Orals East Africa>BCG says $2.4 trillion climate debt unsustainable at ‘African’ interest rates At the hut of the story

Written by Oral East Africa

Governments, investors and private sector have to bring down the cost of Green debt in Africa or the continent will struggle attracting the $2.4 trillion needed to tackle climate change.

According to a recent report by Boston Consulting Group (BCG), titled "More Money, Fewer Problems: Closing Africa's Climate Finance Gap," Africa has only been able to secure commitments to 12 percent of needed financing, mostly by governments, that is coming at very exorbitant costs which is likely to impediment energy transition.

The persistent gap in climate financing for Africa presents an opportunity to accelerate growth, however de-risking capital in the region to facilitate financing for private companies is critical to achieve this.

Africa pays more for debt despite the reality that the continent is less likely to default and has some of the highest rates of recovering bad debts at 80 percent for private debt and 91 percent for public loans.

Recently, BCG held a roundtable discussion on the matter where investors said they knew that Africa’s debt was less risky than portrayed.

Racial debt

They said the Key obstacles hindering investment flow into green sectors in Africa are macroeconomic uncertainty, opportunity cost of capital, and investor risk assessment, all of which result in financing costs that are 5 to 6 percent higher than those in comparable emerging markets.

“The cost of debt for climate projects in South Africa is 20 percent compared with Paraguay’s 15 percent, although their sovereign ratings are the same (BB ratings). Investors see Africa as riskier than reflected by the global credit ratings agencies,” Katie Hill, Partner and Associate Director, Climate, at BCG, Consulting Group Nairobi, said.

The flow of dollars into Africa has frozen over the past couple of years as Americans raised the cost of money, forcing governments into austerity and curtailing green energy transition as most companies within the green industry in the region rely on foreign investment to grow their footprint and impact.

BCG says events such as the 2008 economic crisis and the 2016 US Fed rate hikes drove significant retraction of capital (-10% and -20%, respectively) into safer havens means that Africa needs to create new ways of funding green transition especially since the green sectors are capital intensive and have long investment horizons (10+ years) that will always be impacted by capital cycles.

Consulting wishlist

The powerful consultancies are helping governments and private sector design sustainable investment projects by lobbying for institutional regulatory and funding structures that will convince the global north to release capital flow to help the south transition justly to green economies.

BCG Consulting wants African governments to create favourable regulatory environments, strengthen institutions, ease the issuance of green bonds, and offer sovereign.

The Consultants are also rallying DFIs to lead on blended finance instruments, providing first-loss capital and loan guarantees to absorb initial losses and execute Contracts for Difference (CfDs) and capped return investments that can mobilise more private investment.

The plan would also bring in multilaterals financiers to aid by scaling loan guarantee mechanisms, insurance products, and green bonds to improve availability of capital while de-risking markets to crowd in capital.

Efforts of philanthropic investors can also be coordinated to support and help the use of instruments such as investment readiness support, capped return investments, or debt for climate swaps.

Investments in green sectors in Africa have experienced significant growth in the period 2017 to 2022, despite ongoing volatility and macroeconomic risks.

A substantial gap in climate financing however remains which must be addressed to speed up the growth of these sectors.