The changing dynamics of risk in sub-Saharan Africa

Optimism towards sub-Saharan Africa

Recent years have seen an enormous amount of optimism towards Africa, both internationally and within Africa. Ex-President of the African Development Bank, Donald Kaberuka, has made reference to Africa’s Lions joining Asia’s Tigers. Kingsley Chiedu Moghalu made the following comments in his 2013 book, Emerging Africa, “… global investors are increasingly paying attention to a continent once dismissed as ‘hopeless’ but today regarded as the global economies ‘final frontier’”. The reference to hopeless continent comes from the cover of the Economist, which in May 2000 described Africa as ‘The Hopeless Continent’, but a decade later (late 2011) the Economist title had radically shifted and the new title was ‘Africa Rising’.

Much of this optimism stemmed from the impressive growth rates experienced by many African countries over the recent years together with improvements in democracy, less internal civil strife and better governance. Africa’s largely young population and growing middle class were viewed as a huge opportunity for continued growth and development.

The last two years have however seen a tempering of this optimism.

Regular incidences remind us of the fragility of democratic institutions. Even countries well respected for their democratic stability, have shown vulnerability at times. Then there are of course important markets and significant economies where true democracy is questionable. On the other hand the large economies of Nigeria and South Africa have shown a degree of democratic maturing as evidenced by recent election results.

Corruption continues to be a concern, evidenced by talk of ‘state capture’ in South Africa and the ‘tuna bond’ scandal in Mozambique. Certain leaders such as Buhari in Nigeria and Magufuli in Tanzania are however making strong efforts to address this. Terrorism remains a threat, particularly in countries such as Kenya and Nigeria. Unemployment is high, as is the scale of poverty.

The obvious challenges relate to the current economic conditions. Low oil prices and the downturn in the commodity cycle in general, have highlighted the overdependence on natural resources. Growth rates have declined rapidly with the World Bank now predicting only 1.6% growth in sub-Saharan Africa in 2016. Most countries are experiencing a concerning rise in debt and currency depreciation, and declining hard currency reserves have created currency inconvertibility concerns; Ghana, Angola and Nigeria are prime examples. Power shortages and lack of infrastructure continue to create problems for the continent.

Current state of export credit finance in sub-Saharan Africa

Despite the increasing concerns, export credit finance continues to play an important role, with on average $1 billion to $2 billion of deals being done per quarter. However, a look at quarterly statistics since 2014 provided by TXF’s tagmydeals, do reflect a slowdown in export credit finance since Q4 2015 (see chart below).

 

The majority of transactions being completed in the region are in the infrastructure, power and transportation sectors. Not surprisingly, the power sector has been the most active sector in 2015 and the first half of 2016. This is reflective of the huge power shortages across the continent and the fact that power is critical to ensuring sustainable growth. In January 2016, during the World Economic Forum in Davos, Hailemariam Desalegn, Prime Minister of Ethiopia, said the following: “Africa has huge opportunity and it is becoming a global pole for growth. Energy is the main challenge in Africa. The challenge is to have a quality, reliable energy source that makes industrialisation possible.”

In 2014, the three most active export credit agencies (ECAs)/multilaterals in Sub- Saharan Africa were US Exim, ECIC (South Africa) and CESCE (Spain); in 2015, SACE (Italy), Decredere Ducroire (Belgium) and JBIC (Japan) and for six months in 2016, MIGA (multilateral), US Exim and CESCE (Spain). The top three markets that were beneficiaries of export credit finance in 2014 were Ethiopia, Ghana and Angola; in 2015 it was Zambia, Angola and Ghana and for the first half 2016, South Africa, Angola and Gabon (All information provided by TXF, tagmydeals).

Challenges to export credit finance in sub-Saharan Africa

The political, social and economic challenges highlighted earlier have started to impact on transactions. Credit committees are increasingly raising concerns regarding the viability of projects and the ability of governments to maintain payments, resulting in an increasing degree of selectivity in approved transactions. This seems to be evident across the board both with insurance providers and lenders.

These concerns are not without justification. An increasing number of completed transactions have started to experience difficulties. Entities associated to the oil and gas and broader resource sectors are experiencing cash flow difficulties. We have seen service providers to the oil and gas sector losing contracts or having their margins cut as the oil and gas companies demand lower costs in an attempt to adjust their businesses to a low oil price environment.

Currency is an increasing area of concern. Dollar funded public-private partnerships (PPPs) where offtake agreements have been signed with utilities that earn revenues in local currency, are starting to wobble as the utilities find themselves having to fund dollar debt with less revenue thanks to local currency devaluation. Lack of supporting infrastructure associated with new projects has created problems. Projects have been completed in certain regions, but are not able to operate at their maximum due to limitations in the supporting infrastructure that, although it was anticipated, have not been completed by project completion date. While offtake agreements may have been signed on a take or pay basis, the requirement of the utility to repay debt when revenues are not maximised, adds further strain to the financial performance of the utility.

General hard currency shortages in many markets are causing delays in payments, highlighting currency inconvertibility risks. Rising debt and concerns raised by the IMF are resulting in a reducing ability of Ministries of Finance to issue guarantees or directly borrow for the development of projects. However, in many countries, the state-owned companies fail to provide financial information, or if they do, the financial information is outdated and potentially of poor quality, making it very difficult for lenders and ECAs to approve transactions without the involvement of the Ministry of Finance. This increasingly causes delays in projects reaching financial close.

The regulatory environment in many countries is still inadequate. This is especially evident in the power sector where the regulation around Independent Power Producers (IPPs) and the Power Purchase Agreements (PPAs) are inconsistent. Some countries have frameworks of world-class standards in place, while in others the standards are lacking.

While a more cautious approach to the funding of projects is being adopted by international players, the general view is that there remains plenty of funding available, the key problem is inadequately structured projects.

Outlook for 2017

Export credit finance will continue to be an important source of funds in Africa, despite the challenges facing the continent, which are likely to continue for much of 2017. In fact, with the current challenges, the involvement of commercial and political risk insurance will become increasingly important. The challenges will force governments to be more selective in their choice of projects. In addition, lenders and insurance / guarantee providers will be more cautious in the transactions that they support. Only the wellstructured projects are likely to progress and those that involve well-respected players. For example, transactions that include internationally respected development financial institutions (DFIs), financially sound and experienced project sponsors and EPC contractors and involve high government commitment, are more likely to be able to attract the necessary funding.

The interest in power will continue but with an increasing focus on renewable energy. South Africa has been at the forefront of implementing successful renewable energy projects, but the interest is expanding across the continent. New markets are likely to attract increasing interest as financiers look to diversify their portfolios away from the historical big markets that are experiencing a higher degree of problems to markets performing better and where exposure is lower, such as Ivory Coast and Senegal. Countries along the east coast of Africa will most probably receive more interest influenced by their lower resource dependence. Mozambique, despite its problems, will be a market that will attract much attention in 2017 as various infrastructure and gas projects progress.

Governments, together with international institutions, will try and improve the governance and performance of utilities so that they can start borrowing without the need for government guarantees. Efforts to diversify economies away from resource dependency will gain momentum, with a strong focus on agriculture. Due to the weak private sector in many jurisdictions, it is likely that governments will be active in these diversification initiatives.

ECAs will continue to play an important role, however the involvement of multilaterals such as MIGA, African Trade Insurance Agency (ATI) and The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) as well as private insurers will be more prevalent.

While the current situation in Africa is challenging, the long-term prospects for the continent remain positive and in time the optimism of a few years back should return. Certainly Nedbank remains committed to providing ongoing export credit finance in Africa.

Micheal Creighton

Head: Export Credit Finance - Nedbank Corporate and Investment Banking