In the year to date, the COVID 19 global pandemic continued to loom large on lives and livelihoods. The constantly shifting dynamics of the pandemic’s impact and the responses to it have resulted in a widening divide in regional circumstances ranging from steady reopening in Europe to a devastating third wave in India. Optimism for a faster recovery which was founded on the prospects for a swift vaccination rollout has receded somewhat as supply issues have hampered progress. The pandemic continues to expose variances in the sustainability and resilience of different infrastructure assets. Demand for transport infrastructure has correlated with restriction cycles with marked drops in traffic which adversely affected debt arrangements and equity valuations but utilities on the other hand proved to be very resilient. While the pandemic is still clearly a challenge that the WHO predicts is on course for its deadliest year in 2021, there is an increasing focus on the economic recovery which bodes well for African economies and investment in infrastructure.
INFRASTRUCTURE AND FINANCE – YEAR TO DATE
Africa’s Debt Concerns
The 4th Pension Funds and Alternative Investments Africa conference reflected on the impact of the pandemic particularly on the continent’s debt outlook and the implications for economic recovery. African economies have been hit hard especially tourism-dependent economies, oil-exporting economies, and other resource-intensive economies. The outbreak brought to the fore the deepening inequality across the continent. Government spending in response to the pandemic skyrocketed and had a direct negative impact on budgetary balances and debt burdens. Consequently, the average debt-to-GDP ratio for Africa is expected to climb by 10 to 15 percentage points in the short to medium term. According to the African Development Bank’s Africa Economic Outlook report 2021 which puts a spotlight on the impact of COVID-19 and government debt, recent debt restructuring experiences in Africa have been costly and lengthy because of information asymmetries, creditor coordination problems, and the use of more complicated debt instruments.
French President Emmanuel Macron hosted a summit in Paris on Africa financing mid-May which agreed to work towards persuading rich nations by October to reallocate USD100 billion in IMF special drawing rights monetary reserves to African states. This will be part of a proposed financial package needed to provide post-pandemic economic stimulus for the continent to help cover a spending shortfall of some USD285 billion over the next two years. The summit set out a two-pronged approach to support sustainable, green recovery and the underpinning of private-sector-driven growth. Among the goals outlined were doubling COVID-19 vaccination targets for Africa by the end of 2021 under the COVAX vaccine-sharing scheme and giving Africa the ability to produce and distribute vaccines domestically.
Deal Activity and Notable Initiatives
In April global law firm Baker McKenzie published a report, New Dynamics: Shifting Patterns in Africa’s Infrastructure Funding which reflects the state of African infrastructure and how major global players’ approach to infrastructure lending on the continent is changing. The report shows a decline in the value of infrastructure lending with bilateral and multilateral lending into Africa dropping to USD31 billion in 2020 from USD55 billion in 2019. This was attributed in part to the COVID-19 pandemic. However, market fundamentals show a region with underlying resilience, and as the global economy recovers so too should infrastructure investment. This view was also shared by several speakers at the recent Pension Funds and Alternative Investments Africa 2021 Virtual conference. The view is that the long-term nature of infrastructure projects means that international partners are unlikely to withdraw their commitment due to the immediate pressure on national finances.
The report highlights infrastructure gaps in energy, internet access and transport that require new sources and finance outside that from traditional lenders and international partners. Development Finance Institutions (DFIs) are increasingly forming the backbone of infrastructure finance in Africa as they have a better appetite for political risk and access government projects in ways that other banks may not while having a specialised capacity for facilitating long-term lending. According to the World Bank private participation in infrastructure investment fell in all regions except sub-Saharan Africa and the Middle East and North Africa, where development finance institutions played a strong role.
As the drive to build back better gains further traction on the continent the African Development Bank has partnered with the Climate Investment Funds to release a scoping report highlighting the impact of combining green banks and national climate funds to accelerate green financing. The two sectors identified as key priorities to boost climate mitigation include renewable energy and climate-smart agriculture followed by green cities infrastructure. The continent’s most advanced pension fund industry in South Africa looks set to contribute more to infrastructure development. The draft Amendments to Regulation 28 of the Pension Funds Act published by the National Treasury will seek to allow retirement funds to invest up to 45% of their assets in infrastructure opening a potential source of funding for domestic infrastructure projects. Furthermore, the South African government committed to a R791.2 billion (about USD56.5 billion) infrastructure investment drive. “We are already partnering with the private sector and other players to rollout infrastructure through initiatives such as the blended finance Infrastructure Fund” said the Minister of Finance recently. To improve access to African markets, the country’s six busiest border posts will be upgraded and expanded using the PPP model.
ROUND-UP OF YEAR-TO-DATE TOP INFRASTRUCTURE AND FINANCE DEALS
The African Development Bank in its 2021 African Economic Outlook report expects the continent to weather the challenge of a global pandemic and external economic shocks to recover from its worst recession in 50 years and reach 3.4% economic growth in 2021. Presenting the report during a virtual launch ceremony, AfDB Vice President and Chief Economist Rabah Arezki cautioned that Africa’s predicted growth could be subject to major downside risks arising from both external and domestic factors. Despite the projected growth, an estimated 39 million Africans could possibly slip into extreme poverty this year, following about 30 million who were pushed into extreme poverty in 2020 as a result of the pandemic. The report adds that those with lower levels of education, few assets and working in informal jobs are the most affected and need to be protected.
The report made important recommendations for a multi-pronged policy approach to addressing the pandemic including supporting the health sector with resources for health care systems to cope with the virus and other preventable diseases; monetary and fiscal support to underpin economic recovery; expanding social safety nets and making growth more equitable; and minimising the long-term implications of the pandemic on human capital accumulation by opening schools and scaling up active labour market policies to retool the labour force for the future of work through digitalisation, industrialisations and diversification.
The continental push for a green recovery and growth also continues to strengthen. While speaking at the European Union-Africa Green Investment Forum, AfDB President Dr Akinwumi Adesina touted Africa’s enormous green growth opportunities. “Africa is a huge market offering incredible opportunities. The recovery pathway offers enormous opportunities. Recovery must be green and build climate resilience. Recovery must boost green investments,” Dr Adesina said. He identified energy, agriculture and infrastructure as vital areas of investment for a post-COVID-19 recovery in Africa. Citing the continent’s abundant solar, wind, hydro and geothermal energy resources, Africa’s energy transition alone presents a USD100 billion per year investment opportunity, he added. Climate-resilient infrastructure offers investment potential of between USD130 billion and USD170 billion. Dr Adesina urged investors to seize the opportunities presented by climate change which would be worth USD3 trillion by 2030 with over 70% of the financing needed expected to come from the private sector to complement public investments.
The outlook for the next quarter will continue to track the progress of the Covid vaccination rollouts which are still comparatively low in Africa with an average coverage rate still in the single digit percentage range. Furthermore, markets will look at the strength of the ongoing economy recovery and the prospects for improved infrastructure financing and investment. According to the recent Pension Funds and Alternative Investments Africa conference, project bankability and risk mitigation will continue to be key determinants for stronger infrastructure investments hence the need to prioritise de-risking mechanisms that will open further the space for private investment in infrastructure. The recent Paris summit on finance is one such key initiative and implementation details and proposals may become clearer in the coming quarter.
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