A wait-and-see approach has settled over North Africa’s infrastructure sector as governments, sponsors and lenders wait for the Covid-19 pandemic to pass. Oil and aviation are hardest hit, with experts reporting little appetite to finance deals in struggling industries and suggesting some projects may even be cancelled. Elsewhere, the role of multilaterals and export credit agencies in financing future projects is seen as key, writes Sarah Rundell.
The coronavirus has cast a veil of uncertainty over the future of infrastructure investment in North Africa. Projects underway with money in the door have moved contractors off-site, triggering unexpected risk, while new uncertainties face government procurers with multiple deals in the market. Elsewhere, investors, lenders and lawyers have swapped physical meetings and comfortable offices to work remotely with all the challenges therein.
Anecdotally, market participants report that some borrowers scrambled to preserve pricing and close deals before lockdowns were imposed. But large infrastructure projects, years in the pipeline, are less agile and are now caught in the pandemic’s limbo. Of course, the macro-economic need for strategic infrastructure like water, utilities and power for North Africa’s young and fast-growing economies hasn’t gone away, and much will carry on as planned. It is just a question of when, as governments across the region – whether dependent on oil or tax revenues – rush to rewrite their budgets. More seriously, the appetite to finance deals in struggling industries like oil and gas and aviation has “all but disappeared”, according to some players.
The virus is likely to impact the region’s ability to access finance. Although foreign banks still have adequate capital on hand, UAE banks that have expanded into the region may now prioritise their domestic relationships instead. Meanwhile local banks, some with large exposures to real estate and SMEs, may also prioritise preserving cash over lending long-term, waiting to see what emerges once the storm has passed.
The situation promises to increase North African economies’ reliance on export credit agencies (ECAs) and multilaterals. Many have already sprung into action, offering a different kind of support. Rather than supporting long-term capital expenditure in foreign markets, major ECAs such as UK Export Finance (UKEF), US Exim and the Nordic ECAs have introduced emergency programmes in response to the crisis to support exporters in their own countries.
The oil and gas sector accounts for the lion’s share of Egypt’s capex projects, where investment includes flagship offshore developments like BP’s West Nile Delta project, alongside pipelines, refineries and power grids. Some are focused outside the country as Egypt pushes to export energy across the region. The dramatic fall in oil prices as the pandemic ravages the global economy has cast a cloud of uncertainty over these projects, with fears in some quarters that some may be cancelled all together.
Others reason that energy infrastructure is long-term, many projects are well under way and are structured to navigate short-term oil price volatility. New due diligence and structures are also lending support. “At this stage, we are not seeing any significant slowdown of workflow in the region or elsewhere, as the majority of projects getting done now will have extra due diligence and structures in place, if needed, to mitigate any potential risks,” observes Mark Castillo-Bernaus, global head of projects development and finance at law firm White & Case. “No one is making decisions not to go ahead, and long-term and substantially advanced deals are continuing. Infrastructure still needs building.”
On the flipside, countries that import oil, including Egypt as well as Morocco and Tunisia, will stand to gain from reduced prices, lowering their import bill. “They could look at diverting some of the funding they may have kept for buying oil and put it towards infrastructure spends as they look to restart their economies post-Covid-19,” says Yusuf Ali Khan, managing director, head of trade for Middle East, North Africa, Pakistan and Turkey, at Citi.
Positively, Egypt’s diversified economy, which the World Bank had forecast would grow 6% in 2021, is in a good position to ride out the worst of the pandemic, however sharply updated forecasts fall. “This bodes well for the long-term continuation of these large gas and construction projects,” says Robert Besseling, executive director of EXX Africa.
In other trends, the pandemic could trigger a retreat in foreign banks’ Egyptian presence. In recent years, UAE banks have expanded their footprint in the hot and busy market, including First Abu Dhabi Bank and Emirates NBD. Covid-19 may cause a reversal of the trend, flags Kyle Nevin, a projects and banking partner at Allen & Overy in Dubai. “In the immediate term, Middle East banks will likely be under pressure to prioritise supporting relationships with core corporate and sovereign clients in their home markets ahead of expansion or investment in new ones,” he says.
Steady flows into Egypt’s solar infrastructure is expected to continue. Recent investments include ACWA Power’s 200MW solar plant at Kom Ombo in southern Egypt, adding to the Saudi Arabian group’s significant operations in the region, which include the 170MW Noor photovoltaic (PV) 1 programme in Morocco. These projects also draw liquidity from the likes of the World Bank, the European Bank for Reconstruction & Development (EBRD) and the European Investment Bank (EIB), linked to Europe’s growing appetite for North African clean electricity.
Egyptian capex and infrastructure projects can count on the government’s preparedness to provide a backstop to ECA financing if needed. “Sovereign guarantees are selective and usually linked to the government’s ability to provide these versus promoting a non-recourse approach,” explains Khan. Some large infrastructure projects in Egypt are currently seeing stakeholders weigh multilateral and ECA finance and evaluating the depth of the bank market for debt for long-dated tenors over 10-years, he says.
Egypt’s new administrative capital city, a vast construction site nearly 50km east of the capital promising Africa’s tallest building and a new monorail train link to Cairo, is a case in point. The new city also exposes another trend in the country’s infrastructure sector with consequences for trade flows. Military-run companies are participating in much of the construction, observes Besseling. The presence of these groups, owned by the National Service Projects Organisation, an economic arm of the military, has sparked concern amongst Egypt’s private sector, worried about unfair competition. It could also explain why Egypt’s foreign direct investment remains low in sectors other than oil and gas.
The low oil price is hitting Algeria hard. Although oil infrastructure is long-term and structured to withstand oil price volatility, large capex commitments to the energy sector will likely be withdrawn, along with financing for oil-related projects around petrochemicals or plastics. This gloomy backdrop is reinforced by warnings from the International Energy Agency that the collapse in prices could cut the revenues of “vulnerable” producing countries like Algeria by up to 85%.
One trend could see Algeria take on more debt, either drawing on multilateral and ECA support, or tapping the capital markets. “Algeria is a big oil producer and one of the countries that will look at foreign currency debt,” predicts Khan.
But Algeria’s ability to raise finance hangs on important reforms. In a policy to reduce foreign exchange debt the government introduced regulations in the mid-2000s that prevent foreign currency financing. “Algeria used to attract a lot of ECA support in the late 1990s, early 2000s,” recalls Khan. “The government will consider loosening some of those regulations to allow some sectors to selectively raise foreign currency debt, especially if oil prices remain at historically low levels.”
Other reforms to increase access to finance to boost the economy are also in the offing. Islamic banks have been knocking on Algeria’s door for years but have met enduring resistance, says Besseling, who believes the government may now open to this source of finance. Elsewhere, it might finally phase out oil subsidies, he suggests.
Optimists also hope the pandemic will spur diversification and encourage Algeria to look at alternatives to commodity exports like manufacturing or renewables. “Algeria has the potential to reach out to multilaterals to get help in return for economic restructuring and diversification,” says Besseling.
Renewable energy is a key area of investment in Morocco, where many structures, particularly in wind, follow OECD guidelines characterised by 18-year tenors and non-recourse financing. “These structures have been very much in vogue pre-Covid and are able to attract significant interest from a host of lenders and multilaterals,” says Khan.
As in Egypt, trade flows have been boosted by the government stepping in to support capex on a case-by-case basis. This is evident in aviation, where aircraft purchases from Europe (Airbus) and the US (Boeing) have been supported by their relevant ECAs with backstops from the sovereign. There is little expectation of much investment in aviation until the pandemic is out of the way, and ECA and sovereign support will be even more vital. “Banks will be much more circumspect around aviation until they see government support coming in,” says Khan.
In one interesting development, Morocco’s manufacturing sector has adapted in response to the pandemic with IT, auto and defence manufacturers switching to manufacture personal protective equipment, respirators and masks. “Morocco’s manufacturing sector is still open for business,” notes Besseling, who adds that the country could become a significant exporter of goods to counter the pandemic once its own needs are met. Morocco currently has the third-highest number of infections in Africa.
Morocco has been quick to tap multilateral financial support to keep the economy on track. The EBRD has lent Morocco’s Bank of Africa US$157mn to help finance SMEs hit by the outbreak in a bid to keep imports and exports flowing. Elsewhere, Morocco has just drawn on a US$3bn credit line with the International Monetary Fund, agreed in 2015, renewed in 2018, and used for the first time in April 2020 in response to the pandemic. In another sign of the country readying access to finance, it has raised its foreign debt ceiling (limited at US$3bn) to allow it to borrow more money.
That said, selling sovereign bonds comes with high yields and foreign currency risk. Cash-strapped North African economies may need to tap the bond market for their fiscal needs, but corporate sponsors are unlikely to do so. “While a number of active corporate sponsors in the region have bond programmes as part of their corporate financing stack, project bonds are likely to remain the exception rather than become the norm for greenfield projects in the region,” says Nevin at Allen & Overy. Bond investors tend to be unwilling to take construction risk, and sponsors have to manage negative carry on traditional bond issuance, he explains.
Infrastructure projects and trade flows into war-torn Libya are few and far between. Susah port, a multi-purpose container port and logistics hub backed by private security and critical infrastructure specialists Guidry Group, is the only project on the map, yet is still in its early stages. Libya’s civil war has made the country a no-go for all big projects, says Citi’s Khan. “It is not a market we are getting into anytime soon.” Libya will also feel the heat of lower oil prices and lacklustre demand as buyers look elsewhere.
“Libya will be a forgotten country over the next year or two,” predicts Besseling. “It is an intractable conflict no one can resolve at the best of times.” In one ray of light, however, low oil prices will take away an important source of revenue oiling the wheels of a conflict where the central bank divides oil revenues between the two warring sides.