DRIVING AFRICA'S GROWTH BEYOND THE B20

South Africa is proud to be the first African country to chair and host the B20 and G20 meetings. This puts us in a unique position to drive Africa’s growth.

By Sim Tshabalala, CEO of the Standard Bank Group and Chair of the B20 Finance & Infrastructure Task Force

READ TIME: 4 MIN

Key takeaways:

1. Africa has significant economic potential, but requires major infrastructure investment to unlock this growth.

2. Domestic capital sources, such as pension funds, are critical to financing Africa’s infrastructure needs.

3. Reducing the cost of capital is key to driving sustainable, broad-based development.

3 WAYS TO CLOSE AFRICA'S FINANCING GAP
1 SecurE SUITABLY priced capital

For too long, African economies have borne the brunt of outsized risk premiums due to inaccurate assumptions about political, economic and project risk.

Our experience in 21 markets on the continent has demonstrated how depth of research, breadth of relationships, and a commitment to rigorous data interrogation dispel much of the misperceptions that inform high risk premiums. We do not experience a “dark continent” – as hesitant capital sometimes claims – but one that rewards those who take the time to explore all that Africa offers.

We recommend that independent and lending bodies, such as credit ratings agencies and development finance institutions, also adopt this approach. Blended financing and creative structuring can improve liquidity and moderate the volatility of lending products, enabling them to align with the risk budgets and asset-liability matching requirements of long-term lenders.

2 MobilisE domestic capital

Africa’s domestic resource mobilisation remains dwarfed by the rest of the world. The 2020 tax collections were 11.6% of GDP compared to 19.1% and 20.5% in Latin America and Asia Pacific respectively. Similarly, our gross savings-to-GDP ratio was 16.5% in 2023 versus 20% and 40% in those regions.

Lessons from such markets are clear. During Asia’s three decades of burgeoning growth and economic transformation, its domestic savings not only shot up to some of the highest in the world as a percentage of GDP, but were appropriately channelled into domestic and regional projects.

The two largest economies on the continent provide encouraging examples.

2

When South Africa introduced a definition for infrastructure, with an overall 45% limit on investments, to its Regulation 28 guidelines in 2023, it mobilised a significant portion of the country’s pension fund assets of over USD250 billion towards critical direct investment, with prudent limitations on single assets.

In Nigeria, the introduction in 2017 of InfraCredit – a public-private guarantee institution providing local currency guarantees for corporate infrastructure bonds underpinned by the Nigerian Sovereign Investment Authority – allowed Nigeria’s pension funds’ allocation to infrastructure to soar from USD6 million to USD155 million. This is around 1% of assets under management, and the potential for further domestic capital mobilisation is significant.

3 BalancE economic and social infrastructure

The appeal of economic infrastructure investment is often contrasted with the need for social infrastructure investment when debating inclusive growth. We believe they are complementary investments.

Social infrastructure transforms a society into one that can benefit industrially and commercially from its own resources via national and intraregional trade.

A successful B20 will see all stakeholders committed to reducing the cost of capital for infrastructure projects through appropriate pricing, innovative financing, and highly capacitated policy frameworks in support of broad-based sustainable growth.

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DESPITE MUTED GLOBAL ECONOMIC ACTIVITY, even after factoring in macroeconomic shocks and global uncertainty, the projected growth in 21 African countries is expected to be above 4% in 2025. This already limited contribution is further dampened by rising debt-servicing costs across the continent, particularly for financing sought abroad.

And yet, although we are rich in resources, Africa needs extensive infrastructure development and modernisation. Without it, we will continue to suffer from the so-called Dutch disease that has plagued every commodities-rich country on the continent. Infrastructure development, though a narrow lens that underestimates the impact of social infrastructure on inclusive growth. This includes education, health and communication digital government, healthcare, and infrastructure for road, freight and passenger transport, all of which are central to Standard Bank's expertise.

So, the profundity of Africa's infrastructure requirements cannot be understated, and the urgency to attend to it by all constraints is well-known, but warrants revisiting.

"Economic infrastructure investment is often contrasted with the need for social infrastructure investment. We believe they are complementary."

UNLOCKING AFRICA'S $85 BILLION INFRASTRUCTURE FINANCING GAP

African economies require 7.1% of GDP in annual infrastructure spend to close their infrastructure gap, and currently fall short of 3.5%. Even when these amounts can be raised – through bi- and multi-lateral projects – governments carry a substantial proportion of the outlay while limited contribution is further dampened by rising debt servicing costs across the continent, particularly for financing sought abroad.

What tends to be underestimated is how far beyond "funding and finance" sustainable infrastructure must reach to deliver real impact. Our extensive, deeply entrenched experience across African markets has pointed, time and again, to the role of integrated execution: structuring, due diligence execution hazards, price risk fairly and appropriately, and unearth the sizeable returns available to committed investors.

Standard Bank therefore plays a role far beyond simply being a financier by becoming a partner in the full sense. We channel capital by providing insight on how to structure projects in ways that suit Africa's diverse contexts; navigate the terrain that could attain – by crowding in private investment in support of government fund capital formation; better align transparency and fully integrated sectorial planning; and by ensuring successful end-to-end project completion and operation.

The end goal should be to serve as a catalyst for finding common ground on the expansion of inclusive infrastructure, fair risk mitigation, and the funding of bankable projects.

3 WAYS TO CLOSE AFRICA'S FINANCING GAP
1 SecurE SUITABLY priced capital

For too long, African economies have borne the brunt of outsized risk premiums due to inaccurate assumptions about political, economic and project risk.

Our experience in 21 markets on the continent has demonstrated how depth of research, breadth of relationships, and a commitment to rigorous data interrogation dispel much of the misperceptions that inform high risk premiums. We do not experience a “dark continent” – as hesitant capital sometimes claims – but one that rewards those who take the time to explore all that Africa offers.

We recommend that independent and lending bodies, such as credit ratings agencies and development finance institutions, also adopt this approach. Blended financing and creative structuring can improve liquidity and moderate the volatility of lending products, enabling them to align with the risk budgets and asset-liability matching requirements of long-term lenders.

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60%

of Africa's
population
will live in
cities by 2050

Source: AfDB