Growing ties between South Africa and Mauritius could fuel trade and investment growth on the African continent with financial institutions leading the way through increased availability of trade finance.
This is according to Antony Withers, CEO of The Mauritius Commercial Bank (MCB), the leading bank in Mauritius with a 178-year-old history. He believes the two countries should partner and take a leading role to drive trade volumes within the Southern African Development Community (SADC).
“Investment into power, telecommunication, water and primary infrastructure is needed for conducive economic growth and to support the multinational expansion on the continent driven by a growing working population,” says Withers. “These infrastructure investments will provide big financing opportunities in Africa.”
The need for more collaborative trade finance on the continent is driven by a number of macro factors. The global financial crisis ushered in stringent compliance standards, such as KYC (Know Your Customer) and AML (Anti-Money Laundering). This led to deleveraging and cuts in credit lines to developing nations, including Africa, as many international trade finance banks sought to build up their balance sheets. In addition, there have been new types of providers entering the market, banks digitising their internal process and the need to expand access to small and medium-sized enterprises (SMEs) is widely recognised.
“Despite the challenges, Africa has proven its resilience and the financial industry has grown significantly across the continent thanks to the re-capitalisation of many African banks. Changes in the regulatory regime in some African markets have made it easier for banks to internationalise their activities allowing many African banks to step in and bridge the financing gap,” says Withers.
Recently, five Nigerian banks committed about USD 1.3 billion in support of an independent oil producing company operating in that market. In Ivory Coast, the annual trade finance needs of its national oil refinery – an amount of slightly under USD 1 billion – is fully funded by African banks. Funding from Chinese and Indian banks is also becoming very important with ‘export/import’ banks providing liquidity critical for the financing of investment goods imports into Africa.
A 2016 report by the African Development Bank (AfDB) indicates that the size of bank-intermediated trade finance in Africa averaged about USD 371 billion from 2011 to 2014, representing approximately 31% of total African trade. This suggests a significant share of African trade relies on inter-firm trade credit through open accounts as well as cash-in-advance transactions. The report points to the numerous constraints banks face in meeting demand for trade finance. A disproportionate 58% share of bank-intermediated trade finance is accounted for by banks’ top 10 clients, and only 28% to small and medium sized enterprises, though the latter account for 80% of all business entities in Africa.
With sharply slower projected growth in Sub-Saharan Africa already predicted, the IMF now expects the region to grow by only 1.4% in 2016, and 2.9% next year indicating the time for African collaboration is pertinent.
“Were Mauritius and South Africa to deepen their partnership, which is already gathering momentum by the day, the two countries could complement each other towards enforcing trade exchanges with the continent. Mauritius and South Africa have the potential to become the engine of growth for the SADC and possibly be inspiring models for the rest of Africa,” says Withers.
Both countries have much in common. Each ranks among just a handful of African countries with an investment grade sovereign rating, as well as a world class financial services sector, and adherence to good corporate governance.
Evidence of the growing ties, includes the signing of a Memorandum of Understanding (MoU) last year between the Johannesburg Stock Exchange (JSE) and the Stock Exchange of Mauritius, serving as the foundation in the areas of knowledge sharing and development of the South African and Mauritian capital markets. Another MoU was signed between the Mauritius Chamber of Commerce and Industry (MCCI) and the South African Chamber of Commerce and Industry (SACCI) in September 2016.
In light of regulatory capital and liquidity constraints of Basel III, banks face increased pressure on their single borrower’s limit. Collaboration between investment grade banks such as MCB and the South African commercial banks could result in a relaxation of this pressure, enabling additional investment opportunities.
While Mauritius is a rising star, but a small economy, South Africa is the largest economy in Africa (having recently recovered that status from Nigeria and Egypt). Mauritian companies also find it easier for historical reasons to enter the rest of Africa than South African companies. Some South Africans have already recognised the synergy of the two countries, with 40% of inward investment into the Mauritian property sector coming from South Africa.
With both countries now positioned as regional hubs for trade and investment flows between Africa and Asia, “investors are increasingly looking at both countries in tandem” says Withers. “A strategic tie-up between South African companies and Mauritian companies could potentially unlock a lot more value to both countries and the rest of Africa.”
MCB is present in nine countries including South Africa where it has a representative office based in Johannesburg with the view to increasing its visibility in the SADC region.