South Africa, with the continent’s most diverse and sophisticated economy, retains its attractiveness as a top destination for international investors who will be watching the country’s May 29 general elections with great interest.

However, prolonged and debilitating port and rail logistics deficiencies, erratic electricity supply, and poor governance are tarnishing some of its appeal.

Brad Maxwell, managing executive for investment banking at Nedbank CIB, tells Global Finance that international private equity and development finance investors have targeted South African sectors such as manufacturing, mining and agriculture. There has been a sharper focus on climate and infrastructure as strategic investors have recognized the value opportunities in South African companies.

This includes Luxembourg-based Ardagh Group’s $1 billion acquisition in 2022 of glass-packaging company Consol, Heineken’s purchase last year of brewing and beverage company Distell, and the latest moves by French entertainment group Canal+ to acquire pay-TV operator MultiChoice, currently owned by Johannesburg-listed multimedia company Naspers. Canal+ last year acquired 31.7% of MultiChoice.

“While South Africa has had limited GDP growth over the past few years, it remains the most industrialized economy on the African continent and still presents many opportunities for investors despite the economic challenges,” says Maxwell.

The logistics and infrastructure bottlenecks have resulted in some companies, such as Kumba Iron Ore, curtailing production. Steel company ArcelorMittal South Africa is considering shutting down some of its manufacturing operations.

Additional headwinds, such as suppressed platinum group metals prices, have forced Anglo American Platinum, Sibanye-Stillwater, and Impala Platinum to consider shuttering some mine shafts.

All this has negatively impacted South Africa’s productivity and, ultimately, its GDP performance. South Africa’s economy grew by 0.6% in 2023, according to recently lowered Treasury estimates, due to widespread power cuts, operational and maintenance failures in railways and at ports, and high living costs, said Finance Minister Enoch Godongwana in his February budget speech.

Against the backdrop of South African and emerging markets’ elevated inflation and of central banks raising interest rates in the past few years, predictions were that South Africa’s financial institutions would struggle with nonperforming loans.

FirstRand Bank, one of the largest commercial banks in South Africa, reported that bad loans had crept up, with the credit loss ratio for the half-year period to the end of December 2023 increasing to 83 basis points (bps) against 74 bps a year earlier.

South Africa’s financial services sector primarily comprises banks that are expanding their exposure in numerous sub-Saharan African countries as conditions back home stagnate.

Samira Mensah, director of financial institutions ratings at S&P Global Ratings, tells Global Finance that South African banks are currently “very profitable despite the tough macroeconomic conditions.”

Mensah notes that South African finance institutions are poised to maintain strong risk-adjusted returns of 15%-16% on average in 2024, supported by net interest margins and transactional revenue.

“The latter supports revenue and earnings resilience in an economic downturn. This, in turn, will support banks’ internal capital generation. Lastly, the finalization of banks’ plans to build up additional loss-absorbing capital will contribute to their balance-sheet strength,” she adds.

For FirstRand’s FNB retail banking outlet, which in February reported interim earnings for the half-year period to the end of December, there has been robust growth from digital channels that the report says “continued to deliver solid volume growth.” This aligned with the bank’s “strategy to drive customer takeup of digital interfaces and migration to the FNB app,” the volume of which was up 14%.

“Increased card activity also resulted in good growth in transactional volumes,” according to the South African retail bank.

South African banks’ projected resilience and profitability mainly result from these finance institutions still having solid enough buffers to absorb additional asset-quality risks, given their robust pre-impairment profitability and stable solvency metrics, ratings agency Fitch adds.

“Lending growth, which decelerated in 2023, will remain muted in 2024, in mid-single digits. This is due to the slow improvement in domestic demand and private consumption amid the still-unreliable electricity supply, weak disposable income growth, and still-high market rates, constraining loan affordability for households,” said Fitch in a recent note on the South African banking sector.

Fitch adds that the corporate banking segment is set to drive lending expansion. The agency also details that South African banks have a high propensity to support their major sub-Saharan African subsidiaries.

Regional operations are necessary for the South African banks’ Pan-African strategies and to manage high reputational risks in case of a subsidiary default. In the case of Standard Bank, operations outside of South Africa have “continued to perform very well and delivered strong earnings growth period-on-period in both reported and constant” currency, according to the bank.

Standard Bank’s African regional subsidiaries’ contribution to group headline earnings has now climbed up to 44%, according to the bank.

“We believe support will likely be manageable for the South African banks, given their sufficient capital buffers and relatively small regional operations, which are well-diversified by country,” write the authors of Fitch’s note.

Moody’s reckons that the South African banks’ robust capital generation will allow the banks’ Common Equity Tier 1 capital ratio to remain above 13%. At the same time, existing liquidity buffers and historically stable funding will continue to support financial stability.

The agency has assigned a “stable outlook for the South African banking sector,” balancing high macroeconomic and asset risk against the banks’ sound financial metrics and prudent risk management.

But for Brad Maxwell, managing executive for investment banking at Nedbank CIB, South African banks have become more relevant in Africa, having grown their lending businesses in primary sectors such as mining, energy, infrastructure, property finance, agriculture, and sovereign lending.

“Furthermore, clients banking with Southern African banks enjoy the convenience of moving funds across countries in Africa using a single electronic banking platform,” says Maxwell.

Nedbank has been going all out in building relationships with equity providers based in the rest of the world who generally invest in higher-risk sectors in Africa. This has helped the South African lender to act as an investment capital conduit into the rest of the continent.

With almost all other African economies growing at substantially higher rates than the South African economy, thus presenting desirable investment opportunities, South African banks are spreading their risks equally across sub-Saharan Africa, which has a population of some 1.5 billion people, including a young, largely educated, and urbanizing workforce with an entrepreneurial culture.

“While higher US dollar interest rates have increased the cost of capital, international investors from the Middle East, Europe, America, Australia and Asia are key sources of funding for the continent, and South African banks have been important conduits to tap international markets,” Maxwell explains.

Moody’s analysts expect the banks to record “stable profitability,” with a return on assets of around 1.1% owing to improved digitalization and high net interest margins, which are expected to “compensate for higher loan-loss provisioning needs” and the resultant subdued credit growth.

However, energy and logistic constraints hammering South Africa, restrictive monetary policies and high government debt are significant limits to South Africa’s growth potential, even for the banking sector—although higher average interest rates supported net interest margins for banks such as Standard Bank.

Nonetheless, the bank’s net interest margin expansion slowed down in recent months, given that interest rate increases have bottomed out.

“Lower demand reduced affordability, and competitive pricing pressure (particularly in mortgages in South Africa) resulted in lower disbursements to retail and business clients and a slowdown in growth in the related loan portfolios,” Standard Bank said in a trading update for 2023 year-to-date as of October 31. “Corporate origination remained strong, driven by energy-related opportunities.”

South African banks are nonetheless hedged against risks related to rising and falling interest rates as margins expand in a high-rate environment, cushioning against the impact of rising credit losses emanating from bad debts, Standard Bank tells Global Finance.

“In a rising interest rate environment, [South African] banks may see higher revenue growth through positive endowment. However, the cost of risk increases, and they may face higher credit impairments as clients have higher interest charges to pay.”

For its part, Standard Bank has benefited strongly from margin expansion while managing credit losses, although it describes the South African investment banking sector as “fiercely competitive: with well-established and sophisticated domestic, as well as some large international, banks.”

The countries of sub-Saharan Africa have stayed away from the eurobond market over the past two years, which were marred by elevated inflation and rising interest rates. With Bank of America economists and other analysts now expecting central banks in major economies to start cutting interest rates, African sovereigns are seeing some opportunities for eurobond issuances.

Cote d’Ivoire’s eurobond aimed “mostly to repay debt coming due” in the next few years, says Charlie Robertson, head of macro strategy at asset manager FIM Partners.

Cote d’Ivoire, which is the world’s top producer of cocoa, received three times what it had offered. It placed $1.1 billion under a sustainable bond yielding 7.875% and maturing in 2033 in addition to another $1.5 billion in conventional bonds due by 2037 at an 8.5% yield.

Robertson expects at least one more African sovereign to issue a eurobond this year.

“Yes, there will be at least one other African issuer; the others, though, still can’t or won’t pay the relatively high cost of borrowing at this time,” he says.

The Nigerian government announced its keenness to issue a eurobond this year. Kenya also said that it will return to the international capital markets when conditions permit, with the IMF saying the East African nation was unlikely to default on $2 billion in eurobonds that will fall due this coming June.

David Hauner, managing director, head of Global Emerging Markets Fixed Income Strategy at Bank of America, says an overvalued US dollar likely to weaken against other major currencies, and a tapering off of interest rates. “Capital flows into emerging markets are driven by the dollar,” Hauner said during a presentation on the prospects for emerging markets this year. “We expect to see an improvement in capital flows into the region this year

Since 2022, the dramatic rise of the US dollar against virtually every other world currency has wreaked havoc on the profits of US multinationals as the value of their foreign earnings plummeted. In the second quarter of 2023 alone, the average hit to earnings for publicly traded North American companies was a whopping $0.05 per share, according to the Quarterly Currency Impact Report conducted by consulting firm Kyriba. Currency volatility has moderated somewhat in 2023, but shifting expectations for inflation and future interest rates have made the environment no less challenging for finance executives.

“The US dollar has been meandering this year, and that still causes headaches for treasurers because of the peaks and valleys,” says Andrew Gage, senior vice president at Kyriba.

Gage’s firm tracks the impact of currency fluctuations on the financial results of 1,700 public companies, half in North America and half in Europe. In the second quarter of 2023, companies disclosed a combined $29.14 billion in currency impacts on their financial results. The actual numbers are far larger for the whole group, as most companies do not quantify the impact of currency movements on their results. The trend, however, is clear. FX volatility remains high, and the pain is felt across global markets as the US dollar fluctuates.

“Currency volatility is like Jupiter’s Red Spot: It moves around a lot,” says Gage. “We saw some of that in European results for the second quarter, and I think companies in Europe may experience more [currency] headwinds than those in the US through the end of this fiscal quarter.”

Corporate reactions to the increased volatility in FX markets vary. A survey of 245 corporate treasury departments worldwide conducted in 2022 by Deloitte & Touche found that 76% were using derivatives to hedge their currency exposures, while 24% reported other preferences. A large plurality of respondents, 45%, ranked FX volatility as one of the top five challenges for their organization. “The volatility has come down from last year, but a lot of organizations are just beginning to come to terms with it,” says Erik Smolders, a managing director at Deloitte’s Treasury Advisory Services. “Some companies want to eliminate their FX exposures; others see it as a cost of doing business and are willing to take some of it on the chin.”

Invariably, those taking it on the chin emphasize the results of their foreign operations in nominal numbers without adjusting for changes in currency prices, hoping that investors will look through currency fluctuations and focus on underlying business trends. “It depends on how companies have been talking to their investors over the years,” says Smolders.

However, the increase in volatility has upped the ante for corporate finance executives, and many are now looking for more-effective ways to manage their FX risks. “I’ve had many more companies ask for assessments of their hedging programs in the last 12 months,” says Smolders. “They want to know how to handle their exposures better and manage costs.”

US and Asian multinationals, typically less inclined to hedge currency risks than their European counterparts, are increasingly looking for solutions to manage risks in a more volatile environment. Netflix is a case in point. As a global leader in video streaming services, Netflix has exposure to more than 45 currencies in its operations and has historically tolerated the swings in reported earnings due to currency movements. However, 2022 was a tipping point for the company. CFO Spence Neumann revealed in a 2022 third-quarter earnings call with analysts that “there’s about 2.5 points of FX drag in our margin. That equates to about—it’s about $1 billion of revenue drag.”

In 2023, the company implemented an FX risk management program to limit the impact of short-term currency movements and reduce the need to raise prices or cut costs in response to them. Netflix disclosed it would use standard forward contracts to hedge some—but not all—of its currency risks.

When managing currency risks, the solution can sometimes be as painful as the problem. With the heightened volatility in currency markets, the cost of hedging risks has risen dramatically for companies since the US Federal Reserve began raising interest rates in early 2022. Treasury executives now need to decide when the higher costs of hedging risk outweigh its benefits.

“The responsibility of the treasury department to manage currency risk isn’t only about hedging. It’s also about managing the cost of hedging,” says Kyriba’s Gage. “A lot of corporate risk management programs were established in low interest rate environments. Now that rates are back up, companies need to think differently about them.”

Deloitte’s Smolders also advises his clients to take a measured approach to identifying foreign currency exposures before deciding if and how they should be hedged. He recommends that companies take steps before considering what derivative instruments to use for hedging purposes.

First, companies should determine if they must take on a currency risk or if they can offload it to suppliers or customers and avoid worrying about currency price fluctuations.

Second, larger companies can reduce the amount they need to hedge by netting their currency exposures in costs and revenues across their organizations.

Third, intercompany hedging activities have tax issues. If a company can hedge its net currency exposure, it should consult with tax advisers about where and in what markets to undertake the hedge.

Finally, accounting for hedges remains an issue in currency-risk management. Most companies use simple forward currency contracts for hedging because they are simple and likely to qualify for favorable hedge accounting treatment. When derivative hedges are deemed ineffective, which requires complicated calculations, the results must be recognized in the income statement.

The key to good currency risk management is having good data from which to make decisions. For many large companies, producing that data is challenging, since different parts of their organization still operate in silos.

“Companies need to have confidence with their currency exposures, and they need the ability to analyze them across their organizations,” says Gage. “They need the right data at the right time.”

That remains an elusive goal for most large companies. In the 2022 Deloitte survey, the largest number of respondents (83%) cited the lack of visibility into their currency exposures and the reliability of their forecasts as a key challenge they faced in managing FX risks. The second most-cited challenge (71%) was the manual identification and capture process for those exposures.

“Getting good data out of enterprise resource planning systems is a consistent challenge for companies,” says Smolders. “Companies operating with more than one system have more problems.”

The renewed volatility of the currency markets in the past two years is a powerful motivator for companies to accelerate the digitalization of their treasury function. This can provide the data they need to make better decisions about their overseas investments and operations. Global financial executives will struggle to control them effectively without an accurate big-picture view of companywide currency and financial exposures.

The volatility is not likely to decrease anytime soon. Wars, inflation, supply chain crises, and divergent central bank monetary policies will likely continue to make FX markets more treacherous for global corporations.

“Companies have had to navigate through sustained crises for about four years now, and I don’t see that changing,” says Gage. “Currency volatility is now a front-burner issue for them.”

Global Finance selects its award winners based on objective factors such as trans-action volume, market share, breadth of offerings, and global coverage, as detailed in public company documents and media reports.

Our criteria also include subjective factors such as reputation, thought leadership, customer service, and technology innovation, using input from industry analysts, surveys, corporate executives, and others. Although entries are not required in order to win, decision-making can be informed by submissions that provide additional insight.

Last year was nothing short of historic for our Best Global Foreign Exchange Bank, UBS. Between the takeover of its longtime rival, Credit Suisse, in what analysts call the most important banking M&A in history, and the substantial growth of its foreign exchange (FX) operation in developing markets, the behemoth bank has done it all with unrivaled excellence.

The takeover of its rival’s operation led to substantial growth in clientele and traded volume in European markets, resulting in solid profitability growth. It also led to key additions to UBS’ FX team, further expanding the bank’s knowledge.

At the same time, UBS teams in Asia, the Middle East, and Latin America have kept working relentlessly to improve the bank’s digital offering for emerging market currencies.

As a result of this unmatched year, the Swiss-based giant now ranks as one of the largest private wealth managers in the world, with undisputed market share in Europe. It has also watched its emerging markets FX operation mount into one of the world’s largest, expanding the bank’s offerings to its clients worldwide.

Among the bank’s most significant global technological breakthroughs is UBS’ FX Engine Room, with which the bank can place all analytics in one place for use by its global sales force, thus broadening the footprint of its operations to clients looking to trade currencies on a global scale.    —Thomas Monteiro

Driven by constant strategic investments and rock-solid market positioning, BBVA takes home our award as the Best FX Bank for Corporates in 2023.

With a global presence covering key markets such as the US, Mexico, Colombia, Peru, Argentina, and Europe; adherence to the Bank for International Settlement’s FX Global Code; and a commitment to compliance, BBVA offers a comprehensive FX-services suite that caters to both the broader and the most specific needs of corporates worldwide.

The Spanish-based bank has maintained its core principles, providing world-class strategy and research-tailored insights while investing in cutting-edge technology.

Notable innovations have included improved onboarding with eMarkets and dynamic FX pricing in Colombia, 24-hour FX trading, and a customized mobile app for small and midsize enterprises across the network.

BBVA’s accomplishments among corporates helped the bank strengthen its leadership in Mexico, Peru, Colombia, Spain, and Turkey. The bank improved its position in Argentina, where it increased its share in the corporate FX spot market and sustained leadership in imports and exports.          —TM

With solid growth in key emerging markets and an increasing foothold in both the US and Europe, Santander reaffirmed in 2023 its status as a pivotal institution for corporations operating in some of the globe’s fastest-moving markets.

By providing extensive coverage with over 50 currency pairs; an unmatched clientele; and knowledge of the market in countries such as Brazil, Mexico, Argentina, and Spain, the bank can guarantee that its clients stay ahead of the curve amid the intrinsic difficulties associated with emerging market currency trading.

In a year in which currency volatility proved a challenge for those based in both developed and developing markets, Santander’s comprehensive trading platform offers diverse options for trading across various channels. It includes streaming capabilities for online pricing in spot, forwards, swaps, non-deliverable forwards, FX options, and structured product trading.

The Spanish-based giant also provided top-of-line global research, market updates, strategies, and FX publications to its clients, ensuring an edge over the competition.

Moreover, with a dedicated team of expert trading and sales professionals based in several key markets for emerging markets currencies, Santander’s clients were able to navigate the complex FX landscape confidently and efficiently.            —TM

Liquidity concerns spilled over in 2023 into some of the world’s key markets due to the failures of historical powerhouses such as Credit Suisse and Silicon Valley Bank. Farther south, in Brazil, Itaú Unibanco not only weathered the challenges but also achieved outstanding performance metrics.

These numbers ensured the top-line stability of the bank’s reserves and liquidity offerings, showcasing Itaú’s resilience in the face of global economic uncertainties.

In 2023, the Brazilian financial giant posted an impressive net income of $6.3 billion and a loan portfolio amounting to a robust $224.5 billion. Backed by solid reserves and growing profitability, Itaú’s FX operation thrived, showcasing an above-average return on equity of over 21%.

This trend was also backed by the bank’s continuing investments in technology. Via an impressive compound annual growth rate of 43.5% since 2020, these helped guarantee speed and ease whenever clients needed large sums of foreign currency.

As a result of the bank’s best-in-breed liquidity offering, it effortlessly operated some of the largest FX transactions of its history, such as a $1.2 billion dividend payment for a prominent global beverage company and a single-tranche transaction totaling $1.3 billion for a client in the energy sector.      —TM

Bank of New York Mellon (BNY Mellon) won the Best FX Market Maker award due to its market position, excellent client service, financial performance, and continued technological development. BNY Mellon is one of the top five global US dollar payment clearers. Its client franchise includes 97 of the top 100 banks worldwide and 89 of the top 100 investment managers.

BNY Mellon Treasury Services added new business across strategic payment solutions and liquidity products. It drove higher payment volumes while generating traction as it built its digital payments and related FX and trade businesses. FX revenue has increased, primarily driven by the volume of client transactions, including hedging activities. The bank is a leading provider of global payments, liquidity management, and trade finance services. The bank has extensive experience providing trade and cash services to financial institutions and central banks outside the US.

In emerging markets, the bank is active with custody, global payments, and issuer services. BNY Mellon is a full-service global provider of FX services, actively trading in over 100 of the world’s currencies. It serves clients from trading desks in Europe, Asia, and North America.     —Darren Stubing

The 2023 global leader in sustainable finance, Societe Generale (SocGen) once again proved its core commitment to meeting the diverse demands within the broad environmental, social, and governance (ESG) spectrum.

The global sustainability markets’ recovery from the challenges of 2022 is expected to propel full-year 2023 green, social, sustainable, and sustainability-linked bond issuances to between $900 billion and $1 trillion, according to S&P Global. SocGen’s customers were able to enjoy best-in-breed market positioning, gaining a significant edge over the competition.

The French powerhouse’s FX team helped support its ESG products for customers worldwide, including the bank’s flagship ESG benchmarks, sustainability swaps, sustainability options, and sustainability-related derivatives.

The bank also stepped on the gas by providing hybrid trade financing offerings to its customers, linking traditional finance to sustainability goals, thus helping to fuel ESG investments the world over.

Additionally, in November, SocGen launched its first-ever digital green bond, registered directly on the Ethereum public blockchain. This strategic move aims to enhance transparency and traceability in ESG data and broaden the bank’s currency-related sustainable offerings.     —TM

JP Morgan was awarded Best FX Commodity Trading Bank, as its well-executed strategy consolidated its FX commodity trading activities, capitalizing on its top ranking in fees and market share in investment banking.

The bank is the top ranked in research, underpinning its strength in FX commodity trading. It has a longstanding leadership position in energy, power and renewables. It has made significant investments in the low-carbon energy transition. From local production to worldwide trading, JP Morgan has a strong presence in the metals and mining industry, including key areas in the Americas, Europe, the Middle East, Africa, and Asia-Pacific; and the bank has deepened its footprint in Australia and India.

JP Morgan has achieved excellence in FX commodity trading execution, aided by technology and analytics. Its FX and commodities trading platform provides access to fast and reliable electronic market-making and order placement across every commodity class—including base metals, precious metals, energy, agriculture, and commodity indexes—with tradeable prices in multiple currencies. Its platform can send over 120 currencies and receive more than 40 across 200 countries.  —DS

FirstRand, the operator of the Rand Merchant Bank (RMB) corporate investment bank and of the retail and commercial lender First National Bank (FNB), for South Africa and the region, is this year’s award winner as Global Finance’s Best Foreign Exchange Bank for Africa. This top African financial institution has been rewarded for carefully marshaling its foreign exchange (FX) business and its mobile and online offerings.

Offering FX solutions from personal travel to corporate, remittance partnerships with international companies such as PayPal and MoneyGram, and an FX clearing hub for African banks, FirstRand has been a trailblazer in the African FX market over the past year.

The company says its mobile application and online enhancements for FX are a “continuous focus for individuals and commercial clients,” adding that “smart messaging such as SMS, emails, and [app push notification] are in progress” for 2024.

Straight-through processing enhancements have made a difference in getting clients to move away from manual payments to platform transactions, with the FNB banking application bringing FX transactions to a readily accessible mobile platform.

FNB and RMB are also building a foothold in the world of cryptocurrency transactions and FX blockchain payments. With an FX staff complement of 599, FirstRand accounts for approximately 33% of all banking sector FX volume in its primary market of South Africa.

A further presence across Africa in countries such as Mozambique, Zambia, Botswana, Namibia, Nigeria, and Ghana saw FirstRand’s regional FX profits grow in 2023 by 15% over the previous year. In August 2023, RMB launched a foreign currency clearing solution for African banks.      

—Tawanda Karombo

DBS Bank is the largest bank in Southeast Asia, with global operations across 19 markets. With its vital FX centers in London, Tokyo, and Singapore, the bank presents itself as a seamless connectivity and liquidity provider with FX products, including nondeliverable forwards, FX swaps, and precious metals. As of 2023, DBS’ one-stop global cross-border payment solution has covered 132 currencies across 190 countries.

The bank’s FX business supports large corporations, multinational corporations, and small and midsize enterprises (SMEs) by offering a spectrum of services, such as sophisticated FX payment with integrated, competitive, and committed FX rates—as well as access to transparent pricing and analytical tools. Regardless of size, corporate clients all have access to efficient and secured FX and forward transaction platforms that safeguard against currency fluctuations.

DBS’ commitment to the FX business is also reflected by the increasing number of employees who have dedicated themselves to it over the years and by the bank’s ongoing effort to build global distribution channels with new technology investments and initiatives.

—Lyndsey Zhang

Raiffeisen Bank International (RBI) has long been a significant player in the Central and Eastern Europe (CEE) banking market—it founded its first CEE subsidiary in Hungary back in 1986—and is today active across 12 countries in the region, with almost 18 million customers and some 45,000 employees.

FX is a large part of the bank’s business, and RBI is actively trading in the currencies of most countries of the region, offering a comprehensive product portfolio with competitive pricing and reasonable rates for more than 100 currency pairs. It has been at the forefront of digital innovation, using cutting-edge systems to speed trading, improve accuracy, and reduce trading costs.

Two years ago, RBI established partnerships with AxeTrading, a fixed-income-trading software company, and with Integral, a leading FX tech provider, to provide real-time streaming of FX prices into bond trading. Since 2021, it has also been rolling R-Flex, a digital solution for FX conversion, across CEE, starting in Romania before RBI in Croatia and Hungary adopted what it describes as a simple yet secure user-friendly platform that prioritizes clients’ needs. The plan is to extend R-Flex across RBI’s operations in other CEE countries, giving customers access to a state-of-the-art system that simplifies and speeds FX trading.

—Justin Keay

Amid the volatile FX landscape of 2023, BBVA managed to secure the top market position in several key markets across Latin America, thus providing its customers with unmatched opportunities and products.

In addition to its unique market knowledge, one of the main secrets behind BBVA’s success throughout the year was its relentless dedication to boosting its award-winning technological capabilities. The Spanish-based bank’s FX operations underwent significant enhancements, showcasing this dedication to innovation and client-focused services.

The onboarding process for eMarkets clients saw substantial improvements, incorporating DocuSign for streamlined and efficient client interactions. The introduction of direct market access marked a pivotal moment, providing FX spot clients with a new algorithmic execution service. Real-time FX application programming interface offerings for external clients, encompassing FX and payments, strengthened the bank’s connectivity.

BBVA further implemented dynamic pricing in Colombia and introduced FX SBP (single bank platform); and BBVA eMarkets in Argentina, covering spot and nondeliverable forwards. Enhancements in FX online services for enterprises in Colombia allow for payments from accounts held in other banks.

These strategic improvements earned BBVA recognition in the Global Finance awards and position the bank as a leading force in the dynamic landscape of FX operations in Latin America.

—Thomas Monteiro

The winner as the Best Foreign Exchange Bank in the Middle East, Saudi Arabia’s Al Rajhi Bank is the largest Islamic bank worldwide and has a dominant franchise in the Gulf Cooperation Council’s biggest banking market. Al Rajhi is ranked as the No. 1 bank in the Middle East for remittances by payment value.

The bank’s FX performance has been boosted by digital transformation. Retail, SME, and corporate businesses have expanded, with escrow accounts growing substantially. Its FX franchise has strengthened, with an increasing number of global counterparties and an extensive peer network of banking and financial institutions, further developing its treasury capability to deal in large FX trades. Al Rajhi’s Treasury Group has increased interbank FX counterparties to improve price and FX flow coverage and to access new markets and currencies. Onboard banknote and bullion interbank counterparties have been introduced to enhance supply, storage, and price economies. Several new module enhancements have been carried out on the core treasury management system to onboard new products.      
—Darren Stubing

Like all global banks, JP Morgan has invested heavily in its IT infrastructure and trading networks over the past decade. Headquartered in New York, the bank is in all major world financial centers. It provides corporate clients with everything from FX trading services to international payment processing, cash flow, and working capital management.

In a more volatile environment for global currencies, size matters. JP Morgan, UBS, and Deutsche Bank are the three largest players in the FX trading markets, accounting for roughly 30% of global FX transactions. The bank has an enormous pool of liquidity, with millions of customers across its consumer, commercial, and investment banking operations. It can execute large spot trades in up to 300 currency pairs internally by matching up customers, or it can work complicated orders across multiple external electronic markets. It is also one of the largest providers of FX derivatives contracts globally.

Technology is a significant selling point for JP Morgan. It employs artificial intelligence to enhance its FX trading algorithms that optimize execution services in all market conditions. It also helps companies to fully digitalize their treasury functions across global operations to give them a clearer picture of their FX and risk management needs.

—Andrew Osterland

Already a powerhouse in the European market, UBS skillfully took advantage of Credit Suisse’s March collapse to achieve once-in-a-lifetime boost to customer growth.

By combining its former rival’s market shares with its own, the bank was able to gather unrivaled positioning, which should remain for years to come, in the continent’s FX market.

Naturally, the M&A came with challenges, as UBS faced the need to regain confidence among former Credit Suisse clients and to onboard its rival’s top-line staff. This process led to a challenging yet rewarding second half of 2023, as customer satisfaction grew while FX margins temporarily compressed.

But despite the intricacies of the merger, the bank has continued to invest in deepening its already best-in-class suite of technological offerings for FX.

With significant improvement across the currency-trading spectrum, from FX swaps with its Neo STIR Analytics platform to improved FX liquidity algorithms with a new smart order router, UBS’ European-based customers enjoy a unique combination of unrivaled market positioning and knowledge with state-of-the-art technological FX products.

—TM

As the eurobond market sags under high interest rates, foreign exchange headwinds, and elevated inflation, sovereign borrowers are increasingly focused on domestic capital mobilization and obtaining concessionary loans and advances from multilateral funders like the International Monetary Fund (IMF) and World Bank. The trend is especially noticeable in Africa, where many governments face challenges such as a worrisome security situation including both food insecurity and a threat of coups.

Worse still, the long-term impact of government fiscal precarity, stacked against the need for social spending and the demand for key imports, is elevating the possibility of defaults. Zambia and Ghana have already gone through the painful process, although these two African sovereigns obtained some respite in the form of agreements to restructure their foreign currency debt.

With its large need for capital to fund infrastructure development, food importation, and offshore payments for key services and commodities, Africa had emerged as a major customer on the eurobond market. The United Nations Economic Commission for Africa (Uneca) noted in August that the “number of African States issuing sovereign bonds on the international markets has increased,” along with an uptick in the number of such issuances.

International bond offerings by African countries on the international bond markets rose from four in 2011 to 11 in 2014, Uneca reckons. In 2018, the value of African new sovereign eurobonds reached $29.6 billion. According to the IMF, the stock of sovereign African eurobonds reached $140 billion three years later, with the proceeds mainly dedicated to infrastructure, technology, and skills development.

“The increased bond issuances have meant African countries have increased their weight in the main emerging market bond indices,” the IMF said last year. “The bulk of the issuance had been by Africa’s larger emerging economies, including Egypt, South Africa, and Nigeria. But when compared to the size of their economies, issuance by the frontier economies of Ghana, Zambia, Senegal, Gabon, Ivory Coast, and Angola was sizeable.”

Since then, however, the multipronged financial and economic crisis in international source markets and in African markets has made eurobond issuance by African countries less sustainable. With the impact of Covid-19 still not fully eased off and the disruptions from the Russian invasion of Ukraine still pinching, African sovereigns have plunged into further domestic turbulence. Combined with persistently weak commodity prices, the result is less availability of foreign exchange.

“In the primary market, flight to safety since the war in Russia and Ukraine was launched has caused an outflow of capital from the continent,” says Benjamin Boachie, chief economist at SecondSTAX, a Ghanaian securities trading platform.

The current inflationary trend across the continent is also adding to “a generally difficult macroeconomic backdrop” for African countries, he says. Many African sovereigns already have “dollar denominated debt laden balance sheets” that are “weighed down by their past forays into the eurobond” arena.

Gabon, an OPEC member country with $2 billion worth of outstanding Eurobonds, just suffered a coup. Foreign exchange shortages have also been worrisome in Egypt, Nigeria, and Kenya.

Debt pressures have spiked for Kenya since 2022, given that it has six eurobonds outstanding worth US$7.1 billion, according to the Economist Intelligence Unit. Analysts at the EIU reckon Kenya “will face a potential crunch point in June 2024,” when a 10-year eurobond worth $2 billion comes due, “unless a yield retreat allows for refinancing.”

On the other side of the continent, Ghana failed to settle principal and interest payments on a further eight US dollar-denominated eurobonds after announcing a default on its international foreign currency obligations last December.

The government of Cameroon, rattled by insecurity in some regions, made late payments in 2022 on some long-term foreign-currency commercial debt instruments. S&P Global Ratings pronounced this a “selective default,” although it was followed by a series of restructurings with the state’s creditors.

It’s not just African sovereign debt that accrued an overhang of foreign currency debt in recent years. African banks, according to a recent Moody’s report, have also taken on foreign currency loans from multilateral development banks and now face challenges repaying.

Moody’s cited banks in Kenya, Nigeria, South Africa, Egypt, and Ghana as having benefited from facilities that allow them to on-lend to other parties such as other companies and commercial ventures for economic development ventures. Under normal circumstances, this form of lending can typically qualify as tier 2 capital and is more attractively priced than other market funding sources, but is now viewed by international investors as possibly problematic.

“Aggressive rate hikes in developed economies, as well as the spillover effects of the Russia-Ukraine war on emerging economies means investors are shunning riskier assets and seeking attractive yields in more mature markets,” Moody’s says. “Very few African sovereigns, including Angola, Egypt, Nigeria, Morocco (Ba1 stable), and South Africa have issued eurobonds in the last 18 months”

Over the course of last year, sovereign yields spiked by more than 650 basis points for African countries and by about 400 for Latin American states. This has effectively excluded the African continent from international capital markets, a situation that is likely to continue throughout the current year and beyond.

The eurobond squeeze is forcing African sovereigns to switch their attention to local sources of capital through local-currency treasury bills.

 In July, Zambia secured a $189 million extended credit facility from the IMF, which had already approved a similar $3 billion deal for of Ghana, about $600 million of which had already been disbursed.

“The hunt for alternative forms long-term financing has brought some African governments to multilateral institutions like the IMF and the World Bank seeking concessional loans, as well as scaled-up lending from bilateral lenders, particularly China,” says Stanley Emmanuel, head of partnerships at Lagos-based credit solutions provider, Angala Fintech, along with “innovative financing methods like social impact bonds, green bonds, and diaspora bonds.”

Other economists argue that a better alternative for Africa would be to seek funding from Eastern countries such as China that do not demand difficult-to-implement structural adjustments that could prove to be. China has also been more inclined to grant relatively better debt restructuring terms as was the case with Zambia recently

In Western source markets for capital, mainly in the United States where the Federal Reserve’s credit-tightening policy since March of last year hiked rates from 0.1% to 5.25%, economic conditions have been tough, notes Rufus Kamau, market analyst at FXPesa, a Kenyan global broker.

The tighter conditions in the US have resulted in a strengthening of the “dollar against African currencies and increased their interest payments on debt,” says Kamau.

“This led to a dollar shortage, outflow of investors as their currencies depreciated, and further pressure to keep borrowing from the IMF and the World Bank,” Kamau adds.

Whether local lenders and multinationals can come close to duplicating the volume of lending that African governments and banks were once able to secure through the eurobond market, and on what terms, remains to be seen. However, Emmanuel says “it is important to keep in mind that the situation of drying up eurobonds could change rapidly, particularly given that the initial sell-off in African eurobonds was actually triggered not by any risk increase in Africa, but because investors were looking to reduce exposure,” following the Swiss and American bank failures, mainly in the first quarter.

Central Bank digital currencies are aimed at boosting financial inclusion. But Sim Tshabalala, CEO of Standard Bank, the continent’s biggest lender, has some concerns.

“The key question is whether the retail banking arm of the public sector is subject to the same kinds and levels of regulation” as its private sector competitors, Tshabalala said at the Standard Bank Africa Central Banking Conference in April. “If not, then calling it a CBDC rather than a state-owned retail bank does nothing to mitigate the risk and moral hazards that an unfairly regulated institution could introduce into the financial system.”

Wholesale CBDCs, on the other hand, have the potential to “simplify interbank clearing among institutions,” Tshabalala said. Use of wholesale CBDCs is restricted to financial institutions and for functions such as interbank transactions and settlements,” notes Benjamin Arunda, an independent Kenyan blockchain and CBDC adviser.

Retail CBDCs are nevertheless emerging as the preferred crypto currency for many African central banks; the IMF has conducted CBDC workshops in Africa covering issues posed by central bank-governed virtual digital assets. But adoption rates have been sluggish thus far. Nigeria’s eNaira was launched in 2021, although take-up has been slow, while the Central Bank of Kenya has put its CBDC on ice.

Other countries, including Zimbabwe and Ghana, have said they are working on CBDCs. In April, Zimbabwe  announced that it would introduce a gold-backed digital token aimed at fighting elevated inflation in the southern African country. Expanding upon physical bullion tokens that the Reserve Bank of Zimbabwe introduced last year, the new token is aimed at stemming value loss in the Zimdollar by providing an additional store of value at a time when holders of the local currency are chasing US dollars.

“Because the proposed digital currency is not tangible, the trust deficit that rests with the existing ZWD will likely follow a gold-backed digital token,” says Chiedza Madzima, head of Africa research at Fitch Solutions.

International investors, long jittery over debt default risks in the markets for African sovereigns and eurobonds, have started to return to the region’s long-term issuances, buoyed by attractive yields and stronger liquidity.

Global fund holders snapped up Egypt’s first Islamic bond issue in February; the sukuk offering was four times oversubscribed, at $6.1 billion against an initial booking of $1.5 billion. The same month, Morocco successfully floated two tranched bond offerings worth $2.5 billion.

Rufas Kamau, market analyst at FXPesa in Kenya, noted that enhanced liquidity following announcement of the US Bank Term Funding Program (BTFP) last month allows banks to borrow shorter-term money that was previously locked up in 10-year bonds.

“If the banks tried selling the bonds at high interest rates, they would have sold at a loss. Now they can borrow from BTFP, backed by bonds at par value,” Kamau says.

While the program has injected US-dollar liquidity into the markets, it is also expected to be inflationary in the near term. Nonetheless, “a losing dollar is very attractive for investing in” frontier and emerging-market bonds such as those issued by Egypt and Morocco, says Kamau. Investors are eying African sukuks as a haven from traditional international finance markets.  Moody’s assigned a (P)B3 rating to Egypt’s first sukuk issue. Its analysts voiced concern over the North African country’s “reduced external buffers and shock absorption capacity while the economy undergoes a structural change toward a more export- and private sector-led growth model under a flexible exchange rate” regime.

South African markets analyst Simon Brown notes that earlier defaults by Ghana and Zambia had cast some doubt on African debt markets. “Default’s never good,” he says. “Ghana had some very oversubscribed US-dollar bonds and that’s hurt them as their currency weakens.” On the other hand, he adds, “emerging markets yields such as in Egypt and Morocco will always be attractive for those with a mandate and happy with the extra risk, and this is attracting investors.”

African countries halted the issuance of dollar-denominated notes and Eurobonds due to tightening global financial conditions.

High-interest rates and yields have caused certain regional sovereigns to switch focus to domestic and multilateral borrowing.

Only three African countries—Angola, Nigeria and South Africa—issued Eurobonds since the start of the Russia-Ukraine war. And each country has deferred the issuance of foreign currency denominated notes since April. Other countries such as Kenya, which initially lined up a $1 billion issuance in June, are now making an about-face on dollar and euro issuances.

The average emerging-market (EM) dollar yield has surged to over 9%, rising 433bps this year, Tellimer chief economist Stuart Culverhouse explains, citing how EMs across Africa are finding current borrowing costs too prohibitive. “There has been very little private investment due to the external environment. Instead, African sovereign borrowers turned more to official sector creditors in response (including multilaterals and/or bilaterals), domestic borrowing, policy tightening, or in some cases restructuring,” Culverhouse says. There were no foreign-denominated long-term paper issuances for African countries during the third quarter.

Nigeria and Kenya are struggling to prop up their currencies against a stronger US dollar. Ghana has also been hard-hit, given the surging yields on its Eurobonds and massive sell-off of its cedi currency. “African countries have stopped issuing international bonds because bond yields have soared since the start of the Russia-Ukraine war,” Fitch Solutions senior analyst Gianmarco Capati says. “Unfavourable market conditions for emerging markets will keep African governments reluctant to issue new Eurobond debt until the second half of 2023 or 2024.”

A strong dollar is inflating foreign-currency debt payments, Capati explains, reducing appetite for new foreign-currency debt. It is also “reflective of capital flows out of emerging markets,” he adds, thereby raising borrowing costs for African nations.

The IMF has approved financial programs for Zambia, Tanzania, Mozambique and Benin. Ghana is also negotiating a new IMF lending facility while Egypt presses for a similar bailout.

Duplo, a Nigeria-based business-to-business payment platform, recently raised $4.3 million in seed funding. The effort was so successful that venture capitalists offered the startup more money than it asked for, according to co-founder and CEO Yele Oyekola. In fact, the company “had to turn down” some investors because it was oversubscribed.

“This new funding will enable us to address bottlenecks that hinder the seamless flow of money in other sectors, and to further transform how they make and receive business payments,” says Oyekola. “If you’re solving a big problem in a big market, with a good team that delivers tangible results, investors will always be happy to take a look at what you are doing.”

Lately, investment firms are certainly happy to look at Africa-based companies—especially those that specialize in fintech.

One of those firms is Oui Capital, which—alongside Liquid2 Ventures, Soma Capital, Tribe Capital, Commerce Ventures, Basecamp Fund and Y Combinator—invested in Duplo.

“Africa has come of age,” says Peter Oriaifo, principal at Oui Capital. In August, the Lagos- and Massachusetts-based firm completed the closing of a $30 million fund, its second, dedicated to African tech ventures.

There are “key catalysts working” to Africa’s benefit, Oriaifo says, citing “falling data costs” and improved internet access. Internet use in Africa grew 23% between 2019 and 2021.

There’s also the Africa Continental Free Trade Agreement (AfCFTA), which has supercharged Africa intraregional trade and e-commerce. This makes it even more imperative for cross-border payments within the continent to be faster, mobile and digital, he explains.

Fintech is also helping make financial services more accessible to Africa’s growing population, which is expected to double to 2.5 billion people by 2050. Countries such as Nigeria will see its population grow from the current 200 million to 400 million.

Similar growth trajectories have been projected for the continent’s other highly populated nations, such as Ethiopia and Kenya, whose economies have also been hubs of investment for tech. Ethiopia just approved a policy that allows foreign banks to do business in the country—a major boost to the fintech sector.

Indeed, the landscape is ripe for deal-making. In 2021, a total of $4 billion in venture capital was channeled into African tech startups.

Advisory firm McKinsey says the number of tech startups operating across Africa surged to 5,200 in 2021. Nearly half of these startups were in fintech.

The trend continued in 2022. Start-up funding for companies in the region reached $3.6 billion for the eight-month period of January to August, according to Africa: The Big Deal, a database that tracks venture activity across the continent. That “compares really well to the same period in 2021,” which recorded $2.3 billion.

Also, the number of $100,000-plus deals increased from 486 last year to 608 this year, the report continued.

Rather than a “fintech disruption,” Africa is currently experiencing a “fintech eruption,” one expert from McKinsey said, adding: “Local and international investors [are] taking notice—African fintech is emerging as a hotbed” for deals.

With just about 456 million adults in Africa projected to have bank accounts by the end of this year, it is up to local fintech players to introduce solutions that boost financial inclusion through mobile apps, digital wallets and online payments.

Fintech startups have become so important for Africa that they now have combined revenue of up to $6 billion, McKinsey reported. The overall value of the sector is expected to reach $230 billion by 2025. Such robust flows of financing have been pivotal for a number of African countries, including Nigeria, which continues to attract the highest volume of financing.

Other top destinations for global tech venture financing include Egypt, Kenya and South Africa. These African markets make up a third of Africa’s startup incubators and accelerators and get as much as 80% of the foreign direct investment (FDI) that flows into Africa’s tech industry, according to African Development Bank’s (AfDB) 2021 report. Tanzania, Uganda, Senegal, Kenya, Zambia and Morocco are also garnering interest.

The continued attractiveness of African startups for venture capital can also be attributed to “increasing investor appetite for riskier opportunities spread over the past five years,” says a Nairobi, Kenya–based investment associate.

Fintech startups that ran successful fundraising include Egypt’s Fawry, Senegal’s Wave Mobile Money and Nigeria’s Flutterwave, which is now pursuing an initial public offering.

Beyond Fintech

Even though fintechs are getting the lion’s share of the continent’s venture capital, other sectors—e-commerce, mobility, e-health and logistics—also appeal to global investors, so long as there’s stability and growth prospects in the markets where they invest. This helps them determine the prospects of success for the African ventures they choose to fund.

African startups “operating in stable regions that can demonstrate good market traction and strong growth, along with good fundamental operating metrics, continue to attract interest from investors,” Spike Ventures managing partner Todd McIntyre says.

Spike Ventures has contributed to a $30 million capital raise by Algeria-based Yassir, which targets French-speaking African markets with an app that provides on-demand services such as ride-sharing. 

For McIntyre, it is a case of ticking the “important checkpoints” in pursuit of proper due diligence when deciding which startup to invest in. It is also important to include a lead investor with in-region experience and to determine the “CEO quality and experience in-region,” McIntyre says.

Spike, for its part, peruses the “team composition, revenue and customer acquisition metrics, as well as overall size” of the addressable market for each solution, he explains.“African startups are often addressing some of the primary needs of consumers, like mobile banking, ride-share and food delivery,” he says.

Interest and appetite to invest in African tech, however, mirrors global trends, where rising interest rates, inflation and supply chain disruptions are also impacting investment flows. As a result, the pace of deals has somewhat slowed in recent months compared to 2021. African tech startups raised $247 million in July and $228 million in August. That’s down from 2021, when tech startups raised $309 million in July, $683 million in August, and $824 million in September.

“Growth-stage investors are grappling with repricing in the public market for technology stocks,” Oriaifo says. Public markets “are the ultimate buyer for startups, hence this pricing comes into focus” for growth-stage venture capitalists, he says. “Unsurprisingly, we’ve seen growth-stage VCs move down-market in recent months, displaying interest in seed-stage deals, likely in an attempt to achieve better entry valuations.”

McIntyre and other executives with Africa-focused VCs agree. “Investors are being more cautious across the board and conducting greater due diligence” whenever they see an opportunity, he notes.

For Dare Okoudjou, founder and CEO of Johannesburg-based MFS Africa, “The global macro issues haven’t changed the fundamental issues that fintechs, like MFS Africa, are trying to solve” across the continent.

MFS Africa, which operates a digital payments hub, received one of the biggest VC checks for an African company. After securing $100 million in August, MFS Africa extended its Series C capital raise to $200 million and plans to use the fresh capital to invest in other African startups.

This has boosted its offerings, as it forays into debit and credit cards linked to mobile money accounts, rather than bank accounts. The switch operated by MFS Africa interlinks about 400 mobile money platforms from Zimbabwe, Kenya, Nigeria, Ghana, Tanzania and the Democratic Republic of Congo, among other African countries. This allows for speedy settlement of cross-border payments, including remittances and business-to-business transactions, via mobile money and digital platforms.

Okoudjou believes that the market opportunity for these types of businesses is still massive, emphasizing that “companies solving big problems should be able to continue to raise money” from global investors.

“The second half of this year will be telling, but the first half of 2022 saw venture funding increase by 125% over the first half of 2021, indicating that cash for the right African tech businesses is still out there,” he adds. “That said, the macro climate will cause investors to rightly be more focused on valuations and path to profitability.”