Spotlight on the 2019 Africa Finance Forum on the sidelines of the World Bank Spring Meetings
Corporate Council on Africa hosted the 2019 Africa Finance Forum on April 10, 2019. The Forum featured an address by Rhoda Weeks-Brown, the IMF’s General Counsel and Director of the Legal Department, as well as two panels that included representatives from commercial and central banks. The Forum also featured an address by Phumzile Langeni, one of South African President Ramaphosa’s Investment Emissaries.
Ms. Weeks-Brown noted the IMF has just completed its World Economic Outlook for Sub Saharan Africa, which indicated that growth would strengthen from 3.0 to 3.5% in 2019. Twenty two of the 45 countries in the survey are growing faster than 5%, and also have a faster increase in per capita income than the world average. Resource rich countries tend to be growing more slowly, typically below the rate of population growth. Turning to the financial sector, she noted that public debt has stabilized, but there is a sense that debt vulnerability has increased in some regions, and has done so at a higher level than expected. Weeks-Brown said she was pleased that there is a steady rise in pan-African banks, and an increase in fintech, while also noting there has been a decline in more traditional correspondent banking relationships.
Weeks-Brown summarized some of the financial sector reforms that are taking place across the continent. First, she noted that there are generally strong financial sector authorities, providing capable supervision of banks, and stressed the importance of these institutions maintaining their political independence to support sustainable financial policy. The second trend she noted was sound supervision of banking regulations, particularly in corporate governance. It is important to have both the right institutions and the right frameworks, particularly as the presence of pan-African banks expands. Third, Weeks-Brown also noted the growing challenge of cross-border supervision. Pan-African banks are very dynamic, and they lead to increased competition, although their greater complexity and distance lead to challenges for home country regulators particularly regarding sharing appropriate information with regulators across borders. In some countries, she noted there have also been questions about the corporate governance and business practices of some bank owners, including audits and financial disclosures.
Weeks-Brown is pleased to see the rise of fintech, arguing that Africa is underbanked. Roughly 20% of the population have bank accounts, compared to 92% in the OECD. This is part of the reason Africa is already a leader in mobile money. Fintech has huge promise as a potential enabler to deepen financial inclusion and increase competition. Risks must be addressed, however. There are bottlenecks, including access to foreign currency, and there are also risks including the high cost of intermediation and currency exchange. She stressed the importance of the sector also having a broader sense of purpose, including increasing gender diversity, increasing the percentage of women employed, who tend to be huge drivers of economic growth.
The first panel included the head of Citibank’s Ivory Coast office, Vivianne Bakayoko, the Finance Minister of Ghana, Ken Offo-Atta, and Khalidu Gaido from Manat, moderated by Covington and Burling.
The panel discussed the broader state of African banking, with several panelists noting the significant consolidation in commercial banking that has seen 89 regional banks reduced to 25. There have also been a number of international banks that have decided to exit the African market for a variety of compliance issues, which has opened the door for expansion by African and regional banks. The sector is much stronger than a decade ago, with a decline in non-performing loans. Digital banking is much more important now, and local capital markets are beginning to expand. One of the most pressing concerns is how to finance the huge infrastructure needs. Greater inclusion is driving rapid change, particularly as mobile money expands. One of the most important advances in Ghana has come from linking mobile money applications with SWIFT accounts, which in turn has dramatically expanded their inter-operability. Ghana has just passed a new law that will allow fintech firms to set up operations with Central Bank supervision, with the goal of allowing and supporting innovation but in a framework that is licensed and supervised.
Citibank noted that commercial banks are doing a better job of handling risks associated with Basel II and III, and are increasingly thinking outside the box, including developing capital markets. Participants agreed that maintaining the right levels of capital adequacy levels is very important to reduce systemic risk. Allowing banks to engage in some fintech services is very helpful for all concerned. One participant cited the example of online lending that allows street vendors selling oranges to take out a micro loan early in the morning to fund their purchases, which they repay at night over their phone. Fintech companies have developed a risk model using phone data that allows them to lower the commercial risk to viable levels. This example underscores the importance of having the right regulatory framework in place, both for finance and for data privacy.
There was an interesting discussion about the impact of Know Your Customer requirements, with one participant asking if it was worth it to apply global standards for a $20 loan. Several participants stressed the importance of having no tolerance throughout the banking chain for not applying international standards. Speakers recognized that this brought some unintended consequences of driving some customers away from the financial sector. The need for better customer identification, however, has also been an opportunity for African banks to step up their game and become more innovative. The required improvements from KYC policies have also been useful in driving down non-performing loans, suggesting that there are some important side benefits.
A Call to Invest in South Africa
Phumzile Langeni offered a compelling summary of South African President Ramaphosa’s drive to attract $100 billion in Foreign Direct Investment. South Africa hosted an investment conference last July which was $30 billion in new pledges and deals signed. South Africa has also attracted $20 billion in pledges from Middle Eastern countries, and $15 billion from China. South Africa has been supporting this drive by enacting a range of reforms, including making it easier to obtain tourist and business visas and releasing spectrum later in 2019 to support the ICT sector.
South Africa still has to address a number of challenges, beginning with sorting out the problems of the state owned electricity company, ESKOM. She noted that President Ramaphosa outlined a reform plan for ESKOM in the February State of the Nation address, supported by specific proposals in the draft budget. She admitted it will be a long road to solve all the problems, but promised South Africa is committed to implementing important changes, including expediting approvals under the Renewable Energy Independent Power Producers Program. South Africa has also implemented changes to the mining charter.
Langeni noted the importance of the May 8 national elections. Regardless of who wins, South Africa will need to focus on boosting economic growth, as well as reducing unemployment and inequality, particularly as youth unemployment nears 50%. South Africa must increase economic growth from less than one percent to 3-5%. There are also important policy questions about land reform, unemployment, job shedding as world tensions growth, and improving financial inclusion.
Langeni noted that South Africa is already increasing spending in its ports, including by the parastatal TRANSNET. She also noted that the progress of the African Continental Free Trade Agreement would boost investment across Africa. South Africa is looking to invest at least $10 billion per year in ports and mining related infrastructure, rail and road projects, schools, health through a new infrastructure fund that will augment the spending of line ministries in the regular government budget. Langeni said South Africa would welcome private sector partnerships. South Africa’s top five priorities are agribusiness and manufacturing, including autos, health, finance, and tourism.
In answer to a question, she explained the issues around land reform and what a constitutional amendment might look like. She stressed that South Africa would only consider expropriation without compensation if it doesn’t undermine the economy, food supply and is progressive. She doubted that this would start with privately held land, but rather with state held land. She promised that President Ramaphosa would not “undo 25 years of hard work,” and that there would be more clarity after the May 8 election on this issue, including by proceeding with a test case.