Our panel discusses Chinese investment in Africa, financial institutions’ contribution to economic sustainability and regulatory concerns. Chaired by Romil Patel in Cape Town.
Andre Le Roux (head of business development – Africa, Maitland)
Hari Chaitanya (head of investor services product management, Standard Bank)
Catherine Tinavapi (head of market information services – Africa and Middle East, Standard Chartered)
Charles Buchanan (managing director, IQ-EQ)
Funds Europe – 2018 was a rather difficult year amid flagging global growth, as well as the fallout from the US-China trade war. Can global growth get back on track?
Hari Chaitanya, Standard Bank – Global growth is likely to remain more or less flat and I would focus on the US-China trade equation and how can it impact Africa. What could the positives and negatives be? The positive is that it can create opportunity for Africa. As exports from China slow down – that would create the opportunity for other countries, provided they are producing the same kind of goods for which there is a requirement. Africa can also benefit in terms of the programme between Africa and America allowing duty-free access to US markets, so the volumes can pick up on that front. It can also be in the sense where Chinese companies can use their existing presence or create new capacities in Africa to export to the US. On the downside, there is a fear of dumping from China if those exports are slowed down to the US. In addition, as there are huge capacities built up in China, this can lead to dumping into smaller emerging markets.
Catherine Tinavapi, Standard Chartered – The US-China trade issue did not generate as much of a downturn as expected. At the end of February 2019, we were certain that we would not be seeing the 8.5% drop anticipated and that the drop seen was likely to be the related end range. From an African perspective, the view is not so much that that alone is an impacting factor, we are rather looking at the consolidated impact of factors. On the one hand, a sustained reduction in oil prices is a factor that has buffered the African markets from the impact of the global downturn and could be a concern, but on the other, the recent increase in commodity prices would be an opportunity. Conversely, from a securities services or a custody perspective, we find that portfolio investment suffers when faced with direct competition from commodities investment.
The US Federal Reserve (Fed) is starting to increase its rates. There might be a flight to safety and assets might find that extra percentage uptick is going to be better than taking the Africa risk. You also have a look at factors such as Brexit – nobody knows how that will impact as it is still developing. The outlook for the global economy is perhaps still down from 3.8% global growth to the early twos, but from an Africa perspective, the growth trajectory remains the same, if maybe at a little bit slower pace.
Andre Le Roux, Maitland – Africa is not a country. Often we sit in South Africa or Europe and we have these first-world expectations, and I keep saying: “You have got to recalibrate your expectations, you cannot think of Africa in a sophisticated sense, you have got to think about pragmatic growth, so look at each of the countries that you think with your business there are going to be opportunities and then identify which are those things.” If you think about a funds world, where is the banking industry developing or likely to develop? Where are the capital markets likely to develop? Where is the infrastructure in place? Then start thinking about where growth is going to come from. The global economy and Africa are two different things and you have got to look at each specific country and then identify where the growth opportunities are. There certainly are exciting growth opportunities in selected markets, but you have got to take a micro view of Africa as opposed to a macro global view. There are some nice pockets of opportunities. In east Africa – Kenya, Ethiopia and Tanzania – from a banking, infrastructure and private equity infrastructure perspective, there are opportunities.
Charles Buchanan, IQ-EQ – With regard to global growth, there seem to be a number of headwinds, Brexit, trade wars and so on, but 2018 was not as bad as everyone perhaps perceived. For IQ-EQ, it was a good year. Our business is predominantly focused on private equity and we see a lot of potential for growth globally in the private equity sector as listed markets and listed assets perhaps wane and do not look like they will provide a fantastic return.
As far as the US-China trade war goes, there has been much media hype and there is, of course, much political posturing too. As with many of these sagas, Brexit included, I feel that businesses just want decisions to be made and for a conclusion to be reached because no matter what the result is, businesses are going to make it work. What it means for Africa is that ‘life goes on’, no matter what the outcome in the US-China trade pact or Brexit. It is merely delaying the inevitable quest for Africa and the subsequent economic growth which Africa will enjoy.
China has been taking the bull by the horns in Africa lately. I think that the US and Europe noticed that they were perhaps being beaten to some great investments and have now started to dive into Africa with more impetus, and there seems to be growing interest – particularly out of Europe. China is Africa’s biggest creditor, while the US remains the biggest contributor of foreign direct investment (FDI) to the continent. With the Overseas Private Investment Corporation and the International Finance Corporation now merging into one Development Finance Institution (DFI), you might see even more investment coming from the US into Africa. African countries offer many opportunities for DFIs to affect major positive change.
Funds Europe – Which asset classes and countries are interesting to you at present from an investment perspective?
Le Roux – If you look at the history of African countries ex-South Africa, the development of the capital markets continues to be non-existent, and so what is the asset class that everybody is using to get into Africa? It is private equity – and what is the biggest need for the continent? Infrastructure, hard and soft infrastructure, so putting in fibre, technology, education, just simple things like roads and trains. Some of Africa’s rail networks are also almost non-existent. For us, where is the opportunity and which asset class? I think it is in private equity, and absolutely in infrastructure. Where is the operating environment for setting up those funds most developed? Most probably the eastern axis.
Chaitanya – On the one hand, the amount of work which has happened on the capital market infrastructure side across sub-Saharan Africa has been very impressive in terms of new IT platforms and processes at the exchanges and depositories.
Now you have a depositary in almost every market, a number of capital market regulators have become a member of the International Organization of Securities Commissions (IOSCO) and some are now rewriting their capital market regulations.
Limited investment options remain a challenge for the investors in the region. Investment options are limited to equities and primarily government bonds, and the corporate bond market outside of South Africa is very small.
The key challenge now is how to encourage the funding of Africa’s growth from the African capital market. One-third of sub-Saharan African countries will grow by 5% this year, but looking at how the growth is being financed, it is primarily through debt and bank financing. A number of countries are borrowing via Eurobonds followed by private equity investments.
There is a good amount of growth in the domestic investment pool driven by growth in pensions and insurance, but in the absence of the investment options, pension funds are buying properties. The real challenge is how do you get new listings in African exchanges which will encourage companies to raise money in Africa instead of accessing UK and US markets? Many of the larger corporates will still look at outside markets, maybe rightly so, because they do not have the option to raise that amount of money in the region.
Tinavapi – We must really consider what the 54 individual markets in Africa are bringing to the party and how much of that is inter-Africa related. If you look at the demographic of businesses in Africa, the big businesses have taken advantage of the Africa-Africa internationalisations, companies like Standard Bank, SABMiller, Pick n Pay and ShopRite have positioned themselves to capitalise on the African demographic and its power as a source of the clients. Similarly, we expect further development to be driven by the growth of small and medium-sized (SME)-type businesses. These businesses need exchanges that can support them at a level that is appropriate for their growth, and so far, this has proven to be slow and difficult.
While there are various exchange initiatives to introduce alternative boards and allow SMEs to raise money, the challenge remains that from a cultural perspective, SME business owners in the region find debt finance to be preferable to equity finance, and they would rather have creditors than shareholders.
Meeting the challenge of growing the strength of the local investor base in each market, and then translating that strength into portfolio investment, is really going to take a lot more policy focus than we have seen at both at a local and at a pan-African level. The type of asset classes that are required will have to be specific to the region, and technology-enabled. A recent example in South Africa involved a company that facilitated investment in cows. The concept, which is based on an appreciation of both technological developments, as well as the investment values of the target community, is essentially a blockchain for trading fractional ownership in culturally and commercially relevant assets. They found a way of accessing money at a grassroots level and channelling it into a mutual investment process. From our experience at Standard Chartered, institutional investors are waiting for these sorts of initiatives to become more mainstream, more regulated and standardised before they can start putting consolidated money into them. The sort of asset classes that we will see in two or three years will be novel. They will take into account small, medium and micro enterprises (SMMEs), inter-Africa growth and the digitalisation and the conversion of money into investment.
Buchanan – A lot of the opportunities that are available in Africa are related to disruption of traditional business models. There are two key reasons for this. The first is that Africa’s infrastructure is decades behind most parts of the world, and different regions have different problems. In South Africa we have got a great base infrastructure but parts of it are letting the country down and this desperately needs attention to support robust economic growth. The lack of infrastructure in Africa lends itself to businesses that are flexible and resourceful so, generally, not the traditional business models deployed by large corporates. Secondly, there is also a lack of funding.
SMMEs do not need big infrastructure to start and grow their businesses. They also do not have huge funding requirements. But, how does one fund them? Initially with angel funding from seed investors such as family and friends. In order to fund growth, the next step in funding would be to apply for a loan, normally. Unfortunately, many SMME businesses often do not meet the stringent credit criteria of established financial institutions. Where do they try next? They usually look to private debt or credit. In some cases, micro finance, and yes, it has a tarnished image, but it definitely has a place in Africa. Interest rates can be extortionate, but it is there for a reason – to plug a gap and to get that business to the next level. Once the business is scaled and starts to show that it can turn a profit, then private equity can come in. But private debt is proving to be a great enabler of economic growth in Africa.
Another major factor in the equation is what those businesses do, and where do those businesses have impact? It is not just about ESG [environmental, social, governance] any more, it is impact on many levels. Impact is being far more intensely scrutinised and measured by investors. For example, how many minority sector jobs did the investment create? How many jobs were created for communities that were marginalised from the economy? How many black female entrepreneurs did the investment support? A lot of this narrative is being driven by the investor (LP), but there are quite a few investment houses (GPs) that have woken up to the fact that impact is not just a nice-to-have. In the near-future (if not already), it is actually going to become an essential component of the investment thesis, the investment philosophy and the investment process.
In the next decade there is going to be a transfer of $24 trillion (the figure is from a Deloitte wealth survey) from baby boomers to millennials in the US. In general, the baby boomers were very capitalist in nature, living lives of excess. But now they are handing over to the millennials, where a lot more emphasis is put on the results of their investing, not purely monetary but the impact and what positive impact their investments have had. This is just the beginning of a trend and the uptake is going to be very swift. It is no secret that our planet is in dire straits. We have many problems to resolve and we do not have time to sit around and wait for them to look after themselves, which makes impact investing a crucial element of investing in Africa.
Tinavapi – We are starting to question and appreciate the links between financial growth and poverty and inequality as academics continue to probe the impact of financial development on communities. As financial institutions we need to be asking, “What is the work that we are doing? How is it contributing to or easing inequality?” Today, in South Africa these would be big questions with few answers. We have observed an emerging trend towards products, approaches and business models as well as technological interventions that aim to address these big questions. These developments serve to extend the quality of our contribution to the sustainability of the economies where we work.
Funds Europe – How are you using artificial intelligence (AI), robotics and automation to drive efficiency and maximise returns? What processes have you implemented so far, and what type of results have you seen?
Le Roux – We are still big businesses, and so you hear about robotics and AI, but ultimately automation and straight-through processing are what we still use the most, because there is still so much that is done manually across the value chain.
That will not stop any time soon, notwithstanding blockchain and AI. What we are seeing a lot in the AI space is not our own application, but our vendors’. It is mainly in the information security area. Where we have had the most success is in robotics. We are a back-office administrator, so we have got quite a sophisticated robotics programme. What the robotics programme is teaching us is not so much that we are saving too many human bodies now, but that we are taking away mundane tasks from clever people and then the robots do it, and so our level of precision is going through the roof. What that does is it reduces the opportunity cost of the errors, thus creating capacity.
Chaitanya – For Standard Bank, digital is now part of our core strategy, and it is not just about developing isolated digital solutions, but also a holistic rethink of IT and operating models. We believe that in the short term, you look for quick solutions, but in the long run, you will have to rethink the business models to really compete in the digital era. What we have been focusing on is working with the external players while we are trying to create a start-up culture within the organisation.
The future will belong to the organisations who own the platform, hosting the best solution which may be developed in-house or sourced from external providers. In the last few years, the number of digital initiatives which Standard Bank has launched – from a retail banking to corporate banking environment – have been a mix of solutions where innovations were totally developed in-house, as well as finding a great idea from a start-up and using that, and maybe eventually buying the start-up too. Clearly not all innovation will take place in-house, so you must be open to working with other players. The primary objective in that is to improve client experience, and what we are finding is that people want a uniform experience across the organisation, rather than a different experience with each business line. Asset managers and owners are now looking for a seamless experience – from execution to the settlement and custody. That is what the future players are working on, and the whole objective behind blockchain and other new technology is precisely to cut through several layers of intermediations when it comes to capital market execution and settlement processes.
Buchanan – IQ-EQ deploys a number of systems in the business-to-business service industry and is widely considered to be a significant player in this arena. The systems and processes that we use to execute to give our clients the delivery of the service that they need are constantly under review to look to assist our clients with efficiencies. Where we have started is more on the machine learning side, so it is the precursor to AI and then robotics. A lot of that development is being done by our service providers who are supporting the systems, technology or the infrastructure that we use.
Tinavapi – We are using our robotics as back-office tools. We have got robotic solutions for reconciliations in the securities services operations. For client-facing environments, we are pairing up our robotics with natural language processing and optical character recognition (OCR) to try and make the interaction of the client interface with our processing environment seamless. What it means at the end is we were able, for example, to give our clients the benefit of straight-through account opening using these tools. We are also working very hard in the blockchain environment and we are building pragmatic tools to allow us to grow and add value to clients in the digital environment. We are experimenting with a blockchain of blockchains that will allow disparate blockchains to be interoperable with each other because we know that our institutional investors are looking at blockchain solutions, we must therefore be interoperable with them wherever they want to meet us.
We are investigating tokenisation solutions to allow fractional ownership, automated processing, and liquidity creation for illiquid assets. In Africa, if we look really closely at the environments where we do business, we find opportunities to make a lasting difference through seemingly simple projects like managing title deeds on a blockchain.
Le Roux – Can we just dematerialise the deeds for the office? How difficult can it be?
Tinavapi – Very difficult. Standard Chartered participates on the South African Financial Blockchain Consortium and this was one of the user cases that the consortium considered very early on. It turns out that using digital ledger technology to administer property ownership records, administration processes and sale procedures is a complex and involved process. Technical, operational and institutional factors make it a hugely difficult proposition.
Funds Europe – How quickly have you been able to scale and focus on new areas of growth as a result of technological innovation and are you seeing a greater adoption of blockchain technology?
Tinavapi – Technology has made it hugely efficient. Last year Standard Chartered launched a fully digital retail banking offering in Côte d’Ivoire. The initiative digitised and automated 70 separate client service requests in the retail banking environment. It took ten months to launch the digital bank in Côte d’Ivoire, and as a follow-on project the initiative was rolled out in Uganda, Ghana and Tanzania, and Kenya in a single quarter. The speed of execution has been exponentially improved by the quality of the services, the quality of the relationships that Standard Chartered has with the fintechs and technology companies, and the quality of the approach to digital ventures.
Le Roux – I continue to be surprised at the lack of pace of implementation of blockchain. People have got think differently around blockchain, which is all about collaboration. Organisations have to collaborate, but they are not ready institutionally. Until organisations get over the fact that the blockchain is all about collaboration, these things are going to take a lot of time to develop.
Chaitanya – Let’s separate this whole technology story into blockchain and non-blockchain. A number of initiatives are happening in the digital space that are non-blockchain. When it comes to blockchain, the story has moved in the last four or five years from complete disruption to incremental change in harmony with existing systems. Now focus is on experimenting with permissioned networks in partnership with regulators and market infrastructure entities to come up with solutions which can co-exist with current systems. Interoperability between networks and markets will be a key challenge to avoid inefficiencies similar to one current model. Our approach has been to collaborate with various industry consortium within and outside the region in different parts of transaction banking.
Funds Europe – Which regulation concerns you the most?
Le Roux – In Africa I am not concerned about regulation, I am concerned about the immaturity of the regulation in some of the areas that we operate in. We want to operate in more countries in Africa, but the regulatory framework that we understand here in South Africa and in Europe does not exist there. So, moving in and making big investments in those areas is difficult because we must engage very actively with the regulators, many of whom are very keen that we come into the country and invest. They like the value proposition, but they have still got to draft some of the regulation. Our biggest problem in Africa is the lack of maturity, or the lack of appropriate regulation, in our space. It is things like the collective investment scheme (CIS) in mutual fund regulation, pension fund regulation and funds regulation which is our specific area of interest.
Tinavapi – If you look at CIS regulation in Kenya, they are currently considering changes to pensions legislation which will require investors to approve the appointment of a custodian. The prospect is administratively daunting and would add little value to the pension’s administration framework. Anomalous approaches in the legislation make it difficult to maintain functional operational environments. I am also concerned about the adequacy of insolvency legislation into the future. Even with the current asset types, the quality of protections afforded to intermediated securities by existing legislation is not always adequate. There are markets where intermediated ownership is not sufficiently recognised or operationalised.
Given the trajectory of technological advancement, we are concerned about the quality and scope of cyber-security and cyber-crime legislation in the region. The African Union started setting up a taskforce to look at standardising cyber-security and cyber-crime legislation across the board, but there are very low adoption levels to date and very low implementation levels downstream.
Chaitanya – There is sometimes inconsistency within the regulatory environment. As the countries progress, sometimes one part of the regulatory ecosystem has been upgraded but the others have not, and that creates its own disconnect within a market. If you are a regional player then you are dealing with 54 different regulatory environments, so that harmonisation is an important consideration. For me, what is more important within individual countries is that the whole regulatory ecosystem is not moving in tandem as markets are evolving, which creates ambiguity and disconnect. Much time is spent on clarifying issues and from a global investor perspective, it can be hugely stressful. In recent times, different industry associations are leading the efforts in bringing harmonisation across business and market practices in Africa.
Buchanan – African countries should consider creating alignment between government policies and investors’ policies. Perhaps one of the biggest challenges is foreign exchange regulation. If African countries want to progress, I think they will to have to figure out how to tread that fine line between protecting the local economy and opening themselves up to investment. South Africa is a classic example in that we have got many industries that we do need to try and foster to generate locally grown GDP growth, but we also need to open ourselves up to offshore investors. There are many that feel if our foreign exchange regulations were not so strict, we would be the go-to node for exploration into Africa for many global corporates.
Funds Europe – When you look ahead to the next 12 months, are you optimistic or pessimistic?
Chaitanya – We are optimistic. Despite the various challenges, there are still a lot of opportunities, especially in the investment space. The reason we are optimistic is that being a universal banking player, Standard Bank can service the entire investment value chain starting from research to executions to foreign exchange to settlement, custody, trustee administrations – the whole thing. Increasingly we see our clients looking for that type of proposition, so that makes us very optimistic, not just within South Africa but also the rest of Africa, because as the domestic investment markets mature, more asset managers are coming up and there is a demand for professional investor services.
Tinavapi – I am optimistic. We are really looking at extending ourselves in the non-bank financial institution space. We are encouraged by prospects of growth in the asset management industry not just in South Africa, but in other African jurisdictions as well. Standard Chartered has a strong custody proposition that builds on a global platform and pulls on local expertise with pragmatic use of hubbed operational arrangements. We are looking forward to some good growth over the next 12 months.
Le Roux – We are optimistic on two levels. The first is because we are part of a bunch of global peers that are getting bigger by both acquisition and organically, because of this regulatory tsunami that has hit us. Only people with big infrastructure can really win at the end of the day, so we will get stronger along with some of the other global peers and push out the smaller players. From an Africa perspective, there are reports of around 320 new embassies being built in Africa, and so economic activity will follow political activity, and political activity has demonstrated that. As long as you know your target, where you want to play in Africa and you know what is going to move the dial for you, there is a lot of opportunity in Africa. The big are going to get bigger.
Buchanan – I am seeing a lot of interest from global corporations looking to further expand or begin operations in Africa. Many approach IQ-EQ for structuring advice. I have also been approached by several South African businesses that are exploring opportunities in Africa and I think there are some very exciting times ahead.
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