The African Trade Insurance Agency (ATI) has identified investment insurance – which protects investors against unforeseen losses – as a critical missing link that will enable Africa to reach its full growth potential.
African countries, it says, must focus on de-risking their economies to drive future investment growth or risk losing billions of dollars in Foreign Direct Investments (FDIs).
Investment Insurance has been a hidden but necessary component that has underpinned most transactions in Africa, where country and sub-investment grade credit risks are often the largest hurdles preventing deals from reaching financial close.
Ecobank’s Group CEO, Mr. Ade Ayeyemi, has also warned that investors will run away from Africa unless adequate risk measures are put in place to address actual and perceived risks.
As part of programmes to mark the 25th Anniversary Celebrations and Annual General Meeting of Afreximbank in Abuja, Nigeria, a number of panellists spoke on financing and regulatory considerations around the African Continent Trade Financial Area (AfCFTA).
They included ATI’s CEO George Otieno, and Chief Underwriting Officer John Lentaigne.
The shortage of Investment insurance capacity was identified as being particularly acute in certain African countries like Angola, Ghana, Kenya, Nigeria and Zambia.
This is because most investment insurers cap exposures in any given country and these caps are normally based around the sovereign’s rating rather than the size of their economies.
Nigeria, for example, is rated B/B+ with a GDP of US$376billion and has an economy that is approximately 10 times larger than that of its regional peers – but it faces acute constraints on available investment insurance.
The problem, experts argue, is compounded because most of the capacity is taken up by high levels of foreign currency sovereign borrowing, which is generally de-risked with investment insurance.
“The end result is that sovereign borrowing then tends to crowd-out appetite for private sector risks in the very countries where it is most needed.”
ATI is part of the investment insurance puzzle in Africa. The company helps to generate increased investment insurance capacity, including in West Africa where it is expanding membership, by utilising its own balance sheet and by leveraging private insurance capacity.
It currently insures about 1% of the annual GDP of its member-countries. In West Africa, ATI is currently helping to raise €350million with a 10-year tenure at a competitive borrowing rate for one sovereign.
“With our presence in any given market, we are able to crowd-in a new class of investors who might otherwise have turned their back on opportunities in the region,” ATI’s CEO, George Otieno, said.
“We are looking forward to Nigeria finalising its membership in order for the country to completely benefit from ATI’s ability to help it attract more investments.”
Many international lenders are bound by regulations which prevent them from lending significant amounts to sub-investment grade borrowers, which is the case for most African countries and corporates.
“Institutions such as ATI that provide investment insurance can help to mitigate these risks and thereby bring added investment capacity to African markets.”
ATI and Afreximbank are both multilateral and pan-African organisations founded with a common mandate to provide solutions to financing and trade challenges on the continent.
While Afreximbank focuses on financing and promoting intra- and extra-African trade, ATI’s core objective is to provide the insurance capacity to underpin private investment flows/FDI into the continent, in addition to increasing traders’ access to credit facilities.