Africa Calls For Wartime Financial Strategies Amidst Current War Entanglements
The world is at war. Bullet shells don't have to land in my backyard for me to see it. And if you haven't seen it yet, open your eyes. The United States and Company are directly or indirectly entangled in, at least, three major wars on three different global focal points. The Russia and Ukraine war has now proven to be very sticky. In fact, stickier than even the nations directly engaged in it ever thought it would turn out. Israel is hammering Gaza in pursuit of Hamas, a war that may spill over into the rest of the region at any time, while the Houthis have terrorized the ships in the Red Sea for several weeks now and there is no telling how this will turn out. In all these wars, the U.S. and its allies — especially European countries — are openly at war, either directly or unapologetically indirectly.
For Africa, although there are several internal political and insurgent conflicts in a few countries, there is currently not an open war between one country against another that I can pinpoint at this time. Nations are trading with each other on the continent and participating in global trades amid the above-described wartime. Infrastructure projects are being put up as planned, and demand for capital and energy is as high as ever for both governments and private enterprises.
As a former global macro trader and arbitrageur, I want to outline three areas which, if well played, could position Africa's government trade strategists, financiers, and entrepreneurs to at least not fall victim to credit and energy cost eventualities; if not reap the benefits of it. Below are three key areas to be considered, and what strategies, I believe, should be appropriately considered. In fact, it is fairly irresponsible not to, at least, think about them seriously.
Interest rates hedge
Wars are very expensive to finance. They require raising more capital than what would normally be needed to fuel the economies of fighting nations or re-allocating existing capital earmarked for other projects. This alone results in a considerable increase in demand in the credit market and can significantly affect the global money supply.
As expensive as financing wars are, however, rebuilding after them is even more costly and requires even more capital commitment in the market where the rebuilding nation operates. With the current interconnected global financial dynamics, especially in markets like credit markets, a significant increase in the demand for long-term capital can quickly lead to a scarcity in the money supply. As a result, obtaining credit, particularly for long-term financing commitments, would become very expensive.
How can African nations and private enterprises position themselves to avoid long-term capital costs and take advantage of such opportunities? They will have to employ interest hedge strategies in their intermediate to long-term financing mechanisms. By doing so, they can protect themselves from becoming victims of the inevitably expensive credit market. They achieve this by locking in long-term interest rates and securing cost-effective financing commitments today. This strategy is commonly used by private equity firms, hedge funds, and some major non-profit foundations.
By pre-emptively locking in long-term rates to hedge against high-interest rates, they position themselves to finance their own projects cost-effectively. Additionally, they can offer capital at future higher rates if they have excess capital. This strategy follows the classic principle of buying low and selling high. Alternatively, if future rates drastically fall either due to a responsive increase in the money supply or the outcome that post-war rebuilding turns out to be less expensive than initially anticipated, there could be opportunities to refinance their existing credit at lower rates and retire the ones they had committed to. Either way, it is a sensible approach.
Energy prices hedge
Do you think post-war rebuilding efforts require a huge capital? If so, the need for energy—especially oil and natural gas—and certain commodities is even more pertinent during this period. And any forward-looking strategist should seriously consider entering into intermediate to long-term futures and forward energy contracts today. It’s almost imperative to do so, and again, utterly irresponsible not to.
In fact, many African airlines and major manufacturing enterprises already engage in this practice on a quarterly or annual basis. I am aware of this because your writer has provided consultations to some of them in the past. With this hedge strategy, governments and private enterprises establish forward or futures agreements with some of the largest global energy and commodity suppliers. These agreements ensure a continuous supply of a fixed amount of goods at a predetermined fixed price, regardless of future energy and commodity price fluctuations. The duration of these contracts can range from ninety days to several years for large operational enterprises.
This hedge allows airlines or major factories, for example, to know the fixed cost of energy for the foreseeable future. This enables strategic planning and cost control in their business operations. Considering that over forty per cent of airlines' operating costs are dedicated to fueling aeroplanes, it is a significant portion of the cost to be subjected to daily fluctuations in the commodities market. So airlines do this all the time.
This hedge strategy applies not only to energy and oil but also to other raw industrial and agricultural commodities that are prone to price fluctuations or are affected by unpredictable natural events (acts of God), such as metals, coffee, wheat, frozen orange juice, and yes, even pork bellies! China, as the world's largest consumer and hoarder of pork bellies, can certainly benefit from a fixed price for pork in the future. Just imagine the people who locked in long-term forward contracts on wheat right before the Russia-Ukraine war and the subsequent wheat shortage crisis. They must be reaping the rewards now, although it is a sobering reality considering the innocent lives lost in the war.
Contract arbitrage
This is my favourite as an avid arbitrageur myself. For those who are not familiar with arbitrage, it is, in my opinion, the most interesting trading strategy that Wall Street speculators have discovered. Arbitrage involves identifying pricing inefficiencies in a security or commodity that is traded at different prices across different markets. By taking advantage of these pricing discrepancies, one can capitalize on the failure of these markets to accurately price the security. For example, if the shares of TotalEnergies trade both on France's Bourse and the New York Stock Exchange at the same time, an arbitrageur can identify that the shares of TotalEnergies are trading at different prices on both exchanges at the same time, either due to exchange rates or market pricing inefficiency. With arbitrage, the trader would then buy low at one exchange while simultaneously selling high at another exchange. This would offset both trades (buy or sell) and leave the trader with a net profit from the price spread. The trader would keep doing this until the price of the stock on both exchanges evens out. Arbitrageurs have been touted to promote market efficiencies by finding pricing failures and ultimately correcting them while profiting in the process. This works very often in credit markets, forex, commodities, and obviously in equities or stocks.
Moreover, there is such a thing as contract arbitrage in the consulting and supply chain businesses. With this strategy, one enters (buy or sell) into a contract to supply or receive specific goods and services at a fixed price into the future in one market and sells a similar contract to provide similar services in a different market during the same period. The arbitrageur then charges different prices for exactly the same service rendered while pocketing the difference. For example, one would enter into a contract with an engineer to develop an IT solution in one market and sell the same exact IT solution by the same engineer into a market where such a solution would command a higher price tag. The engineer would then just have to deliver the service elsewhere as long as the contract stipulation permits such delivery flexibility. It is an efficient way to reallocate skills and talents in markets where they are needed and get paid handsomely while at it.
Is the juice worth the squeeze?
As simple as all the above strategies sound, they require specific skillsets and time to sift through market data, global financial dynamics, energy prices, and the perceived direction of interest rates in the near term and the foreseeable future, among other market analytics. All of these are great efforts and require capital to compensate people who can execute such strategies and see them through. But for those who will succeed, the payoff is worth it. Now, ask yourself, is the effort worth the reward, or should you just improvise, pay as you go, and maybe face consequences for it?
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