Africa gets better for investors

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Increased linkages between African countries is one of the key trends to watch in 2016.

By GEORGE OTIENO

As 2016 begins to unfold, it is an opportune moment to look back and reflect on gains made and challenges faced in 2015. The key question is – what drove business in 2015? The answer is based on the specific sector, but setting aside this detail, there were general trends that broadly impacted on trade and investments in Kenya. I will focus on trends in governance, infrastructure and security as these underpin both trade and investment growth in any country as well as on public and private sector trends and observations.

Notwithstanding any statistics to the contrary, on the ground, we continue to see government’s focus on creating a more enabling business environment for investors. Specifically, there have been efforts to tackle corruption, one of the key obstacles to a competitive business environment. We have also seen efforts to shore up security and improve security services.

Two aspects stood out in 2015; the increased investment in infrastructure and the continued move towards regional integration. Additionally, we now start to see some synergies between the public and the private sector towards achieving economic development.

Regional development

With regard to infrastructure, 2015 saw continued efforts to improve transportation but many projects remain at the pre-implementation stage, especially taking into account the regional approach to increasing economic development. For instance, work is progressing on the standard gauge railway linking Mombasa to Nairobi. Ultimately, this will connect to Uganda, Rwanda and South Sudan. Additionally, the oil pipeline will be vital for landlocked Uganda’s oil exports.

Increasing national electricity capacity is also a cornerstone of the government’s infrastructure plans. In 2014, national capacity was at 2,000MW. Several renewable energy projects, among them geothermal and wind energy, are expected to come on-line to boost capacity, contribute to the government’s 5,000MW target by 2020 and reduce the cost of electricity by up to 30 per cent.

Despite efforts to tackle some of the issues that would most likely deter investors, namely security and infrastructure, there are challenges that loom ahead.

Kenya, like most African governments has embarked on long-term infrastructure development plans that will cost billions to realise. The challenge governments face is lack of funds at affordable rates. Meanwhile, investors in government securities are demanding higher yields against the backdrop of weakening currencies. Yields on Kenya’s USD2 billion Eurobond, for example, rose sharply to about nine per cent since the country first borrowed the money in 2014 and the government is now paying much more than what was budgeted for. This trend may see fewer countries issuing bonds, thereby closing the door slightly on what has been a lucrative source of income. In the highly integrated global financial markets, the payment record of a Government whether on loans or supply contracts is public knowledge and can affect the pricing of future credits. This needs to be a key lesson for African Governments.

Interest rates

With regard to financing for the private sector, similar challenges persist within the banking sector. Depreciation of the Kenya Shilling against the dollar contributed to a rise in bank interest rates and a resulting increase in the cost of credit and loans. This situation poses a challenge to domestic companies, which will now have an even harder time securing credit and loans at reasonable rates. With Kenya’s current account deficit continuing to widen, this may be an ongoing concern for some time. Banks remain conservative, in part because they have Central Bank guidelines to comply with. Collateral remains a key consideration when lending. This is particularly constraining for the SME sector.

African Trade Insurance Agency (ATI) saw this as an opportunity to step in and offer a solution to banks. ATI is an insurer that offers specialised products for political and commercial risks, with its much broader lens focused on trade and investment risks in Africa. In 2014, the company introduced a solution that covers banks’ risks on their lending portfolio. This is a risk share structure with lenders, where if a borrower defaults the bank doesn’t lose all its investment. For ATI, it was a way to broaden access to credit for SMEs in an increasingly tight market. The institution has discovered that this innovation is quickly becoming a must have product for banks in the broader East African region.

The increasing demand by banks in the region for this particular solution also speaks to another trend. Although countries within Africa have historically reflected one of the lowest rates of intra-African trade in the world, from ATI’s vantage point, demand for regional risk solutions is rising. In 2015, these types of commercial risks represented 37 per cent of ATI’s overall exposure – which is quite startling considering that the company’s primary mandate has historically been political risk insurance for investments.

Infrastructure projects

This trend is especially pronounced within the manufacturing sector where multinationals are setting up local affiliates to serve multiple markets within one region or the entire continent. Demand from infrastructure projects has, in part, led to this growth as markets require more raw goods to manufacture products that feed into infrastructure projects. Cement, steel and plastics are common examples. While international-backed manufacturers expand in order to increase market share and keep costs down, domestic manufacturers are driven by similar factors, including a need to spread their risk concentration.

With depressed commodity prices impacting global trade flows, this trend will be one to watch in the months ahead. It will no doubt be a potential boon for financial solutions providers. And for the economies we serve, it can be an opportunity to grow more sustainably from within. Either way, Africa will be the winner if this trend is exploited to the fullest.

The writer is the CEO at African Trade Insurance Agency.

Email: george.otieno@ati-aca.org.

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