Country: Nigeria

Study on Managing Sovereign Debt in Times of Crisis: External Financing Operations

Introduction

Since the beginning of 2020, countries around the world have been grappling with the worst economic, social and sanitary crisis of recent times. At the end of March 2020, the IJN was already warning about a ‘looming financial tsunami* for developing countries. Then, the dark clouds from the COVID-19 pandemic suddenly clogged all aspects of economic and social life. The pandemic brought about a severe contraction of productive sectors and overall GDP, increased unemployment; and put serious pressure on countries’ fiscal balance sheets through reduced revenue collection, the need for massive budgetary reallocation to finance urgent expenditure in health and other essential services, and the urgent need to put in place social safety nets for the most vulnerable segments of the population.

The COVID-19 pandemic is still evolving as the virus continues to mutate and infect more people around the globe. Initially, some observers felt that Africa had not been unduly affected by the spread of the pandemic.

However, it has become clear that the pandemic’s economic and social impact on African countries has been as considerable and pronounced as in other parts of the world. Despite recent progress in strengthening health systems, dealing With future waves of COVID-19 is likely to be more challenging in Africa than in other parts of the world, given limited access to healthcare across the continent and the availability of vaccines. According to the World Health Organization (WHO), as of mid-January 2022, only 17.31 vaccine doses per 100 population had been administered in Africa, compared to 143.14 in Europe, 144.4 in the Americas, 102.87 in South-East Asia and 185.21 in the Western Pacific. If indeed the reduction in mortality rates experienced in other continents is attributable to vaccination, then as the least vaccinated continent Africa remains very much at risk.’

According to the IMF, since the onset of the COVID-19 pandemic, real GDP of sub-Saharan African countries fell by 1.9 per cent in 2020, the worse performance on …

 

Study on Managing Sovereign Debt in Times of Crisis: Local Currency Bond Markets

Introduction

The COVID-19 pandemic that spread across the world in early 2020 triggered one of the most devastating global health and economic crises in modern history. The crisis affected all facets of socio-economic functioning, permeating through the financial markets. According to the IMF, the impact of COVID-19 on developing countries was historic and unusual in its severity as it induced debt stresses that exceeded past experiences across several dimensions (IMF, 2020). These included a sudden increase in government borrowing needs, a sharp downturn in economic activity, strain in market conditions and disruption in normal operations.

As reviewed in Chapter Two of this study, managing sovereign debt proved complex and challenging, particularly for debt managers in developing economies. Most of them entered the crisis with
pre-existing vulnerabilities (AfDB, 2021), especially limited fiscal space due to other localised shocks. Faced with significantly narrow fiscal space compared to its situation during the 2008/09 global financial crisis, sub-Saharan Africa was caught with limited room for manoeuvre. Specifically, 16 countries were either at high risk of debt distress or already in debt distress prior to the pandemic. In addition, their funding conditions remained highly vulnerable to global risk dynamics and therefore historically more volatile than in advanced economies (OECD, 2020). The stage of development and efficiency of local currency bond markets exacerbated debt managers’ challenges.

Operational challenges escalated to unprecedented levels during the crisis. It became evident that the pandemic created challenges on how to meet increased government borrowing requirements
against a backdrop of volatile market conditions, both locally and globally Worse still, the adoption of remote working arrangements changed the overall control environment in which staff performed their roles, thus exacerbating the vulnerability of debt management offices (DMOs) to operational risks. Generally, it is more challenging to manage risks in a dispersed remote working situation than in an office

Study on Managing Sovereign Debt in Times of Crisis: Governance and Operational Risk Management Frameworks for Public Debt

Introduction

The COVID-19 pandemic has caused devastating economic and social disruption across the world. It has especially affected developing countries, which were not fully prepared and had limited leeway to take the required preventive measures.

As seen in previous chapters of this study, not only was the impact of COVID-19 historic and unusual in its severity for developing countries, it caused immense debt stresses and put fiscal pressure on governments’ economic and financial fortunes. Faced with increasing requirements to spend on health and other essential services at a time when economic activity had all but stalled and revenue streams dried up, the need to resort to additional government borrowing became inevitable. That pushed the average general government gross debt-to-GDP ratio to 57.8 per cent at the end of 2020 for the 45 countries in the sub-Saharan Africa region, from 51.5 per cent in 2019. This was the highest level in almost 20 years, and an increase of more than six percentage points in just one year (IMF, 2021).

The fact that developing economies were already facing different vulnerabilities before the pandemic made it more difficult for them to manage the level of sovereign debt. Pressures particularly came from issues such as fast-growing interest expenses as a share of revenue, rollover risks due to shorter debt maturities, a narrowing of the differential between the real interest rate and growth, expanding contingent liabilities and, in some countries, debt collateralisation with limited transparency (AfDB, 2021). As seen in Chapter One of this study, the region entered the crisis with significantly less fiscal space than it had at the onset of the global financial crisis of 2008/09, with 16 countries either at high risk of debt distress or already in distress in 2019. At the same
time, the funding conditions of these countries were vulnerable to global risk sentiment and therefore historically more volatile than in advanced economies (OECD, 2020).

FSD Africa, PenOp Equate To Deploy Extensive financing

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August 2,2023.

The Financial Sector Deepening (FSD) Africa Capital Markets has associated with the Pension Fund Operators’ Association of Nigeria (PenOp) to revitalize economic sustainability through mobilisation of extensive capital for private sector financing.

We develop Africa’s capital markets to increase the availability of long-term finance for economic development, to achieve a sustainable future for Africa’s people,” said Evans Osano, director, Capital Market at FSD Africa.

Osano gave the hint at the FSD Africa Capital Market Roundtable Series: Nigeria 2023 held in Lagos on Wednesday with the theme ‘Mobilising Patient Capital Via Innovative Financing Structures For Sustainable Development in Nigeria’.

Encouraging fund managers and partners to deepen participation, Osano said the country’s over $40 billion investible assets should be explored in developing the green economy as opportunities abound in infrastructure, housing, water, and power, among others.

He said environmentally friendly growth can improve access to food, services, create green jobs and boost incomes in new and existing sectors of the economy.

Osana said the transition towards carbon-neutrality and environmental sustainability will reduce the negative impacts of climate change among poor communities.

He said: “The traditional mindset is to say, I want returns for the level of risk I am taking and that is very simple and laid back, but given that we are operating in a context, an environment, we need to start thinking about how we can generate those returns and still contributing to solving the society’s problems.”

“How can I invest money that can also create jobs? That is impact investing. And impact is at the far end of the scale and we can start that journey. That is really what I am challenging the Nigerian institutions and investors to start thinking about.”

According to him, there is no point in getting a very high return and then one retires into an environment where if one falls sick, there is no access to medical care.

Oguche Agudah, chief executive officer of Pension Fund Operators Association of Nigeria, said: “What we need to do is to look at challenges facing us as a country in different ways and use the capital that we manage to tackle them in an innovative way.

“What needs to happen is for capital to be deployed in a manner that seeks to solve some of these challenges and for that capital to be deployed adequately in a way that compensates the capital providers for their risk, compensates them for their time, and also compensates the people who manage those funds. In this way, they will be incentivised to do it again and again and again.

“We need new sustainable models. We need new products, we need new mindsets, because the problems that are ahead of us are new. We also need to work together more closely in order to ensure that we have the society that we all crave for and that Nigeria can indeed be a beacon of hope to the rest of Africa.”

FSD Africa is currently implementing its initiative in over 60 projects in 33 countries across Africa including Ethiopia, Ghana, Kenya, Morocco, Nigeria, Rwanda, Tanzania, UEMOA, Uganda, Zambia, and Zimbabwe.

In Nigeria, FSD Africa Capital Market has initiated projects like the first African green bond, first certified corporate green bond in Africa, FMDQ – green bonds, and Infracredit Nigeria – guarantee and preparation facility (NSIA).

Mark Napier, CEO of FSD Africa, said the focus of his engagement with key actors in the Nigerian financial market is to significantly boost the role of the private sector in climate finance.

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United Kingdom Government reiterates commitment to Africa’s green industries

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In line with the UK Government’s commitment to supporting clean, green and sustainable economic growth in Africa, UK Foreign Secretary James Cleverly visited a Nigerian e-mobility platform and electric vehicle assembler, MAX Nigeria.

 

With support from the UK-funded Manufacturing Africa programme, MAX raised $31 million to ramp up the assembly of electric two- and three-wheelers. MAX is now gearing up for a third capital raise, to fund its expansion to become a regional e-mobility player. MAX Nigeria has empowered over 21,000 drivers operating in 8 cities within Nigeria and has contributed to cutting 52 metric tons of CO2 emissions from the environment.

Manufacturing Africa’s team of McKinsey consultants conducted a market assessment of the electric vehicle value chain for MAX, contributing to their electric vehicle (EV) scale-up strategy. UK-linked financiers including Novastar (backed by British International Investment) and Shell Foundation are some of the organisations financing MAX’s growth. MAX has also found a UK business partner in Field Ready, to support them on recruitment.

Work with MAX is part of the UK’s support for economic growth, job creation and value-addition in Africa that aligns with global climate priorities.

British funds continue to support game-changing entrepreneurs and companies in Africa. British International Investment manages a $4.7bn investment portfolio in Africa, including 86 companies and 43 funds in Nigeria alone. Other funding sources include:

  • Infracredit, which provides local currency guarantees to unlock long-term infrastructure financing in Nigeria
  • FSD Africa Investments, which invests in order to improve the financial instruments supporting Africa’s green economic growth
  • the Climate Finance Accelerator, a public-private finance initiative that supports low-carbon projects

Importantly, the UK also provides support for companies to access investment, whether from the UK or elsewhere. The Manufacturing Africa programme is supporting 22 manufacturers to land investments in Nigeria, with a pipeline of $664m+ foreign direct investment (FDI). The programme supports over 120 companies across 5 countries in Africa, which are mitigating 239,000 tonnes of carbon dioxide, while creating 14,000 new jobs.

British High Commissioner to Nigeria, Richard Montgomery said: “I am delighted to visit MAX Nigeria with our Foreign Secretary James Cleverly. MAX are truly innovative and entrepreneurial, solving a thousand problems at once to bring affordable electric vehicles to West African riders.”

It is fantastic that a combination of UK public and private sector support is helping MAX to create jobs, bring new skills into the market, and solve climate change challenges. We will continue to support companies doing this groundbreaking work on the continent.

Chief Executive Officer and Co-Founder of MAX Nigeria, Adetayo Bamiduro said: “Our mission at MAX is to continue scaling the impact of our vehicle subscription platform across Africa and to deliver on our commitment to provide sustainable income to millions of mobility entrepreneurs by enabling them to access income-generating, energy-efficient, and electric vehicles that meet the essential needs of Africans.”

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FSD Africa, InfraCredit Invests £10 Million In Risk-Sharing Facility

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FSD Africa in collaboration with InfraCredit has invested £10 million in a first-of-its-kind risk-sharing facility, Risk-sharing Backstop Facility (RSBF). The credit line is designed to unlock funding for sustainable infrastructure development in Nigeria.

With the increased accessibility of finance for climate-aligned infrastructure projects, the facility seek to accelerate Nigeria’s economic and social development as well as deliver on its climate goals.

In a statement, RSBF plans to mobilise short and medium-term local institutional investment into critical and climate-aligned infrastructure projects that have a reliable business model and are ready to expand but struggle with a higher perception of risk without this form of credit enhancement.

According to the International Monetary Fund (IMF), an estimated $3 trillion is required by Nigeria to finance its infrastructure deficit over the next 30 years. Despite the large amount of liquidity in the local market to fund a significant portion of this, infrastructure receives relatively little.

According to the statement, “The RSBF will address this perception of high risk by providing backstop support to investors alongside InfraCredit’s guarantees, thereby providing early-stage greenfield climate-aligned infrastructure ventures which are at a construction stage and too early for additional capital to be secured via a bond issue, with more time in which to start generating stable predictable cash flow and demonstrate their status as being long-term bankable.

“The current pipeline demonstrates the breadth and variety of projects this facility will support, with projects ranging from distributed renewable energy services for urban residences to commercial and industrial renewable projects, edge-certified green housing and e-mobility infrastructure. As part of any funding application all projects will be rigorously assessed on their environmental credentials.”

FSD Africa Invest (FSDAi) has disclosed that it is pleased to be undertaking this investment in partnership with an established player in the sustainable infrastructure financing space, InfraCredit – a business with a capitalisation of $209 million, and a series of AAA ratings from local rating agencies.

“Indeed, since its inception in 2017, InfraCredit has built an exemplary record supporting strategic Nigerian infrastructure projects, having written ₦145 billion (approximately $315 million) of guarantees underwriting bond issuances by eleven companies distributed across the power, transportation and logistics, ICT/telecommunications, gas to power, LPG clean cooking and input to infrastructure sectors. All of these issues have been fully subscribed, some by more than 160 per cent by domestic pension funds and insurance companies.”

FSDAi, which is backed by UK aid through the Foreign, Commonwealth and Development Office (FCDO) with a total capital base of $131 million, has a track record of backing innovation and being prepared to take risks to address financial market failures to bring about sustainable economic growth.

According to the statement, FSDAi’s £10 million investment in the RSBF is intended to galvanise finance and direct it to landmark infrastructure projects that will help create exponential economic, social and environmental benefits for Nigeria. This investment, therefore, aligns with one of FSD Africa’s primary objectives – developing capital markets by tackling blockages in the system.

It stated, “The facility has been carefully designed to support sustainable infrastructure initiatives which boast a reliable business model and are ready to expand but lack the necessary capital to do so. This delay or deferral of expansion projects due to unavailable capital creates a bottleneck that slows Nigeria’s progress towards solutions for some of the country’s most pressing, and transformational, infrastructure needs.

“The RSBF will raise funding in series, initially from FSDAi, but eventually from other funders, aiming to reach a total capital base of up to $50 million.”

Also, CIO of FSD Africa Investments, FSD Africa, Anne-Marie, stated that, “FSDAi’s partnership with InfraCredit on the bridge-to-bond facility introduces a de risking financing solution to mobilise short and medium-term local institutional investment into critically needed infrastructure projects that are currently considered un-bankable without alternative credit enhancement. Moreover, as Africa’s economies struggle to mobilise capital to develop key climate mitigation and sustainable power generation projects, this facility comes as a timely and much-needed intervention for Nigeria’s infrastructure landscape.’’

CEO of InfraCredit, Chinua Azubike, also expressed delight saying: “I am delighted to work with FSD Africa on an innovative facility which will support much needed but underfinanced projects realising their ultimate goals and purpose. Smart use of catalytic capital can dramatically increase the role of private capital and local intermediaries in investing in Nigeria’s sustainable infrastructure space and help the country develop responses to the significant challenges which confront it from the deteriorating environment and ecology to an unstable energy mix and severe social inequality.”

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NAICOM, FSD Africa partnership yields dividend

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THE partnership entered into by the National Insurance Commission (NAICOM) with FSD Africa has yielded the desired result as the latter has embarked on capacity building for the staff of NAICOM.

Already, sequel to the NAICOM’s collaboration with FSD Africa, a two-week training on Risk Based Capital (RBC) for 70 members of staff of the Commission has been concluded.

The training was facilitated by the principal in charge of innovation at FSD Africa, Mr Elias Omondi.

According to NAICOM, other benefits of the partnership will spill over to the Nigerian Insurance Industry, and they include, the development of Risk Based Capital framework and toolkit and the incorporation of Economic, Social and Governance (ESG) Principles into their operations.

The commission added that the partnership will also lead to the development of Innovation portrait which would facilitate innovation for the regulator and insurance operators amongst others.

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FSD Africa Investments injects £10m into InfraCredit to support Nigeria’s Sustainable Climate Infrastructure

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1st August 2023, Lagos – FSD Africa Investments (FSDAi), in collaboration with InfraCredit, have invested £10m into a first-of-its-kind risk-sharing backstop facility, designed to unlock local currency funding for sustainable infrastructure development in Nigeria.

The Risk Sharing Backstop Facility (RSBF) will address the challenge of low credit enhancement by mobilising local institutional investment via bonds into viable early-stage or green-field climate-aligned infrastructure projects.

By increasing the accessibility of finance for the “climate-aligned” infrastructure projects, the facility will help Nigeria accelerate her social and economic development, green economic transition as well as deliver on its climate goals.

Backed by the UK International Development through the Foreign, Commonwealth and Development Office (FCDO), FSDAi is pleased to be undertaking this £10m investment in partnership with InfraCredit – an established player in the sustainable infrastructure financing space.

InfraCredit’s current investments and project pipeline demonstrates the breadth and variety of projects this facility will support, with projects ranging from distributed renewable energy services for urban residences, to commercial and industrial renewable projects, edge-certified green housing and e-mobility infrastructure.

The RSBF will raise funding in series, initially from FSDAi, and eventually from other funders – aiming to reach a total capital base of up to US$50m.This investment therefore aligns with one of FSD Africa’s primary objectives – developing capital markets by tackling blockages in the system

UK Foreign Secretary, James Cleverly MP said:

 “This investment further demonstrates the UK’s commitment and contribution to Nigeria’s transition to clean energy and builds on decades of UK leadership in mobilising support for climate-related infrastructure challenges.”

“Just like the successes of British International Investment (BII) and our Private Infrastructure Development Group (PIDG), I am optimistic that InfraCredit will continue to grow and mobilise even more private sector capital to invest in better, greener infrastructure.”

 Chief Investment Officer, FSD Africa Investments, FSD Africa, Anne-Marie, said: 

“FSDAi’s partnership with InfraCredit on the bridge-to-bond facility introduces a derisking financing solution to mobilize short and medium-term local institutional investment into critically needed infrastructure projects that are currently considered un-bankable without alternative credit enhancement.

 “Moreover, as Africa’s economies struggle to mobilise capital to develop key climate mitigation and sustainable power generation projects, this facility comes as a timely and much-needed intervention for Nigeria’s infrastructure landscape.’’

Chief Executive Officer, InfraCredit, Chinua Azubike, said: 

“I am delighted to work with FSD Africa Investments on an innovative facility which will support much needed but underfinanced projects realise their ultimate goals and purpose.

 “Smart use of catalytic capital can dramatically increase the role of private capital and local intermediaries in investing in Nigeria’s sustainable infrastructure space and help the country develop responses to the significant challenges which confront it from the deteriorating environment and ecology to an unstable energy mix and severe social inequality.” 

Experts Call for Increased Climate Finance to Tackle Africa’s Crisis

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Finance experts and stakeholders at the FSD Africa Capital Market Roundtable Series have underscored the critical role of climate finance in supporting sustainable development and addressing social priorities in Africa.

Dr. Evans Osano, the director of Capital Market at FSD Africa, brought to light the urgent need for increased climate finance to tackle the pressing challenges of the climate crisis on the continent.

During the roundtable discussion held in Lagos, Dr. Osano emphasized that climate finance in Africa must grow exponentially, rising nine-fold from its current level of $30 billion to an astonishing $277 billion.

This substantial increase is essential to fund the implementation of Nationally Determined Contributions (NDCs) and address the mounting costs associated with climate change mitigation and adaptation.

A significant concern raised during the discussions was the disparity in the distribution of climate finance in Africa when compared to other regions.

While African NDCs had projected that 90% of the funding would come from the private sector and international sources, the reality proved to be quite different, with the private sector’s share of climate finance amounting to a mere 14%, the lowest among all regions.

Further analysis revealed that a substantial 74% of private sector investment in climate finance was concentrated in the energy sector. To promote sustainable growth on the continent, Dr. Osano stressed the importance of diversifying investments across other climate-resilient sectors as well.

The global landscape of climate finance was also examined during the event. It was disclosed that global climate finance had doubled over the past decade, reaching an impressive $850 billion in 2021.

However, to achieve Net Zero targets, an annual investment of at least $4.3 trillion is required. While private sector investment is on the rise, it still falls short of the scale and speed necessary to transition to a sustainable future.

Notably, renewable energy dominated mitigation finance, accounting for 70% of the total over the past decade. However, there was a call for increased investment in low carbon transport, which emerged as the fastest-growing mitigation solution. The Agriculture, Forestry, and Other Land Use (AFOLU) sectors received relatively low levels of climate finance, indicating a need for more focus and support in this area.

To accelerate climate finance, several financial instruments and strategies were discussed, including Sustainable Bonds and Thematic Bonds. These regulated instruments are subject to the same capital market and financial regulations as other listed fixed income securities.

Additionally, strategies such as demonstration transactions, de-risking through blended finance and guarantees, and the development of investment vehicles like green bonds, funds, and exchange-traded funds (ETFs) were proposed.

The urgency of addressing climate change was highlighted by drawing attention to the top five global risks in terms of likelihood, all of which were environmental concerns. These risks encompassed climate action failure, extreme weather events, biodiversity loss, human-induced environmental damage, and natural resource crises.

Dr. Osano revealed that FSD is actively working to build Africa’s financial markets for sustainable development and is seeking to leverage Nigeria’s $40 billion investible funds to scale up impact.

He stated, “We develop Africa’s capital markets to increase the availability of long-term finance for economic development, to achieve a sustainable future for Africa’s people.”

Oguche Agudah, the CEO of the Pension Fund Operators Association of Nigeria, stressed the need for innovative approaches to address the country’s challenges using the capital they manage.

Agudah emphasized the importance of deploying capital in a manner that compensates providers for their risk and time, as well as incentivizes fund managers to continue tackling these issues.

The roundtable served as a crucial platform for stakeholders in Africa’s financial sector to come together and discuss practical solutions to tackle the climate crisis while prioritizing social needs.

By aligning investment strategies with sustainable development goals, the financial sector can play a pivotal role in shaping a greener and more prosperous Africa for the future

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Timing of Financial Liberalization Perfect to Realize Ethiopia’s Growth Ambitions: Kenyan Expert

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  • Eyes carbon credit, biodiversity, women-owned firms for fund
  • Agency helped to raise $423m green, gender bonds for continent

FSD Africa, a UK development agency headquartered in Kenya, said it is helping issuers raise at least $1 billion in green and gender-based bonds over the next year to support sustainability projects across the continent.

The organization, backed by the UK’s Foreign, Commonwealth & Development Office, has already supported green and gender bonds that it says have raised $423 million in Africa.

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