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Green light shines bright in otherwise bleak picture for Africa finance

Eddy Njoroge_ISO.jpeg

A burgeoning suite of green products to help Africa build-out renewable energy networks offers a silver lining in an otherwise brutal year for the continent’s financial markets. But experts warn much more innovation will be needed to meet the enormous funding needs

The spread of sustainable finance products is a rare highlight in the annual Absa Africa Financial Markets Index, which was released on Wednesday and in partnership with thinktank Omfif.

The report scores 23 African countries — together accounting for almost 80% of Africa’s GDP — across a variety of metrics. On many, including market turnover, FX reserves and debt levels, the picture is not positive.

“Aggregate scores have deteriorated pretty heavily,” Absa chief economist Jeff Gable told GlobalMarkets. But he emphasised that it was pandemic-related volatility dragging down scores, not backsliding on fundamentals. The inclusion of ESG in this year’s index, meanwhile, shows nine of the countries tapping capital markets with sustainable products and 13 having put in place a regulation promoting issuance.

Africa’s energy experts are urging national policy makers to look beyond established funding sources as they seek to bridge a colossal investment shortfall. The continent faces the dual tasks of decarbonising its energy sector and connecting 600 million people still without power using sustainable forms of electricity. The Economic Commission for Africa estimates that $40bn a year is needed annually to bring power to those 600 million by 2030.

“That is a staggering amount,” said former KenGen CEO Eddy Njoroge, speaking at last week’s Africa Climate Week event. “If you look at how much has been spent across Africa in the last decade, it does not amount to [$40bn], and now that is what we are expected to extend every year to bridge the energy gap.”

Funding from IFIs is ramping up as the push for green financing builds momentum. The Green Climate Fund (GCF) announced at the end of last week it had approved 13 new projects totalling $1.2bn -— a record for a single board meeting. More than half of the funding will go to African nations, small island states and least developed countries.

Green bond incentives

But experts like Njoroge want to see far more effort from African governments to help generate green financing through capital markets. South Africa, Nigeria and Kenya have sold green bonds, but issuance needs to accelerate sharply. Njoroge also pointed to the potential for securitization to finance long-term projects like geothermal power plants.

“Governments need to have more incentives and make it easier for issuance of these [green] bonds,” he said, suggesting making green bonds tax free, certification easier and potential government underwriting. The latest Absa index shows that countries are slowly recognising the need to make this kind of funding easier.

Gable points to Zambia, which the index rewarded for having reduced registration fees for green instruments. Other nations like Kenya and Morocco have introduced not just green bonds, but sustainable equities and sustainable mutual funds. With sufficient capital, Africa could bring millions on to its grids and become a major exporter of renewable energy.

“Africa could be a massive deliverer of electric power in the next decade,” said Simon Quijano-Evans, chief economist at Gemcorp Capital. “I think the capital is very much going to be there. Europe needs the electricity, and this necessity will drive the projects. This could attract many billions of dollars to the continent.”

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