Africa is sweet spot for Citigroup.
Several strands have been converging to reinforce the perception among the world's financial high priests that Africa is rapidly becoming a highly attractive investment destination.
As 2010 rolled to a close, an increasing number of the Wall Street fraternity were articulating a strong interest to invest in the continent.
The Boston Consulting Group's June report, The African Challengers, has made a t remendous impact on i nvestors by highlighting some outstanding performances both by African companies and countries (See African Business, July 2010 issue). McKinsey's 80-page report talking about Africa's 'Lions' further underscores the continent's enormous potential.
Today the rate of urbanisation in Africa is nearly equivalent to that of China, with 52 cities burgeoning with more than one million inhabitants. In 2008, the collective GDP was $1,600bn, which is equivalent to that of Russia or Brazil, with consumer spending some $860bn.
EFPR Global, which provides funds flows and asset allocation data to financial institutions around the world, states that Africa's regional funds attracted inflows of $484m in the first half of 2010 and total investment for fund allocation was a record $1.39bn.
Given these prospects, it is no wonder that Citigroup, another Wall Street member, describes Africa and its one billion population as a "sweet spot" for financial institutions. The bank is the world's ninth largest by market value and has more than 200m clients.
Citigroup's Dick Parsons sees huge opportunity.
The giant suffered huge losses during the financial crisis and received $45bn following the US government bail-out of 2008. Today it is increasingly turning its attention to highgrowth emerging markets, more attractive when compared to the sluggish growth that can be found in heavily indebted developed markets.
It is hoped an African strategy will generate higher-margin activity for the company. Chairman of Citigroup Dick Parsons observed that "Given the demographic trends, given the presence of so much of the world's natural resource base here, there is huge opportunity and it's high margin."
The American lender, already present across 15 African countries with plans to expand to three more in 2011, aims to achieve 20-25% growth for its African activity in the next two to three years.
Citigroup says it wishes to develop organic growth in Nigeria - which Parsons describes as a "particularly" interesting country. The bank has been doing business in the country since 1984, formerly operating under the name Nigeria International Bank Limited - it was renamed Citibank Nigeria Limited in 2008 to fully integrate with the bank's global identity.
Citigroup operates the largest Direct Custody and Clearing Services propriety network in the world and, on August 2008, it entered its 53rd international market in Nigeria. Nigeria the front runner To respond to the growing global demand for investment in countries offering higher interest rates, compared to the yields of US Treasury Bills for instance, there is a race to issue the next Eurobond in Africa.
Nigeria seems to have won the latest contest. Following a keenly contested process in November, the country chose Citigroup and Deutsche Bank as book runners for a here is a race on to issue the next Eurobond in Africa
$500m debut international bond. Africa's second-biggest economy plans to issue a 10-year bond which foreign investors have been waiting to see since before the global financial meltdown started.
This issue wil l set a benchmark in international capital markets and a l low Nigerian state governments and companies to follow suit in pursuing this access to capital markets.
It is likely that this will become a popular stop for foreign investors preying on high yields who have been waiting many years for the Nigerian bond.
The US Federal Reserve's QE2 decision to pump $600bn into the US economy will probably have a significant impact on the bond's success, as speculative money pours from the printing presses of the Federal Reserve into high-growth, high-yielding economies like Nigeria's.
These bonds play a vital role in improving the perception of African risk as the increasing demand for the resources of emerging economies is pushing the yields of African bonds to all time lows.
Nigerian Finance Minister Olusegun Aganga predicts the bond issue will surpass expectations as he states that there will be enough interest for the country to be able to raise $1bn; although, for now, Nigeria is not planning to raise more than $500m.
Yet there is a risk, as some analysts point out, that the bond will be hampered by the Presidential and parliamentary elections and a period of high government spending and falling foreign exchange reserves.
Standard & Poor's affirmed in November its B+ long-term and B short-term foreign and local currency sovereign credit ratings on Nigeria, predicting a stable outlook.
Financial crisis response As a result of the global financial meltdown, there has been a rapid depletion of liquidity in international markets, leading to a global reduction in the appetite for risk and more restrictive liquidity management.
Inevitably, this has adversely affected the ability of banks to offer trade finance in emerging markets. Africa has not been immune to this trend and this ongoing failure hitherto to bolster trade finance, particularly in the short term, could have undesirable implications for the continent.
Striving to build a comprehensive crisisresponse strategy with the aim of boosting trade across the continent, Citigroup, the African Development Bank (AfDB) and the International Finance Corporation (IFC) have collaborated to provide up to $300m in trade financing for exporters and importers across the continent.
The financing initiative is part of the Global Liquidity Programme (GTLP), a public-private partnership that started in July 2009 to address the shortage of trade financing amid the global financial crisis.
The GTLP has targeted commitments of $4bn from public sector sources with forecasts stating the partnership will be able to support $45bn of trade in three years. "The innovative structure of this transaction will significantly increase the supply of trade finance in Africa, helping create jobs and boost economic growth at a time when the region is still facing a severe credit shortage," says Lars Thunell, IFC Executive Vice President and CEO.
The I FC , which is a member of the World Bank Group and is the largest development institution f o c u s i n g on t h e pr i v a t e s e c t or i n developing countries, has committed $1bn to the fund.
Globa l l y, a nd e ven i n t imes of g reat uncertainty, the IFC managed a record $18bn in the fiscal 2010. The GTLP's publicpr ivate s t r uc t ure permits i nvestment i n i mpor t a n t s e c t o r s , p a r t i c u l a r l y i n c l u d i n g f o o d a n d a g r i b u s i n e s s .
AfDB says that Citigroup "will originate a $175m portfolio in trade finance transactions from banks across Africa, focusing on lowincome countries". This means that the local banks, in turn, will be able to extend trade finance to importers and exporters.
The IFC and AfDB plan to fund up to 40% of the portfolio in order for Citigroup to have additional liquidity. Predictions indicate that the assets financed could generate up to $1.5bn in trade financing.
Also, to further their interest in managing the increasing f lows of capital to Africa, Citigroup has kept a close eye on the South African market, where it is the largest international bank in the country and was able to increase its size, despite financial difficulty, with paid-up capital of R4.2bn ($2.8bn). Citigroup has a balance sheet of R53bn ($35.5bn).
It plans to target governments and large companies in Africa's largest economy by inciting them to use their commercial cards. South Africa is the 50th country to take up Citigroup's commercial credit cards, which allow clients to immediately track their payments.
This innovation presents significant new prospects for government departments, some of whom Finance Minister Pravin Gordhan has accused of wasteful spending, to be held to account.
Citigroup is also targeting heavyweight corporations such as Rio Tinto, currently the world's third-largest mining company, with its commercial card services.
The company has also recently opened a desk in its South African subsidiary focusing on lending to Chinese businesses both initiating and expanding their operations on the continent. This close cooperat ion with Chinese investors i s designed to improve their access massive investment flows between cash-rich China and resource-rich Africa.
Avid investor in technology
Citigroup is eagerly contemplating its year ahead in Africa but there is little as yet cast in stone. Buying a South African bank is, however, not on the agenda for now.
Speculation remains as to whether Citigroup's commitment to an organic growth strategy is in earnest or mere artifice designed to camouflage its designs on one of South Africa's local lenders.
Citigroup's involvement in the partnership with the IFC and AfDB is a clear signal that the bank is looking to Africa to instigate growth, and furthers its commitment to the continent. However, CEO of Global Transaction Services Francesco Vanni d'Archirafi announced that integrating Africa in the bank's global reach strategy will only come after the US government divests itself from Citigroup - a process which will continue through 2011. Even though the US Treasury recently sold stock, American taxpayers still own 13% of Citigroup.
Africa's high-margin markets are clearly becoming increasingly competitive. The profit of local and Western banks in sub-Saharan Africa, excluding South Africa, was approximately $2.6bn in 2009. The Bank of China's loans to Africa and the Middle East doubled last year to $3bn.
Two competitive features can be said to distinguish Citigroup. Firstly, the bank is highly liquid with some $345bn of liquidity on its balance sheet; this also represents
Future economic prosperity requires innovations in African capital markets an attractive opportunity for other banks that are unwilling to use their liquid cash pools. Secondly, the giant is an avid investor in technology, and its capabilities in this domain make it a good candidate for multinationals, companies and governments, all of whom are increasingly looking to private players to fund their expansion needs.
Currently only around 10% of the continent's trade is intra-continental trade. The future economic prosperity of the region is tied not just to increases in export volumes but also to improved infrastructure and the further increased facilitation of cross-border trade. This will require innovations in African capital markets. Fortunately, demonstration of their keen appetite for African lending from institutions like Citigroup, driven by the innovations in African governance, resilient growth, strong demand for commodities and a rapidly rising middle class, mean that the requisite access to capital for further growth is emerging.
Copyright IC Publications 2011
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|Date:||Jan 17, 2011|
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