Where will the Sub-Saharan Africa recovery come from?

Sub-Saharan Africa was particularly hard hit during COVID-19 as political ambitions of lowering support of carbon emitting industries affected one of the most supported sectors in the region on top of the consequences of the pandemic. Jonathan Skovbro Steenberg explores Berne Union data to see where recovery can come from.

The inequality between developed, developing and emerging markets generated by the COVID-19 pandemic has been an area of discussion since the pandemic began. From the initial difference in what countries could do to stop the spread – whether that be through lockdowns or financial support – to how to effectuate a recovery from the economic drop. Meanwhile, most developed economies are planning ambitious infrastructure investments that emerging economies simply cannot afford. Emerging economies have experienced a slower recovery for many reasons such as lower access to vaccinations, rising costs, fiscal constraints and continued hesitancy from foreign investors. The difference was and is clear when looking at how the pandemic affected financing, especially interest rate spreads and ratings downgrades.

All of this has resulted in a quicker recovery for new cross-border investments in developed economies driven by lower interest rates and post-pandemic government stimulus while emerging markets are still seeing further dips. For cover by Berne Union members, most regions still have not seen a full recovery following the COVID-19 pandemic as is shown in the Figure 1, with all regions, except North America, still being below the 2019 level.

However, the unequal recovery is still evident as regions with more developed economies – such as North America, East Asia & Pacific, Latin America & Caribbean, and Europe – being closer to their 2019 levels. They have all seen an improvement between 2020 and 2021, whereas the remaining regions are still more than a quarter lower and fell further in 2021. Sub-Saharan Africa is 36% lower in 2021 than it was in 2019.

Figure 1: Shift in new commitments underwritten by Berne Union members by region

[% change between 2021/2019 and 2020/2019, MLT export credit, PRI and OCB Support]

Note: The orange markers are the difference between 2020 and 2019.

Sub-Saharan Africa has gradually been making up a larger share of insurers’ portfolios in the medium-to-long-term business ((MLT) export credit, political risk insurance (PRI) and other cross-border (OCB) support) in the past decade, but this trend has changed since 2020.

What is the cause of this?

While there is a myriad of reasons – some already mentioned – a large part comes down to a sizeable fall in transactions-related natural resources. Sub-Saharan Africa, being a region blessed with many natural resources, has seen much investment in this sector over the past 10 years and this continued to be true in 2019, the first year Berne Union started recording sector data. However, this sector has seen a large dip in new commitments since the pandemic driven by a hesitancy to underwrite new large-scale transactions in an uncertain risk environment, but also a political decision to slowly transition away from carbon intensive industries and towards more renewable energy sources.

Figure 2: Decomposed change in new commitments to Sub-Saharan Africa by sector

[% change between 2021 and 2019, MLT export credit and PRI]

	Natural resources	Non- specified	Infra- structure	Other/ Multiple	Manu- facturing	Renewable energy	Energy	Trans- portation

Natural resources transactions are a notable 57% lower in 2021 than 2019 with two years of consecutive drops in new commitments. Looking at the graph, it is clear that 29% of the overall drop (an overall fall of 36%) in new commitments between 2021 and 2019 is simply driven by a fall in transactions related to natural resources.

The current geopolitical situation with rising energy costs may slightly change this trend on the short term with certain natural resources, such as gas and some metals becoming more financially attractive as well as some governments, especially European ones, wanting to diversify their energy imports. Several European governments have already struck new deals with African countries in 2022 to increase imports of gas^[1] which could spur further investments in the sector in the coming years. However, the overall longer term trend towards more renewable energy will still be there.

Can and will renewable energy transactions replace the historic business in natural resources?

Despite still being a smaller sector, cover for renewable energy transactions was 53% higher in 2021 compared to 2019 with the number of insurers active in renewable energy transactions in the region also rising by 40% in this period. Replacing the gap left behind will not happen overnight, but it is not impossible that renewable energy projects can fill it. On a global scale, the energy transition will require specific metals and minerals that are native to Sub-Saharan Africa and on a regional scale the continent is ideal for much generation of sustainable energy, especially for a region that will only see more people and growth over the next few decades.

In its Energy Transition Outlook 2021,^[2] DNV projects that solar PV and wind power will see the strongest growth in the region towards 2050 but highlights that one of Sub-Saharan Africa’s problems is that electricity still makes up a small part of the energy consumption, and that is why investments in infrastructure, such as grids, is necessary too. IEA emphasises that ‘Africa is home to 60% of the best solar resources globally, yet only 1% of installed solar PV capacity. Solar PV – already the cheapest source of power in many parts of Africa – outcompetes all sources continent-wide by 2030’ in its Africa Energy Outlook 2022^[3].

Several insurers – both ECAs, multilateral institutions and private insurers – have an increasing risk appetite for renewable energy or transition projects either due to widened mandates/strategies or simply a desire to increase the sector’s share in their portfolios. This includes both traditional renewable energy production (such as hydropower, solar PV or wind power), but also support of transitional projects, energy efficiency and battery development. The large demand for these transactions is so significant that some private insurers are having to lower premiums to underwrite these projects. Some ECAs have even introduced more favourable requirements for renewable energy or transition transactions, such as lowering local content requirements, increasing amounts covered, offering direct lending facilities among other solutions. This along with the increased demand and profitability of renewable energy and transition projects will support the growth of direct and indirect transactions related to organisations’ net zero ambitions.

Emerging economies often feel the brunt of economic crises and Sub-Saharan Africa was particularly hard hit during COVID-19 as the political ambitions of lowering support of carbon emitting industries affected one of the most supported sectors in the region on top of consequences of the pandemic. However, the transition towards net zero can also be the catalyst for more support for better energy infrastructure and renewable energy projects in a region in need of it.

1. https://www.bloomberg.com/news/features/2022-07-10/europe-s-africa-gas-imports-risk-climate-goals-leave-millions-without-power ↑
2. https://eto.dnv.com/2021/about-energy-transition-outlook ↑
3. https://www.iea.org/reports/africa-energy-outlook-2022/key-findings ↑