The borrower power balance is shifting in sub-Saharan Africa
Bankers have to be more innovative amid improving economic and political conditions
Banks in sub-Saharan Africa are looking for quality assets that promise adequate returns, in a region where banking differs vastly from the international landscape.
These banks face issues that include challenging economic and political conditions, the high costs of hard currency borrowings, currency transfer and inconvertibility constraints, single obligor limits, and the limited depth of local currency markets.
The banking power balance has shifted in sub-Saharan Africa over the past year, particularly in traditional banking where investors are hungry for good credits. Bankers have to think innovatively when they structure transactions and mitigate risk to deliver results.
This trend – mostly a result of the limited returns achieved on assets – has been more prevalent in the US dollar syndicated loan space, with a few sovereign borrowers in East Africa now borrowing at five to seven years, as opposed to the usually two- or three-year bullet facilities. Coupled with this is the lower margin rate being accepted by some investors, which may lead to a distortion of the market and an inaccurate risk assessment by international yield seekers.
Local real money investors looking for quality credits are also pushing borrowing rates lower, particularly in the South African, Namibian and Botswana markets. Borrowers therefore see no value in expensive vanilla banking facilities and would rather take the upside of thinly priced capital markets funding.
What contributes to this landscape? First, there is a limited (and shrinking) pool of quality assets across sub-Saharan Africa. While the general sentiment is that rising commodity prices, stable currency rates, a positive political outlook and improving investor sentiment will support growth and investment in the region, there is a substantial gap between investor liquidity and good regional assets. Sovereigns have stretched their loan tenors between five and seven years, and recent sub-Saharan African Eurobond issuances such as Nigeria, Senegal and Côte d’Ivoire were five to eight times oversubscribed, achieving significant pricing deductions.
Second, local markets and borrowers are taking advantage of deep liquidity and asset scarcity. South African companies have held back on capital expenditure, while subdued growth in markets such as Botswana and Namibia has led to limited asset growth for lenders – shifting the capital supply and demand dynamics. Borrowers are taking full advantage of this when they come to market. A sustained improvement in commodity prices (the oil price is now above $60 per barrel and copper above $6,000 per ton) and a positive political outlook in parts of sub-Saharan Africa will also increase the supply of assets in the market.
Last, commercial banks need to find better ways to collaborate with development finance institutions to avoid crowding out each other and ensuring the creation of value. Joint pitches, blended funding structures and appropriate risk sharing are some of the ways in which these institutions can achieve a common goal.
The significant and positive changes this year in SA have given rise to renewed market and investor optimism and confidence. However, this does not necessarily translate into immediate increased lending activities. Banks are still constrained by economic and other factors, including recent South African rating downgrades. The overall improvement will boost lending activities, but it will take time.
While borrowers in sub-Saharan Africa become regular issuers in both the local and international markets, local commercial banks must do more to meet the needs of their clients.
As trusted advisers with deep knowledge of their clients’ businesses, these banks should be more amenable to borrowers’ needs, which requires a shift in thinking from their traditional vanilla offering to a more individualistic and innovative approach. Client centricity is hard to achieve, particularly in sub-Saharan Africa with its diverse jurisdictions. Commercial banks need extensive service platforms across jurisdictions, using seamless advisory and funding processes with minimal red tape.
It is indeed an interesting period for banks and borrowers in sub-Saharan Africa as both parties seek out the best possible terms and conditions to lending. The improving political and macroeconomic conditions will no doubt soon lead to increased lending capacity and borrowing cycles. Exciting times await us.
This article was paid for by RMB.