Infrastructure Risk/Reward Ratings: Volatile Rewards, But Risks Improving

BMI View: While Sub-Saharan Africa continues to offer impressive construction market growth rates, this quarter we are highlighting that growing economic headwinds will potentially reduce rewards on offer over the coming years. Government budgets are likely to come under increasing pressure and damage is being done to certain market's attractiveness to investors - both factors which will limit already badly needed capital investment in infrastructure.

Key Trends and Developments:

  • Nigeria's rebased economy has boosted the size of the market, making it the largest construction industry in Africa. While this has seen the country move up to 9th position in our regional table, it remains well behind South Africa in light of high levels of risk.

  • Other position improvements this quarter include Zambia and Mozambique, who now sit at 5th and 8 th respectively - further extending Southern Africa's lead at the top of the table.

  • Uncertain economic outlooks has seen volatile industry rewards scores and we highlight that although growth in African markets will continue to be the highest globally, we expect volatility over the coming quarters as government's struggle to manage growing macro-economic headwinds. Ghana, Zambia, Kenya, Nigeria, Mozambique and Tanzania are all particularly exposed to this.

Nigeria The Major Mover

Southern Africa Dominates Low Risk High Reward Space
Infrastructure Risk/Reward Ratings

BMI View: While Sub-Saharan Africa continues to offer impressive construction market growth rates, this quarter we are highlighting that growing economic headwinds will potentially reduce rewards on offer over the coming years. Government budgets are likely to come under increasing pressure and damage is being done to certain market's attractiveness to investors - both factors which will limit already badly needed capital investment in infrastructure.

Key Trends and Developments:

  • Nigeria's rebased economy has boosted the size of the market, making it the largest construction industry in Africa. While this has seen the country move up to 9th position in our regional table, it remains well behind South Africa in light of high levels of risk.

  • Other position improvements this quarter include Zambia and Mozambique, who now sit at 5th and 8 th respectively - further extending Southern Africa's lead at the top of the table.

  • Uncertain economic outlooks has seen volatile industry rewards scores and we highlight that although growth in African markets will continue to be the highest globally, we expect volatility over the coming quarters as government's struggle to manage growing macro-economic headwinds. Ghana, Zambia, Kenya, Nigeria, Mozambique and Tanzania are all particularly exposed to this.

Southern Africa Dominates Low Risk High Reward Space
Infrastructure Risk/Reward Ratings

Nigeria The Major Mover

The most notable movement in our Infrastructure Risk Reward Ratings for Sub-Saharan Africa this quarter has been the jump of Nigeria from 11 th to 9 th place in the regional table, after increasing its Industry Risks score from 27.5 to 35.0. Following Nigeria's national statistics office's move to more accurately calculate the true size of Nigeria's economy by rebasing its figures, it was revealed that Nigeria's construction industry was around four times larger than previously thought. The rebasing shunted the Nigerian construction sector past the South African market in terms of value, making Nigeria the largest construction and infrastructure market in Africa.

Despite the impressive scale the market offers, we note that Nigeria still lags behind South Africa in terms of overall Risk/Reward Ratings by some margin, meaning South Africa will likely remain the choice destination for investment in the continent for some time. Corruption and transparency in the tendering process remains a serious dampener on investor interest in Nigeria, as does the lack of institutional capacity to deal with major infrastructure projects. Crucially, investment as a % of GDP is lower in Nigeria than in South Africa, both in terms of capital investment and government spending as a % of GDP (proxies for investment into construction projects).

Volatile Industry Rewards
Industry Rewards Score

Namibia, Mozambique and Zambia have all improved their Industry Rewards scores this quarter. Southern African business environments are much more conducive to investment and much lower risk than the majority of their eastern or western African counterparts. While we note that Botswana's Industry Rewards score has come down this quarter, from 65.0 to 62.5, it is still the highest in SSA. Additionally, Botswana's Country Risk score has also improved, furthering the attractiveness of the market.

We maintain our view that West Africa presents the weakest investment profile, despite Nigeria's and Gabon's improved scores this quarter. Although Kenya and Uganda have both seen their industry rewards score fall this quarter, on account of weaker than expected performance over 2013, East Africa still averages higher Industry Rewards.

That said, we highlight that financing conditions in West Africa are set to improve over the coming years which should see the region's infrastructure risk profile follow suit. Access to financing is particularly pertinent as the region is relying on the public-private partnership (PPP) model and direct investment from the private sector to drive growth in the construction sector.

  • Chinese funding remains a prominent source of capital in West Africa. On a trip to the continent in early May, Chinese Premier Li Keqiang announced funding for major projects, as well as an expansion in the credit line to USD30bn (from USD20bn announced in 2012).

  • West Africa has been one of the leading regions forming part of the Eurobond trend which has taken hold across SSA in recent years. Eurobonds have been launched by Cote d'Ivoire, Senegal, Gabon and Congo-Brazzaville, with funding earmarked in many cases for infrastructure. The recent USD1.5bn Eurobond issued by Gabon in December 2013 was a key foundation for our upward revision to our construction growth forecast.

  • Another key development taking place in the African banking sector is the announcement by South Africa's Standard Bank to expand operations into other parts of Francophone West Africa following its entry into Cote d'Ivoire in November 2013. We believe this is a positive sign as it indicates that more traditional sources of financing could also be opening up without the need for government backing.

West Africa's Risk Profile Remains Poor
Infrastructure Risk Ratings

While we have noted the improving capacity to fund their own infrastructure development as opposed to relying heavily on loans from multilateral institutions and China, there are growing concerns about some of BMI's choice African markets. There has been a sharp widening of current account deficits and fiscal deficits, rising debt levels and severe currency depreciation across a number of high-growth African markets. Ghana, Kenya, Zambia, Nigeria and Tanzania are some of our best performing markets in the Infrastructure Risk Reward Ratings, but are some of the most exposed markets to these growing economic headwinds. Not only will higher levels of debt and larger deficits mean government spending goals on infrastructure will be a challenge to meet, but it also will damage the attractiveness of these markets in the eyes of investors.

Budgets Remaining In Deficit Across The Board
Africa - Budget Balance, % of GDP, 2014f and 2011

With this deteriorating economic picture, we highlight the risk to SSA's growing use of eurobonds as a means of raising capital for infrastructure projects. Ghana and Zambia's eurobonds have already sold off as a result of macroeconomic instability in those markets and BMI's Country Risk team believes that further downside could be in the offing. We also highlight the risk of macroeconomic weakness in Mozambique and political and security risks in both Nigeria and Kenya as presenting threats to the creditworthiness of those countries.

SSA INFRASTRUCTURE RISK REWARD RATINGS
Rewards Risks
Industry Rewards Country Rewards Rewards Industry Risks Country Risk Risks Infrastructure R/R Rating Regional Ranking
Botswana 62.5 43.0 55.7 45.0 61.4 54.8 55.4 1
Ghana 60.0 46.5 55.3 50.0 49.7 49.8 53.7 2
South Africa 42.5 62.7 49.6 57.5 57.9 57.7 52.0 3
Namibia 60.0 40.2 53.1 42.5 53.3 49.0 51.8 4
Zambia 60.0 32.1 50.2 40.0 52.4 47.4 49.4 5
Kenya 47.5 42.8 45.8 45.0 49.5 47.7 46.4 6
Tanzania 57.5 33.0 48.9 25.0 47.5 38.5 45.8 7
Mozambique 60.0 23.0 47.0 35.0 41.5 38.9 44.6 8
Nigeria 35.0 57.8 43.0 35.0 52.6 45.6 43.7 9
Cameroon 47.5 29.9 41.3 50.0 45.4 47.3 43.1 10
Angola 55.0 12.8 40.2 30.0 51.3 42.8 41.0 11
Uganda 42.5 25.6 36.6 32.5 52.0 44.2 38.9 12
Cote d'Ivoire 42.5 22.4 35.5 40.0 42.2 41.3 37.2 13
Zimbabwe 45.0 26.9 38.7 26.0 25.4 25.7 34.8 14
Gabon 32.5 29.9 31.6 27.5 48.7 40.2 34.2 15
Sudan & South Sudan 10.0 19.2 13.2 15.0 23.5 20.1 15.3 16
Regional Average 51.7 36.3 46.3 40.6 50.5 46.5 46.4
Source: BMI. Scores out of 100, with 100 highest.

Read the full article

This article is tagged to:
Related sectors of this article: Infrastructure, Transport Infrastructure, Utilities - Infrastructure, Construction, Public Private Partnership, Tenders - Infrastructure, Finance - Infrastructure
Geography: Africa, Botswana, Cote d`Ivoire, Gabon, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Zambia
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.