The numbers speak for themselves… or do they? Not according to speakers at the LMA’s East Africa Conference in Nairobi this year. In fact, if you are interested in truly understanding the nuances and drivers behind this part of the loan market, or indeed the African market more broadly, you need to look way beyond the published data.
That’s because, looking solely at the numbers, according to Dealogic data, syndicated loan volumes and deal activity are trending downwards (2024 vs 2022 YTD shows roughly a 50% drop off rate) and hard currency deals are dwarfing those in local currency, with 100% of deals being hard currency in 2024.
Yet listening to a host of senior bankers on the ground in Kenya, the picture is in fact quite the opposite: after a challenging macro-economic and geo-political environment in recent years, deals are being done and even more are coming to market: in fact there is currently a very strong pipeline leading up to the end of this year.
Drilling down into the reasons why the numbers don’t reflect loan market reality in Africa reveals the essence of the market itself:
- African sovereigns are back, in anticipation of big infrastructure spends. However, these deals are ongoing and are therefore not yet reflected in the numbers. Expectations are that volumes for 2024 overall will show a noticeable increase as a result, notably in Tanzania and Uganda.
- Local currency bilaterals remain the mainstay of the market. Since interest rates for USD remain high, there has been a slowdown in new capex opportunities in hard currency. However, this has been replaced by an increase in, for example, $30-50mn local currency bilateral deals, none of which are officially reported. As one panellist commented: “The truth is when markets are tougher, syndicated lending falls off and borrowers retrench to cheaper bilaterals.” A better proxy for the health of the market is not therefore loan market data but the balance sheets of top tier banks across the region. Between them, they can take on a significant amount of local currency lending before having to go out to syndicate. Interestingly, in some cases, they don’t have to go out to the international markets at all – a recent syndicated loan to the Government of Zanzibar was financed entirely by local, rather than international banks, evidence of growing capacity and expertise outside the traditional syndicated loan market players.
- Demand for capital continues, but in forms outside syndicated lending. Whilst syndicated loan volumes may have decreased over the course of the last two years, there is still a huge demand for capital in the form of trade finance products, bilateral facilities with local relationship banks and specialised private credit lenders offering liquidity across the SME, Fintech and manufacturing space, as well as other growth sectors. None of these deals are reported since they are all private by nature.
- Local Fis are borrowing bilaterally, not on a syndicated basis. Whilst the FI market in many regions is done on a syndicated basis – Turkey being one obvious example – that is not the case in Africa, with local banks under the belief that they can obtain a competitive advantage by negotiating a series of bilaterals. Again, however, these loans are not reported in official syndicated loan market data.
Other Key takeaways from the event included:
- Emerging trends. Perhaps surprisingly, the picture is not as dissimilar to Europe as people might think. ESG related activity with broader sustainability objectives, a drive towards clean energy transition, fintech, warehousing and data centre activity were all mentioned as becoming much more relevant across the region.
- Challenges in the infrastructure space remain. As with any market, the picture is not entirely rosy. No market ever is. There is still a huge infrastructure gap, for example, and a lack of bankable deals in the project finance space: a lament which has been ongoing in Africa for decades. However, even here the outlook is becoming more optimistic as more players enter the market willing to both collaborate and provide a greater range of risk mitigation products across the insurance, ECA and DFI space. There is unsurprisingly, an increased demand for blended finance solutions.
The conclusion to this event was, as ever, challenge the official line before accepting it as reality. And to do that effectively, you need to be on the ground, talking to the people who know. Hence the reason for LMA events such as these.
The LMA would like to thank all its speakers at its East Africa Conference this year, who spoke across a range of topics including lending trends, sustainability and risk distribution. Anyone who would like to know more about the event or how to get involved in the LMA’s African initiatives should reach out to [email protected]
