake in South Africa's Standard Bank and acquired its UK subsidiary. The UK entity rebranded as ICBC Standard, recently announced plans to invest $80bn to finance over 100 infrastructure and industrial projects in almost 30 African countries.
Rise of the renminbi
A key trend to monitor will be the rise of the RMB (Chinese yuan) in Africa, both as a reserve currency and settlement currency. Firstly, the Chinese yuan is already recognised as a reserve currency in a growing number of Central banks in Africa, which include Nigeria, Ghana, South Africa and Zimbabwe. The agreement between the South African Reserve Bank with the People's Bank of China to invest in China's bond market is but a start. Nigeria is reportedly looking to issue panda bonds (yuan denominated) onshore in China, to increase its RMB stock.
With China as the leading trade partner for many African states, it is only a matter of time that the option of trading and settling in RMB becomes readily available across all African-based financial institutions. For example, Ecobank is already offering direct settlement in yuan for its clients in East Africa, especially in Tanzania and Uganda.
If more African states follow the example of South Africa, Morocco, and purportedly Nigeria, in concluding currency swap agreements with China, local demand for financial solutions centred around the Chinese currency will grow.
From a corporate treasury perspective, African financial institutions or corporates can consider the issuance of RMB paper in mainland China or offshore financial centres like London, Singapore or Hong Kong. The topic of capital market linkages between Africa and Asia will be actively discussed in future forums to come.
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About the author
Kelvin Tan is an Executive Committee Member of the Africa Southeast Asia Chamber of Commerce.