Africa’s Financial Infrastructure

Russell Duke Chairman of National Standard Finance, LLC Global Sovereign & Infrastructure Investors

Russell Duke<br />Chairman of National Standard Finance, LLC<br />Global Sovereign & Infrastructure Investors

Financial infrastructure comprises a set of government managed financial institutions such as a central bank as well as privately owned market institutions, networks and shared physical infrastructure that enable the effective operation of financial intermediaries, the exchange of information and data, and the settlement of payments between wholesale and retail market participants.

A safe and efficient financial infrastructure promotes financial stability and is imperative for the successful operation of modern integrated financial markets.

Africa’s financial infrastructure has one of the world’s least development integrated financial systems across the Africa continent. This has occurred in part due to Africa’s slow participation in globalization in the global financial and banking system that is predominately based in the United States, Europe and Asia. Secondly, the lack of a predominant common currency across Africa has almost made integrated and seamless financial transactions more complex and challenging which also depresses economic trade and business amongst countries both at the private sector business and government level. For this reason is the primary reason in 1999 the Euro was born and it began to be in circulation in 2002 across Europe, Europe created the Euro zone and the Euro currency so that commerce amongst the European countries would be simplified and would increase which has dramatically occurred since creating the Euro.

Roles of a Central Bank
• The Central Banks acts as banker, agent and advisor to the government on financial and monetary issues.
• A Central Bank is a state owned institution and works closely with the Ministry of Finance in most countries.
• The Central Bank maintains the accounts of the government, receives deposits from the government and makes advances to the government.
• The Central Bank may collect taxes from the public through the government and also raises debt from the public and institutional markets thereby manages the public debt of the government.
• The Central Bank also controls and regulates the entire banking system and currency of the country.
• Issues currency and the supply of money in the market to regulate currency value.
• Obtains and manages governments foreign reserve holdings.
• Acts as a clearinghouse for other banks operating in the country.
• When commercial banks cannot meet their financial requirements and are unable to borrow from other sources the Central Bank acts as a lender of last resort to the private sector commercial banks.
• It facilitates the liquidity of the financial markets and banks to enable a vibrant financial system and access to borrowing/liquidity.

Liquidity Crisis in Africa’s Financial & Banking System
The overwhelming majority of Africa’s Central Banks and commercial banks are lacking liquidity to sustain a vibrant and healthy flow of capital to the market and to meet their financial needs and requirements. Commercial and project lending has drastically slowed by local commercial banks in 2015 due to increased pressure on the banks a drain on liquidity leaving the banks with limited capital available to make new loans for businesses, governments or important large scale projects and infrastructure such as healthcare and power. The money simply isn’t available locally to make these loans. The Central Banks are desperately seeking to reduce obligations while seeking to identify and raise more capital from the public markets to meet their governments operating budget needs as most African governments are presently operating at a deficit.

Central Banks throughout Africa also urgently need to secure additional foreign reserves of U.S. dollar currency. With the exception of Botswana, virtually all other governments and Central Banks are estimated to have a six month supply or less of required foreign reserves (US Dollars) to meet their import requirements. Foreign reserves are necessary for all emerging market economies to purchase critical imports such as oil and gas, commodities which may also include food and agricultural products. All oil sales worldwide are purchased in US dollar currency resulting in all governments needing a steady and healthy supply of US dollar currency foreign reserves. Central Banks can obtain foreign currency by borrowing in the international markets outside of Africa in foreign currency rather than local currency.

Central Banks and Commercial Banks should actively be doing roadshows and reaching out to the international capital markets to raise liquidity. It is estimated that collectively African governments need to raise more than US $230 Billion in the next six to twelve months – for infrastructure such as power production and roads the estimate rises to US $650 Billion. At least half of this will need to come from Europe and the United States as well as be denominated in US dollar currency to boost foreign reserve holdings.

Nigeria Loses $3 Billion in New Investments from Europe and Asia
A delegation of European and Asian financial institutions visited Nigeria for two weeks during the month of July to meet with Nigerian government leaders, Governors of States and local business leaders. The investors came prepared to invest immediately as much as US $3 Billion into critical Nigerian projects such as low income housing, power, healthcare and oil and gas to jump start the Nigerian economy with new jobs, new revenues and economic stimulus. Unfortunately, the investors left Nigeria frustrated with no investment as the Nigerian community was not cooperative or willing to support with the various investors to complete a deal.

It was unfortunate for Nigeria as the investors left Nigeria and were immediately welcomed into two other African countries that welcomed their investment with open arms and full support. Without this investment millions of Nigerians remain homeless, thousands of new jobs potentially lost, without power and power blackouts and without quality healthcare and it is unknown where Nigeria leaders will obtain the funds for these projects considering the financial difficulties currently taking place at the government level. APEC Logic Investments, Chairman Colin Archer was interviewed and said “We came with our European financial partners to Nigeria with very high hopes and goals, but unfortunately the Nigerian leaders and locals were not open to welcoming us to Nigeria as they felt they didn’t need our help so our delegation were left with no option, but to take those funds and invest them elsewhere in Africa where they could be put to use for the good of the people. We remain committed to investing and developing Africa for the long term future and hope to revisit Nigeria and look for new opportunities.” Mr. Archer said by telephone.

China’s Currency Devaluation Impact on Africa
Last week China announced and took immediate steps to devalue the Chinese currency by 2.00% initially. The Chinese Yaun’s (RMB) value is set each day by the Chinese government’s central bank called the People’s Bank of China. They are allowed to adjust the value each day by up to 2.00% from the prior day. A devaluation of the Chinese Yuan will further depress commodity based revenues across the Africa continent. It is anticipated by the financial markets that this monetary move by China will have a severe impact on the South African Rand. China itself is the midst of an economic slow-down and is experiencing a major real estate market correction. Lending from Chinese banks has also become more difficult and expensive as the markets in China tighten due to an economic downturn and slow growth. China’s Premiere also has recently cracked down on corruption amongst government officials, State Owned Enterprises and the Chinese markets. This new policy has most large State Owned Corporations such as construction companies and the China Export Import Bank very concerned and much more careful than in prior years under more flexible policy and oversight. This has slowed major projects and financings throughout China as the leaders are in fear of prosecution of the new corruption laws, additionally under this new policy these officials are no longer financially incentivized by deals so they have lost motivation in some instances to take on new business or financing.

Russell Duke is Chairman & Managing Principal at National Standard Finance, LLC. Mr. Duke can be reached at RDuke@NatStandard.com. www.NatStandard.com



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