Issue 134 • 7 March, 2008

Analysts recalibrate risk perceptions in wake of SA, Kenya events

If pessimists are right, it may come to be seen as a balmy period when the strong macroeconomic figures registered by a majority of economies, and the upturn in investor interest from fixed income assets to downstream hydrocarbons mega-projects, suggested that economic positives could now outweigh the perennial political risk factors when assessing African business – the trend recorded by African Energy in 2006-07 (AE 129/22, 120/1). Recent events in Kenya and South Africa have shown the continent’s ability to generate fresh risk for project developers, their banks and insurers, even in those countries viewed as most secure. Fortunately, Kenya now has its power-sharing agreement, while the SA government has reacted in a more assured manner to tackle the electricity supply crisis and accommodate the Jacob Zuma factor. But in edgy early 2008, African Energy’s soundings of financial and risk mitigation markets suggest that concerns are evolving about social, economic and risk environments that have made many players take a harder look at sub-Saharan energy and the industry’s wider political and economic context.

There is still plenty of good news out there – including a revival of deals in Kenya. The sustained run of high oil prices has supported existing payments obligations and made new energy projects more viable for African oil producers. As Peter Hornsby, director at the London office of risk management brokerage Lockton, observed, “financiers and sponsors are dusting off projects from 18 months ago that now look good, which should see greater levels of exploration and production going ahead.” However, in Nigeria the Niger Delta crisis is stopping some companies from pumping oil. Lack of refining capacity and damage to products pipelines means Nigeria has to import gasoline, which is sold at subsidy, which creates a cashflow squeeze, so there is always three to six months of debt rolling forward, making for significant late payment risk.”

Nigeria’s economic reform and modernisation is an uneven process at best – but there are plenty to keep investors interested, as illustrated by the recent naira-linked $200m loan tapped by Oando, which attracted a cluster of hedge funds into the commercial syndication (see Finance and policy). Other oil-producing African markets could be ready for this type of lending structure, according to the Oando deal’s sole arranger Merrill Lynch.

Meanwhile for power sector financing, “there is an awful weight of money chasing deals, which can only be good for people developing projects,” said Aldwych International financial director Mike Scholey. The UK-based developer is in the process of financing the 90MW Rabai project in Kenya – whose return to the market is a very positive trend (see Finance and policy above). Scholey commented that “people were surprised by the recent events in Kenya, and have become worried about South Africa’s currency and political situation.” Consequently, “perhaps there has been an under-pricing of risk, and you might expect pricing to rise a little as a result.”

Eskom’s load-shedding has “made governments nervous, and has got things moving in places like Botswana and Namibia, which are realising that they can’t depend on South Africa anymore,” Scholey observed: “But they still all have their own domestic problems, and the power sector is not always a priority.” Several market players canvassed by African Energy reported a rise in requests for credit and non-performance type cover as a result of the economic instability caused by flooding in Zimbabwe, Zambia, Mozambique and Botswana. “This means lower crop yields and seed and food crop shortages will be seen later in the year, and in the meantime increased prices in addition to the commodity market price increases,” said Texel Finance’s London-based director Ian Henderson.

In the fixed income markets, risk perception “is rapidly turning positive”, contended Peter Enti, until recently with Standard Chartered Bank. He pointed to rising levels of offshore and onshore bond market flows. “This is largely due to investors looking much more closely and carefully at African risk, a significant move away from the previous reliance on headline news which mostly reports on the negative issues,” Enti told African Energy. One notable development was that “the change in perception is not just predicated on the commodity story but one of a continent that has imbibed transparency, democracy and responsible macroeconomic management sailing in the wind of debt write-offs.”

London Forfaiting Company (LFC) is among operators assuming a rising level of risk on African banks. Managing director Simon Lay reported that most business was in Nigeria but transactions also emerging from Ghana, Mali, Mauritania, Ethiopia and Burkina Faso.

At multilateral investment and export credit insurer African Trade Insurance Agency, chief executive Peter M Jones argued that “the overall risks in African countries are improving”, while stressing that risk remained highly country specific. “The recent problems in Kenya have helped people understand the concept of political risk, but it did not increase the overall risk of doing business,” he told African Energy. According to Absa Corporate & Business Bank general manager for commercial international banking Brad Greenfield, trade finance remained unaffected, at least for now. “We have not noticed any impact in our Kenyan business yet,” he said. However, in South Africa, “the volatility of the local currency remains a key concern for both importers and exporters” (see Finance and policy).

Another theme raised by several insurers was the risk attached to participation in the burgeoning but often legally murky mining sector. “The mining licence review in the DRC [Democratic Republic of Congo] is more concerning [than Kenya], as is the sudden imposition of higher royalties and windfall taxes on mines in Zambia,” Jones said: “Hopefully, these issues will be satisfactorily resolved but they are currently a cause for concern.” Lockton’s Hornsby said physical security was the chief concern for mining contractors in DRC “Enquiries are often from people looking to make sure that equipment worth millions of dollars is not stolen or destroyed.”

A senior ECA official, who asked not to be named, emphasised that “Africa’s resource curse looks set to bite again.” He commented: “Mining countries are looking to get their hands on cash from western investors, rather than focusing on their medium- to long-term needs. A stronger institutional framework and better governance is required.”

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