Despite the end of the commodities super cycle, the fundamentals of African economic growth remain in place. Africa is also increasingly peaceful and governance standards continue to improve rapidly. However, a critical need for infrastructure investment remains, with funding currently in short supply. This combination of factors may provide an ideal opportunity for private financiers to fill the funding gap. Matching investors to infrastructure projects in Africa could be a win-win, supporting long-term potential growth on the continent in return for meaningful, long‑term returns.
Although the IMF has revised down the annual growth forecast for sub-Saharan African growth in 2016 to 1.6%, well below the 5.1% enjoyed in 2014, the drivers of growth are broader than simply the commodity super cycle. While surging oil and other commodity prices certainly benefited Africa, growth is also supported by improving governance, urbanisation, labour productivity growth and an emerging services economy. In addition, the proportion of African countries that are largely peaceful has grown significantly over the last thirty years.
African governance: Countries at place vs countries involved in armed conflict and/or authiritharian rule
Source: Investec Asset Management
The fall in commodity prices has put pressure on both government and international private sector financing. Chinese entities have sharply reduced investment since 2013 and commercial banks have withdrawn funding due to growth concerns and regulation. Likewise, government finances have been crimped by the fall in commodity prices even as rising bond yields have pushed up borrowing costs. However Africa still requires at least US$93 billion in infrastructure investment per annum, with an estimated infrastructure funding gap of some US$31 billion per annum.
The opportunity/need goes beyond power, roads and ports, to encompass educational facilities, agricultural storage and financial infrastructure to include urban, social, services and farming infrastructure. Although many projects have been shelved, the lack of facilities in many countries, there are still viable projects and opportunities for business expansion, particularly in infrastructure.
The African debt markets remain less developed than those of the developed world, particularly corporate credit. Therefore, infrastructure sponsors are much more dependent on either bank funding or private debt funding for their projects.
The private credit markets, which include infrastructure, are by definition illiquid. However, investors in these areas are well aware of the constraints and benefits of these investments. Ultimately, long-term investors have an opportunity to benefit from improving valuations and capture a long-term illiquidity premium, while supporting Africa’s growing infrastructure development.
The viability of any infrastructure funding opportunity will always depend on its fundamentals, market conditions, supply/demand dynamics and valuations.
Currently there are a growing number of projects with intact fundamentals. The challenging market conditions has resulted in less demand for certain types of credit resulting in increasingly attractive valuations for some financing initiatives. But as always, investors will need to remain very cautious and ensure that the fundamental assessment is solid before investing.
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