Leveraging risk mitigation for Africa’s development

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According to a report by the African Development Bank, the continent’s infrastructure financing gap is estimated at about $100 billion per year with about $170 billion required a year until 2025.

This illustrates how much financing the continent would need to raise to deliver on key infrastructure such as roads, water and sanitation, education, telecommunication infrastructure and transport.

One of the biggest constraints is that there is limited capital to be mobilised to meet the financing gap from institutions that understand and accept the inherent risks associated with financing sub-Saharan African transactions.

Capital providers such as banks, funds and the specialist liquidity pools that exists for African investors have to account for responsible deployment of capital, while complying to the various regulatory frameworks.

It is therefore essential to leverage various risk mitigation instruments to ensure that every dollar has the maximum impact for the continent.

RMB believes that the use of credit and political risk insurance serves as a key instrument in ensuring that the limited capital has maximum impact.

Partnerships with the private insurance market and export credit agencies (ECA) alike enable institutions to be more creative with its client origination strategies, while simultaneously improving the management of internal risk parameters.

As the world continues to emerge from the COVID-19 pandemic, we have seen the private insurance market continue enabling projects on the continent. Private market insurers have embraced alternative credit risk instruments such as synthetic securitisations, insurance of derivative exposures and collateral swap solutions, among others.

But the willingness to change and be innovative is not limited to the private market, and more recently we have seen ECAs’ acceptance to move from the traditional level of 85% cover to a more investor-friendly level of 95% of eligible content for certain transactions.

We have also witnessed a move to a 100% cover delivered through a combination of ECA, World Bank, DFI and ATI support this year.

These latest innovations will greatly impact on the levels of liquidity that are available to finance key infrastructure projects across the continent - from both traditional and new entrants to financing Africa.

Historically, a growth area for private market insurance was to support swaps and derivatives, non-trade related working capital, project finance, and other structured lending.

Insurers have taken to the task of understanding these asset classes, and as the regulatory framework continues to evolve and the Basel transition from Basel III to Basel IV occurs in the coming years, substantial work remains to be done.

The huge opportunities have been recognised though for those using the product as recognition for transaction security which will enable more favourable Loss Given Default treatment.

ECAs remain relevant

The Organisation for Economic Co-operation and Development (OECD) Agreement on Officially Supported Export Credits continues to evolve with the latest agreement released in July 2021.

Some notable changes include the re-joining of the UK following BREXIT; the increase in local costs support from 30% to 40% in high income countries and to 50% in all other countries.

These changes have been widely applauded by financial institutions who make use of the ECA product. RMB believes that ECA-supported transactions remain critical in the mobilisation of funds to support trade and development in the African continent.

We have further seen an expanded mandate from many ECAs to include credit instruments that were previously not supported, such as working capital facilities and other short term trade instruments.

The pandemic triggered ECAs and financial institutions to be innovative, and one said structure was leveraging the ECA support from an OECD participant and a non-OECD participant. This allows financial institutions to provide a much higher level of ECA-supported financing to clients.

Over the last two years, ECAs have played a crucial role in preventing the complete drying up of private finance by either providing direct ECA financing or providing guarantees to wrap private financing.

A key strength of the ECAs is their greater risk bearing capacity as opposed to commercial banks. This is because the ECAs are largely public policy instruments and, depending on the governing legislation, can be used when needed.

This provides exporters with an alternative source of financing and enables public-private credit risk sharing arrangements. RMB has continued to arrange, structure and fund ECA-supported transactions and is of opinion that the product remains hugely relevant for capital mobilisation - allowing borrowers and exporters to benefit from competitive financing terms.

Way Forward

African Sovereign nations have come through the pandemic in a much stronger position than initially expected, thanks in part to its strong underlying commodity base.

As the emergence of ESG and a preference for more sustainable greener infrastructure projects over traditional oil and gas and commodity transactions continue to gain momentum Africa, with the support of private market insurers and ECAs, will be very well positioned to lead on such change.

The continent faces a transformative time with the evolution of large capital expenditure projects and the transition in trade from the implementation of the African Continental Free Trade Area (AfCFTA).

Authors:

  • Stuart Hulks is global head of insurance and export credit agency at RMB
  • David Sawyerr is an insurance and export credit agency finance transactor at RMB

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