Source: Ephraim Modise/ Techcabal
With de-dollarisation a hot topic at the ongoing 15th BRICS Summit, how will the process, if effected, impact startups in South Africa?
BRICS leaders, including Cyril Ramaphosa of South Africa and Vladimir Putin of Russia, are outlining plans to reduce dependence on the US dollar at the 15th BRICS summit. In his speech on Wednesday, Ramaphosa stated that global payment systems, including the SWIFT system for international transfers, were continuously used in political differences and urged member countries to use local currencies to facilitate trade.
“We will continue discussions on practical measures to facilitate trade and investment flows through the increased use of local currencies. This is a matter we believe further discussions need to take place, particularly between our finance ministers,” Ramaphosa said.
Putin said that BRICS nations are already developing effective mechanisms for trade settlements, currency and financial control. The payment mechanism will revolve around local currencies and sideline the U.S. dollar for cross-border transactions. “We are working to fine-tune effective mechanisms for mutual settlements and monetary and financial control,” Putin said.
What does de-dollarisation mean for SA startups?
According to experts who spoke to TechCabal, the de-dollarisation proposal by BRICS leaders presents both opportunities and challenges for startups. On one hand, easier access to capital in regions moving away from the US dollar could attract domestic and regional investments. Tshepo Magagane, an investment banker, says that reduced dependence on the dollar could present an opportunity for local limited partners to play a more significant role in VC funds.
“Institutions such as the Public Investment Corporation in South Africa [would] need to play an increasingly important role in backing LPs looking to deploy capital locally. Local currency funding for local projects remove the headache of currency risk for all concerned, ” Magagane told TechCabal.
There has been an increasing participation of local LPs, especially institutional investors, in the South African VC market over the past year. In May, the SA SME Fund announced that it had secured the first close of its R1 billion (~$51 million) Venture Capital Fund of Funds (VC FoF) at R600 million (~$30 million) against an initial target of R500 million (~$25 million). For the first time, one of the LPs of the fund was a local pension fund, the Consolidated Retirement Fund, which contributed R250 million of the R600 million raised.
“A lot more institutional capital is likely to come into VC and we are also very proud that we were the first to convince a pension fund to allocate capital to a VC fund. We are expecting at least one more fund, if not more, to partake in the next raise of fundraising and we are very proud of that because it is a needed development in the growth of VC in South Africa,” Ketso Gordhan, CEO of SA SME Fund, told TechCabal.
Despite this potential advantage of de-dollarisation in boosting local investor participation, Magagane emphasised that the importance of the dollar to South Africa. “The EU,US and China are important trading partners for South Africa, so the country should always position their FX holding accordingly,” he added.
Without using the dollar, attracting international investments from dollar markets may be hindered by currency concerns. With the Rand having nosedived against the world’s leading currencies in the last ten years, dollar-denominated investors might be weary of cutting checks for the South Africa ecosystem. Despite the increase in participation by local LPs, international LPs, especially in dollar markets, still contribute a significant amount of capital to South African VC funds.
“The reason why the US capital is important, is that all savings across the world find their way into US capital markets given the liquidity, price discovery, optionality, and the extremely important idea of political security.Global companies will continue to [need to] tap into US capital pools just given how deep and varied they are,” Magagane added.”Investors are more focused on a stable currency, given that is what inserts the foreign exchange risk into their planning.”
Additionally, de-dollarisation could make cross-border transactions more complex, leading to higher transaction costs and operational challenges. This is important to note for South African startups whose expansion plans usually feature entrance into dollar-leaning markets. According to Will Green, founder of Co.lab, a holding company for collaborative ventures, stated that although this could be hedged by South African startups expanding to more BRICS markets, the reality is that there is not much activity by startups in those markets.
“There still isn’t much activity between the startups ecosystem of most of the BRICS nations mainly because of language and culture restrictions. Even in VC most funds in South Africa are either raised locally or in dollar markets. Until we get to a point where there is a significant amount of cross-activity between the ecosystems of these countries, in the case of de-dollarisation, it would be difficult for South African startups to scale beyond our borders,” Green told TechCabal.
To address these bottlenecks, Green believes there should be consolidated efforts between the member countries to assist startups setup their presence in these markets.
“BRIC nations can help fill the disparity in the VC market where at the moment, African VC activity accounts for only 1% of the global total. If I were to rank the countries by order of which South African and Africa would be most aligned with, it would be India, China, Brazil, Russia,” Green said.
With the good and the bad of de-dollarisation for South African startups established, beyond just speeches at the BRICS Summit, how likely is the process to happen in the next few years? Magagane believes that it is not very likely. “This is more of a political statement than an economic or a financial one. Countries should be focusing on local capital formation and they will have functioning economies,” he concluded.
