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.
