This will be long but bear with me and you will see that there is a reason. I am more familar with Uganda so I will use that as a case study. But the effects shouldn’t be that different all over much of Africa.
I had a discussion about this subject on one of my recent cyber travels. One friend told me that a Ugandan banking personnel had said in a throwaway that the credit crunch wouldn’t affect her bank because whenever they lent money for mortgages, they took a 50% stake so that the bank’s stake diminished as the mortgage was paid down. More on this later.
I think the credit crunch will come to Uganda as surely as night follows day even though it may not be as severe as it is right now in the eye of the storm (America and Europe).
Any companies that rely on foreign aid, borrow or trade money on the international money markets will feel it in the pocket or psychologically when credit lines dry up, portfolios shrink and when loan negotiations start to take weeks instead of a faxed request and/or a phone call.
Take Zain for instance. It is HQ’d in the Middle East which is already feeling the downturn because of the drop in oil revenues. Oil countries budgeted for 2009 at $100 a barrel but it is now trading around $40 and demand is static if not falling. Building projects have stalled, expatriates are literally running away from accumulated debt and Dubai (for instance) has lost its international allure. A company like Zain likely finances a lot of its ‘satellite’ projects from Dubai. Once the easy credit dries up, Zain Intl will ask Zain Uganda to tighten on the perks, to justify all advertizing and marketing and to fund ‘customer appreciation promotions’ in-house. Zain Intl. should likely sneeze in 2009 if it is not sneezing already and obviously Zain Uganda will feel the cold in due course.
That is on the tangible hard dollars side.
Then here is the intangible FEAR factor. As Barack Obama is learning, there is nothing even the president of the USA can do about people’s psyche. Right now, the feeling is that the global economy is still sinking like a lead balloon and everyone is hankering down in fear that their job might be next. People are simply not spending money as freely as they did just seven months ago. American banks are being urged to lend, but they are reluctant because it is runaway lending that brought them to their knees in the first place. In any case, they cannot find suitable borrowers since everyone is scared of finding themselves out of a job with all this debt hanging around their necks. Prices in the US have been slashed so precipitously in some cases that we are looking at a fully fledged depression. Loan rates have been reduced to 1% but Americans are instead … saving. In reality they are putting money aside in expectation that they are going to be laid off next. The fear of job losses in this country is palpable.
How will this affect Uganda?
NGOs will not renew expats’ contracts for fear that they might lose funding from corporate and government agencies that are cutting back. Or they will cut back their projects and thus their international and local staffing. My prediction is that some key expats’ contracts will not be renewed in June when they expire and their positions will not be filled. The Nkuba Kyeeyos’ (nationals living abroad) disbursements to Uganda (at $480m in 2007/2008, the biggest earner of no-strings foreign money for Uganda) will be drastically reduced as the Nkuba Kyeeyos lose their jobs or tighten the purse strings in fear of losing them. Suddenly, John Blue Collar’s school fees obligations will shoot up in April because the Kyeeyo relative who has been helping out is out of a job in the US. The progress on the house construction will stall. And John Blue Collar will talk about it. Even if the disbursements reduce by just $60m in 2009 that is a lot of Blue Collars talking about tough times and meaning it. The ensuing fear will drive anyone listening into the bunker.
You recall our throwaway banker who thinks that her job is insulated because of that 50/50 split she talked about? Once Zain Intl. puts the squeeze on Zain Uganda, jobs will be lost in some sections at Zain (less need for sales staff, PR assistants, marketing clerks etc) to balance the books. And once that happens, fear will spread in the middle ranks because they will realize that they are likely next. And once fear sets in, the banks themselves will be the ones to look more critically at lending because word will reach them about the cull at Zain. Zain employees with loans will likely see their interest rates raised as banks cover themselves (in Uganda they can do this willy-nilly) for tough times to come. Now, imagine 100 John Blue Collars with loans at X bank. Overnight their interest payments will go up 3% even as the Kyeeyos who used to help out with the children’s fees cut back and Zain also battens down the hatches by letting staff go or announcing a hiring freeze. Again, word goes out that banks have toughened, Zain employees will gossip about the state of things at Zain and Orange Uganda (if Orange France doesn’t pull the plug before then) will be preparing to add to yet more competition in the market, ensuring reduced market share and lower bottom lines at Zain in the foreseeable future. Fear will do the rest.
What might insulate that banker’s job for a while is the fact that Uganda has a substantial informal market, with office professionals doing all sorts of things on the side to augment their salaries. So, loss of a job is drastic, yes, but Ugandans are resourceful and usually have other things to carry them over when times are tough and so will likely not default on loans as quickly as happens when jobs are lost in the West. But remember, too, that Ugandan banks are saddled with a lot of salary loans that, from my experience, were often accorded without enough vigilance.
Officially, inflation in Uganda is running at about 14% (I think it might be even higher) due to stubbornly and mystifyingly high fuel prices. Inflation eats into consumers’ income directly. Umeme is toying with yet more exorbitant electricity tariff increases, likely because the places it borrows financing on the international markets (Umeme is owned by Globeleq CDC which relies on Standard Chartered Bank as its inter-creditor agent) have turned the screws and it is not raising enough revenue locally to plug the holes caused by shortfalls in local revenue. School fees have been raised astronomically to keep pace with domestic price rises and will likely be raised again midyear. At some point something has to give and usually it is the loan repayment that an individual will look at. Companies usually look at jobs first when they want to keep pace with their own overhead increases so those afraid for their jobs are quite justified.
But it is also true that many Ugandans have borrowed heavily to build homes rental properties and buy plots of land on which they hope to build. A domestic domicile is dud capital in Uganda because once they move into their homes, Ugandans rarely move again. Also, hardly anyone ever sells their home so there is usually no equity in it once you move in – you cannot for instance re-mortgage on the basis that the value has gone up because it is notoriously difficult to establish the true worth of a self-built house that people live in in an unplanned neighborhood. Also, people usually don’t want to live in a house already lived in by someone else (personal taste issues mostly) so unless they are ready to raze the house and start over, they will go for an empty plot and start from scratch. And if it is a house bought from under a family that has failed to meet loan repayments, the stigma attached to owning such a house will put off most Ugandans.
This means that technically most homes in Uganda have no financial worth to the lender and so that 50/50 split is more theoretical than real. The exceptions are homes in tony neighborhoods like Kololo, Bugolobi and Mbuya where one can ask for almost any price and get it. Rental properties suffer from the same vagaries of a tight economy and anecdotal evidence suggests Uganda seems to have had a glut of rental housing (mostly financed with borrowed money) at least in June 2008 when real rental rates were falling rather than rising in real terms. When I moved to Kiwatule, a mid to up-market Kampala suburb, in early 2007, a two bedroom rental in that area was going for about 500,000/= ($300 at the time) a month. When I left in mid 2008, rents were static but renters were moving to cheaper accommodations that had been completed in the general area. But lending rates had risen about 2% on existing loans. There must therefore be a lot of landlords out there choking on debt even if their rental properties are fully rented.
Land is the better gauge of worth, and it appreciates, yes, because Ugandans seem to want land more than a plot with a house on it. But the fear that the financial crunch was spreading to Uganda should ensure that unless borrowers put down a lot of money upfront, banks will be more stringent when lending money to finance land purchases. So, our smug banker’s bank will find itself with all this money sitting there not making more money because borrowers will have been hit by the twin fears of raised interest rates and the tighter job market made worse by whispers of employees being laid off as well as reduced lending by banks which are trying to forestall red ink. God help our banker if she is a loans officer and lending craters – as it should if it hasn’t already.
Banks like Barclays with international exposure are likely already using the experience of their parent companies to tighten systems in their satellite operations and I bet you that borrowing money from Barclays Bank Kampala Road today is like pulling teeth compared to what it was like same time last year. One could go on.
What should companies do?
Look carefully at your budget and reduce or get rid of any expenses that you can; cut out the entertainment junkets or host some of them in the CEO’s garden (much cheaper than Kampala Serena or Bulago Island), Kati Kati or the office foyer; undertake essential training in-house or hire local companies rather than bringing in needlessly expensive ‘experts’ from abroad; put a moratorium on travel overseas for things such as conferences and seminars; conference-call rather than fly to meetings; keep an eye on payroll especially items that can spring up on you such as overtime; monitor utilities (phone, electricity, water); actively question fuel consumption and unscheduled repair/maintenance expenses; push work to the current workforce rather than hiring new people. Make contingent plans for unpaid lunch breaks and/or fallow days; consider unpaid flexi-time; “stagger” employees’ schedules rather than stick to a strict 8-5 schedule that doesn’t meet productivity goals; put your top and middle managers on notice that they might have to roll up their sleeves and do frontline work (and have the junior staff give them refresher courses to prepare them) such as answer the phone and man the reception desk during slow days.
Last but not least, have your HR department offer help to employees struggling with bank debt. For instance they can help smoothen the way for them to negotiate lower interest rates or more flexible repayment terms. HR departments in much of Uganda tend to be glorified office messengers passing down instructions from the bosses, some of whom are thousands of miles away, or signing hiring and firing letters. But there is so much more they can do to help employees not slip off the edge when times are tough. Imagine the HR manager at the mighty MTN calling the loans manager at whatever bank (in confidence of course) on behalf of 200 employees to ask that he/she should try to be flexible in case they come to ask that their repayments be stretched out a little longer because, yes, their hours have been reduced. Wouldn’t she have more clout than an individual employee making that SOS call cold turkey? Now, if she can do that on their behalf, why would staff lose morale if she has to put them on a four-day working week due to the credit crunch?
Thereafter there is only one thing for companies to do: pray that the credit-crunch winds blow lightly or that they change direction at the border and head off somewhere else.
1. “No need to panic,” Museveni assures Ugandans
2. Central Bank reassures on credit crunch
3. Africa for worst credit slump – IMF
4. Credit Crisis will affect Uganda – Mutebile