Butterflies as they flutter across Washington, impact us all

by Lionesses of Africa Operations Department

It was mathematician and meteorologist Edward Norton Lorenz who noted when studying and modelling the creation of Tornados that minute changes in initial conditions created significantly different outcomes in storms many miles if not countries and continents away. He likened these minute changes to a seagull flapping its wings and this vibration change in the surrounding air being the tiny difference that set either the Tornado off, or changed its direction. Luckily for our poetic sensibilities, he was persuaded to ditch the Seagull and write about a Butterfly fluttering its wings instead, and so in a lecture he gave in December 1972 he used the expression: “a butterfly flapping its wings in Brazil can produce a tornado in Texas.”, and the rest (as they say) became history.

This is Chaos Theory, small unnoticed changes having a massive impact. In Edward’s case he made a mistake of putting a value of 0.506 in his model instead of entering the full 0.506127, and in the time it took him to make a cup of tea a completely different weather scenario appeared in his models for the next two months. That is a fraction of a fraction of a fraction difference and is all it takes. Next time you notice ‘unexpected consequences’ of certain past actions, you will now know they have a basis in Chaos Theory!

Given the current state of the world, we would probably wish for Butterfly wings rather than the huge Dragon sized wings of war, of inflation, of famine, drought and floods that day by day seem to bear down upon us. But if one goes back in history there is always one, and usually a very small event, that is the flutter that starts it all.

For us in business we have enough to worry about without thinking of a Butterfly (or a Dragon for that matter) on the other side of the globe, but as we have seen, these do impact us, and sadly in amongst all of the pain and suffering there is another flutter that is gathering speed and intensity that we have to be aware off.

Bill Clinton’s political adviser James Carville (and advisor to many others) has always said: "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

The Bond Market and to be precise, the US Bond Market, is what we are watching currently with wide open eyes. We don’t care about daily movements but instead the medium to longer trend, and that does not look good. There has been a consistent sell off this year that has moved interest rates higher and it is looking very stubborn, i.e. will remain higher for longer.

A recent Bloomberg article (here) confirmed our largest fears, entitled 'Worst US Bond Selloff Since 1787 Marks End of Free-Money Era’, it went onto state that “The biggest US banks are poised to write off more bad loans than they have since the early days of the pandemic. Higher-for-longer interest rates and lingering fears in some quarters of an economic downturn, despite data pointing the other way, are putting borrowers in a bind.”

In the last decade, the low interest rate environment we have grown accustomed to has been almost like a Dragon asleep for years and years. Believing it posed no danger we have crept closer and closer until safe in the belief that the Dragon posses no threat, we have walked, danced and sung in its shadow. This cheap money has sucked us all in and allowed us to be lax with structure and processes within our businesses as we could always borrow to expand, to employ, or even to continue to undercut our competition in our drive for turnover.

That party is now over, as Warren Buffet has famously said, “it’s only when the tide goes out that one sees who has been swimming naked.” Banks are now having to make the difficult choice whether to keep financing those businesses already in their portfolio, to continue to prop them up - to possibly (probably) throw ‘good money after bad’, in the hope that they might survive, or dump them, take the loss and support businesses with stronger balance sheets, structures and processes.

Many countries (including within Africa) that borrowed in US$ are now feeling serious pain. Yes, earlier this year they got hit overnight by higher US$ rates as the Fed raised rates to slow inflation (so their US$ repayments went through the roof) but at the time they will have thought that they could be able to weather the storm, that stop-gap measures in their spending plans and budgets might work, but now this higher interest rate environment is proving very sticky and the hurt and pain is becoming unbearable.

This impact we have already seen - just look at how difficult it is to find foreign currency to pay our foreign suppliers - the government needs it all to pay the interest demands! These huge extra costs mean that long term and essential investments in health, education and infrastructure that had been delayed will now be cancelled - as seen with recent cancellation of one part of the UK’s HS2 rail network that was supposed to bring essential jobs and investment to the generally poorer north. Cancelled! This is happening all over Africa as this Dragon of US interest Rates (the Bond Market) that woke earlier this year is now prancing about flexing its muscles and (yes) flapping its wings.

This fast filters down into the local currency interest rates we have to pay for our business loans, for our trade finance, and even receivable financing. All interest rates up, and as it looks now, for longer.

Higher interest rates in themselves are not such as problem if the economy is growing strongly. Indeed this is why central banks such as the US Fed raise rates, to slow the economy to cool inflation. Indeed for businesses with strong fundamentals, structure and processes (so they would have concentrated on profits rather than turnover, remember: "Turnover is for ‘Bling’. Profit is for ‘Ching’”), they can both weather the storm and take advantage of the pain of their competitors. But for those economies and businesses already on the back foot, with high debts, higher interest rates are killers. We can put our feet to the fire for a split second and as various governments and businesses hoped, ride it out, but now we are being asked to keep them there for longer. This is when countries turn to the IMF for a rescue and when businesses go bust in large numbers.

So where does that leave us? Thankfully Lionesses tend to bootstrap their way to success given the lack of access to financing (can’t believe that we are celebrating this - but if there is ever a time when we can - this is now!). As the EIB report states (here): “The distribution of loans is still notably skewed in favour of male borrowers. In lending to [SMEs], almost 70% of banks reported that less than 30% of their lending was to female borrowers…50% of banks cite a lack of acceptable collateral as a major constraint…” - Certainly from what we have seen across our membership, that number is in fact far lower than 30%, as: “…when they do have access, women typically face more stringent loan arrangements [higher interest rate or higher collateral] than men.” IMF.

“…women are more likely to be excluded from the formal financial sector in countries where there are gender discriminatory laws and norms, lower participation of women in the labor market, and high level of state-ownership in the banking sector…” AfDB. (‘High level of state-ownership’ is an issue? One would have thought given the heavy data on women building communities and employment, more state ownership should increase women’s finance…- Go Figure!)

“Legal restrictions or property requirements…Such [as] requirements for married women to obtain their husband’s signature to open a bank account, a provision in the laws of eight Sub-Saharan countries…in many instances, only male heads of households can receive formal credit…Women can also be affected by a husband’s adverse credit history and…be required to repay the debt or be denied credit…” World Bank.

Although possibly the 30% figure is helped from a boost from Microfinance institutions (MFIs) “[which] have targeted women, helping to shrink gender gaps in access to credit.” World Bank. The MFIs at least recognised the gap.

With that in mind larger banks should be knocking on our doors looking for businesses without large debt dragging them down (and in fairness, some are, although often hampered by their credit and risk committees). But if past experience is anything to go by, good money will be poured after bad; businesses that have previously been financed will be refinanced; non performing loan (NPL) ratios will continue to head higher; high collateral requirements will continue to ignore history (such as the lack of legal property ownership for women for many many years); oh and add AI that will dampen any flicker of a flame for women’s businesses by seeing that male businesses grow quicker (ignoring the steroid effect of finance - duh!), and Lionesses will continue to wonder what they have to do to get noticed.

Our advice to our over 1.7 million inspirational members? Continue doing what you are doing, continue ranking profit over turnover; continue respecting your cash flow; continue keeping debtors and the size of your warehouse under control; continue building your business through supporting and celebrating your communities (many of whom will of course be your customers as well); continue applying for finance if you need it (if you don’t ask you have zero chance!); continue finding solutions to local and worldwide problems; continue believing in the community that is yours, the Lionesses of Africa, and we shall continue banging on all the doors of finance complaining at the highest level of the craziness of ignoring such huge opportunities.

The latest butterfly? That flapped its wings around 60-65 years ago. Baby boomers in the States reached their 50’s at their peak roughly 10-15 years ago when typically their pension investments would flow into longer dates bonds (as bonds are bought so the price rises and long-term interest rates fall). This was at a time when rates were very low and so this buying kept the pressure on those already low rates. As these baby boomers reached their retirement age they started to cash out and you guessed it, sold their longer dated bonds (bonds drop in price/interest rates rise). Fine when rates are low, stable and calm as there is always someone else to buy the bonds being sold and so rates stayed low, but now? Now the Dragon has woken, rates are higher, investors are nervous and volatility is through the roof, they are selling into what is already a weak market (so keeping interest rates higher). The buyers (which include the smaller Generation X who are the next to reach their 50s) are far more nervous to buy bonds - as they say in the markets, far better to join a rally than to try to catch a falling piano (no wings there!), and so they sit on the sidelines.

This Butterfly will continue to be felt for far longer in all parts of the world but especially Africa. Be warned.

Stay safe.