Increased linkages between African countries: one of the key trends to watch in 2016
By George Otieno
As 2016 begins to unfold, it’s an opportune moment to look back and reflect on the gains made and the challenges faced in 2015. ATI sits in a unique position. We are an Insurer but we offer specialized products for political and commercial risks. Therefore, while we provide insurance products, ours is a much broader lens focused on trade and investment risks in Africa and to call us an insurance company, along the lines of general insurance, wouldn’t accurately capture what we do as we are a Development Financial Institution (DFI). ATI offer solutions for risks that companies might face if, for instance, they want to expand into new markets or enter into a contract with government or its agencies. My reflections are made from n this standpoint – that of an investor or trader and with a specific emphasis on the Kenyan market.
With my perspective clarified, I turn to what I consider a key question – what drove business in 2015? The answer is based on the specific sector, but setting aside this detail, there were some general trends that broadly impacted on trade and investments in Kenya. I will focus on the 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 governments 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 also see that the efforts to shore up security and improve security services have had made progress.
Two aspects were striking in 2015; the increased investment in infrastructure and the continued move towards regional integration. Also, we now start to see some synergies between the public and private sector towards achieving economic development.
With regard to infrastructure, 2015 saw continued efforts to improve transportation but many projects remain at pre-implementation 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 Also, we have yet to see much progress on the oil pipeline that 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 and boost capacity helping to contribute to the government’s 5,000MW target by 2020 and to reduce the cost of electricity by up to 30 percent.
Despite the efforts to tackle some of the issues that would most likely deter investors, namely security and infrastructure. there are some 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 these Governments face is where to source for funds at affordable rates. Meanwhile, investors in government securities are demanding higher yields against the backdrop of weakening currencies. Yields on Kenya’s $2 billion Eurobond, for example, rose sharply to about 9% since the country first borrowed the money in 2014 and the government is now paying much more than what was budgeted. 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 easily public knowledge and can affect the pricing of future credits. Going forward this needs to be a key lesson learnt for African Governments.
With regard to financing for the private sector, , similar challenges persist within the banking sector. The depreciation of the Kenya Shilling against the dollar contributed to a rise in the bank interest rate 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.
ATI saw this as an opportunity to step in and help the banks. In 2014, we introduced a solution that covers the bank’s 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. What we discovered in the process is 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 our vantage point, we see demand rising for regional risk solutions. In 2015, these types of commercial risks represented 37% of our overall exposure – which is quite startling considering that our primary mandate has historically been political risk insurance for investments.
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 concentration of risk.
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 in both the banking and insurance sectors. 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.