By Romain Py, Head of Investments, African Infrastructure Investment Managers (AIIM)
African governments reacted faster than their European counterparts to COVID-19, imposing sweeping lockdowns and stay-at-home orders. Although some countries are now moving to ease restrictions, most remain cautious in the face of so many unknowns about the pandemic. This uncertainty has forced investors and financiers to re-strategise, re-prioritise and react quickly to a new and evolving environment. Many deals have been postponed or cancelled, though there are signs that transactions are now progressing, and that investors are learning to navigate new logistical, compliance and regulatory challenges.
Most countries in sub-Saharan Africa are likely to see some temporary and long-term adjustments in policy and regulation due to COVID-19, as economic drivers change and attitudes towards foreign investment shift (for both better and worse depending on the context). Regulatory changes motivated by governments’ attempts to manage the crisis are inevitable and investors will need to monitor macroeconomic and political developments closely and plan appropriate risk mitigation. Ability to raise finance from local or international institutions is also likely to be affected, forcing investors to re-evaluate the viability of a transaction and consider difficult scenarios.
The economic impact of COVID-19 on sub-Saharan Africa
As reported cases of COVID-19 continue to rise across the African continent, governments are struggling to mitigate the economic impacts as sub-Saharan Africa heads towards its first recession in 25 years. The economic impact will depend on the duration and extent of the outbreak, not only in Africa, but also among its trading partners. It will not be homogenous across the continent and will be heightened by the continent’s exposure to China and falling commodity prices. Countries with single export-orientated industries are more at risk, such as the island nations of Seychelles and Mauritius, which are heavily reliant on tourism and expected to be the worst hit with GDP contracting by 6.8% and 10.8% respectively. Africa’s oil exporters, Angola, Congo-Brazzaville, Gabon and Nigeria, will be hard hit by the fall in oil prices resulting from the demand disruption caused by COVID-19, and the mining economies of DRC and southern Africa will also struggle. Botswana, for example, relies on primary mineral products for more than 60% of export revenues and its GDP is forecast to contract by 5.4%.
More diversified economies in East and West Africa should however prove more resilient, as their growth models are based on domestic consumption, healthy local private sectors, and relatively robust agricultural sectors. Countries like Senegal, Côte d'Ivoire, Rwanda or Uganda are likely to experience 3% GDP growth, vs a GDP contraction of 1.6% for sub-Saharan Africa, with the agriculture sector playing a crucial role as it is typically regarded as an essential service and is less affected by social distancing measures or other government restrictions.
Central banks across the continent have adopted aggressive monetary policy initiatives to boost liquidity in their economies though this is expected to have limited effects, with large parts of many economies having only limited exposure to formal financial services and therefore likely to see limited benefits from central bank measures. To sustain these economies, governments will have to look to fiscal policy, including emergency funds and loans for businesses, as well as lowering or suspending taxes. Most countries, however, went into this crisis with high fiscal deficits and little headroom to increase spending on a sustainable basis, meaning that any such fiscal stimuli will have to be funded by borrowing. Average Debt to GDP for sub-Saharan Africa is forecast to reach c.56%, up from 50% in 2019, with six countries already having debt-to-GDP levels greater than 100%.
While the IMF, World Bank and other bilateral creditors have mobilised billions of dollars to assist the continent, their efforts might be undermined by Africa’s fragmented debt landscape. Private-sector creditors, as well as China, which is the largest single creditor to sub-Saharan Africa, have expressed misgivings about the idea of blanket debt moratoriums, instead stressing the need for debts to be restructured on a case-by-case basis. With commercial financial markets tightening and bilateral creditors struggling with their own imminent recessions, access to capital for Africa will become more difficult and expensive.
COVID-19 impact on AIIM portfolio
As many fund managers have done during the pandemic, AIIM has actively engaged with its portfolio company management teams to consider the impacts of COVID-19, assessing business continuity, macroeconomic impacts, liquidity and specific asset risks. Overall, the strong contracted asset base has provided our portfolio with a high degree of resilience and ability to continue operating through the crisis as critical infrastructure in their markets, and its diversification across countries, sectors and mix of contractual and commercial offtake has meant that the portfolio is well positioned to manage the risks posed by the pandemic. As infrastructure investors, AIIM’s investment strategy is based on a long-term hold of the assets, allowing to weather changes in political and economic conditions. With our embedded discipline of scenario-analysis and the need to think and plan ahead, we have structured resilient investments to withstand macro and regulatory headwinds. This is particularly evident for transport assets, where their project finance structures provide for adequate liquidity (c. 5 months in average).
The biggest operational risks across assets relate to the revenue impact from travel shut downs on GDP linked assets, such as airports and toll roads, and the impact of potential economic slowdown on sales and payments across the BBOXX and IHS Towers’ portfolios. Supply chains have been well managed to date with limited interruptions expected across spares and stock supplies.
Sub-Saharan Africa’s recovery from COVID-19 will be slow, but the 2021 recovery is not expected to be as pronounced as elsewhere in the world. New economic and fiscal challenges are likely to prompt shifts in government policies as well as driving some long-term changes that open up new opportunities for investors, though not all changes will be favourable for investors and there may be a rethink of the privatisation efforts ongoing in many southern and East African countries. Governments will be more reluctant to sell off state-owned enterprises that have served as vehicles for ensuring employment, but the reinvigorated role of multilateral institutions such as the IMF should increase pressure to push ahead, as governments will struggle to afford the burden that often loss-making public companies place on budgets.
While the impact of the pandemic on African economies is expected to be less than in Europe or North America, it still brings to the forefront the continent’s need to accelerate its economic diversification efforts. This will take time, as illustrated by the limited progress made to date by oil exporters, despite bold rhetoric, in diversifying their economies since the 2014 oil price crash, and will necessitate both an increased private sector role in the economy, and a reduction in bureaucratic burdens.
The COVID-19 outbreak has highlighted the importance of the digital economy, with central banks encouraging mobile money and other digital payment systems as means of facilitating commerce while maintaining social distancing, and there is also likely to be a renewed focus on agriculture and healthcare. For many years, governments have misallocated public resources and under-invested in healthcare, with expenditures in sub-Saharan Africa around 5% of GDP, roughly half the global average.
COVID-19 will potentially turn into an overdue wake-up call to find better ways to finance the continent’s infrastructure deficit, in particular access to reliable, cheap and clean energy. Given global liquidity constraints however, financing Africa’s energy transition and supporting industrialisation will still require greater private sector involvement, with Public-private partnerships (PPPs) expected to play a key role going forward as governments find themselves unable to fulfil their obligations.
Romain Py is the Head of Investments at African Infrastructure Investment Managers (AIIM) He has 20 years’ experience in infrastructure with a proven track-record in originating, structuring and executing investments in developed and emerging markets. Prior to joining AIIM in 2014, he worked for JPMorgan, HSBC and Société Générale. Romain is leading AIIM pan-African fund business, notably AIIF3, and represents AIIM as a director on the boards of African Ports & Corridors Holdings, DSM Corridor Group, SEGAP, Albatros Energy Mali, Beyond Energy and AIIM Hydroneo.