At the start of the decade, trade and export financiers would look with real comfort only at Moroccan and Tunisian risks within the wider Maghreb region, complaining that the relatively small size of these economies limited their business. Now all has changed as relative political stability and growing hydrocarbons-based wealth in Algeria, Libya, and to a lesser extent Egypt and Tunisia, is facilitating the financing and investment flows required to evolve the region’s under-developed infrastructure.
“There has been a clear shift in the nature of our business in North Africa to infrastructure transactions, as the region’s hydrocarbons producers try to reinvest their oil and gas windfalls,” says Jerome Swinscoe, senior underwriter at the HCC Service Company’s UK branch.
For short-term financiers, Stefano Cesari, Milan-based trade assets syndication manager in UniCredit’s global transaction banking team, observes that some of the very big ticket letters of credit (LCs) are being raised to finance capital goods and turn-key plants or machinery. Regular items financed by Unicredit for buyers in Algeria and Morocco, and to a lesser extent Libya and Tunisia, include power generation equipment, rolling mills, food processing machinery and refrigerators.
There has also been a growth of open account transactions involving public sector obligors in some North African countries, generating a growing level of receivables discounting.
“We are quite active in the telecoms sector, where we buy receivables owed by telecoms equipment suppliers in Europe, which become a risk on the telecoms operators in Egypt, Algeria and Morocco,” observes Alain Lacoste, Calyon’s head of global origination for EMEA. “There is a flow of €10mn plus payments in these markets, which are normally settled without too many problems, but where payment delays can occur due to administrative procedures,” he explains.
The high oil price is clearly helping keep banks generally happy with most North African risks. “If it’s above $60/barrel, we don’t see any specific issues in the region, but the local political risk remains monitored in some areas,” he cautions. comments Denis Stas de Richelle, global head of export finance for Société Générale Corporate & Investment Banking (SG CIB).
Florence Mognetti, political risk director, Coface UK & Ireland adds: “The countries we are dealing with are cash rich and need European technology for equipment and infrastructure so there are no particular concerns for the time being.”
However, Coface’s chief economist Yves Zlotowski, highlights some of the region’s potential short-comings, observing that North Africa is bucking the trend whereby many other emerging markets have received upgrades in recent years. “If you look at our short-term ratings, the only change has been Algeria’s upgrade in 2005 from B to A4,” he says, underlining that, “business and governance issues are holding back further ratings improvements”.
Zlotowski says that this is especially mirrored by Coface’s new ‘business climate’ ratings for both Algeria and Libya, which are lower than their country ratings. “Algeria has a B rating for its business climate, compared to its B country rating, and Libya has a D, compared to its C country rating. In both cases, the macro risks are very good because of oil revenues, but there is less effort to improve the business environment.”
Algerian paradigm change
Algeria’s Central Bank has for over four years restricted Algerian parastatals from borrowing money abroad, to better utilise ballooning foreign exchange revenues that grew by a staggering 230% between 2003 and 2007. These revenues are driving Algeria’s US$155bn, five-year investment programme, launched in 2005, which has generated recent US$750mn and US$800mn contract awards by Sonelgaz, the power sector parastatal, and spawned a number of larger fertiliser projects as well as tourism and real estate developments, all aimed at diversifying the industrial sector away from oil and gas.
“Most of the transactions with public entities are paid in cash via confirmed LCs that are opened by the leading three Algerian banks, Banque Nationale d’Algerie, Banque Extérieure d’Algérie, and Credit Populaire d’Algerie. Banks from France and all across Europe are requested to confirm – although we have seen a limited number of exporters accepting not to confirm LCs when the applicant is Sonelgaz,” says Stas de Richelle.
Emmanuel Bouvier d’Yvoire, global head, export and trade finance at Calyon, adds: “The lack of opportunity for Algerian medium-term financing has given rise to some huge LC confirmation syndications. We were involved in several totalling around €1bn for the power sector earlier this year – and there is another €1bn LC in the market now for Sofert’s fertiliser project.”
With confirmation capacity stretched to the limits for LCs that are swelling in size and lengthening in tenor – sometimes to as much as four years, pricing is being pushed up, Bouvier d’Yvoire adds. “It’s already 10-15 basis points more than at the end of 2007 – it will take time for banks to adjust to the new tenor and capacity requirements.”
Opportunities for ECAs are now limited to private sector Algerian risks under the new paradigm, with the most active insurer here being Denmark’s Eksport Kredit Fonden (EKF), which in September 2007 backed a structured non-recourse financing for private sector player Lafarge’s Ciments Blanc d’Algerie (CIBA) plant, adding to a series of private sector cement deals in past years.
According to Yusuf Ali Khan, vice president and team head for Middle East, North Africa, Turkey & Pakistan in Citi’s export & agency finance group: “amongst the key innovations of the US$320mn-equivalent local currency financing, where Citi acted as sole mandated lead arranger, was the fact that the debt for the non-recourse financing was raised entirely in local currency in Algeria, and it was the first time that EKF had provided a guarantee in Algerian dinars, a non convertible currency. “The challenge was to get both EKF and the regulator comfortable with the structure of the local currency guarantee,” he comments.
EKF will also “consider open account cover case-by-case, depending on a potential buyer’s equity and cash flows,” says Esben Schoejdt, EKF’s senior country risk analyst, adding that this policy applies generally to North Africa, with the exception of Libya.
Another private sector player, Cevital, is mobilising ECA-backed financing: “via a framework agreement in the transportation sector,” says Stas de Richelle.
“Algerian requests to HCC have involved political risk insurance (PRI) cover for transportation projects in Algiers and Oran. “The market is still very keen and aggressive, with premium rates remaining at around 50% of what they were five years ago, but any new growth in political violence could pose risks for any infrastructure project in the country,” argues Swinscoe, citing a recent suicide bombings, one of which killed a French civil engineer.”
Cash is also the prevalent payment technique in Libya, where financiers place a higher premium on the risk, as reflected by the confirmation pricing attached to the country’s growing volume of LCs. “For an Algerian LC, typically with a 24 month-tenor, the market would tend to ask for a fee in the 40-70bp per year range. In Libya, the fee would be in the range of 110-140bp, with the lowest pricing asked for paper issued by Central Bank of Libya, then by Libya Foreign Trade Bank,” emphasises Stas de Richelle.
Cesari adds that Unicredit will take risk on all Libyan public banks and, more recently, some private banks. “However Italy’s market for Libya is largely dominated by UBAE Bank Rome and ABC Milan, which handle something like 80% to 90% of total export volumes. “Only recently have we started to get some flows thanks to cooperation with UBAE,” he says.
“Strong relationships are generally necessary for Libyan trade finance, the banks there remember the institutions that were faithful during the more difficult period,” says Lacoste, who highlights that the Libyan market is nonetheless changing. “We have seen an increase in the last 12 months of LCs issued by Libyan banks other than Libya Foreign Trade Bank, and some mergers and acquisitions within the local banking market,” he says.
Libya’s post-sanctions opening-up is, “continuous, although maybe a bit slower than we would wish,” comments Margrith Lütschg-Emmenegger, president at the Fimbank Group, underlining that several foreign investors with minor shareholdings in the banking sector will start to allow the introduction of new products”.
Fimbank is still hoping to obtain a representative office in Libya, following other major players such as HSBC, which recently established a rep office in Tripoli.
Stas de Richelle points out that Libya does not yet use any long-term financing. “I don’t see any movement in that direction in the foreseeable future, unless the private sector develops more strongly, which may take another 12-18 months,” he predicts.
“Greater deal flow and traction will come with the development of the private sector, and as foreign banks acquire licenses to operate local branches, thereby allowing them to more actively market export credits,” adds Khan.
For the infrastructure projects underway, – such as roads, real estate and tourism, – “insurers taking contractor payments risk on Libyan banks are comforted by the multi billion dollar annual allocation in the budget for this,” notes HCC’s Swinscoe.
“The market for Libya has expanded substantially as a result of sanctions being lifted and this has allowed all insurers to participate, which has had a downward effect on premium rates as supply increases,” adds Thomas Holmes, associate director at the London office of Miller Insurance Services.
Soft market in Egypt
The market has also softened for certain counterparties in Egypt, says Holmes, adding that cover for oil project contracts and for payments risk on local banks is most in demand. At HCC, observes Swinscoe, “we see a few projects where existing oilfields are looking to expand, mainly in the Gulf of Suez, where comprehensive loan cover against default, or PRI cover focused on expropriation is required.
Citi is looking at the market, “to address public and private sector requirements both from a tied and untied basis utilizing export credit agency, bilateral and multilateral support,” says Khan, while Bouvier d’Yvoire flags up a new ECA-backed financing tranche being negotiated for the Cairo metro.
Those in the market believe that Egypt’s banking system is strong enough to be able to provide the bulk of the financing needed for investments by the public and private sector.
The exceptions to this trend occur where international banks come into the market via project finance or by taking direct risks on Egyptian buyers in telecoms, LNG terminals and trains, and power generation units.
SG’s Stas De Richelle gives an example of a large LC confirmation that bank did confirming a €450mn payment to a German exporter, issued by SG’s local bank.
Tunisia – a star performance
Some ambitious investment programmes are at work in Morocco, where French banks are the most active, and where the country has taken some big steps to diversify its predominantly agriculture-based economy, generating growth opportunities in areas such as tourism, banking and manufacturing. Coface reports that it has a couple of very big projects coming in the energy and transport sectors in the future that will let it use export financing products, forcasts Lanquetot.
The Tangier Med project on the northern Mediterranean coast, for example, will handle 8mn shipment containers a year when complete in 2015. According to Stas de Richelle, Morocco represents one of the most active markets for export finance banks. “There is a rising private sector, and a substantially private sector banking system, which knows how to finance long-term investments. But ECA and local bank financing can compete and mix, and banks including ourselves are looking at ECA-backed local currency structures now.”
Bank enquiries to insurers focus on regular import trade. “We have seen requests for a project linked to phosphate. Rates tend to be very cheap, and we focus on the first tier banks in Morocco,” says Swinscoe.
But both Tunisia and Morocco have shown volatility on Coface’s payments index, says Zlotowski. “Morocco has been hit by bad harvests, and hardships in the clothing industry, and Tunisia by the credit crunch, linked both to poor performances in the tourism and textiles sectors, and to a local banking system characterised by some wavering of the credit policies among the local banks, which affects the payments behaviour of companies in Tunisia.”
On the medium and long-term side, Tunisia is not as regular as some bankers would like, and there is a high level of competition from institutions that provide concessional financing.
Stas de Richelle also observes: “Tunisia is a small country, but we do see public spending from time to time where ECA financing is requested in sectors such as health, oil and gas, power, hotels, defence and education, and for amounts in the US$25mn to US$50mn bracket.”
The local banking sector is unable to fund in any currency except the Tunisian dinar, suppliers’ requests for hard currency-denominated funding can often give rise to syndicated loan facilities or ECA-backed deals, with the most regular of the latter being turbine purchases every three to four years.
However, despite market volatility, Tunisia is in many ways the region’s star performer to date, attaining real GDP growth of 6.3% in 2007, and the fastest real trade growth in the region at 17.8%.