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South Africa: Weak growth, smaller appetites

Photos© Mike Hutchings/ReutersLow credit appetite, inadequate power supplies and tough labour talks are likely to limit banking revenue growth this year. Greater regulation is expected to squeeze margins as lenders adapt business models

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Zimbabwe thirsts for cheap credit lines, Botswana lends a hand

Tendai Biti, Zimbabwe's finance minister says the country needs capital in the form of foreign direct investment, lines of credit and cheap access to finance/Photo©ReutersZimbabwe is in desperate need for cheap credit lines, as the country seeks to revamp collapsing infrastructure and boost its mining sector.

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Zimbabwe's bank group to penalise loan defaulters

Faced with a severe liquidity squeeze, financial institutions in Zimbabwe are mulling establishing a credit bureau that would blacklist loan defaulters.

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Will Kenya's property bubble burst?

altInterest rates are making mortgages unaffordable for many and the construction boom has temporarily stalled, but demand continues to outstrip supply.

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Private equity, hedge funds: The untouchables!

The crisis drama deepens: creditors' pressure on governments increases austerity policies that increase mass opposition that frightens creditors who increase their pressure on governments - Wolf/ Photo/ReutersPrivate equity and hedge funds: you, your children and your environments are not our problem - anywhere!

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New credit strategy targets Air Zimbabwe's informal traders

Air Zimbabwe struggling to get customers after a strike by pilots forced it to suspend flights by two months has now resorted to offering packages that will allow informal traders to fly on credit.

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Is microfinance working in South Africa?

In an investigation into one microfinance recipient in South Africa, Khadija Sharife asks whether microfinance is helping families out of poverty or merely plunging them into debt    


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Buying on borrowed time in Morocco

The expansion of consumer credit has encouraged middle class families to spend beyond their means


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TOP 200 BANKS IN AFRICA 2010

Each autumn we collate the results of Africa's Top 200 performing banks. Use our interactive ranking to search by country, assets, net earnings, credit or deposits.

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TOP 200 BANKS IN AFRICA 2011

Each autumn we collate the results of Africa's Top 200 performing banks. Use our interactive ranking to search by country, assets, net earnings, credit or deposits. 

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Banks: Lucky escape, only minor damage

Ghana banksThe Bank of Ghana is trying to strengthen the financial sector amid the global crisis

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Carbon Credits: Voluntary solutions for climate change

 

There is growing momentum to involve Africa in the carbon-credit trade, now worth some $64bn a year, but strict regulations may keep it away from certified global markets

 

Anew project to protect some 425,000 hectares of rainforest in Madagascar’s Andasibe-Mantadia corridor might seem a win-win proposition for the local population – which can benefit by selling non-timber products like fruits, vegetables and fibres – as well as for the rare lemurs that live there. But many African projects like this one have been left out of the lucrative regulated market in carbon credits that has been growing rapidly worldwide.?

 

Africa is now taking the matter into its own hands and developing the conditions for more carbon-credit trade and for more direct benefits on the ground. Last December saw the launch of the Africa Climate Solution, an initiative led by the Common Market for Eastern and Southern Africa (COMESA), which is also lobbying for the inclusion of projects such as ‘avoided deforestation’, the ‘re-vegetation’ of degraded land, as well as agro-forestry and sustainable agriculture schemes that can operate within regulated global carbon markets. “If they are included, we can take the pressure off our existing forests and use the carbon market to help lift poor farmers out of poverty,” said Sindiso Ngwenya, COMESA’s general secretary.?

Green and gold standards

 

There is a wide variety of
voluntary carbon schemes.
Read more. 

 

Africa still only makes up only 2% of the world carbon-credit market, whether of the regulatory kind – through the Kyoto Protocol’s Clean Development Mechanism (CDM), whereby industrialised countries can offset their own emissions by investing in low-carbon projects in developing countries – or in the sprawling voluntary market, which is certified mainly by independent alliances or NGOs. ?

 

The CDM market for certified emission reductions (CERs) has complex and rigid regulation mechanisms. Only projects from a number of pre-selected (mostly heavy, polluting and large-scale) industries qualify. Those industries get carbon credits through adopting new, more environmentally-friendly technology.

 

?In Africa, 46% of the current carbon projects are forestry-based, but forestry has so far been largely excluded from the regulatory market. Only one out of the 1,383 registered CDM projects worldwide is forestry-related, and it is in China.?

 

Take-off will be delayed?

 

Because CDM registration can take several years, there are long time-lags between initial investment and the first revenue from a project. Green Resources, a Norwegian forestry company that has been planting trees in East Africa since 1997, has yet to sell emission reductions, which is a “terrible frustration”, according to its managing director Mads Asprem. The company’s first project in Tanzania fell foul of CDM criteria because it began before the CDM starting point in 2000. Other, more recent, projects in Tanzania and Uganda have been in the pipeline for months and are still not registered.?

 

The chairman of the Uganda Carbon Bureau, Bill Farmer, who advises entrepreneurs interested in venturing into the carbon market, warns of the difficulties for companies with little financial clout operating in African economies that lack the infrastructure and business environment to facilitate project development. ?

 

The alternative for the smaller projects is the voluntary market. Although the lack of regulation and liability to scams have given the market a bad name, a number of new voluntary standards have emerged, and some of these are backed by methodologies just as rigorous as the CDM process.?

 Registered CDM projects

The result is a new-found legitimacy. The voluntary market is “more adapted to our project types and sizes”, says Farmer. “It’s also, in many cases, a learning experience before coming head-on with the CDM.”?

 

The price of voluntary credits, unlike the market-driven CERs, can vary hugely depending on the size of the project and the type of verification. Forestry and renewable offsets tend to be the dearest on the market, with Africa proving the most expensive at $13.70 per credit, compared to $5.80 in Asia.?

 

Still, while the price of CERs has gone down, the price of Voluntary Emission Reductions (VERs) has gone up. “The price difference between CERs and VERs is much smaller – €10 for CER, €7-8 for VER – and for the extra inconvenience the CDM involves, project developers may well be more inclined to opt for VER,” said Edward Hanrahan, head of voluntary sales at J.P. Morgan, which last year acquired Climate Care, one of the UK’s biggest sellers of carbon offsets.?

 

Baby steps?

 

The Uganda Carbon Bureau’s Bill Farmer points out that conventional financial institutions are not flexible enough for a market that is still in its infancy, which is why he has been trying to create a local carbon market of companies keen to become carbon neutral, a market that is less risk-averse and more tolerant of relaxed standards.?

 

Information provider Ecosystem Marketplace produces an annual “State of the Carbon Markets” report. Its managing director, Katherine Hamilton, says new standards have raised the bar and many projects that would have started trading credits during the CDM-registration phase are now waiting for the standard’s approval.?

 

Such was the experience of Norway’s Green Resources. The company estimates it has produced 500,000 tonnes of CO2-equivalent carbon credits since it began operating – half of which has been independently verified by the Swiss company SGS – but refuses to sell them until they are certified to the highest standards available. “If we sold them now, they wouldn’t have the same value,” says Green Resources’ Asprem.?

 

Despite these different approaches, experts agree that Africa has huge potential in trading carbon credits, particularly if ‘avoided deforestation’ and land-use projects are included in climate-change-mitigation efforts. Asprem says that such projects would also help the most destitute in Africa: “If you plant trees where there is no economic activity, with no other employment, it makes a huge difference, socially and economically.”

 

?The World Bank is investing actively in Africa’s fledgling carbon market: 22% of its carbon projects are in Africa, and the continent accounts for a third of projects from its BioCarbon Fund, a $91m facility dedicated to ‘carbon sequestration’ initiatives through forests and agro-ecosystems. It has also helped fund Madgascar’s Andasibe-Mantadia project, which is now well under way.

 

The UN Framework Convention on Climate Change, which runs the CDM and is organising a major conference in Copenhagen in December 2009 that will draw a post-Kyoto road-map, accepts that Africa has mostly missed out on the regulatory market. But this is slowly beginning to change. While there are currently only 29 registered projects in Africa, mainly in Northern and Southern Africa, 94 more are in the pipeline. 

 

Finance: The taps of credit run dry

Real import growth

As African credit markets begin to dry up, companies and governments anticipate a difficult year ahead


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Interview: Oyama Mabandla, Executive Chairman, Vodacom, South Africa

 

South Africans are adjusting to the new world prices for their minerals and the sudden reluctance of the banks to extend credit. If life is not going to get easier soon in the manufacturing sector because of Chinese dominance, the service sectors should propel the economy through the worst of it, with telecoms leading the charge

 

Oyama Mabandla ?is Non-executive Chairman of Vodacom and Executive Chairman of Langa Group, an investment holding company, South Africa

 

The Africa Report: How did the financial slowdown affect the operations of African companies in 2008, and what are the prospects for 2009??

 

Oyama Mabandla: In South Africa, we are seeing mergers and acquisitions drying up. You can’t get debt now from banks to do anything. The credit markets are on holiday. Some of the expansion that was under contemplation – that is southern companies going northwards – is slowing down. ?

 SA top 500 performers

Are the banks’ problems due to the global financial slowdown or to the internal dynamics in South Africa??

 

Both. The slowdown in debt provision has been happening since the latter part of 2007, ending up with the global contagion. Banks are conserving their firepower. This should be a buyers’ market because assets are cheaper, but nobody has the money because banks won’t lend. South African banks are very conservative. And the Africans who were looking to China as an alternative to the West didn’t think that China is also risk-averse. Chinese companies were among the first to leave the Democratic Republic of Congo. ??

 

Will telecoms fare better than other sectors in the slowdown?

 

Analysis of the Top 500 companies in Africa 2008

Search our interactive Top 500 ranking

?Indeed. The view is that we make money no matter what. At the lower end people may use our services less, but you’re going to see companies picking up on our other products. We are getting into data services in a big way, investing in new infrastructure.

 

??Looking at the Top 500 companies, is African manufacturing growing or contracting?

 

?Our manufacturing sector has eroded with the emergence of China. Our textile industry has been decimated. I’m certainly not seeing new industries strengthening in South Africa. What we’ve seen in South Africa of course is the emergence of ICT, and our banks remain very strong.??

 

South Africa dominates the Top 500 companies. Do you see any changes in the economic drivers there?

 

It’s mines and services, financial services, telecommunications services. Sasol – the coal-to-oil plant – is an exception; it’s become stronger in the last ten years. You have a lot of ICT companies in South Africa, such as Datatec. Most of the companies are extractive, and our retail sector – Shoprite, Pick ’n Pay, Spar – is very strong. They’ve grown in the last ten years with forays into Africa and the Middle East.??

 

With low growth and tighter credit, will the service sectors be squeezed? ?

 

Absolutely. But people have to eat. Food companies, especially those that have diversified, like Tiger Brands and Shoprite, are doing well, but Woolworths has stumbled. ??

 

And the banks? ?

 

Standard Bank is in a pretty strong position, largely because of Chinese investment, and they’re just a very well-run bank. First Rand group have some difficulties; they’ve closed down their international private-equity business. Absa is in robust health, as is Nedbank. Investec bought some toxic assets, but it’s a small bank so it hasn’t caused ructions. If you’re looking at the top four, three of them are in reasonably good health. On the insurance side, Old Mutual is in trouble – their US operation has been decimated and their share price has collapsed – but Sanlam is robust.

 

??When will commodity prices rise again? ?

 

With things like platinum, it will depend on the emergence of the North American auto industry from recession. We’re not going to see any recovery within 18 months.

 

Domestic demand to square the circle

 

Easing pressures on the African consumer could mitigate the worst of the downturn, as credit dries up and commodity prices recover slowly

 

Raising finance for expansion or mergers and acquisitons will get much harder for African companies this year. As the Chairman of South Africa’s Vodacom, Oyama Mabandla, told The Africa Report: “The credit markets have gone on holiday.”

Top 500 Companies in Africa

Search our interactive rankings

 

?This tightening of credit is a direct consequence of the US’s financial meltdown last year; the indirect results of the slowdown, such as falling commodity prices and dwindling foreign investment, will hit African companies more gradually over this year. Both foreign portfolio and direct investment will slow down sharply. Already, portfolio investors and foreign fund managers have pulled out of markets such as Nigeria, South Africa and Uganda. ?

 

The continent’s non-correlation with world markets works on the way down as well as the way up. Matthew Pearson, head of Africa equity research at Renaissance Capital, explains Ecobank’s recent failure to raise money on the international markets thus: “Why would a fund manager bother with a Togolese-based bank, when he has Morgan Stanley available at a knockdown price?” ?

 

The news is not all bad. Commodity prices may have tumbled, but if 2008 was an aberration due to speculation following a weakened dollar, some believe that prices should return to levels seen in 2006 by the end of this year. A lot of the money that poured into Africa played on this commodity boom, says Kenyan investor and analyst Aly-Khan Satchu. “We’re going to see a sharp slide in that slam-dunk money…a lot of that money will look for a different type of home. The balance in Africa is moving away from the commodity producers to the consumers.”

 

?African companies are generally not over-borrowed. Though they may have been criticised for their conservatism about credit, they are probably thankful for it now. They have also benefited from the near ten-year growth spurt in many parts of Africa, which has created a denser web of smaller companies, the supplier network for the titans who make up our Top 500. This stronger, more diversified business ecosystem is being driven by and helping to drive domestic demand, an increasingly important force. Top 500 turnover by sector and country

 

?Over the last ten years, the service sector has been the beneficiary, as our rankings of Africa’s Top 500 companies makes clear. Although the Western consumer may be in reverse gear, the African consumer will have a great deal of inflation relief from receding oil and food costs, the latter making up half of household spending, freeing discretionary funds for telecoms, travel and retail.?

 

The construction boom is a vital part of this new domestic demand economy. Though construction may slow as credit tightens, the slack will be taken up by government infrastructure investments and Africans in the diaspora with their own housing projects. This will help those oil-rich countries sitting on comfortable foreign-exchange reserves, such as Nigeria and Algeria, but applies across the board and may even create some jobs.

 

?It is too early to tell where the bigger players in Africa will try to recoup their losses. The prospect of stagnating domestic demand in more industrialised countries such as Egypt could cause these investors and companies to focus regionally or in Sub-Saharan markets. ?

 

They will watch and wait, says Tamer Hafez, contributing editor at Business Today Egypt. “I really do believe that for Egyptian companies 2009 will be a year of consolidation and rigorous monitoring of what is happening in the EU and US markets.”?

 

Not an imaginary slump

 

?Any company exporting to the West will face a real slump in income, but mostly in the higher-end manufacturing and services sectors. Though there may be less demand for call centres in Morocco and Tunisia, North African fruit and vegetable exports to Europe, for example, should be spared. The textile sector will gain from European companies relocating to the Maghreb to take advantage of the cheaper workforce. Arezki Daoud, editor of the North Africa Journal, says that companies have to be creative if they want to crack the US market: “The survival and the success of the textile industry will depend on the ability of the Moroccans and Tunisians to be aggressive competitors.”

 

?Looking closer to home may be the answer in East Africa, where cross-border business within regional groupings (such as the East African Community) will seem more attractive. “This is a high-growth, super-growth curve,” says Kenya analyst Satchu. “One’s got to look at it regionally, and the region is the Swahili sphere.” ?

 

What our rankings show most clearly is the growing diversity of economic activity in several countries. Growth in Africa should outperform other parts of the world, except East Asia. Take Mozambique’s Mozal. A few years ago it was just on the drawing board, but now it ranks high in the continent’s Top 100 companies, a powerful reminder of the recent, rapid and successful diversification of whole economies.?

 

Constant diversification explains the ever-growing economic weight of Algeria, Egypt, Morocco and South Africa, but it is also becoming an important factor in regionally-important countries like Cameroon, Côte d’Ivoire, Ghana, Kenya and Nigeria. In all cases, the new elements are dynamism, bold investment, smarter management and heightened competition. ?

 

Despite the political problems, Kenya’s economy has bounced back much faster than expected: both its business and political class appear to be propelled by self-interest in their efforts to shore-up the grand coalition government. Diversification – tea, coffee, light manufacturing, ICT and financial services as well as tourism – was the other secret of Kenya’s resilience. As prices for Kenya’s key commodity exports remain in the doldrums, the ingenuity of its businessmen will be tested again.?

 

Interview: Oyama Mabandla
Non-executive chairman of
Vodacom, South Africa

The crashing oil price may not be all bad news for Nigeria if it boosts efforts to develop the indigenous and more productive areas of the economy. With its internal market of 140m people, Nigeria offers great economies of scale to companies that can find a way around the still-chronic problems with electricity, water and traffic jams.

 

?Nigerian companies have already been hit by their own mini-credit crunch. This year will be tough for Nigeria’s stock exchange and financial sector, and many predict a further involuntary consolidation of the banking sector before the end of the year. ?

 

In contrast to the political plaudits offered to Ghana in the wake of another free election and peaceful transfer of power, investors will be taking a much more critical look. President John Atta Mills’s new government starts the year with two ballooning deficits – the budget and the current account. But there are two bright spots for Ghana’s key exports: financial-system worries have driven up the gold price, and cocoa prices are at a 30-year high, buoyed perhaps by casualties of the slowdown who find solace in increasing their chocolate consumption.

 

Editorial: Credit-crunch politics

 

“Cui bono?” a FRIEND asked pointedly while we were waiting for Ghana’s election results in one of Accra’s more popular hotels. He was of that generation of Ghanaians who had spent their formative years declining Latin nouns and translating Virgil’s Aeneid. “Why the winner of course, that’s who benefits!” I replied impatiently.

 

?“Not our election, the bigger picture. Look at it all – crashing oil prices weaken Hugo Chavez and Mahmoud Ahmadinejad. Russia’s oligarchs are ruined as the gas price heads south and what chance for China’s plans to outstrip the US economy by 2025 when it’s closing factories and sacking millions of workers. And American workers are rejoicing as their fuel prices tumble. Cui bono?” he boomed.?

 

As other hotel guests, bored with waiting for the results, turned to listen to this high- volume exposition, my friend warmed to his conspiratorial theme. The credit crunch, he insisted, was a put-up job by the few surviving investment banks: they had made huge profits and huge errors, so they invented a huge crisis to cover it up and then got the outgoing Republican administration to bail them out with hundreds of billions of dollars. ??

 

“And why should Africa have to pay for this nonsense?” he concluded rhetorically. Like many, he was hopeful that after a decade of economic growth and a few good elections, such as Ghana’s, that Africa was turning the corner. Now Africa’s plans were put on hold because of great power shenanigans, and its good economic prospects would be reversed.?

 

His audience quickly divided into conspiracy buffs buying into his theory and rationalist opponents who argued that economic interdependence meant everybody’s boats would be sinking in the credit crunch.?

 

China needed its mass sales to the US market, while the US, as the world’s biggest debtor, needed Chinese finance, the gainsayers concluded. They are locked in each other’s embrace. “Ah, but who wins at the end of the day?” flashed back the conspiratorialists.?

 

That the credit crunch changes everyone’s political calculations, at least, is beyond dispute. It was Barack Obama’s reaction to the evolving crisis that enabled him to pull so decisively ahead of John McCain in last year’s US elections. And it was John Atta Mills’s selective borrowings from the Obama electoral lexicon that gave him an edge over his rival Nana Akufo-Addo in Ghana’s cliff-hanger elections. Like Obama, Atta Mills won support by spelling out how the economic slowdown would hit the voters’ living standards and how change would help them. ??

 

We will hear a lot about change from politicians this year. In Ghana, ‘change’ is local slang for a tip or gratuity. And in South Africa, the ANC’s embattled Jacob Zuma promises change and better conditions for those left without jobs and decent houses amid the post-apartheid transformation. But with South Africa’s economic growth forecast to slow drastically as capital inflows decline, Zuma will struggle to deliver. The impact of the global slowdown will not be lost on the ANC’s new rivals in the Congress of the People.?

 

Other Southern African ruling parties facing elections – in Angola, Botswana, Malawi, Mozambique and Namibia – have to tackle the credit-crunch effect, whether falling oil prices for Angola or crashing demand for Botswana’s and Namibia’s diamonds, or falling aid and tourism receipts for the others. And in West Africa’s Guinea, junior officers have mounted the first credit-crunch coup with over $10bn in mining investments at stake.?

 

Credit-crunch politics will mean weaker economies and harder-pressed ruling parties across Africa, slower GDP and export growth, wobblier currencies, lower investment and higher government borrowing. Opposition parties are gearing up for heroic election struggles this year, taking Ghana as their model. For them, harder times may mean more votes. That’s the change they can believe in.

 

Two scenarios for Africa

The high road and the low road for African economies 

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