Africa’s costly hedges prompt alternative solutions
Treasurers agree on the need to manage FX risk in devaluation-prone Africa. But hedging products offered by banks can be prohibitively expensive.
Should corporates operating across Africa hedge their FX risk? The answer is obviously ‘yes’, where cost-effective cover is available and the banks offer a variety of products by which volatility can be reduced, but many companies complain that hedging in the region is expensive and choice limited.
Speaking at the Effective Finance and Treasury in Africa conference, Natalia Martynova, regional treasury manager at international tobacco group BAT, said her company employs various hedging strategies across the continent. While the group regards the cost of hedging in the region’s biggest economy, South Africa as reasonable, it rises sharply in other countries such as Mozambique or Zambia where the alternatives available are considered.
“You have to be agile and innovative in shaping a suitable solution in the countries where there is no hedging market and/or hard currency access is restricted. This may involve conducting business model reviews with commercial functions and reducing where possible/practical reliance on hard currency” she added.
Martynova added that Angola is a good example of a country where a variety of solutions for protecting cash should be considered. “You can’t do much about trapped cash, so the next-best option is to protect the economic value,” she suggested.
“In Angola, where local currency depreciated over 60% last year, we have used a portfolio of investment options to protect the value of trapped funds. One example was an investment into government securities, dollar-indexed bonds.”
William Scheepers, corporate finance and treasury director for consumer products giant Unilever, which has a direct presence in more than 15 countries in sub-Saharan Africa, agreed. “Sometimes the situation becomes challenging, so you need to remain agile and innovative at all times.”
Asked what happens when normal hedging tools are unavailable, he said that individual countries and their central banks each tend to solve FX challenges and to stick with that over time. For Nigeria, the policy is to peg the currency; Ghana opts for free-float; while for others the preferred allocation of FX depends on their political objective.
Instruments to hedge “tend not to come and go – either a specific market has it, or it doesn’t” and our strategy reflects this by varying from country to country. Over time it supports us all if markets “normalise” and provide sufficient liquidity at low volatility.
For the consumer goods multinational “inter-company financing makes sense, as it has some long-term advantages over bank financing in most of the cases, but you need to do your due diligence and be detailed to ensure you capture all the local regulations.”
In common with its peers in the consumer goods sector, Unilever is restricted in its ability to lessen the impact of a currency devaluation by having its customers share some of the pain. “It’s an industry worry, as we’re limited as to the price increase we can pass on,” said Scheepers.
By contrast, Leon Unk, treasury manager front office for South Africa-based internet and media group Naspers said that the company has found its internet TV and other subscription packages to be “pretty price elastic”.
Most of its expenses for broadcasting rights are in US dollars and one of treasury’s main tasks is to “assess the possibility of a massive blowout in a certain currency – so we look at its level of volatility over recent years and the sovereign debt level of the respective country.” If these parameters reach a particular threshold, the company increases its hedging, Unk says.
Accounting and reporting also have an impact on the company’s FX hedging strategy. “They represent quite a challenge as there’s often an accounting mismatch,” confirmed Unk. “We try to keep it in line as much as possible.”
From the offshore perspective of the Netherlands, hedging African FX risk requires the use of non-deliverable forward (NDF) contracts. “When we do an NDF we ask for two-way pricing, to keep banks on their toes”, Unk says. With wide variations in pricing, sometimes corporates can buy from one bank and sell to another without taking any risk. “One of the things we did as a corporate was to arbitrage between two banks”, Unk adds.
International vs local banks
It appears that banks still have a role to play, often acting as what Scheepers described as “the gateway to the regulator” in a specific country. Martynova agreed, suggesting that banks are instrumental to “opening doors in a difficult country.”
However, BAT was the only one of the three companies represented on the panel to make much use of local banks. Unk said that for NDF hedging of exposure in sub-Saharan countries, Naspers uses only international banks as part of its centralised hedging strategy and Scheepers confirmed that Unilever follows a similar policy.
But for BAT “local banking partners are critical in certain markets, particularly in the countries where local banks would have stronger branch networks to support sales collections or countries with hard currency shortages” said Martynova.
The panellists were all agreed that internal communications within the group are key to a successful hedging policy – particularly when operating in numerous countries within Africa. As Unk explained it may sometimes be necessary to revise your policy even while still adhering to the overall strategy.
According to Scheepers: “You need to be super-adept when it comes to opportunities, while at the same time stay with and be confident about the framework.”
Treasury’s role includes “acting as a consultant” and keeping company personnel appraised of new developments and especially regulatory changes, while also explaining ‘this is how we prefer to operate’, he added.
“The commercial side of the business sees the opportunities [in Africa] but also needs to be aware of treasury policy,” added Martynova. One of the benefits is that “currency devaluation can be an opportunity to gain competitive advantage if you’ve got your hedging strategy correct.”