What Can SA and Nigeria Do To Grow Faster? @HoganLovells

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The heads of state of sub-Saharan Africa’s two biggest countries – Nigeria and South Africa – met earlier in October as part of continuing bilateral engagements aimed at strengthening and deepening cooperation between the two countries.

Pres. Muhammadu Buhari of Nigeria and pres. Cyril Ramaphosa noted “with great satisfaction the economic cooperation between the two Republics and welcomed the steps to increase trade volumes as well as private sector investments”, according to a joint statement.

The visit comes at a time when the two economic giants of the region are struggling.

Growth in sub-Saharan Africa remained slow through 2019, hampered by persistent uncertainty in the global economy and the slow pace of domestic reforms, and the recovery in Nigeria, South Africa, and Angola – the region’s three largest economies – has remained weak and is weighing on the region’s prospects.

This is according to Africa’s Pulse, the World Bank’s twice-yearly economic update for the region, which says that overall growth in sub-Saharan Africa is projected to rise to 2.6 percent in 2019 from 2.5 percent in 2018, which is 0.1 percentage points lower than the April forecast.

Andrew Skipper, partner and head of Africa at Hogan Lovells

Global uncertainty is taking a toll on growth, but in Nigeria, growth in the non-oil sector has been sluggish, while in Angola the oil sector remained weak. In South Africa, low investment sentiment is weighing on economic activity, according to the report. Economic growth in Nigeria and South Africa remains sluggish and has been lowered from the forecast in April.

To accelerate the pace of economic growth structural reform and policy certainty in both Nigeria and South Africa are needed.

Buhari and Ramaphosa reaffirmed their commitment to working together in pursuit of economic development on the continent in the context of AU Agenda 2063 and the African Continental Free Trade Area Agreement (AfCFTA).

Agenda 2063 is Africa’s blueprint for transforming Africa into the “global powerhouse of the future”.

The aspirations of the 2063 Agenda include “an integrated continent, politically united based on the ideals of Pan Africanism and the vision of Africa’s Renaissance”; and an Africa “of good governance, democracy, respect for human rights, justice and the rule of law”.

The impact of the AfCFTA Agreement is certainly potentially and theoretically huge for an “integrated” Africa and seeks in grand scale to unite 1.2 billion people, around 54 nations and a gross domestic product (GDP) of more than US$ 3.4 trillion under a single tariff-free continental market.

There is no doubt that it is critical, at a time when intra-African trade amounts to only 15% of the world’s GDP, as compared with 67% in Europe. The lack of scale of most independent countries on the continent inhibits growth (and especially the development of in-country industrial base), it is cheaper to get some ingredients from China than the next-door neighbour.

The AfCTCA has lofty ambitions to deal with these issues, especially to eliminate tariff and non-tariff barriers and increase intra-Africa trade to 50% by 2063.

Trade in Africa is one of the driving forces of integration on the continent and is crucially important for the economic development of the region and the establishment of the AfCFTA will support a further increase in intra-Africa trade.

Agenda 2063 also mentions “the Rule of Law”. The strength of the Rule of Law in a country ranks among the top three considerations when multinationals make decisions about where to locate foreign direct investment, which is crucial to economic growth. The consideration of the Rule of Law is above considerations such as the cost of doing business and access to national and regional markets, which is some of the findings of "Risk and Return: Foreign Direct Investment and the Rule of Law".

Hogan Lovells alongside the Bingham Centre for the Rule of Law and the Investment Treaty Forum at BICIL, the Economist Intelligence Unit and the British Institute of International Comparative Law published Risk and Return in 2015, based on a survey of over 300 senior decision-makers at Forbes 2000 companies with global annual revenues of at least US$1 billion.

Where investors experienced Rule of Law challenges – particularly political instability, arbitrary or discriminatory treatment, and intellectual property violations – it also revealed that they are liable to reduce or even withdraw investment. 

There are other challenges in the two economic giants of sub-Saharan Africa, but progress towards higher economic growth can be made by, amongst others, driving clear strategy and policy, putting predictable regulations in place, and controlling corruption.

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Digital Money Set to Disrupt The Banking Industry @HoganLovellsSA #eNotes

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Natoshi Nakamoto – the creator of bitcoin – had a vision for the new age of commerce and that vision is being realized at a rapid pace as with all financial services, people all around the world desire financial platforms that are convenient, safe, reliable and trustworthy. Cryptocurrency has been established to be detached from regulatory intervention, but it still does not satisfy those four requirements given its volatility in value. Digital money, on the other hand, has given this cushion of surety for its users. Uruguay, as an example, is at the forefront of integrating digital money into its payment systems.

What is the difference between cryptocurrency and digital money? Well, the simple answer is that digital money is regulated by a country's Central Bank and is formally accepted as legal tender, whereas cryptocurrency is decentralized and is not formally accepted as legal tender, making it optional for people to accept it. This means that a creditor is not under any obligation to accept a bitcoin tender as means to settle a debt.

Digital currency is a centralized solution that generates digital money that can be exchanged between users that own digital wallets. Quite simply instead of physical money and a physical wallet, users now have a digital form. The main attribute of digital money is that it will be pegged against the value of the currency of the country in which it is being utilized. Cryptocurrency, such as bitcoin, creates a separate commodity with its own value, which is influenced by a volatile means of economic principles such as supply and demand.

The technology that will support digital currency is through a system that generates "eNotes" for the Central Bank. The Central Bank will at all times have monitoring power over the circulation of the "eNotes". In addition, the Central Bank will also be in a position to adjust the volume of legal tender in circulation. Given this transparency, the use of digital legal tender will also help to provide an effective deterrence to illicit and fraudulent transactions. The reason for this is that electronically the Central Bank will be able to track at any time the flow of the "eNotes".

eNotes can be stored with commercial banks or Fintech companies that will account for eNotes transactions. eNotes will not be directly stored on mobile devices and thus presents the advantage that the end-user may always have a sense of security that should his mobile device be stolen or damaged, the digital wallet and the eNotes will not be stolen.

Digital currency would also be able to be used for both points of sale payments and remote payments. Digital money can also be interchanged with physical notes at ATMs or at a point of sale.

Digital money also has benefits for the state. The costs associated with printing money for the state will be significantly lowered than the costs involved in managing digital money.

The traditional form of legal tender in circulation means that retail banks are advanced funds from the Reserve Bank at a particular interest value. Retail banks then distribute the funds to the public through various payment systems that are responsible for clearing and settling payments. The retail banks then place their interest margin on the legal tender that is used by the public.

The digital currency system intends to reduce the burden of additional interest costs. eNotes can be directly provided to the public.

Where eNotes may be a disrupter for the banking industry, they pose an opportunity for the insurance industry, as an example. National Treasury, for instance, has prioritized a mass-based and sustainable transformation that will direct the financial sector work and generate wealth for all South Africans.

Access to financial services is a key driver towards achieving economic and social transformation. eNotes would enable all South Africans to save, borrow, insure and transact.

There is no requirement to have a bank account, but merely a phone that enables an eWallet. Now insurance premiums can be paid via the use of an eWallet unlocking the insurance industry to more South Africans.

 

Written By Christine Rodrigues, partner, and Craig de Bruyn, candidate attorney, at Hogan Lovells (South Africa)

 

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