GTR brought together three leading insurers from the African Trade Insurance Agency (ATI), Italy’s export credit agency Sace, and US Ex-Im to discuss the challenges and trends of operating in the Sub-Saharan African market.
Peter Jones, chief executive officer, African Trade Insurance Agency
Ivan Giacoppo, head of oil and gas, infrastructure and steel, Sace
Joseph Grandmaison, member, board of directors, US Ex-Im
GTR: What are ATI’s strategies with regards to Sub-Saharan Africa, and how has this changed over the past few years?
Jones: The African Trade Insurance Agency (ATI) was set up with the mandate to facilitate, encourage and develop the provision of, or support for, insurance, including coinsurance and reinsurance, guarantees and other financial instruments and services for the purposes of supporting trade, investment and other productive activities in Africa in supplement to those which may be offered by the private or public sector, or in cooperation with the private and public sector.
Our vision is to transform Africa into a prime trade and investment destination and our mission is to secure trade and investments in Africa and thereby support both regional trade and integration and international trade and investments.
Given that credit and investment insurance mechanisms in Africa are often unavailable or are insufficient, the strategy is to extend cover to all African countries in order to broaden the development impact of ATI on the continent.
This strategy has not changed over time and we are still focused on expanding our membership into other African countries so as to broaden our target market and help ATI achieve its objective of supporting growth and development in Africa and in achieving regional trade and integration. Our membership expansion drive also includes non-African states, private corporations, international financial institutions and regional economic organisations, as this will provide both additional equity capital as well as valuable business networks. Current African member states are: Burundi; Djibouti; DRC, Eritrea; Kenya; Liberia; Madagascar; Malawi; Rwanda, Sudan; Tanzania; Uganda and Tanzania.
GTR: What is US Ex-Im’s strategy in the Sub-Saharan markets?
Grandmaison: Over the past few years, US Ex-Im has supported a widening number and range of buyers in Sub-Saharan Africa (SSA).
Recently, we have done this through SDAs, or Special Delegated Authorities. Pioneered in Nigeria and now at over US$1bn, we analyse local banks in a market and use them as our security on loan guarantees into Nigeria. This mutually beneficial relationship has allowed for quicker transaction turnover as well as opening our institution to more buyers.
GTR: Why an emphasis on Africa?
Grandmaison: We have seen the private sector continue to develop in Africa and as such, we stand ready to assist in the financing of US capital equipment to these new and growing businesses. Also, we have seen risk levels trend downwards in the Sub-Saharan market.
GTR: What is Sace’s Africa strategy and how has this changed in recent years?
Giacoppo: Sace’s support is focused on Italian exports and civil work contracts, Italian investments and Italian strategic imports such as raw material and oil and gas from African countries. It is focused on priority projects, which may involve the upgrading of infrastructure such as roads, power plants, and facilities providing benefit to local communities.
In 2006, Sace launched the Africa programme to provide greater support to Italian companies investing or exporting in the continent through the implementation of more flexible terms of cover. Through the Africa Programme, Sace provides an added level of security for Italian exporters and investors, thereby reducing the political and commercial risks. Sace’s involvement can also facilitate the financing of such transactions.
In line with these objectives, in July 2008 Sace opened a representative office in Johannesburg: Sace’s direct presence is intended to further reinforce the support to Italian and foreign investors in the Sub-Saharan region.
Following our new Africa programme, 14 countries were brought back on cover, including: Angola, Benin, Burkina Faso, Djibouti, Equatorial Guinea, Ethiopia, Malawi, Mali, Mauritania, Mozambique, Republic of Congo (Brazzaville), Tanzania, Uganda and Zambia.
GTR: What are the main risks you all face in Africa?
Jones: ATI has now established itself as a credible insurer of credit and investments risks in Africa with a growing pipeline of business and a strong client base.
This has greatly enhanced confidence in ATI among its member countries and prospective members who are seeking to join the agency, and thereby eliminated credibility and start-up risks. There is a perception of risk in Africa that does not match reality and a tendency for investors and lenders to treat all 53 African countries in the same way. This could not be further from the truth, and one of ATI’s key roles is to help dispel such incorrect perceptions.
The agency has legal agreements in place that provide it with a de jure preferred creditor status that acts as a very strong deterrent to adverse behaviour by members against ATI-insured investors. A key risk that may be encountered is concern with renewed war/civil disturbance in some member countries and the normal risks associated with providing comprehensive non-payment cover to commercial entities.
Grandmaison: Our risk is confined to political and commercial risk, the latter of which is harder to gauge and is determined on a transactional basis. The state of financial reporting in Sub-Saharan Africa is still developing and as such, determining creditworthiness of private buyers can be difficult. This is where the SDAs assist. Receiving local bank guarantees, many of which have decent financial reporting, gives US Ex-Im the security we need in offering our guarantee.
Giacoppo: Risks are mainly related to the limited creditworthiness of local buyers/borrowers and to the impact of exchange rate risk on foreign currency debt service. Legal framework in some regions is still weak and needs to be improved. Recent global economic downturn effects on the Sub-Saharan African economy are under consideration.
GTR: How has African business been affected by the recent economic downturn globally?
Giacoppo: The African business is only minimally affected: Africa ‘isolation’ in terms of less developed financial systems has impeded the continent’s exposure to the subprime bubble.
Yet as the global economic activity and trade contract, so will the demand for African oil, minerals and other export commodities, causing volatile commodity prices and stress on African countries’ balance of payments. Also the western capital inflows (remittances, private capital, aid) on which these economies rely could decrease because of the global credit crunch.
GTR: Are there any bright spots?
Giacoppo: Beyond South Africa, also Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia (labelled by IMF as “frontier emerging markets”) have experienced strong macroeconomic performance, resulting from higher and better managed export revenues, better policy frameworks and higher international reserves. Last but not least, these economies are developing investment opportunities and stock exchange markets which attract a growing interest of foreign investors.
GTR: Where are you avoiding?
Giacoppo: In Central Africa, political stability is still far way: countries such as Sierra Leone, Liberia, Cote d’Ivoire, Central African Republic, Congo Democratic Republic, Niger, Sudan, Chad and Somalia have been in a war or violence situation for a long time, so they are not able to develop a business-friendly environment, in terms of security, infrastructures and investment protection
Grandmaison: Sub-Saharan Africa has remained rather insulated from the global financial crisis. However, trade finance has not. Many banks are not willing to lend to buyers without strong guarantees. US Ex-Im, which is backed by the US Treasury, remains the most liquid bank around. As such, we are in a unique position to guarantee trade finance transactions such as insuring letters of credit to guaranteeing commercial loans.
In full year 2008, US Ex-Im worked with 20 countries in Sub-Saharan Africa, which is the most to date. From Mauritania to Mauritius and Mali to Malawi, Ex-Im Bank’s results show our diversification. However, we are transaction-based, so we follow where the demand is on the continent. Nigeria, South Africa, Kenya and Ghana drive most of our commitments, but other new and exciting markets, such as Angola, our garnering more attention.
US Ex-Im is only open in certain countries for certain transactions. Countries where we are “on-cover” have steadily increased, but several remain where we cannot do business, such as Zimbabwe and Somalia.
Jones: The impact of the global economic downturn is still unfolding in many African countries. A number of governments are undertaking impact assessment studies to assist them in coming up appropriate policy interventions to mitigate any likely impacts. In the short term, uncertainties related to shrinking export markets occasioned by drops in demand and commodity prices and currency depreciation are making inputs and essential imports expensive. We believe that capital flight is likely to be experienced.
GTR: At ATI, what do you see as the bright spots in the continent?
Jones: Africa is still a preferred investment destination given the high returns to investments and its rich resource base. Recent World Bank information indicates that there has been an increase in foreign direct investment (FDI) flows and trade flows between Africa and its trade and investment partners. A key objective of ATI is to help maintain those trade and investment flows in the current difficult economic environment.
In response to demand from the domestic insurers in Kenya to be able to offer their retail and corporate customers property and vehicle cover against losses arising from political violence, civil disturbance and sabotage and terrorism, the agency recently put into place an excess of loss treaty for UAP, a major domestic Kenyan insurer. This cover was provided in partnership with Africa Re and Zep Re, and the agency reinsured itself with Lloyd’s of London. This was truly a local, regional and international response to the needs of a member state and a “first” in the regional marketplace.
It is hoped that similar cover can shortly be put into place for other major domestic insurers in Kenya, Tanzania and Uganda, and thereafter expanded to include other member states.
The World Bank has also recently reaffirmed its commitment to ATI and African regional trade and investment by agreeing to seek additional funds from the International Development Association to provide financial support for the equity capital subscriptions required of new African States that wish to join ATI. The countries currently being targeted include Angola, Benin, Cameroon, Ghana, Mali, Mozambique and Nigeria.
GTR: Where is ATI avoiding in the continent?
Jones: As a risk mitigating agency with presence in Africa, ATI has a strong knowledge of the markets and political risk situation in its member countries and has taken the approach of prudent underwriting rather than avoiding sectors or markets, and is always open for business in its member states. ATI has, for instance, had the greatest success in markets that have been perceived as very risky, such as the DRC and Burundi.
GTR: Will ATI’s budgets be clipped somewhat in light of recent economic events?
Jones: Given that most of ATI’s African member states are not fully integrated into the world financial markets, the global financial crisis may not severely impact on their financial markets, at least in the short term, although the stock markets have already been adversely impacted. However, the resultant slowdown of the global economy, including Europe and the US, which are key trading partners for African states, will impact the traditional export markets and may cause a significant decline in demand and prices for ATI’s African member states exports. This will specifically affect agricultural and horticultural production (for example, tea sales in Kenya are down 30% and the price realised at auction by 50%), as well as other commodities, with widening trade deficits in favour of countries that export into the region. In many of our member states, the forecast of real GDP growth in 2009 has been revised downwards, reflecting the impact of the slow down in global demand.
The foreign exchange markets of our member states have been the early victims of the financial crisis as foreign portfolio investors divest from some markets, notably Kenya and Zambia. This has in turn increased the volatility and weakening of currencies of ATI’s member states against most hard currencies.
In terms of the potential impact of the crisis on political risks, it is not expected that there will be immediate adverse impact on the political and sovereign risk profile of ATI’s member states. Macro economic fundamentals remain strong in most of our member states and donor commitment remains strong, at least for now.
However, inward remittances are rapidly slowing as the Diaspora are finding it more and more difficult to make a living or retain employment, and these flows are more significant than those of the donor community.
Central banks in ATI countries have re-emphasised their commitment to improving risk management and corporate governance in the banking sector and ensuring that banks are adequately capitalised so as to maintain confidence in the sector.
The biggest challenge to the financial sector is a serious lack of liquidity in hard currencies, especially the US dollar, even where there is significant liquidity in the local currency, and this is also exacerbated by the strength of the US dollar and euro.
However, if the recession is deep and long, a global risk aversion and the need to repatriate capital back home may lead to a further withdrawal of investment from ATI’s member states.
Also, any significant declines in official usable foreign exchange reserves could, in the longer term, trigger payment defaults. While the drop in oil prices is welcome, the strength of the US dollar and euro has dulled the immediate benefit and increased the cost of other imports, with high inflation still apparent in a number of countries. Food security still remains a serious concern.
GTR: What about US Ex-Im – will budgets be tightened?
Grandmaison: No. US Ex-Im has shifted to a zero-based budget, meaning our revenues must cover our costs. This was incorporated into the FY2009 budget, which was submitted to Congress in January 2008.
GTR: And Sace?
Giacoppo: Sace’s focus on Africa remains strong. Even if the Italian market share in the continent is still limited, compared with other European players, Italian interest in the region continues to increase. Due to the recent international economy events, Sace business in Africa could be slightly reduced since the global economic downturn has caused the decreasing of international investments flows worldwide.