Brighter skies for sub-Saharan Africa?

Many of the challenges facing businesses in sub-Saharan Africa in recent years stem from international events beyond their control. First, economic growth was dampened by the Covid-19 pandemic. Just as the worst of the crisis had passed, Russia’s invasion of Ukraine caused a spike in food prices – which account for around 40% of the region’s consumption basket versus 14% in the US. To make matters worse, rate rises from the US Federal Reserve – in order to contain inflation there – triggered a cascade of developments that have made life tougher for CFOs across sub-Saharan Africa.

‘When the Fed raises rates there is strong pressure on central banks in Africa to follow,’ explains Fiona Nuwamanya FCCA, co-founder and CFO of Rocket Health, a telemedicine company based in Uganda. ‘Tighter monetary policy in the US strengthens the dollar against our regional currencies, boosting the cost of imports and adding to inflation here. In turn, higher domestic rates make it harder and more expensive for innovative companies like ours to get capital.’

Turning point

But with the Fed signalling that it is nearing an end to rate hikes, optimism is mounting that business conditions in the region could be about to improve, says Danny Balluck FCCA, regional CFO for Mauritius and Southern Africa at Standard Chartered Bank. ‘There is a strong indication that we are reaching the peak in the tightening cycle for key developed market central banks, including the Fed,’ he says. ‘This could be a turning point for sentiment towards emerging markets, notwithstanding debt sustainability concerns in some countries.’

As Nuwamanya points out, higher US rates and a strong US dollar have made life difficult for CFOs in a range of ways. Take governments’ ability to spend. Since around 40% of the debt owed by sub-Saharan governments is in hard currencies like the dollar, the falling value of their domestic currencies has increased the burden of debt. Along with higher interest rates, this has increased the cost of servicing debt to around 11% in 2022, according to the IMF, roughly double the level from a decade earlier and about three times more than the median in advanced economies.

This matters for local business, says Nuwamanya. ‘In Uganda, the government is the largest contributor to spending in the economy,’ she says. ‘Consequently, any reduction in investment or reduced support to consumers can have a substantial adverse effect on business.’

Another impact is that companies can struggle to raise capital at a reasonable rate. Lending rates have risen as central banks tighten monetary policy, and nervousness among international investors has made them less willing to pump capital into frontier markets.

‘Although Rocket Health had a successful Series A fundraising round with venture capital and private equity in 2021, there has been limited success in tapping into the local bank capital, affecting our expansion plans,’ says Nuwamanya.

Finally, the rising dollar has increased the cost of imported goods. For Rocket Health, this includes the pharmaceutical and clinical inventories and supplies needed to deliver services adequately and affordably.

While an end to Fed rate hikes appears to be on the way, it is likely to take time to feed through into conditions on the ground. At its September meeting, the Federal Reserve warned that rates might need to stay higher for longer to vanquish inflation, and, at the time of writing, markets are only expecting cuts to start around June or July 2024.

In Africa, central banks are likely to lag behind the Fed in easing, says Thea Fourie, head of sub-Saharan African analysis at S&P Global Market Intelligence. ‘Relief on borrowing costs isn’t likely for businesses until well into next year,’ she says. ‘Many of the region’s central banks will still have to contend with other drivers of inflation, especially if adverse weather conditions due to El Niño lead to another spike in food prices.’

Austerity continues

David Omojomolo, Africa economist at consultancy Capital Economics, believes fiscal strains are also likely to keep governments in austerity mode. ‘Public spending constraints look set to remain a headwind for growth, so we expect 2024 to be another sluggish one for the economy and a lean one for many businesses,’ he says.

That poses a dilemma for CFOs, says Bright Amisi FCCA, finance director for Solenta Aviation, an airline leasing company based in South Africa. ‘On the one hand, companies need to get through a period in which demand is likely to be very weak, especially for companies exposed to consumer spending,’ he says. ‘On the other, you don’t want to miss the upside. I think CFOs will need to switch from an “austerity” to a “growth” mindset around the middle of 2024.’

In the meantime, he suggests CFOs consider two main strategies. The first is to keep costs low and variable. ‘One way of doing so is to outsource finance or human resources functions, which more companies are doing,’ he argues.

Second, Amisi suggests CFOs explore more innovative approaches to pricing. ‘With consumers likely to become more price sensitive, companies may need, for example, to explore bundling services or more frequent special offers.’ Rocket Health, for example, is placing more reliance on technology, recently launching a customer-facing chatbot to improve turnaround time for orders.

Meanwhile, says Balluck, more structural forces are improving the outlook for businesses. ‘Domestic reform momentum is evident across a number of key economies,’ he observes, adding that ‘the potential for the African Continental Free Trade Agreement, which aims to eliminate barriers, would be a game changer for businesses in the region’.

After several tough years, then, both the near- and long-term outlook for businesses in the region is looking brighter.