Renewable Energy Investments in Egypt: 5 Indicators to Watch in Q1-2017
Infrastructure funds raised nearly $275B between 2010 & 2015 (source: Infrastructure Investor) that was poured on operational projects in developed countries’, and more recently in development, projects. As infrastructure and renewable energy investment opportunities in the developed countries become more scarce, over-valued, and dry powder is on the rise ($108B in 2015 according to Preqin and $137B in 2016 as per pionline.com), it is now the time for fund managers to start looking at emerging countries (outside of the OECD countries) for capital deployment opportunities, where overestimated political and economic risks have hindered capital inflows. To put the global infrastructure fund raising bias in context, out of ~$20b raised by infrastructure funds in the first half of 2016, $0 were raised with a focus on Africa/Middle East. Moreover, funds dedicated to Africa/Middle East accounted for only 2% of the cumulative funds raised between 2010 and 2015 (Source: Infrastructure Investor).
Egypt, with ~20GW of additional capacity planned for 2016-2018 of which ~ 3GW will come from renewable resources (Solar and Wind), is on the top of the list of emerging markets opportunities for infrastructure and renewable energy investors seeking capital deployment opportunities and a healthy risk/return profile.
Developers and Investors interested in the Egyptian market could enter the market through: competitive bidding for building and operating projects; FiT; bidding for the Engineering & Procurement of Government-Owned projects; and a merchant scheme. The merchant scheme is a very interesting development in the market and will highly depend on the electricity prices after the gradual liberalization and subsidy cuts announced in 2016. Net-metering is also permitted in Egypt, allowing for small-scale and community solar projects.
The Egyptian government’s ambitious renewable energy program faced significant hurdles since its launch in 2014, among these issues are the local arbitration clause in power purchase contracts, foreign exchange rate volatility and restrictions on profit repatriation. Meanwhile, the government added ~7GW of new capacity, that reduced the immediate need for new investments in the power sector.
Some of these issues eased in the past few months including allowing for international arbitration for the FiT Phase II contracts, devaluation of the currency that allowed for a more transparent foreign exchange price and a promise from the central bank to ease profit repatriation in the next few months. In light of these positive changes, that might signal the government’s willingness to improve the regulatory conditions to attract foreign investments, infrastructure and renewable energy investors interested in emerging markets risks/returns should keep an eye on the following indicators:
1- Foreign Currency Reserves (Creditworthiness):
Egyptian foreign currency reserves increased by ~50% in 2016 to reach $24B in January 2017. An enhancement in this indicator should provide more confidence in the country’s ability to honor its external debts and obligations and also to finance the purchase of strategic goods such as oil products and wheat along other subsidized products and services, thus decreasing - to some extent - some of the political risks in the country that could arise from a prolonged period of increase in prices or lack of essential goods.
2- Bond Yields (Foreign Investors’ Appetite):
The Egyptian government plans to sell $2B to $2.5B of Eurobonds in a road-show that starts January 17th. This will be a new test for international investors’ confidence in the current economic reforms and the general direction of the economy. The previous bond issuance – in a private placement- in November 10th was for $4B and includes: $1.360 billion bond with 4.62 percent interest maturing in Dec. 2017, a $1.320 billion bond with 6.75 percent interest maturing in Nov. 2024, and $1.320 billion bond with 7 percent interest maturing in Nov. 2028. Egypt's debt is rated as B- by S&P with a stable outlook as of November 2016.
3- Multilateral Development Banks' Return (Availability of Debt/Financing):
The International Finance Corporation (IFC), along other Multilateral Development Banks, have pulled out from the Egyptian project finance market after the government announced in May 2016 that international arbitration is not an option and legal disputes would be settled in Cairo’s courts. This issue cleared later in the year but only for the second phase of FiT contracts that comes at a significant discount from the original contracts. However, we are yet to see if this will lure back the development banks to the market. Developers pursue development banks financing as the Egyptian government requires financing renewable projects with ~70% of the funds coming from international (non-local banks) sources.
4- Return of Tourism (Political Stability & Security):
According to the World Travel and Tourism Council, the Tourism sector’s contribution to GDP is ~ 11.5%. In addition to being a major contributor to GDP, foreign currency in-flows, FDI and employment, the sector also reflects the political stability and the security situation in the country. The return of the Russian tourism, along other European countries, which stopped after the Russian airplane crash in October 2015, would signal an improved security perception of the country and a possible return to the pre-revolution highs (2010).
5- Reaching Financial Close (Regulatory Risk):
As of December 2016, only nine companies have signed the energy purchase agreement during the first phase of the feed-in tariff and twenty-seven companies are taking part in the second phase. All eyes are on how these developers will finance their projects, and more importantly, whether they will face any other hurdles in reaching financial close and starting construction.
