Editorial by Jef Vincent-Chief Underwriting Officer
Three pivotal events took place in 2011. Separately, they will impact how business is conducted in many African countries – together they may transform the economic landscape altogether.
The youth are beginning to assert themselves, and as the majority in most African countries, their voices are commanding attention. With 50% of Africa’s population aged 16 or under and a projected doubling of working age people in the next 30 years from 500 million to 1.1 billion, jobs growth will become an increasingly pressing issue.
From a singular moment in Tunisia triggered by the act of a street vendor in 2010, African governments have been put on alert – quite simply, people are now demanding with more urgency that their governments do better – to create more jobs and opportunities.
While the youth in North Africa protested under the banner of the ‘Arab Spring’, similar protests began in Sub-Saharan Africa proving that no government was immune from public and global scrutiny.
Growing access to mobile communications and the web across Africa have been credited for helping people to mobilize. This ‘revolution’ as some have called the broad movement, has revealed what telecommunications companies have known for years – Africa represents tremendous growth opportunity.
Mobile devices have improved the lives of millions who are now able to take part in the formal economy as they bank, pay bills and even receive training at affordable rates. For mobile telephone companies, the opportunities are endless – in the past five years the industry has grown by an unbelievable 550%.
While the mobile telephone penetration rate in Africa is low relative to the rest of the world, standing at just 41% compared to the global average of 76%, Africa has 600 million mobile phone users – more than Europe and North America.
As companies vie for market share in this competitive industry, they are building mobile networks and strengthening infrastructure in many African countries. From a risk perspective, the mostly international businesses that can supply and install the required equipment may be hesitant to enter into contracts with local operators, who are often not in a position to satisfy the financial requirements needed to do business on a credit basis.
Since 2005, ATI has facilitated access to equipment for operators in five countries in Eastern and Southern Africa. One of our main clients, is an international supplier who has been able to enter into several contracts with local operators in part due to the ATI insurance cover they’ve obtained to protect them against non-payment and a range of political risks. In many African countries, these projects are helping governments achieve their targets to increase connectivity and to help bridge the existing socioeconomic gaps between the urban and rural populations. To date we’ve insured nearly $95 million worth of transactions in this sector with a positive growth curve predicted into the next several years.
The second big event to hit the continent in recent months has been the Euro zone crisis. While some experts predict that the continent may not be able to weather another external crisis that falls so closely to the last global financial turmoil of 2008, I believe Africa is already turning this event into a positive.
Despite the adverse impacts such as a decrease in remittances to many African countries as well as foreign direct investments, an interesting and, I would argue, positive trend is emerging. From what appears to be an adverse situation, African banks have stepped in to fill the financing gap left by their international counterparts.
As the large global banking giants retreat to their home territory, banks such as Standard Bank of South Africa, PTA Bank and others are working with African governments to help them keep their infrastructure development projects afloat.
With decaying road, water and power networks that will require at least $93 billion a year to modernize, African governments have made infrastructure a priority. To assist, African banks have increased their lending capacity – of the $3.5 billion worth of transactions ATI covered in 2011, $900 million represented projects insured on behalf of banks. This contrasts with just $121 million out of a $1.2 billion portfolio in 2010.
The government of Tanzania has been at the forefront of partnering with the private sector to raise needed capital for infrastructure development. In one transaction, which ATI backed, a leading African bank led a syndicate of financiers to produce a $250 million financing facility for infrastructure development. The project was hailed by many as setting a possible trend for other regional governments to access infrastructure financing in the capital market.
The third development that I believe will impact on the African economic climate is ‘the war on terrorism’, which seems to be moving to Africa. Costly military operations are bound to put a strain on the already tight budgets of African governments and just as important, the risk perception in these countries may actually increase in spite of their efforts to curb terrorist threats.
The net effect is that we are seeing an increased uptake of political risk insurance and covers against terrorism and sabotage. From our portfolio we have seen an average increase of over 120% uptake of these products in the last three years.
Level of PRI and T&S Uptake by ATI Clients in Africa: 2009 – 2011
While increased risk perception may account for some of this growth, It’s also important to note that other factors may play a role such as the demand for larger and longer-term loans to finance infrastructure projects.
To give a balanced picture, in addition to the events that did occur in Africa last year, I must also mention what did not happen.
The wave of elections that hit Africa in 2011 was predicted to have a destabilizing impact. Yet, this did not happen. Instead, we witnessed country after country undergoing a peaceful transfer of power – with only a few exceptions. This is significant because since 1991 African governments have transferred power through the ballot box more than 30 times—much more than the Arab world.
Africa is proving its resiliency once again. Even in the face of these challenges, the continent has seen an increase in investments that has soared, according to The Economist, tenfold in the past decade. Buoyed by a strong commodities market and a growing manufacturing and services base, the IMF projects Africa’s growth to reach an average of 6% in 2012 – nearly the same rate as Asia and most certainly ahead of the overall global growth rate.
All these factors combined are fueling the optimism that continues to bathe the continent. My message to investors looking at Africa as a serious destination is to come and reap the benefits because this continent represents the future. With political risk and other insurance products now readily available, there’s no reason that you wouldn’t be able to make a profitable go of things here.
