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Crisis Talk — with Samaila Zubairu, CEO of the AFC


Africa Finance Corporation (AFC), the Nigeria-based multilateral development bank (MDBs), has emerged at the forefront of regional coronavirus rescue efforts, providing financing for emergency hospitals, medical aid and more. As Africa finds itself at the centre of global calls for emergency financing and debt relief, the AFC’s chief executive, Samaila Zubairu, talks to GlobalCapital about the bank’s response to the crisis, how its own fundraising plans have been affected, and the future of Chinese capital in the region.

GlobalCapital: How did the bank respond to the coronavirus pandemic? How prepared were you as an institution?

Samaila Zubairu, AFC: Our response was threefold. As a first step, we proactively engaged with staff and clients to build broad consensus and understanding around the importance of adhering to the social distancing and disease prevention guidelines issued by the WHO and other relevant health authorities. We also took further steps to safeguard employee health and safety by setting up a crisis management team and implementing a work-from-home protocol. Fortunately, as we work across several African countries as well as internationally, outside the continent, we usually have at least 50% of our staff working out of the office. Therefore, we had the technology available to make the transition to working remotely seamless.

In the second phase of our response, we started by trying to identify the most significant and immediate challenge facing Africa as a result of the pandemic, and we quickly realised this was the inadequacy of our healthcare infrastructure and delivery systems. With this in mind, we began to narrow our focus on ways in which the AFC could enhance the immediate and long-term capacity of healthcare delivery facilities on the continent.

As a result, AFC partnered with one of our shareholders to build a 110-bed emergency biosecurity isolation centre within Lagos in just four days. The facility is fully equipped with a fully functional intensive care unit, laboratories and a pharmacy. It has greatly relieved the strain on the public healthcare capacity in Lagos state. 

Furthermore, just last week, AFC along with its partners also delivered a 340-bed emergency hospital in Abuja. We also joined the Central Bank of Nigeria-led Private Sector Coalition Against Covid-19 in Nigeria with a donation. And, through our Arise Integrated Industrial Zone partners, we provided medical aid to five African countries in the form of PPE, test equipment, ventilators and therapeutics, and we have secured the necessary approvals to offer similar assistance to 10 more African countries.

Thirdly, we are putting in place development support solutions to help clients manage the twin challenges of liquidity and solvency as well as the urgent investments required to manage a health crisis of this magnitude and safeguard livelihoods. On a selective basis, we are also looking at import substitution projects to produce pharmaceuticals and other essential products on the continent. Of the 57 countries that have tapped into the IMF’s emergency financing, 26 are in Africa. Why has the pandemic hit the region’s finances so hard?

The dual shocks from the drop in commodity prices and the effects of the pandemic on economic activity have impacted Africa on an unprecedented scale. Some of the largest African economies rely heavily on oil revenue. That makes Africa very vulnerable to shocks in global commodity markets. While we have seen copper, aluminium and gold recovering, oil prices have remained volatile.

With that being said, the continent faces its first recession in 25 years as a direct result of this pandemic. As there are 54 countries in the continent, so some will have much deeper recessions. We hope this crisis reinforces the need to move from exporting primary commodities to value-accretive beneficiation of African commodities and produce for enhanced bargaining power in trade, locally produced goods and services for the continental free trade, and more jobs on the continent for our young population. AFC stands ready to support such initiatives.

Some countries have buffers and mitigating factors they can deploy to offset the impact of the crisis. For example, Nigeria, a heavily oil-dependent country, has a number of liquidity buffers it can trigger to manage this crisis. It has foreign currency reserves of around $35bn that can be utilised, and, in the context of its budget revisions, the government has indicated that there are some assets it can dispose of to raise additional revenues to offset the impact of lower oil prices. The Nigerian government has provided a stimulus package to reduce the cost of doing business for firms, by providing as much as a 400bp reduction in domestic borrowing costs with intervention facilities to support healthcare facilities and import substitution projects.

However, there are still many other African sovereigns that have drawn on the IMF’s emergency facilities. Lenders, including AFC, have received requests from our borrowers to restructure their loans. We have learnt during this crisis that it is very important to keep economies liquid. There are signs that the stimulus packages being offered by the IMF and other MDBs may not be enough if the crisis continues to expand. That being said, this is an opportunity for Africa to start focusing inward, and for private institutions within Africa to provide more capital. This could be a positive for the future of the continent, enabling Africa to take more ownership of its financing structure for the long-term and establish healthier relationships for savings to remain in the continent for developing the continent.

Africa has also found itself at the forefront of calls for debt relief, while China stands as one of the largest bilateral creditors in the African continent. Will this pandemic cause African borrowers to reconsider their dependence on Chinese capital?

Capital is always welcome in the continent and China is one of the biggest investors in Africa, especially for infrastructure. We require infrastructure investment of about $170bn on the continent, with an enormous $70bn infrastructure investment gap in Africa. In 2018, we crossed the $100bn investment threshold. Around 38% was contributed by African countries themselves and around 25% was provided by China, the second largest investor on the continent. China has agreed to support debt restructuring under the G20 debt sustainability support initiative.

Around $143bn of Africa’s external debt is owed to China. Implicit in the borrower-lender relationships must be an agreement for mutual benefit. Most prudent lenders and borrowers will analyse base, worst and optimistic case scenarios before they enter into a finance agreement. A successful borrower-lender relationship requires conversations when the variables and assumptions underpinning the cashflow available for debt service change significantly outside the base and worst case scenarios, like we are experiencing in these unprecedented times.

We are in a very different place now than we were in previous economic crises. In the past, if a borrower defaults on repayment to a Chinese creditor, then the loan’s covenants could become applicable. We have also seen cases of debt restructuring with Ethiopia when the president announced tenor extension from 10 to 30 years on some of their loans to China.

Most creditors appear to be showing more flexibility and assessing situations on a case by case basis. What we are seeing now is a renegotiation of terms, not debt forgiveness. Some borrowers may simply need to elongate the tenor of a facility or reduce the cost of their loans temporarily. Negotiations have to be net present value neutral. Like most creditors, China and its state banks will continue to be pragmatic and view the requests on a case by case basis. Now is not the time for enforcing covenants, but for renegotiating them. 

Ultimately, everyone needs access to the market. If a borrower wants that, they need to be able to service their obligations, and if they cannot under current circumstances, there are ways for them to negotiate. Conversations around debt relief are welcome, and the IMF is right to support calls for that and to ask for private sector participation in African finance ministers’ requests for debt restructuring. 

Have you had to put any of your project financing investments on hold due to the coronavirus?

In light of the rapid spread of the Covid-19 pandemic and its significant impact on global financial markets and unprecedented volatility in commodity prices, we engaged all the clients in our portfolio to assess their situation and the impact of the pandemic on their business on a case by case basis. We also looked at all our construction projects to determine the impact of the lockdown on their ability to operate and the potential delays to the implementation timelines, as well as the cost implications, if any. We continue to monitor all projects and clients on an ongoing basis for the impact of the lockdown and uncertainty in global markets and commodity prices on operations.

Most of the countries we operate in have imposed lockdowns and various other containment measures, which has put pressure on staff and materials reaching project sites. For example, tranche two of AFC’s equity funding of Danakali and the Colluli Sulphate of Potash project will be deferred to allow for the stabilisation of market and global conditions. 

Other more advanced projects that are not as impacted continue to receive our funding support across the continent.

How has the pandemic affected your own fundraising plans?

We are a resilient institution with significant capital and liquidity buffers. We came into this crisis with a 32.9% Basel II capital adequacy ratio, exceeding our internal target of 30%, as well as 25 months of liquidity requirements, exceeding our prudential guidelines of 18 months. To further enhance our liquidity, we focused on conserving cash and drawing on some of our standby liquidity facilities. For example, we drew the $100m standby facility with China Export-Import Bank. We have a similar facility with Agence Francaise de Developpement, which we are yet to draw on.

We are currently raising additional equity to further improve our capital adequacy as well as additional debt facilities, with tenors between five and 10 years. We are taking a long term view as we know that many of the African countries we support will have borrowing needs that extend beyond simply this year and next. Support will need to be extended for at least three years to ensure proper recovery and the growth needed on the continent to create jobs for its young population.

We are typically funded across three buckets. Firstly, we have our retained earnings and a syndicate of banks providing facilities for our short to medium-term needs — we will continue to access those markets. We are in two ongoing discussions with banks in Europe, the US and Asia for additional liquidity and support.

Secondly, we have access to Eurobond markets. The previous two bonds we issued were a medium and a long term, and we are considering tapping the market again when the time is right. At the start of the crisis, most African issuers yields spiked, but those have since compressed as we are seeing more confidence in the market.

Our final bucket, which is the very long tail of our financing comes from our development finance institution (DFI) partners across the globe, and is typically the funding with tenors of 10 years and above. We are currently in conversations about a facility of 10 years with four DFI partners.

Most importantly, we have not been subject to an increase in pricing in these new facilities. Thanks to our strong credit profile and investment grade rating, we have managed to keep funding cost at the same level before the crisis. We see a general improvement in the pricing for African Issuers as credit spreads continue to tighten and yields return to pre-crisis level. African issuers are becoming more attractive in a very low interest rate and negative yield environment.

What has this pandemic shown about the role of multilateral development banks in the public sector?

Both MDBs, DFIs and commercial lenders have proven themselves during this crisis. At AFC, we have provided support to financial institutions with the aim of providing liquidity and funding support for emergency healthcare infrastructure. We also know from our own experience that commercial lenders are open and willing to lend and are available for conversations on debt restructuring on a need basis. 

This pandemic has demonstrated that in times of crisis, everyone has a role to play — the commercial lenders, DFIs and MDBs play critical roles in ensuring that users of capital continue to have access to funding from capital providers.