Pensions and Investments magazine, 4 August 2020
The novel coronavirus pandemic has had a devastating global impact on public health and economies. The worst global recession since World War II and the effects of large-scale shutdowns of all non-essential businesses worldwide, cutting off international and regional supply chains and halting all non-essential travel, have also rippled across Africa. The International Monetary Fund is forecasting a 1.6% contraction in the continent's GDP, and the outlook is expected to worsen when revised later in the year.
The continent has a less well-resourced health-care sector and much lower fiscal capacity to support businesses and people negatively affected, but it is worth noting that Africa's mortality and contagion rates have so far been significantly lower than initially feared. COVID-19 spread later to Africa, enabling many countries to learn vital lessons from other parts of the world. It is also important to recognize there have been drastically different government interventions from each of Africa's 54 nations, some introducing quick and draconian lockdowns, while others imposed curfews or made minimal changes to daily activity.
We expect to see a marked economic slowdown through this year and into 2021. In the context of lower oil prices, commodity exporting countries such as Nigeria and Angola will be more severely impacted from a fiscal perspective. However, ultimately the rate of Africa's economic recovery will depend on each country's response.
We do not expect to see a V-shaped recovery but being later into lockdown and early out of it could mean African countries will begin to recover sooner — cautious optimism that has been boosted by China, a key supplier, reopening and easing pressures on supply chains.
For large-scale infrastructure, institutional investors' main area of focus has been on the power sector, where projects have invariably been deemed to be "essential services" by African governments, allowing them to remain operational throughout the lockdowns — a position that has resulted in continued revenue generation and has underlined the resilient nature of these assets. For infrastructure projects under construction, most countries have restricted the movement of people rather than goods, allowing for instance, power and renewable energy projects to continue on-site activity, with South Africa as the exception, even during the height of the outbreaks.
Given the less developed supply chains, African projects typically hold more equipment on site than in other parts of the world and have time buffers factored into plans due to lower unpredictability of the operating environments. The impact on project construction has been more nuanced. For example, delays arising out of the limited movement of personnel with specialist skills required in the construction and commissioning process.
Insulation from other impacts
In Africa, strategically important assets with strong defensive characteristics have continued to display robust revenue and returns for investors even while the COVID-19 crisis raged. In the past three years, an average of 68% of African infrastructure transactions have been into thermal power and renewable projects, the majority of which are contracted assets. The projects also have hard currency-linked revenues, given almost 60% of projects are financed in U.S. dollars, which offers protection to investors.
In projects where cashflows are in local currency, risk is often managed by utilizing local currency debt facilities and applying lower gearing — a small proportion of debt to equity — as well as building in conservative currency devaluation assumptions.
GDP-linked assets in Africa have been the most exposed, and across the transportation sector, toll roads, ports and airports have been the most significantly affected by the abrupt shutdown of international travel and subsequent local and regional restrictions. African airlines operating in an already fragile market, and with heavy reliance on intercontinental traffic, will be hard hit. Unlike Europe and U.S. markets, where domestic flights account for 85% of seat capacity, overseas flights account for 55% of African airlines' market share.
The most resilient African airports are in capital cities that are critical transport hubs, holding strategic importance for sustainable economic growth.
During the virus outbreaks, some airport investees have invoked economic equilibrium clauses built into their contracts to secure 'holidays' in concessionaire fees while COVID-19 restrictions were at their height, thus protecting the business.
Some sectors, like digital infrastructure, will come out of the pandemic stronger due to increases in data usage as people seek to remain connected remotely, making their operations more sustainable and more attractive for future private investment.
Availability of public funding for infrastructure is under more strain than it has been in the past so a slowdown in new public-private partnership deals is to be expected. Private-sector investment is critical with the African Development Bank estimating that pre-COVID-19, there was already an annual infrastructure investment gap of around $62.5 billion.
There is evidence to suggest a wider interest in emerging market infrastructure from private investors looking to diversify their portfolios beyond their traditional markets. We are likely to see greater engagement in countries traditionally less open to private-sector investment with these countries easing regulations to become more investor-friendly. We are seeing this trend develop across sectors with a number of African sovereign wealth funds looking to partner with the private sector to build agriculture capacity in countries like Egypt, Morocco and Nigeria and help bolster domestic food security in line with their strategic investment priorities.
These are the types of trends we expect to see across the board in post-COVID Africa — accelerated conversations around how public-sector entities can partner with private financing to deliver critical infrastructure projects.