Bankable Insights - Credit Markets 2022
This sustainability focused edition shares insights into how credit markets are playing a crucial role in the global transition to net zero.
*Bankable Insights* Accessing
credit markets for a sustainable future
2022 has been a turbulent year across global credit markets, and a slower economic backdrop may continue. Amid shifting markets there are always opportunities. Persisting supply chain issues, geopolitical tensions, energy security challenges, and inflationary and monetary policy pressures are materially impacting the credit markets. I look forward to a challenging but exciting 2023.
For both emerging and developed markets, financing opportunities are opening up in parts of the economy which have been best able to adjust, adapt and innovate during a changing environment. This is especially true for infrastructure development, where increasing trends towards localisation and onshored supply chains, are creating excellent debt and equity investment opportunities. And across all this, environmental, social and governance (ESG) continues to be the prominent theme, which in my opinion, we will see further accelerated.
We remain committed to our clients and their needs for a wide range of funding and financing options. Many of which are outlined in the form of case studies, articles and videos in this year-end edition of Bankable Insights.
We hope you will find this an interesting read and I look forward to engaging with you further as you renew and pivot your business and investment strategy for a more sustainable future. Thank you for your continued support and trust in Standard Chartered.
Warm regards,
Henrik Raber
Global Head, Credit Markets,
Standard Chartered
Beyond the watershed:
three trends bracing
global credit markets
Beyond the watershed: three trends bracing global credit markets
Against the dramatic backdrop of the war in Ukraine and the gloomy prospect of stagflation, credit markets keep delivering growth and prosperity.
Inflation, or stagflation? In the wake of Russia’s invasion of Ukraine and China’s ongoing pursuit of its zero-COVID strategy, economists and policymakers are growing increasingly gloomy about the future. Many predict that rapidly rising prices and the looming possibility of negative growth will lead us into a period of stagflation by 2023. But when it comes to credit markets, it is possible to look beyond the current turmoil to a possibly brighter second half of 2022.
Russia’s invasion of Ukraine exacerbated a number of weaknesses in the global economy. The war has further disrupted supply chains already under stress due to ongoing and stringent COVID-19-related controls in some major exporters, notably China, coinciding with a swelling of demand in others as they unlocked from restrictions. Energy producers and traders in particular struggled to meet a sudden resurgence in demand from the nadirs seen in 2020 and 2021, and sanctions on Russia placed even greater pressure on fuel supplies.
As a result, the global economy has snapped from a deflationary position to an inflationary one. Prices that were already on the up have been sent soaring by the food and commodities supply shocks stemming from the war in Europe. Many countries are attempting to sever Russia, physically the world’s largest country,1 from their supply chains, and Ukraine’s global breadbasket has been crippled by the crisis.2 Meanwhile, India has banned the export of wheat after a heatwave damaged harvests and pushed up domestic prices3 and, unsettled by the ongoing conflict, a number of other countries have also imposed export restrictions on various commodities, from soybean to sugar.4
Even in the most resilient countries, the crises has served to slow the pace of the recovery from COVID-19. Countries like Thailand, which hitherto had very low levels of inflation, have seen it surge above target.5 However, central banks are limited in what they can do to respond – simply hiking their benchmark rates does not magically create more oil or wheat on the market. In both emerging markets (EMs) and developed markets (DMs), inequality is growing and a cost-of-living crisis is biting into real incomes.
The multiplying shocks are pushing some economies into recession and many markets into food and energy insecurity, with political instability following in its wake. Thus far the starkest example has been Sri Lanka, which has experienced violent unrest, political upheaval and a sovereign default - Asia’s first for decades.6 Yet this level of distress is not the norm in EMs, and understanding the differences between the state of their economies is important in understanding credit markets.
There are reasons to believe that major developed-market economies are more resilient than they were before the last major economic crisis in 2008. In the US, for example, even if rate hikes do inject some more slack into labour markets, the unemployment rate is currently a mere 3.6%7 - extremely low by historical standards. It would still be low if it rose to 4.6%. Moreover, US banks’ capital and liquidity positions are robust.8
While we are facing watershed moments in terms of inflation, a war and so on, the ability of the system to manage that and provide credit has never been stronger. Overall, I think markets have proven to be very resilient.
Henrik Raber
Global Head of Credit Markets,
Standard Chartered
When it comes to emerging-market credit, real yields are currently quite low across the board, primarily a result of inflation, and the current strength of the US dollar poses a further headwind to EM borrowers. This strength reflects both economic recovery in the US and an international flight to safety, but these effects may dissipate in the second half of this year as the US growth story starts to fade somewhat and more economies around the world recover from the pandemic.
Many central banks, in both emerging and developed markets, are on a rate-hiking cycle, offering risk premia and term premia to investors in their credit. Some EMs, notably in Latin America and Eastern Europe, find themselves ahead of the game in terms of this cycle, which could benefit the local currency trade.
For energy producers in emerging markets, higher prices present a windfall, as many seek to end their dependence on Russian oil and gas. This is likewise true for countries such as South Africa, which produces metals like palladium, a major Russian export. Even for high-yield sovereign bonds, the risks are already reflected in the price to some extent, which again means examining them on a case-by-case basis rather than assuming those risks are simply intensifying.
For investors, the watchword is diversification. Russia was a very big part of various indexes, with its place now being taken in many cases by Gulf states, which could cause concentration risks for portfolios. Likewise, credit investors need to monitor their exposure to China, a country which anchors many Asia-Pacific economies and where the COVID-19 strategy has negative implications for China’s short-term growth and thus that of the region.
Three credit trends to watch out for
Assuming that the world economy begins to stabilise in the second half of this year, the dollar’s strength fades and supply chains begin to work out how to function in the new reality, Raber suggested that credit markets may move beyond their immediate crisis-management mode. He pointed to three important trends that will instead grow in prominence.
- The first is debt relief and debt transparency. The situation in Sri Lanka has illustrated the chasm of inequality that has grown not only between different classes of society, but also between countries in the emerging and developed world. Initiatives such as the World Bank’s Debt Service Suspension Initiative9 are likely to become more prominent as the world moves into repair-mode.
- The second trend will be ever growing importance of environmental, social and governance (ESG) factors and their relationship to lending. While the war in Ukraine may alter the path of ESG somewhat, it also presents a strong argument for the need to accelerate the shift away from hydrocarbons. There is no doubt that renewable energy is here to stay, and so is ethical investing, with Raber seeing greater emphasis from investors on social and governance factors in the years ahead. “Gender finance, for example, will become a much stronger theme in coming years,” he said.
- Finally, infrastructure will be an important theme in both developed and emerging markets and is going to be full of opportunities. The overlapping global crises have shifted discussions away from globalisation and towards localisation and onshored supply chains, but these will require new infrastructure investment across all markets. The infrastructure sector offers excellent investment opportunities for both equity and debt participation in various tranches, formats and sectors.
What has been striking about this year, Raber noted, is the resilience of credit markets. Their relative strength in the face of several crises is the one luminous silver lining that can be discerned among the dramatic events of the first half of 2022. It suggests that while there are pockets of market instability and dysfunction, overall the market plumbing of global finance has never been better prepared to handle adverse conditions, and to keep delivering the growth and prosperity that EMs, in particular, are counting on for a brighter future.
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Riding the wave. View the recording.
Financing a
giga-green future
Financing a giga-green future
To accelerate decarbonisation, the development of giga green technology must also pick up pace.
We are at a critical juncture in the journey towards net zero and a giga green future. Without a major acceleration in clean energy implementations, net-zero emissions targets will not be achievable. Even though the European Union has ploughed enormous sums into renewables in recent years, including wind and solar, under its pledge to reduce emissions by at least 55% compared to 1990 levels by 20301, the bloc has far to go to. It must add 27GW of wind-power annually by 2030 and 24GW of solar – 2.3 times and four times respectively what it managed between 2015-2019.2 It also needs an extra 3GW per year of batteries to provide the flexibility necessary for renewables – four times the historical rate.3
At the same time, the EU must overcome challenges in areas like mining (with far greater quantities of lithium, nickel, copper, cobalt, nickel and rare earth minerals needed), better policies to incentivise the development of less mature areas of the renewables sector (like green hydrogen), improved permitting, and a focus on market design and interoperability.
Not the least of its challenges, though, will be financing the extra capacity that is required. Conservatively, the EU must spend EUR519 billion in capex on renewables and batteries alone by 2030, and a further EUR565 billion to ensure these renewables can access the grid.4 In other words, it must deploy at least EUR1 trillion.5
2 Figures provided by Aurora Energy Research at the Standard Chartered Global Credit Conference 2022.
3,4,5 Ibid.
The final figure, though, will be higher than that, after factoring in the entire supply chain – from mining to production to sales to transmission, said Alper Kilic, Global Head of Project and Export Finance at Standard Chartered.
Creating a sustainable future for Europe, then, will require vast sums of capital. The planet will need far more still – USD5 trillion a year by 2030, according to the International Energy Agency (IEA).6
The good news, said Kilic, is that there is sufficient capital: Standard Chartered alone has pledged to finance USD300 billion by the end of the decade for transition financing and green financing; other banks have also stepped up, and many equity and debt investors are interested in the opportunities presented by the so-called giga-green revolution.
“The capital is there, the opportunities are there,” said Kilic, referring to bank financing in the form of equity and debt sources.
Kilic added, “Standard Chartered has unique expertise in the energy sector at large, and a leading track record in financing the first generation of renewable projects in particular. Given this background, we have the capability to look at the right projects and ensure they’re bankable so that the capital goes to the right projects. But we can’t do it alone.”
As the example of the EU shows – where the sums needed by 2030 are greater than the market capitalisation of its ten-largest banks and utilities – bank financing alone won’t be enough. Meeting those goals will require capital from, among others, institutional investors, governments, Export Credit Agencies (“ECAs”), multilateral development banks and development finance institutions.
Usefully, such partnerships can help borrowers access the long-term financing they need and also allow banks to mitigate some of the risk factors which in turn, improves the bankability of the projects.
Alper Kilic
Global Head of Project and Export Finance,
Standard Chartered
The evolution of the bankability of solar and offshore wind projects in Europe over the past decade – a huge success, Kilic said – offers lessons that can be applied elsewhere. One of the key lesson learned is the importance of regulatory stability which has had a big impact on incentivising investors. The outcome is lower tariffs and costs and more bankable projects.
New technology requires new financing approaches and tools
Kilic said success also requires that banks be more innovative with their products – something that has potential to become scalable since a broad range of stakeholders, including the ECAs, insurance companies and institutional investors share the same vision and are helping to create new financing tools to modernise debt financing.
The development of new financing tools comes in parallel with technological advances in renewable energy solutions, with the promise of more, as significant sums are spent on research and development for next-generation solutions.
Among those highlighted by the IEA are advanced batteries, direct air capture and electrolysers for green hydrogen.7 Other areas of disruptive innovation include progress in clean transportation, smart cities (where the use of 5G technology to monitor traffic and buildings helps to lower energy consumption, cut pollution and conserve water), and smart agriculture, which results in the use of less water, fertiliser and pesticides.8
The UK is among those funding disruptive innovations: last year, for instance, the country’s government announced it would channel more than GBP90 million to help innovators develop solutions for energy storage, floating offshore wind power and biomass production9 – part of its larger GBP1 billion Net Zero Innovation Portfolio to fund low-carbon technologies and systems.10
Emerging markets: Solving for higher risk
If funding the transition will prove difficult for wealthy countries, it will be far harder for developing nations, with many disadvantaged by poor credit ratings – which affects affordability – and which are in need of investor-friendly domestic regulations. All of this also feeds into investor perceptions that projects in emerging markets are riskier.
A further challenge is the capital gap between what low- and middle-income countries need to attain their Sustainable Development Goals (SDGs) and the funding they can access. According to the UN, prior to 2020 less than 60% of the funding was being met – with the figure for Africa just 10%.11
In meeting these challenges, Kilic reiterated, reliable partnerships and collaborative financing can help. Blended finance, for instance, sees non-bank players like governments, multilaterals and ECAs getting involved in project funding, including by providing long-term support to banks.
Standard Chartered, for instance, has partnered with UK Export Finance, an ECA, on several sustainability-linked projects in recent years, including helping to arrange EUR2.4 billion of financing for Turkey’s Ankara-Izmir high-speed railway12, EUR133 million to reconstruct road infrastructure in Cameroon and EUR 150 million for a hospital project in Angola.13 Standard Chartered has also partnered with:
- The ECAs of Denmark and Sweden for an innovative EUR1.24 billion green loan to fund a 200-kilometre high-speed railway connecting Turkey’s cities of Bandirma and Osmaneli.14
- The Asian Development Bank to provide USD186 million for a 257MW solar plant in Vietnam, the country’s largest, in which we also provided our debt-structuring expertise and long-term interest rate hedging solutions.15
Partnering in these ways not only helps to funnel funds to projects that are needed to boost countries’ sustainability; it also alleviates investors’ concerns and ensures banks can focus on providing advice, including helping to identify feasible projects and optimal technologies. All of that, said Kilic, comes as banks are increasingly prepared to step up in supporting sustainable infrastructure projects.
We all realise that we can’t have the same conventional or conservative view, banks’ understanding of the need to finance the energy transition. It has to change – and it certainly is.
Alper Kilic
Global Head of Project and Export Finance,
Standard Chartered
And yet, he added, much more is needed. Take the example of a 145MW floating solar power plant in Indonesia that Standard Chartered was involved in financing.16 The Cirata project in West Java will, once completed, be among the largest floating solar developments in the region, and will generate electricity sufficient for 50,000 homes, offsetting 214,000 tons of CO2 emissions.
Impressive though the project is, said Kilic, it stands out because there are too few others like it to help meet the world’s sustainability targets. “And the question I’ve been asking is … we need 10s of these projects around the world to get to the scale [where we can say]: ‘You know what, we are finally making some moves,’” he said.
A brighter, decarbonised future
Progress, then, is being made, even though more is needed. And, Kilic added, geopolitical and macroeconomic concerns – not least the impact of the war in Ukraine – are unlikely to derail progress towards a low-carbon future because there is “no other option” in the long-term, or even in the medium-term. “Everybody will have to invest into the transition, everybody will have to invest into green technologies,” he said.
Admittedly, the transition might be more costly than was envisaged just a few years ago, “because since 2014 – if you look at offshore wind and solar across the world – tariffs and production costs have been coming down, and perhaps it’s not going to be like that over the next two to three years. But, in terms of the bigger agenda of the green transition, I don’t think we have an option, so we’re going to have to find a way to support that.”
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Riding the wave. View the recording.
*Case study:* Refinancing BlackRock’s
diversified solar portfolio in the Taiwan market
Case Study: Refinancing BlackRock’s diversified solar portfolio in the Taiwan market
Learn how we helped with the first green loan arranged by BlackRock Real Assets in Asia Pacific.
Solar PV is one of the most installed renewable technologies in the Taiwan market; a rapidly growing consumer of clean energy. BlackRock Real Assets’ Global Renewable Power Fund II owns a 186MW portfolio representing 42 diversified solar PV projects in Taiwan market. The projects comprise ground-mounted, floating and rooftop solar assets that BlackRock and New Green Power, a subsidiary company will manage. Each project is fully contracted and the entire portfolio generates a total of 270 million kWh of clean electricity annually that will provide power to 80,000 households for over 20 years.
Given the number and diversity of assets, BlackRock decided to optimise the capital structure. Therefore, a USD328m debt facility was restructured into a 18-year green loan divided among different lenders including Standard Chartered. Standard Chartered was selected for this deal because of our extensive experience in financing the clean energy sector in Asia.
This financing facility is the first Green Loan framework undertaken for renewables portfolio financing in the Taiwan market, and also the first green loan arranged by BlackRock Real Assets in Asia Pacific.
Standard Chartered’s role
Standard Chartered acted as mandated lead arranger, interest rate hedging bank and green loan coordinator of the debt facility.
Deal structure
The final structure included a Debt Service Reserve Facility and a non-recourse holdco portfolio financing for renewables. The Green Loan Framework that was adopted for the financing is in line with the Green Loan Principles (2021).
This transaction is integral for optimising the capital structure of and a key milestone for BlackRock Real Assets climate infrastructure investment activities in the region.
Detour, derailment or driver?
How geopolitical shocks
change the path to net-zero
Detour, derailment or driver? How geopolitical shocks change the path to net-zero
The industry’s move towards net-zero has been complicated by a succession of destabilising world events. But will they detour, derail or accelerate the energy transition?
The question of how to lower carbon emissions without damaging quality of life has been complicated by a succession of destabilising world events. Opinions differ over whether the turmoil surrounding Russia’s invasion of Ukraine has accelerated or set back the energy transition in the short term, but in the longer term the transition remains inevitable, with emerging markets among the leaders.
Divisions have widened over the right approach to environmental, social and governance (ESG) investing within what is a deeply uncertain geopolitical and macroeconomic landscape. Brent crude prices were tracking up even before the Russian invasion, a result of major economies lifting their COVID-19 restrictions, but the conflict saw them spike above US$125 before seesawing wildly in the months afterwards as Western European countries sought to reduce or end their imports of Russian oil and gas.1 Spot prices for natural gas also rose quickly.2
For some, this has shown the urgency of moving away from hydrocarbons altogether, not only to prevent global temperatures from rising to catastrophic levels but also to untangle democracies from their economic reliance on rogue regimes and the multitude of risks they present. These voices, which urge an even faster divestment from hydrocarbon energy, see the geopolitical disquiet as a driver of change along with the rapid advancement of low-carbon technologies.3
For others, the war has demonstrated the opposite: that decarbonisation should be slowed or even abandoned, because financial institutions have been too quick to divest from oil and gas, creating a supply shock that is inflicting a cost-of-living crisis, with political unrest and debt default following in the case of Sri Lanka.4 They worry that divestment is pushing up fuel and fertiliser prices for some of the world’s poorest people,5 and also that by turning oil and gas facilities into stranded assets, divestment could have vast and unpredictable impacts on pension funds, notably in the US and UK.6
While in the short-term such concerns are understandable, in the longer term the derailment theory overlooks the strong incentives that geopolitical shocks create in favour of decarbonisation. First, such events demonstrate not only the world’s reliance on hydrocarbons, but also why this dependency is unwelcome and a potential cause of conflict. Secondly, as energy prices rise, they make greener technologies and practices more economically viable. For these reasons, while such shocks may delay or detour the journey to net-zero, they will not derail it. Indeed, they may ultimately prove an accelerant to the transition.
It is generally acknowledged that oil and gas will be with us for decades to come, but that the world needs to scale back its use of these hydrocarbons urgently.7
The demand for oil and gas is such that you cannot just switch off the pumps, without a massive social consequence. That's not just for cars and airplanes. There's a critical role of oil and gas in heat, electricity, chemical production and so on.
Ben Daly
Head of Transition Finance,
Standard Chartered
He adds that the oil-and-gas industry is a repository of technical expertise that will prove vital to scaling up the production and distribution of renewable energy and decarbonisation technology, and therefore must be part of the solutions.
When it comes to financing the transition, the war in Ukraine has again complicated the picture. Courtesy of Russia’s actions in Ukraine, capital is not only needed for transitioning from fossil fuels to renewables – it must also now support geographical transitions.
Cutting out Russian gas is much more complicated than cutting out Russian oil. There is much more impact on industry. Ending this reliance requires every piece of slack in the energy market to come into play.
Emily Ashford
Executive Director, Energy Analyst,
Standard Chartered
Germany, for example, currently lacks a permanent LNG terminal that would allow it to import gas by sea and sever its reliance on pipelines from Russia. It has moved to charter floating LNG terminals8 to permit seaborne imports while it works to build onshore infrastructure.9 The contractual side is also challenging. “LNG will require Europe to outcompete Asia for cargoes, many of which are subject to long-term contracts,” Ashford notes. “But it also depends how much demand for Russian gas heads to Asia.”
Some European countries are even tracking back towards coal-fired plants, the most carbon-intensive form of power generation, driving up coal prices in the process.10 This has prompted fears that such backsliding could encourage emerging and frontier markets to conclude that they, too, need not shift away from coal, perhaps also fostering a more pro-hydrocarbon mindset among some finance houses.
However, it is important to avoid the misconception that wealthy nations are doing better on their energy transitions than emerging markets. In many cases, the opposite is true.
In Sub-Saharan Africa, Zambia derives 85% of its electricity from hydropower11 which, while not without its environmental impacts, is a renewable energy source. The figure is even higher in the Democratic Republic of Congo.12 In Asia, China has installed 330 gigawatts of wind power capacity and 320 gigawatts of solar13 - multiples of the installed solar and wind capacity of the United States.14
With oil, gas and even coal prices rising, such investments in green energy are reaping clear economic dividends for the countries in question, for instance by acting as a brake on inflation. As for countries and companies that are producers of hydrocarbon energy, the surge in prices offers an opportunity to re-invest in a greener future.
Daly points out that with many oil and gas companies pocketing windfall profits, they have now been presented with an opportunity to deploy those gains to establish themselves as transition-friendly enterprises. They could, for instance, become lead off takers in voluntary carbon markets, thereby supporting investment in projects to decarbonise and otherwise mitigate the impacts of climate change.
Such initiatives would also serve to make these companies more credit-worthy. While much of the media focus is on the super-majors, there is a much wider universe of smaller energy companies, notably on the exploration and production side, that require access to credit.
More attention needs to be focused on those smaller players when it comes to linking finance to sustainability as that can make a big difference. For instance, the avoidance of practices such as gas flaring – the burning of excess gas from oil wells – can be linked to finance for these smaller energy companies. With the right amount of investment, that gas can often be conserved for industrial use rather than flared.15
In the short term, the consequences of geopolitical turmoil are not straightforward. They create both headwinds and tailwinds for the energy transition. In the longer term, however, the direction of travel is clear: helping to fund the transition away from fossil fuels is going to become an ever more important function for financial institutions, while the appeal of solar, wind and other sources of power that are not only renewable, but also domestic - and thus immune to external supply shocks like the Ukraine war - is only going to grow stronger.
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Riding the wave. View the recording.
Financing Africa into
a new era: the future is green
Financing Africa into a new era: the future is green
Learn how the transition to a lower carbon future is opening up unique opportunities for issuers and investors in Africa.
The global economy, recovering from the pandemic and the supply chain crisis, has been dealt a fresh blow in the form of rising interest rates as central banks around the world race to tamp down decades-high inflation rates.1 For emerging markets around the world, this will make it harder not only to service existing debt but also to access affordable capital to fund much-needed growth.2
The developing economies of Africa are no exception and the challenges they face in the years ahead are manifold. They include exposure to climate change (despite Africa contributing just 3.8% of global greenhouse gas emissions),3 the economic impact of Russia’s invasion of Ukraine, and depreciating currencies – all of which have conspired to undermine the continent’s economic rebound.
3CDP Africa Report: Benchmarking progress towards climate-safe cities, states and regions, Carbon Disclosure Project (2020).
Raising capital against the odds
Then there’s the problem of credit ratings, which also presents a major hurdle. In the first half of 2021, a number of African countries saw their ratings downgraded, which hurt their ability to recover from the pandemic and hindered efforts to narrow fiscal deficits and access affordable financing for development projects.4
It’s been a very, very tough year for capital markets generally, especially debt capital markets and for bond issuers.
James Nelson
Managing Director, Head of Debt Capital Markets, Africa,
Standard Chartered
While Fitch Ratings recently upgraded three sub-Saharan African sovereigns, the outlook for many nations, including Ghana, Rwanda and Namibia, remains Negative.5 This impacts yields. In Ghana, for example, Nelson said, its sovereign bonds yielded 11% in January; today the benchmark 10-year note is closer to 19% with a cash price of 50 cents on the dollar. Countries like Nigeria and Kenya have also seen a rise in yields.
Furthermore, African countries’ ratings also suffer from a number of other challenges, such as limited availability of data, which some ratings agencies contend affects their assessment of a country’s economic performance. Rating agencies meanwhile face criticism that they are slow to respond to a country’s positive economic performance with a ratings upgrade, which then hurts the ability of those governments to raise funds at competitive rates.6
A serious consequence of these issues is that sovereign debt issuance has proved difficult, said Nelson. “We are undoubtedly in a space where, in the 12 years that I’ve been involved in emerging bond markets, I’m not sure I have ever seen a more prolonged period of this sort of volatility or weakness,” he said.
The challenges go beyond sovereigns. Africa’s corporate bond market is nascent and lopsided: in mid-2020, around two-thirds of the continent’s USD149 billion corporate bond market7 was raised by South African firms. Given the US corporate bond market is worth USD10.9 trillion and China’s USD7.4 trillion, according to figures from the International Capital Market Association, there is clearly room to grow.8
7Defined as “bonds issued by companies incorporated in an African country”.
Tapping the continent’s natural capital
Though current conditions are less than ideal and access to capital has become harder, it is imperative that this challenge is resolved because the continent’s vast wealth of natural resources means it can play a significant role in aiding the global effort to net zero.
The region’s incredible ecological diversity - including rainforests in the Congo Basin that according to some estimates sequester more carbon than the Amazon9 and the advances in harnessing wind, solar and hydro power made by countries in North Africa10 - means the future of financing in Africa is green. And success lies in leveraging the continent’s well-established multilateral institutions as much as mobilising its abundant natural capital.
According to Nelson, the past two years have reinforced the importance of working with stakeholders across Africa - sovereigns, corporates and other banks - to mobilise capital. “There is a case to be made to incentivise institutions like the Africa Finance Corporation (AFC), the African Export-Import Bank (Afreximbank) and the African Development Bank (AfDB) to use their stronger balance sheets to support those that don’t.”
This is a crucial consideration given that the population of sub-Saharan Africa is expected to nearly double by 2050, and the region faces a USD100 billion-plus annual sustainable infrastructure funding gap.11
Multilateral institutions play a key role
Africa’s highly rated multilaterals, which can raise funds relatively cheaply, are central to the effort of plugging this gap. Being on the ground, they have a more pragmatic, long-term view and an unparalleled ability to support borrowers.
AFC, for instance, has in recent years been involved in green lending for the continent’s first commercial wind farm in Cape Verde and another in Djibouti,12 and, in 2020, the institution issued its debut green bond13 In this way, AFC is building a platform of renewable assets that push the discussion around sustainability and climate risk, and – with those assets on its balance sheet – uses them to tap larger pools of liquid funds.
AfreximBank, with Agence Française de Développement, runs a EUR150 million programme aimed at financing green and socially inclusive projects across Africa.14 The AFDB meanwhile serves as an implementing agency of the USD8.5 billion Climate Investment Funds, that provides various types of financing to support sustainable development on the continent.15
Governments, too, have had successes. In 2018, Seychelles issued the world’s first sovereign blue bond, raising USD15 million for ocean-friendly projects.16 Egypt, which will host the UN Climate Change Conference (COP27) in November 2022, is working on a USD40 billion hydrogen strategy,17 including allocating areas near the Suez Canal Economic Zone for the production of green hydrogen. Gabon, which is among a handful of countries that absorb more carbon than they emit, thanks to its forest cover, is capitalising on this natural resource by helping wealthy nations offset some of their emissions. For instance, the Central African Forest Initiative (a Norwegian fund), paid the Central African nation USD17 million in 2020 for this purpose.18
Untapped: Nature-based capital solutions
In short, much is being done – though not enough. At the global level, emerging markets require nearly USD95 trillion to transition to net zero by 2050,19 with Africa alone needing USD170 billion a year by 2025 for infrastructure financing, according to the AfDB.20 Of that, USD108 billion annually is currently unmet.21
What is needed, experts note, is for governments, multilaterals and the private sector to work together to fund a fairer transition. Experts also agree that understanding how banks can support the public sector in developing this market and attracting capital is crucial. Because banks are among the most crucial players in the quest to funnel financing to where it’s needed the most.
For instance, Standard Chartered has pledged to mobilise USD300 billion in green finance to aid the transition to net-zero around the world.22 In Ghana, Standard Chartered helped structure a EUR280 million social loan to fund a road infrastructure project.23 The bank also acted as the sole arranger to put together an innovative structure for a green private placement by Access Bank Nigeria.24
Financing Africa into a new era, then, requires addressing numerous challenges. Hind Chawki, Head of ESG, Global Credit Markets West, and Head of Financial Markets MENAP at Standard Chartered, mapped out the path:
- To ensure a flow of capital, projects must be investable and bankable, and must be backed by strong economic and credit fundamentals.
- At a time when Sovereign debt is already elevated, it is critical for the private sector to play an increased role in driving investments into Emerging markets.
- A number of developing economies suffer because of their reliance on fossil fuel imports. The energy transition offers them a chance to change this dynamic in the medium to long term. By relying on renewable energy, which they can gradually produce locally, they will be able to alleviate a key element of pressure on their external sector;
- Voluntary Carbon markets – currently fragmented – have the potential to attract billions of dollars of investments. This is a new market with significant potential for Africa, and at Standard Chartered, we look forward to helping our clients unlock its full potential.
It is critical that multilaterals play an increased role in driving as much private and institutional capital as possible, by de-risking political and credit risk, especially in low income countries.
Hind Chawki
Head of ESG, Global Credit Markets West, and Head of Financial Markets MENAP,
Standard Chartered
The Luanda Bita Water Supply Project in Angola shows, there are replicable successes. This project saw USD1.1 billion provided under two facilities (coordinated by Standard Chartered
