No boom but no bust in Maghreb

10 February 2010

There is still appetite among international finance houses to fund major projects in Morocco, Algeria and Tunisia, despite the risks

The Maghreb economies missed out on the boom – but they also missed the bust. At a time of slow and cautious recovery in projects markets in the wider region, investment in infrastructure and export capacity continues at a steady pace in Morocco, Algeria and Tunisia, where appetite for major contracts and long-term loan exposures remains robust.

“There is still significant interest in credit risk in the Maghreb at the moment,” says a senior special risks underwriter for one of the leading commercial credit insurers. “Indeed, risk capacity is available in the London market for large infrastructure projects or trade.”

Key fact

The US’ Eximbank has capacity for $1bn in new Algerian exposure

Source: MEED

However, Maghrebi governments are not rushing to load their economies with new debt – the pace of development is measured and domestic financing capacity is significant.

The fundamental drivers for project investment in the Maghreb have remained local – the export industry, particularly in the oil and gas sector, and the construction of new infrastructure to cater for the basic service needs of fast-growing indigenous populations.

Export ventures

Because they have these development needs, the Maghreb states continue to benefit from the financial support of multilateral institutions, such as the World Bank, the African Development Bank or the European Investment Bank.

Maghreb economies also benefit from their proximity to the large market of the EU, with its 500 million consumers. This means that some projects that would be purely local or regional in scope if they were sited in other parts of the Middle East, can be developed in the Maghreb as export ventures, with an assured foreign exchange income stream.

Tunisia, for instance, is preparing to press ahead with long-discussed plans for a thermal power plant at Haouaria, on Cap Bon, in the far northeast of the country, just 223 kilometres from Sicily. It was 12 years ago that talks were first held with the then Italian Prime Minister Romano Prodi about the construction of a major generating facility in this strategic location, which could service both Tunisian and Italian markets and thus generate a strong income flow in euros.

A framework agreement covering the deal between the two countries was signed in 2007, but concerns about the strength of Italian power demand following the economic downturn held back immediate implementation.

Then, late last year, as economic recovery got under way in parts of Europe, Tunisia decided it should press ahead with a search for investors to develop the proposed 1,200MW plant on a build-own-operate basis, supplying 800MW to Italy by a sub-sea cable and 400MW to the home market.

European demand will also be crucial to the feasibility of plans to develop major solar power generating plants in the Sahara. Morocco has announced plans to develop 2,000MW of solar generating capacity, at a cost of $9bn, over the next 12 years or so. Aware that uncertainties hang over the economics of solar power on this scale, the government plans to inject a significant amount of state money into the scheme; but it still hopes to attract private capital through the involvement of foreign energy companies.

“The role played by state entities may partly explain why demand for financing has not lived up to hopes”

Algeriaalso has ambitions to develop solar power plants – and a track record of commercial project investment in the power sector upon which to build. In July last year, Abu Dhabi government-owned Mubadala Development Company began operations at the 1,227MW gas-fired plant it has developed in Tipaza province in Algeria in a $900m partnership with Canadian engineering group SNC-Lavalin. However, while this was structured as an independent project, its main developer, Mubadala, is a UAE state-owned company, which limits the degree of both political and commercial risk to which the project is exposed.

Moreover, the Algerian government remains strongly committed to a continued heavy public investment in infrastructure. National gas and power company Sonelgaz has announced plans to invest E29.1bn ($40bn) in electricity generation and distribution over the next nine years. It is Sonelgaz that will take on the risks associated with large-scale development of solar power.

The group hopes to export power to Spain, but it has yet to discover whether its structure as a state-backed power generator complies with tough new power market competition rules introduced by the Spanish government.

The large role played by well-resourced state entities in Algeria, and the role of direct private investors in Tunisia and Morocco, may partly explain why demand for external financing has not lived up to the hopes of some of the would-be partners.

Britain’s Export Credits Guarantee Department (ECGD), for example, would be keen to do more business in the Maghreb. It has the capacity to take on £500-750m in risk exposure for Algeria and a similar level of business in Tunisia; for Morocco it could even exceed £750m of risk. For all three countries it could look at exposure tenors of up to 10 years. However, the department reports modest or low demand for cover from UK companies in the region. The ECGD certainly does not think the region is risk-free, but it takes a broadly positive view.

“In general, we think the Maghreb countries avoided some aspects of the global financial crisis,” a spokesman for the department tells MEED. “Certainly their banking sectors generally were not exposed in the same way as in developed markets.

“But they are likely to be affected by second-wave effects, such as falls in tourist receipts and falls in exports to the EU, and by the problem of unemployed workers returning from abroad following downturns elsewhere.

Project financing

“The ECGD has plenty of risk appetite for these countries and our premium rates for medium-term export credit cover are at the Organisation for Economic Co-operation and Development (OECD) minimum. We try to ensure consistency in our cover policy worldwide, and the overall risk appetite and premium rates will apply to all countries that demonstrate similar payment risks. The ECGD’s ability to take on new business will be affected by the amount of existing exposure, although for these countries, given current demand, this is not an issue.”

The US national export credit agency Export-Import Bank of the United States (Eximbank) takes a similarly positive view about doing business in Algeria, Morocco and Tunisia. Hala el-Mohandes, a member of the project finance team at Eximbank, says that the agency did “a huge amount” of deals with Algeria in the early 1990s, when the country was among the institution’s top three largest borrowers at one stage.

But the debt crisis forced a halt to new business with Algeria from 1994 to 1999. When it reopened for new deals, Eximbank tried to encourage the Algerians to look at project financing structures, rather than the pure sovereign risk arrangements, upon which it had mainly relied in the past.

However, as the country’s oil revenues surged, it paid off much of its foreign debt, so it began to build up its own cash reserves and started paying for new capital investments from these, rather than borrow abroad.

Eximbank would like to do more new business and it has a capacity for $1bn in new Algerian exposure, but so far its overtures have not tempted the country to change tactics.

“We pursued Algiers many times, but they were paying for projects in cash,” says El-Mohandes. She adds that Tunisia and Morocco are similarly self-sustaining and have little need to take on international credit. Eximbank had thought Morocco would be interested in purchase credits to fund procurement of Boeing aircraft by Royal Air Maroc; but in fact that airline has not sought US export credit support for its fleet renewals.

El-Mohandes also notes that in North Africa it is difficult for the US to compete with supply offers from Europe, where exporters can offer lower shipping times and costs.

Overall, Eximbank would like to support more business in the Maghreb, but there seems to be little appetite for its support.

At Canadian export credit agency Export Development Canada (EDC) the story is much the same: there is potential interest in Maghreb project risk, but little demand.

“We have capacity and appetite on the three countries, but we have not been actively approached by our Canadian exporters or investors for project finance transactions,” says Patricia Bentolila, chief representative for Africa, Europe and the Middle East.

But she does add some caveats. “Our appetite would heavily depend on the credit profile of the sponsors and off-takers, transaction structure and the legal and regulatory framework … our appetite would be greater for projects that generate offshore or hard currency cash flows, rather than domestic revenues. Any potential participation in project financing transactions would need to have the participation of strong financial advisers and well-known international banks or development banks.

“Among the three countries, and considering all products, Algeria is the most active. We provide bonding solutions to our Canadian exporters there. Projects are generally financed by the government, thanks to their strong liquidity position.”

However, in risk terms, Algeria is probably the most complex of the Maghreb markets, because of its distinctive political structure, its history of political violence and the fitful pace of reform.

 “EDC views political risk in Algeria as somewhat higher than in the other Maghreb countries,” says Signi Schneider, director of political risk assessment at the Canadian agency. “Militant operations in some areas of Algeria, above all in the Kabylie region and its southern border, continue to be a risk, although the authorities have made significant progress against the local terrorist group, Al-Qaeda in the Islamic Maghreb, in the past three years.

“EDC considers Morocco and Tunisia to have positive political risk outlooks. Political violence, expropriation or government interference and transfer risk are not of high concern, except in the Western Sahara, a disputed territory claimed by Morocco.

“Both countries are politically stable and have weathered the global financial crisis without major political unrest. Tunisia has continued on its path of economic reforms and is considered to be the most business-friendly market in North Africa.”

While Tunisia may be considered the most business-friendly market in the Maghreb, it is Algeria’s size and potential that in theory offers the greatest rewards to lenders and investors. Many investors, however, do not currently have the appetite to invest in the country, given its troubled political climate. For the time being in Algeria, the investment rewards may not outweigh the risks.

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