Africa is home to nearly a fifth of the world’s population and has youth on its side, but its development is being held back by complex and converging factors. An overstated perception of risk, generating inequitable borrowing costs, dissuades investment entirely and is a key inhibitor to unlocking Africa’s potential.
Underlying structural issues in African economies, governance and public finances are among the concerns highlighted by the UN Development Programme (UNDP).
These weaknesses contribute to low credit ratings, which not only drive the perception of a consistent level of investment risk but also discourage investment and perpetuate economic conditions that lead to low ratings.
This further inflates interest costs, restricts borrowing and deters foreign direct investment, hindering economic growth. Urgent action is needed to address the fact that the continent attracts just 3% of global energy investment.
While these challenges are significant, a bottom-up approach to assessing investments, combined with the strategic use of insurance capital, can enhance the overall risk-adjusted return. By reframing our understanding of risk and how this is presented to stakeholders, governments and investors we can begin to unlock the necessary capital. A new approach to blended finance and “blended thinking”, and improved regulation and data transparency, can pave the way for a fairer and sustainable investment landscape.
It’s regrettable that the continent’s potential for economic growth and development remains untapped. Realising this promise means addressing its infrastructure deficit, particularly in the clean energy sector.
A UNDP report, “Lowering the Cost of Borrowing in Africa”, highlights the issue of sovereign credit ratings and their effect on Africa’s borrowing costs. It finds that the dominant methodologies used by S&P, Moody’s and Fitch contain anomalies that lead to unfairly low credit ratings for African countries.
It estimates that subjectivity in ratings cost African countries $24bn (about R430bn) in excess interest and more than $46bn in forgone lending over the life of various bonds.
On average, African countries pay a 2.9% risk premium on borrowing due to investor biases. This undermines their development progress and potential to achieve the sustainable development goals (SDGs) by draining resources needed for investments in infrastructure, health care and education.
Copenhagen-based investment firm Frontier Energy argues against the conventional “country risk premium” (CRP) applied to African markets. Their analysis suggests low systemic risk, highlighting that the African equity market is largely uncorrelated with global markets. This offers a valuable diversification opportunity that would lower overall portfolio risk, theoretically negating the need for a CRP.
The firm acknowledges there are asset-specific risks, such as political risk, particularly for non-infrastructure debt. However, it highlights that Africa’s historical default rates for non-infrastructure debt are the third-lowest globally. That’s lower than in Western developed markets and significantly lower than in other emerging markets. For infrastructure projects, the risk appears lower than in Europe and Central Asia.
Even in countries with political instability, major energy infrastructure projects often remain operational and commercially unaffected. This suggests that the perceived country risk in African markets, particularly for renewable energy infrastructure, is significantly overstated.
The urgency of this situation was underscored at COP28, which highlighted the unequal progress in the global energy transition. Emerging markets, particularly in Africa, are being left behind in terms of access to crucial adaptation and transition finance.
The International Energy Agency (IEA) estimates that energy investment in Africa needs to double to more than $200bn annually to close this widening gap. This paints a stark picture: African countries are making commitments towards a global energy transition without the corresponding financial mechanisms to realise these ambitions.
Key to bridging this gap is private capital, and swift and concerted action to address unequal risk measurement. International development finance institutions and multilateral development banks must drive greater innovation, leveraging their unique position to encourage private capital. Portfolio securitisation platforms and a range of blended finance strategies can create the right environment for capital deployment at scale.
Wider support for project development at a grassroots level, through development grants and technical assistance, as well as a unified industry voice to engage governments on bottlenecks, should help to increase the number of projects and time to execution to bridge the infrastructure gap.
African governments have a duty to prioritise stable and transparent regulatory environments, strengthening institutions and improving data availability to provide investors and industry bodies with greater confidence and clarity. Streamlining permitting processes, protecting the sanctity of contracts and fostering robust local capital markets are essential steps in reducing perceived risk and attracting long-term private investment.
The urgency of the situation cannot be overstated. The IEA says demand for energy services in Africa is surging, driven by population and income growth, yet maintaining affordability remains critical. Without a significant influx of private capital at competitive financing costs, Africa risks being locked out of the global clean energy transition and failing to meet its energy needs.
By addressing the systemic issues that lead to the unequal measurement of risk and working to improve access to capital and ease financing costs, Africa can unlock a transformative wave of clean energy spending, paving the way for a sustainable and prosperous future.
• Doyne-Ditmas is speciality growth leader at Marsh Africa
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