H E A LT H W E A LT H C A R E E R

E M P L O Y E R R E A C T I O N I N A F R I C A T O C U R R E N C Y V O L AT I L I T Y A N D H I G H I N F L AT I O NA R T I C L E

2 E M P L O Y E R R E A C T I O N I N A F R I C A T O C U R R E N C Y V O L A T I L I T Y A N D H I G H I N F L A T I O N

Nobel Prize winner Milton Friedman wrote, “Inflation is always and everywhere a monetary phenomenon.”

When inflation is on the rise, an employer’s first reaction might be, “What increase should we provide to our employees? How is the market reacting? What are our peers considering?” This reaction, if we follow Milton’s research, will clearly compound the problem if the solution is monetary-based. Inflation can be triggered by currency volatility, and though currency volatility might seem like a new and rising phenomenon, it has been a concern for many years. Five well-known cases illustrate this phenomenon: the credit crisis of 1772, the Great Depression of 1929–1939, the OPEC oil price shock of 1973, the Asian financial crisis of 1997 and the global financial crisis of 2007–2008.

Although these examples took place in other parts of the world, our focus in this paper is on the African continent. Uncertainty is currently a global phenomenon, and one that leads to volatility. People make decisions and decisions are often made based on emotions — as the saying goes, “Emotion drives the market.”

In many European countries, the legacy practice was to set budgets based on cost inflation plus a few basis points . This practice was possibly driven by negotiated settlements and unions seeking to bargain for improvements to their members’ quality of living. In fairness, companies have always preferred to take a market view, but when the market practice is inflation plus a bit, they are following the legacy practice by default. If you typically follow this practice, what will your organisation’s response be when inflation hits 30%, 40%, 50%? Would you still align with the local inflation rate? In economic terms, we need to look at the supply and demand of skills in the market, which directly affects the cost of labour. Supply and demand in a specific market determines compensation in that market — not inflation, depreciation, devaluation or the cost of living.

This paper provides insight into the actions taken by organisations from different industries in several countries in Africa based on currency volatility and high inflation. These actions were based on internal decisions to react or to adopt a wait-and-see approach, which in essence is also a reaction. Our focus is on a selection of countries that experienced currency volatility and high inflation: Angola, Ghana, Kenya, Malawi, Mozambique, Nigeria, South Africa and Uganda.

Nobel Prize winner Milton Friedman wrote, “Inflation is always and everywhere a monetary phenomenon.”

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There is a difference between reacting and responding to risk: a reaction is typically a quick decision driven by emotions; a response, on the other hand, is a well-thought-through decision based on evidence and made calmly.

Inflation, devaluation and depreciation of a currency bring about uncertainty. Uncertainty affects many aspects of business and has a direct impact on productivity. All of this leads to currency volatility in a specific market, and that poses a risk to any organisation. Risk can be dealt with in various ways:

Accepting risk is an option, but when organisations have limited control over that risk, mere acceptance might not be the best decision.

Monitoring risk by gathering information on market reaction is another option, but may expose organisations to another risk: an inability to meet the market reaction due to operational or financial implications.

Transferring risk would typically mean stating, calculating and paying salaries in hard currency. However, this option may not be legally possible in all countries and, once again, organisations may open themselves up to the risk of the volatile exchange rate.

Mitigating risk does not remove it, but acknowledging the risk and defining the approach to be taken if a specific set of parameters is met could be wise. Defining a framework to mitigate currency volatility provides some certainty.

There is a difference between reacting and responding to risk: a reaction is typically a quick decision driven by emotions; a response, on the other hand, is a well-thought-through decision based on evidence and made calmly. To ensure your organisation can respond and not simply react to a problem, you should define the response in advance before emotions can dictate decisions. Proactively designing a framework for decision-making when there is certainty, clarity and, most importantly, time will ensure an appropriate response and provide sufficient time for stakeholder buy-in and sign-off so that the response is clear, concise and considered. Risks will always be present, but how you address risks in advance makes a world of difference. Planning a response in advance can help to proactively mitigate uncertainty.

The findings we share in this paper on how other organisations responded to currency volatilities in Africa can be used as one of many inputs into the development of a currency volatility framework that aligns to your organisation’s culture, style, shared values and strategy. Designing a framework would enable you to move from a reaction to a response and provide certainty in uncertain times.

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S O M E D E F I N I T I O N S

To better understand the various forms of inflation and devaluation of a currency, we have listed a few key definitions:

• Inflation: the rate at which prices for goods and services rises and, inversely, the rate of which the purchasing power of currency falls. Inflation is measured as a percentage change over a period of time (usually one year). A positive change means inflation; a negative change means deflation.

• Deflation: the opposite of inflation; a reduction in the supply of circulated money in an economy. During deflation, the purchasing power of currency and wages are higher than under normal circumstances. The Zimbabwe economy recently experienced deflation, in sharp contradiction with its hyperinflation experience in the late 2000s.

• Hyperinflation: very rapid or out-of-control inflation. Price increases are so wild that the concept of inflation becomes meaningless. Hyperinflation has no precise numerical measurement.

• Currency devaluation: devaluation of a currency is often confused with depreciation of a currency. Depreciation denotes a decrease in the level of a currency in a floating exchange rate system due to market forces, whereas devaluation is the deliberate downward value adjustment of a country’s currency.

M E T H O D O L O G Y

The market data used in our quantitative analysis were collected during Mercer’s 2016 Africa Depreciation Survey during March 2016. We also make reference to various spot polls conducted in several African countries from 2015. The participants in this study consist of multinationals and preferred local national employers in a number of African countries. Data are presented in six different employee groups to allow readers to identify any differentiation in responses between these groups. Please refer to the Appendix for the full definition of the employee group.

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TABLE 1. EMPLOYEE GROUPS

Employee groups Condensed definition

Head of organisation Typically the highest position in the organisation

Executives Includes employees providing strategic vision and/or operational activities across multiple functions

Management Management and supervisory level focusing on tactical and/or operational activities in specific areas

Professional sales Professionals with no management responsibility; may provide supervision to less experienced sales staff

Professional non-sales Professionals with no management responsibility; may provide supervision to less experienced staff

Para-professional — white collar

Roles that are semi-skilled or unskilled with no supervisory or management responsibility; carries out administrative/technical tasks

Para-professional — blue collar

Roles that are semi-skilled or unskilled with no supervisory or management responsibility; reports to a team leader/supervisor; carries out manual tasks

The quantitative analysis also includes a longitudinal survey for Ghana, the data collected for this portion emanates from various surveys and spot polls conducted since 2014 with multinationals and preferred local national employers in Ghana. For this portion, the participant base is kept consistent from 2014 to 2016 to ensure the relevance of year-on-year comparisons.

Mercer uses a number of market-data-masking rules to guarantee client data confidentiality. A minimum number of incumbents, organisations and distinct organisations are required to publish statistics. If the minimums are not met, market data are masked. A minimum of three distinct organisations is required to publish the average.

Our analysis focuses on responses from employers made in 2015 and planned for 2016 in six main categories, as shown in Table 2.

TABLE 2. RESPONSE CATEGORIES

Provided usual annual salary increase

Provided lump-sum compensation

Provided an additional (extra) salary increase

Provided cash-allowance compensation

Other measures undertaken

No actions undertaken (salary freeze)

Para-professional — blue collar

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Q U A N T I T A T I V E A N A LY S I S

The quantitative analysis has been done based on information provided by 342 organisations across the eight countries.

TABLE 3. SURVEY PARTICIPATION DETAILS

Country Local currency Number of responses

Angola Angolan kwanza (AOA) 39

Ghana Ghanaian cedi (GHS) 57

Kenya Kenyan shilling (KES) 42

Malawi Malawian kwacha (MWK) 23

Mozambique Mozambican metical (MZN) 32

Nigeria Nigerian naira (NGN) 66

South Africa South African rand (ZAR) 55

Uganda Ugandan shilling (UGX) 28

Where we make reference to “the market”, “countries” and or “employers”, we are referring to practice(s) employed only by those organisations that participated in the survey. Readers can find the full list of participating companies’ sectors in the Appendix.

Table 4 and Figure 1 depict how companies responded to currency depreciation in 2015 in each of the six reaction categories per each country:

TABLE 4. RESPONSES TO CURRENCY DEPRECIATION BY EMPLOYERS IN 2015

COUNTRY Provided Usual Annual

Salary Increase In

2015

Provided an Additio- nal

(Extra) Salary Increase In

2015

Provided Cash-Allowance

Compensation For Currency

Deprecia -tion

Provided Lump-Sum

Compensation For Currency Depreciation

Other Measures

Under Taken

No Actions Under Taken

(Salary Freeze)

Number Of

Respon -ses

Angola 64% 10% 10% 5% 8% 21% 39

Ghana 72% 16% 5% 4% 18% 14% 57

Kenya 86% 10% 0% 0% 7% 7% 42

Malawi 74% 9% 9% 0% 9% 13% 23

Mozambique 59% 3% 0% 0% 9% 38% 32

Nigeria 71% 14% 2% 0% 14% 12% 66

South Africa 89% 7% 5% 0% 4% 5% 55

Uganda 75% 7% 4% 0% 7% 11% 28

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As shown in Table 4 and Figure 1, most employers have avoided responding imprudently and have not provided out-of-cycle increases or increased cash allowances and benefits. The most prevalent employer response to a depreciating currency and its potential effect on local cost of living was normal salary increases. However, first consider Figure 2 below. Most of the currencies experienced major depreciation only later in the year, not necessarily leaving sufficient time for an effect on inflation and, consequently, causing companies to respond in ways other than the usual annual salary increase.

FIGURE 1. RESPONSES TO CURRENCY DEPRECIATION BY EMPLOYERS IN 2015

0%

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Provided usual annual salary increase in 2015 Provided lump-sum compensation for currency depreciation

Provided cash allowance compensation for currency depreciation

No action undertaken (Salary freeze)

Provided an additional (Extra) salary increase in 2015 Other measures undertaken

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FIGURE 2. CURRENCY DEPRECIATION VERSUS THE USD S INCE JANUARY 2015

‐10%

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MZN AOA NGN MWK GHS UGX ZAR KES

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Source: XE, “Current and Historical Rate Tables,” available at http://www.xe.com/currencytables.

Source: IECONOMICS, http://ieconomics.com.

Angola Inflation Rate

Mozambique Inflation Rate

Malawi Inflation Rate

Nigeria Inflation Rate

Ghana Inflation Rate

Kenya Inflation Rate

South Africa Inflation Rate

According to Mercer Total Remunerations Surveys in Africa, most employers award salary increases in the first part of the year. Therefore, for most employers, the salary increases that awarded in 2015 did not take into consideration the major depreciation of the various currencies later in the year, nor the possible effect depreciation might have had on local cost of living. The additional actions outlined in Figure 1 are therefore the only actual responses to currency depreciation in 2015. A better view would be to consider the same companies’ responses in 2016, because if inflation is affected by currency depreciation, by this stage the depreciation would have been significant enough to affect local inflation and prompt employers to respond.

Figure 3 shows inflation for each of the surveyed countries (excluding Uganda) from January 2015 to October 2016.

FIGURE 3. INFLATION COMPARISON BET WEEN SURVEYED COUNTRIES

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Figure 3 clearly shows that not all countries’ inflation is equally affected by currency depreciation. For example, between January 2015 and January 2016, the South African rand (ZAR) depreciated almost 40%; however, inflation stayed fairly consistent. In contrast, over the same time period, the Mozambican metical depreciated over 40% and inflation had increased to close to 15% from 8%. This distinction is important, since employers would rather respond to an increased cost-of-living index (inflation) than the depreciation of the local currency.

When considering how companies planned to respond to currency depreciation in 2016 (if at all), we need to keep in mind the idea that inflation doesn’t always follow currency depreciation. Table 5 and Figure 4 indicate the planned employer reaction for 2016.

TABLE 5. EMPLOYERS’ ACTUAL RESPONSES TO CURRENCY DEPRECIATION IN 2016

COUNTRY Provided Usual Annual

Salary Increase In

2015

Provided an Additio- nal

(Extra) Salary Increase In

2015

Provided Cash-Allowance

Compensation For Currency

Deprecia -tion

Provided Lump-Sum

Compensation For Currency Depreciation

Other Measures

Under Taken

No Actions Under Taken

(Salary Freeze)

Number Of

Respon -ses

Angola 51% 5% 8% 5% 13% 28% 39

Ghana 81% 7% 14% 0% 16% 11% 57

Kenya 88% 0% 7% 0% 19% 5% 42

Malawi 86% 5% 9% 0% 5% 14% 22

Mozambique 78% 6% 9% 0% 13% 16% 32

Nigeria 76% 3% 8% 2% 14% 15% 66

South Africa 93% 4% 5% 2% 7% 7% 55

Uganda 82% 0% 7% 0% 11% 7% 28

FIGURE 4. EMPLOYER RESPONSES TO CURRENCY DEPRECIATION IN 2016

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Provided usual annual salary increase in 2016 Provided lump-sum compensation for currency depreciation

Provided an additional (extra) salary increase in 2016

No action undertaken (Salary freeze)

Provided cash allowance compensation for currency depreciation Other measures undertaken

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Once again, most employers responded to the depreciation of the local currency and its potential effect on local cost of living with the regular annual salary increase. In most countries, employers are very hesitant to increase any existing cash allowances and even more hesitant to provide new cash allowances.

In addition to the responses listed in Table 2, employers might choose to change from calculating employees’ salaries in local currency to calculating them in a foreign currency, such as the US dollar (USD). Table 6 indicates how companies have calculated their salaries in 2015.

TABLE 6. CALCULATION OF EMPLOYEE SALARIES IN 2015

Country Local currency

USD EUR Other currency

Number of responses

Angola 62% 33% 3% 3% 39

Ghana 79% 12% 0% 9% 57

Kenya 98% 2% 0% 0% 42

Malawi 86% 9% 0% 5% 22

Mozambique 88% 13% 0% 0% 32

Nigeria 92% 6% 0% 2% 66

South Africa 96% 2% 0% 2% 55

Uganda 93% 4% 0% 4% 27

FIGURE 5. CURRENCIES IN WHICH ORGANISATIONS CALCULATE SALARIES

Figure 5 shows that most employers calculate and state their local employees’ salaries in the local currency. Angola has a relatively high number of companies that calculate salaries in USD, but the reasons for this are outside the scope of this paper.

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Local currency depreciation has resulted in renewed pressure from employees to have their salaries calculated in a foreign currency, specifically USD. Table 7 shows that few employers planned to change from the currency they used in 2015 (see Figure 5). In fact, the most significant change was for the small number of companies that calculated salaries in a foreign currency to switch it to the local currency in 2016.

TABLE 7. PLANNED CHANGES TO DENOMINATION OF SALARIES IN 2016

COUNTRY Will convert salaries to local

currency

Will convert salaries to

EUR

Will convert salaries to USD

Will convert salaries to other

currency

Will not change the currency in

which salaries are calculated

Number of responses

Angola 8% 0% 0% 8% 85% 39

Ghana 4% 0% 0% 4% 95% 57

Kenya 0% 0% 0% 0% 100% 42

Malawi 0% 0% 0% 0% 95% 23

Mozambique 3% 0% 0% 0% 97% 32

Nigeria 5% 0% 0% 2% 94% 66

South Africa 2% 0% 2% 2% 96% 55

Uganda 0% 0% 0% 0% 100% 28

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L O N G I T U D I N A L S T U D Y : G H A N A ( 2 0 1 3 – 2 0 1 6)

planned to change from the currency they used in 2015 (see Figure 5). In fact, the mostMercer conducted a longitudinal study covering the same group of employers in Ghana from 2013 to 2016 to determine their responses to the depreciation of the Ghanaian cedi against the USD and the increasing cost of living in Ghana. The group consisted of 19 employers across various industries with an average of 355 local national employees per company. The study focused on how companies responded to currency depreciation through salary increase forecasts versus actual increases and the average movement of salary data from 2013 to 2016.

Figure 6 depicts how the group of employers responded over the four years.

FIGURE 6. PREVALENCE OF PROVIS ION OF ADDITION REMUNER ATION TO EMPLOYEES DURING CURRENCY DEPRECIATION

Has your company made additional provision to employees due to the depreciation?

Figure 6 demonstrates that companies typically first investigate the impact that currency depreciation has on local cost of living and also whether the situation will improve itself quickly or continue for a longer period. Our study reveals that employers in Ghana favour a very reactive, rather than proactive, approach to depreciation. For companies caught off guard, with no plans in place, the most natural reaction was to “wait and see”; both to see what other employers would do, and also to gauge the impact of depreciation on the cost of living and how long it would be before economic conditions turned around. The study also considered the number of times the average employer in Ghana made special adjustments over the four years. Figure 7 shows that most employers made more than one additional adjustment.

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When considering the salary increases provided by the group since 2013, as shown in Figure 8, we can draw a line based on the gap between the forecast and actual 2014 salary increases compared to the gap between the forecast and actual 2016 salary increases. This line implies that most companies were caught off guard by the depreciation of the currency and increased cost of living, since the gap between the initial 2014 forecast increase and the actual increase for that year is almost 2%, compared to a maximum 0.5% gap in 2016.

Figure 9 shows the correlation between the depreciating cedi and increasing inflation in Ghana between 2014 and 2016.

FIGURE 9. CORRELATION BET WEEN CURRENCY DEPRECIATION AND INFLATION IN GHANA (2014–2016)

FIGURE 7. FREQUENCY OF ADDITIONAL ADJUSTMENTS TO SALARIES (EXCLUSIVE OF ANNUAL SALARY INCREASE IN GHANA (2013–2016)

FIGURE 8. FORECAST VERSUS ACTUAL SALARY INCREASES AND INFLATION IN GHANA (2014–2016)

4 Times0%

1 Time46%

2 Times39%

3 Times15%

Forecast salary increase Actual salary increase Inflation

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C O N C L U S I O N

Currency depreciation and high inflation are macroeconomic phenomena over which employers have no real control; the majority of companies analysed in Mercer’s study have responded with the future and sustainability in mind. Many employers in Africa take a wait-and-see approach when it comes to responding to macroeconomic events such as currency depreciation and its perceived and actual effect on cost of living. Most surveyed employers have used the usual annual salary increase as their primary tool to address the shortcomings caused by an increase in the cost of living. In addition, we believe that the best practice under such circumstances continues to be to calculating local employees’ salaries in the local currency.

Some companies with multiple offices in Africa and around the world have dealt with currency depreciation by designing a dedicated framework. This currency depreciation framework then guides the employer’s response in depreciation scenarios of varying severity. Such a systematic approach helps ensure that an objective, rather than emotional, response is followed; that the response is equitable across office locations; and that the correct metrics are considered before changes are made. Designing this sort of framework will help move employers from a reactionary approach to a more thoughtful response in times of currency depreciation.

A U T H O R S :

DIRK JOUBERTT: +27 12 667 5905Dirk.Joubert@mercer.com

NICOL MULLINST: +27 12 667 9500Nicol.Mullins@mercer.com

DEON DE SWARDTT: +27 12 667 9500Deon.de.Swardt@mercer.com

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For further information, please contact your local Mercer office or visit our website at: www.imercer.com

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