Power Risk/Reward Ratings: Middle East And Africa Outlook

BMI View: An overhaul of our methodology behind the Power R/R Ratings, coupled with the addition of seven new markets to our Middle East and Africa (MEA) regional portfolio, has resulted in a slight improvement of the average regional score (up from 41.02 in Q3 2012 to 46.35 in Q4 2012 ) . That said, the business environment in the region remains as diverse as ever, with Saudi Arabia and the Gulf Cooperation Council continuing to offer a relatively more attractive investment climate, whil st several Sub-Saharan African countries lag severely behind.

This quarter BMI has introduced new Risk/Reward Ratings for the Power service, with a view to strengthen this analytical tool by integrating aspects of our new Renewables Risk/Reward Ratings and Infrastructure Project Finance Ratings. The methodology behind the Power R/R Ratings has been enhanced to consider a thorough and all-encompassing range of factors that affect the investment climate in the electricity sector in different ways.

Most notably, the individual weighting of various Industry specific factors has been revised to provide a more accurate picture of the power markets under consideration. Furthermore, imported raw material dependence has been added to the jigsaw that makes up the broader market picture (Country Rewards). In terms of risks, new metrics have been added to the Industry Risks section of the matrix. Inter alia, a specific renewable outlook indicator has been introduced to gauge the existing potential of a market as well as the sophistication of renewable energy policies. In addition, a project finance indicator has become part of our matrix to enable users to quantify the risks to both raising financing and repayment of project loans over the course of a project's life.

New Metrics Boost Scores
MEA Power Risk/Reward Ratings, Scores Out Of 100

As a result of the changes, the MEA average regional score has seen a slight improvement compared to previous quarters, with the overall score up from 41.02 in Q3 2012 to 46.35 in Q4 2012. We highlight that the changes have been particularly pronounced in the Industry Risks section of the matrix, where the significant renewable potential - chiefly solar in the Middle East & North Africa (MENA) region, and a combination of geothermal, solar and wind in SSA - has played a key role in boosting scores. In spite of this relative improvement, we highlight that no country posts an overall score in the 60s, reflecting still very high levels of risk in both industry- and country-specific indicators.

Accounting for these changes as well as for sector- and country-specific developments, the key takeaways from BMI's updated MEA Power Ratings are:

  • Saudi Arabia remains the regional leader in this quarter's R/R ratings, with a higher Industry Risk score contributing to widening the gap between it and its closest competitor - Qatar.

  • Qatar , which has long been one of our favourite power markets in the region owing to its relatively balanced R/R profile, has retained its second place . However, we note that the gap with Saudi Arabia is closing , with only 4.42 points separating the two markets.

  • Qatar remains our favourite market in terms of risk. However, the ratings do highlight some concerns about the business environment, with the most prominent concerns being the country's low state of liberalisation and absence of subsidies to support the diversification of the energy mix.

  • Vice versa, our new indicators have been instrumental in teasing out the differences among the other members of the GCC which are currently part of our Power portfolio. Most notably, the previous plateau that saw Qatar and the UAE competing for second place has disappeared , chiefly owing to Qatar stronger performance in the Country Rewards section of the matrix.

  • Although the risk of widespread public unrest across most of the MENA region continues to fade, the volatile climate left by the Arab Spring has seen political risks remain very much to the forefront of our Country Risk ratings . In addition, the weak global economic environment and Eurozone exposure - once again especially for North African markets - present downside risks.

  • Unsurprisingly, sub-Saharan Africa continues to underperform the MENA region , owing primarily to higher Country Risks as well as to lower Industry and Country Rewards . The difference would be even starker were it not for Ghana, Mozambique and South Africa, whose strong potential provides some support to the sub-regional scores.

  • As such, the lower part of our R/R table offer support to this view , with our scores highlighting an unfavourable combination of high risks and low rewards in Namibia, Zimbabwe, Gabon and Sudan. Tanzania, Botswana, Zimbabwe and Sudan.

  • On a positive note, we see rising investor interest across the Africa region as a result of the commodities boom . In addition, increased government spending and a growing consumer market are driving investment in power infrastructure.

Changes At The Bottom
MEA Power Risk/Reward Ratings, Scores Out Of 100

Disparity Within The Region Remain A Dominant Feature

A stark disparity among sub-regions is one of the dominant features of BMI's R/R ratings for MEA. With relatively well balanced risks and rewards, a plateau of sorts has emerged at the top, with Saudi Arabia, Qatar and the UAE continuing to outperform their regional peers. Conversely, sub-Saharan Africa continues to underperform the MENA region, owing primarily to higher Country Risks as well as to lower Industry and Country Rewards.

The difference would be even starker were it not for Ghana, Mozambique and South Africa, whose strong potential provides some support to the sub-regional scores. From this perspective, thanks to the higher level of economic development and its mature power market, South Africa is the outstanding exception in terms of Risks; conversely, Ghana and Mozambique benefit primarily from strong market- and country-specific potential, as reflected by their relatively elevated Reward scores.

That said, scores across the board are held back by structural, political and policy related problems, from lack of electrification to institutional weaknesses and transparency issues. Therefore, a significant increase in MEA's scores will not be achieved until such structural issues are addressed.

Mixed Bag
MEA Power Risk/Reward Ratings, Scores Out Of 100

Inadequate diversification of the energy mix leaves countries in the MEA region with significant exposure to fluctuations in fuel prices and weather conditions. As such, Industry Risks are a major Achilles' heel in the region - where the liberalisation and opening up of the market is often stagnant and there is little incentive to develop renewables capacity and push diversification. Elevated Country Risks (with low scores in several indicators) also hamper potential in several countries.

Levels of liberalisation and competition in the power sector are also comparatively low across the region, translating into high industry risks. The transparency in the tendering process subcomponent registers disappointing scores and only a few countries - such as South Africa, Uganda and Kenya - have feed-in tariffs (FiTs) and other policy tools in place to facilitate mix diversification through renewables.

Yet, we highlight that high growth rates for electricity consumption and ambitious capacity expansion programmes are a distinctive feature of the MEA's power markets, with countries in the region planning to invest billions of dollars in their blackout-prone power sectors in order to meet rising demand.

As such, in a number of cases our ratings point to numerous idiosyncrasies in the Risk/Reward balance, with very high scores in one category cancelled out by very low scores in another.

Industry Rewards Country Rewards Rewards Industry Risks* Country Risks* Risks* Power R/R Ratings Rank
*Higher score = Lower risks. Source: BMI.
Saudi Arabia 70.00 59.60 66.00 48.86 65.24 55.88 62.46 1
Qatar 46.50 72.40 56.46 55.33 68.51 60.98 58.04 2
UAE 49.00 59.20 52.92 49.19 69.85 58.04 54.71 3
Ghana 46.50 68.40 54.92 39.17 63.25 49.49 53.02 4
Israel 40.00 58.00 46.92 59.55 62.79 60.94 51.83 5
Mozambique 45.50 80.00 58.77 30.15 47.30 37.50 51.33 6
Egypt 50.75 56.60 53.00 45.18 45.07 45.13 50.25 7
Botswana 40.50 56.40 46.62 40.62 78.61 56.90 50.21 8
South Africa 46.50 42.20 44.85 55.83 65.06 59.78 50.07 9
Nigeria 42.00 71.60 53.38 38.75 48.23 42.81 49.68 10
Uganda 36.50 75.20 51.38 43.73 49.40 46.16 49.56 11
Morocco 53.00 43.20 49.23 49.48 47.47 48.62 49.02 12
Ethiopia 40.50 68.40 51.23 48.21 37.81 43.76 48.61 13
Kuwait 40.00 56.20 46.23 39.51 70.97 52.99 48.60 14
Cote D'Ivore 47.50 63.00 53.46 39.81 38.47 39.23 48.48 15
Tanzania 37.50 64.00 47.69 38.33 54.36 45.20 46.82 16
Angola 36.50 74.20 51.00 25.36 50.61 36.18 45.81 17
Algeria 38.75 57.80 46.08 38.49 53.49 44.92 45.67 18
Kenya 34.50 60.80 44.62 47.01 42.99 45.29 44.85 19
Zambia 26.50 63.40 40.69 36.62 57.38 45.52 42.38 20
Iran 48.75 45.00 47.31 23.21 37.29 29.24 40.99 21
Cameroon 30.50 58.60 41.31 23.30 47.46 33.66 38.63 22
Tunisia 29.50 44.60 35.31 45.80 39.97 43.30 38.11 23
Namibia 21.50 43.60 30.00 35.31 68.96 49.73 36.91 24
Zimbabwe 30.50 62.80 42.92 22.76 16.58 20.11 34.94 25
Gabon 19.50 52.60 32.23 27.10 53.86 38.57 34.45 26
Sudan 21.50 44.40 30.31 19.09 16.28 17.88 25.96 27
Regional Average 39.64 59.34 47.22 39.47 51.75 44.73 46.35
This article is tagged to:
Sector: Power, Renewables
Geography: Africa