Hope for the best, but prepare for the worst — Lionesses of Africa

by Lionesses of Africa Operations Department

No one can be in any doubt now about the impact the Russian attack on Ukraine and subsequent horrific war is having on our day-to-day lives. Two countries that provide a huge amount of the world’s basic staples such as wheat, sunflower oil and many other food essentials, at war, was always going to be felt in our weekly shop, no more so than in Africa given its massive imports of those basics. Many in the West have never experienced inflation of this kind, although for our Lionesses in Zimbabwe, there is still a long way to go as they sadly know only too well. The battle scars gained through having to cram Trillion Zim$ notes into their pockets and then fight their way to the front of the queues at the shops will never go away…

We wrote last month about the dangers of Stagflation heading our way (here), which is a horrible state of affairs where economic growth drops along with company earnings, which in turn creates ever increasing unemployment as businesses go bust, whilst prices continue higher and higher, truly the ‘perfect economic storm’. With many Central Banks having a mandate to control prices, even if it is control prices with a secondary view on business conditions, so interest rates are sent higher in a vain attempt to stop the rising prices, yet all this seems to do is send more companies to the wall. Horrible. This is because there is a difference between demand stoked inflation called ‘demand-pull’ and supply driven ‘cost-push’ inflation.

‘Demand-pull’ inflation is attacked in the normal fashion, raise interest rates and taxes to rein in spending and therefore lower prices. ‘Cost-push’ inflation is tougher. This involves policies to increase supply – supply during a time when our supply chains are broken or croaking under the strain, Covid is still shutting down factories (more of that later) and a war plus closure or blockade of all the major Ukrainian ports is suffocating supply of such essentials as wheat, barley, sunflower oil and so on (and let’s not forget fertiliser). One major example of cost-push inflation was the oil crisis of the 1970s. The price of oil was increased by OPEC countries, while demand remained the same. To counter this one still increases interest rates, but at the same time one has to release the tension on businesses by lowering taxes…and yet still one can easily fail (economics being an art not a science being an ongoing debate, but we know which side we fall on), not least because supply shocks often force panic buying, so demand does not remain the same – then are you fighting ‘demand-pull’ or ‘cost-push’ or both? This is why many are now talking about the dreaded Stagflation.

Interestingly, the honorary Lioness Christine Lagarde (surely an honorary Lioness!), Head of the European Central Bank, in her recent decision kept interest rates negative whilst stating that whilst she was worried about inflation. She was also concerned how the war was going to impact the EU Countries, showing her recognition that a recession was a serious possibility.

Thankfully Stagflation is very rare, although since our article more and more commentators are now talking about it as a serious possibility – who knew so many across the globe read the Lioness Weekender! (“Nice try!” – Ed) But the fact is we have to be aware of the markets so that we stay one step ahead of any dangers rushing towards us, especially in times such as these with huge volatility (political, economic, socioeconomic, and of course least we forget – Climate Change), so that we keep our businesses safe and secure, our employees in employment and our customers well stocked – all the usual run of the mill issues we have to content with as business leaders.

So where are we currently?

Certainly we can put a heavy tick the Inflation box. Prices are rushing higher in the West and with Africa being a net importer of grains from Russia and Ukraine, likewise. Indeed according to Statista (here), of the top 8 importers of Russian and Ukrainian Wheat, 7 of these are in Africa (in order: Somalia, Benin, Egypt, Sudan, DRC, Senegal and Tanzania), yet Kenya which is not even mentioned in this list, imports over US$100mil per annum, so if you add in the petrol price increases that have just started to hit, there is no surprise that inflation in that country, along with the above 7 and many others started to turn and head higher. As our friends in Zimbabwe will confirm, once the Inflation Genie is out of the bottle it picks up speed fast…

But within our businesses, where do we have to be careful? 

The last thing we need is to be forced to stop production. This means we have to take a careful look at our basic needs, the raw materials we use to both feed and power our business. Thankfully, as far as powering our business is concerned, more and more Lionesses have taken themselves off-grid by investing in Solar, as electricity is usually a large cost, as we all know power shortages and blackouts are sadly a hefty business cost for so many of us. Underinvestment and sadly in many countries theft and fraud by government officials and Ministers over the years has destroyed so much infrastructure in many of our countries.

Infrastructure failures are exacerbated by flooding – drains are clogged, foundations of building and roads are soft and so you see the tragic results as seen this week in the Durban area of South Africa with hundreds dead. With such flooding and collapse of infrastructure such as major roads in Durban and around Richard’s Bay, a major trade hub into southern Africa, means yet again delays. Delays mean costs mount and potentially production stops. It does not matter if you are a Lioness with a huge factory and production line with a thousand employees or a small business Lioness with three employees, production stoppages kill. Bills mount up and banks don’t listen. As we have so often written – it’s not losses that kill companies, but a lack of cash flow.

All of this however means we need to look to your raw materials – what are your current stocks? How many months production will that feed? Speak to your suppliers, check what they are seeing with regard to lead times?

For example, one area we have been watching and is one product that quickly starts to move once inflation moves in – is the humble label. If you are lucky, the label moves out of your business on the back of sold goods, if you are not so lucky, then constant price changes on the back of Inflation means using more and more labels as you scribble out the prices and increase!

Working on the basis that in business, when it starts to rain, it storms… there has been a strike in the Timber industry in Finland. In the same way that the supply chain collapse during Covid caused many a sleepless night in the UK (a company in Brazil supplies about a third of the hardwood pulp that goes into Toilet Paper. During Covid they were unable to find the necessary ‘break-bulk’ cargo vessels to supply the rest of the world, so there was almost panic in the UK that happens to be the world’s centre of panic buying Toilet Paper in any emergency), so too with Finland and Labels – they produce the ‘release papers’ – the backing material to labels that allows you to peal the label off. Finland is one of the globe’s largest suppliers and this strike which started on the 1st of January 2022 is now up to 100 days  with no end in sight!

Not only has this increased prices, but lead times have doubled – and this is the extra worry. It no longer just becomes a question of price once supply chains move out of quilter. Call your supplier of labels and they will laugh if you want them ‘yesterday’ in any large number. You might use a local supplier, but at some point all roads lead back to Finland (well most of them anyway). If you have specialized labels such as in the Food or Pharmaceutical Industries, you will be particularly exposed. Be warned.

As we have also warned often, Covid is not over and that is especially true with its impact on Trade. The last outpost of major-league lockdowns? China, with its ‘zero-Covid’ policy continues to shut down entire cities. Just so we put this in context, many cities in China are the same size as many countries. As the BBC say (here): “When disruptions take place in China, it is significant because about a third of the world’s entire manufacturing capacity is based in the country…when Shenzhen went into a six-day lockdown on Sunday after a massive surge in Covid cases, it sent shockwaves through the world’s businesses. The restrictions have since widened to other major cities and provinces like Shanghai, Jilin and Guangzhou. Factories had to suspend production, and cities turned into ghost towns.”

What a mess, but on top of that…we have to be concerned about political fallout as well. Such rising prices as we are seeing in basic staples has always created political chaos on the streets. The Arab Spring uprising was fed by the higher food prices seen across North Africa at that time. This is why in Egypt the government is extremely careful to keep the price of their basic bread fixed. “Under the existing program, more than 60 million Egyptians, or nearly two thirds of the population, get 5 loaves of round bread daily for 50 cents a month, little changed since countrywide “bread riots” prevented a price hike in the 1970s” (here) – this is in spite of the fact that wheat is imported (in US$), the price of wheat has been steadily rising (before exploding higher just recently) and to cap it all the currency has dropped constantly over the years vs the US$. This has resulted in the Government now subsidizing the price by at least 87%.

The Egyptian government is not alone in staring down the barrel of potential riots, political unrest and (sadly a knock on effect) xenophobic attacks as outsiders get blamed. Indeed South Africa once again is going down that route as are many other countries. As basic food prices rise, it is easy for some to deflect responsibility onto others who are unable to defend themselves. This will always affect businesses and as we saw in South Africa in 2019, xenophobic riots then often spread onto impact and attack all businesses – even if it is just your employees who become too frightened to come to work – it is still an unintended consequence.

We apologize for being so pessimistic, but it is important that we consider these issues. The USA now has an inverted yield curve (where longer dated bonds yield less than shorter dates ones). This means that the bond market believes that interest rate rises will dramatically now to slow the economy  but this will simply create a recession, so the central bank will have to turn and lower interest rates in the future to counter a severe drop in economic activity. One of the unintended consequences for this (that we are already seeing) is that investors take their money out of emerging markets and into the US$, thereby hitting local exchange rates, meaning we in Africa need to find more of our local currency to buy US$ for our imports. If we are exporting to a major currency country such as US, EU, UK etc then fabulous as we earn US$ etc, but if only importing – as we said earlier – what a mess.

Whilst we always hope for the best, we must and certainly at these times, prepare for the worst. So work hard on your debtors’ list, bring that cash in! Check you have ample supply of your ‘must have’ raw materials to keep your production turning, check if you are importing that you have a stock of US$, check the lead times for future supply and most importantly, check that your employees are safe, can make it into work and know that they can always talk to you about issues that might be affecting them. 

Now is the time for Lionesses to show strong leadership, their usual high levels of empathy and the foresight that whilst hoping for the best, we prepare for the worst.

Stay safe.