Corporate Treasury & FX in South Africa

Commentary

South Africa sums up a lot of what is good in Africa – and what is not so good. The country has a lot of problems, with a lot of violence and people living in poverty. At the same time, it possesses enormous mineral wealth, and has a tradition of being a business friendly environment - it is ahead of many African countries in this respect. Also, the years of isolation during the Apartheid sanctions mean that many local subsidiaries operate with a greater degree of independence than is usual.

What does this mean for multinational companies doing business there?

Basically, South Africa works. There is a lot of bureaucracy, and there are laws to promote the advancement of certain ethnic groups. Our peers’ activities there vary in size, but they are generally profitable. There are exchange controls, but the currency is convertible, and can be hedged onshore: offshore hedging is available in both deliverable and non deliverable forms, and does not drive a significant premium.

The main points:

• Banking can be a challenge. A lot of international banks have scaled down their presence, or are exiting the market – HSBC is the latest example. There is a concern that a lot of effort may go into moving to an international bank, only for them to withdraw from the country – this happened to one peer with HSBC.
• For the banks who remain, peers expressed the view that the country is small business for them, so they are not necessarily prepared to go the extra mile.
• Amongst the international banks, Citi and Standard Chartered received the most favourable comments.
• There is a ready selection of competent local banks. Unsurprisingly, most of the local teams prefer to work with them, while most of the HQ teams would rather work with global relationship banks. Both approaches work: some peers manage treasury in the country from HQ (usually in Europe), with no local treasury presence, while others secure the buy-in of a local team.
• Cash pooling within the country is not an issue, but cross-border pooling is not allowed.
• Remitting cash outside the country requires effort, planning, and approvals from the central bank. These typically take time, but usually come through.
  • The most common form of cash repatriation is by dividends. The approvals usually take time, but there is a feeling this is improving.
  • Several peers reported obtaining blanket approvals for various types of services imports (royalties, intercompany invoices, etc). This considerably speeded up the remittances: the payments do not have to match detailed invoices, though these have to be maintained for the regular audits. It still takes a few days to process these payments, as proof needs to be provided that there is still a valid and ongoing business relationship.
  • One peer adds together all import and export invoices, and performs a single remittance for both (gross in, gross out).
  • Most peers remit rand (ZAR) to HQ, and then do the FX conversion in Europe.
  • The participation and help of the local team is essential – this is not always willingly provided. As always, it is important to secure the buy-in of all people involved – several peers found the local team saw, and accepted, the benefits of using the group relationship banks.
  • Some peers found that their banks, including international banks, provided effective support in maintaining relations with the central bank in this process. 
  • Intercompany loans in and out are permitted, but prior approval is required, and they must be registered. It can take time for the central bank to check the interest calculations.
• As in most countries, there is a move towards cashless payments. However, there is a feeling other African countries are more advanced – South Africa does not have a phone-based equivalent of Kenya’s M-Pesa system.
• In the past, a local bank was needed for cash collections and credit cards, though this is less the case now.

Bottom line: South Africa remains a challenging environment, but one where business can be done and cash repatriated. As one peer put it, in relative terms, it is a small business, but it consumes a lot of management time. Is it improving? There were positive and negative comments on this, but a slight balance in favour of some easing of the problems.

So – as with many complex countries, it requires extra effort and drives extra workload. All the peers on this call felt it was worth it: for some, it is even one of their key markets.