Insurers will lose R6 billion over South Africa’s junk rating

South Africa’s BB- sovereign rating may cost local renewable energy insurers R6 billion over the next five years.

This is according to Crawford Dougall, an insurance company servicing both local insurance and international reinsurance markets.

South Africa’s credit rating has remained below investment grade since 2017. Despite a re-evaluation from S&P last year, the sovereign rating is still BB-.

A poor credit rating means an increasing number of renewable energy projects must be insured through foreign insurance firms.

According to Crawford Dougall’s head of renewable energy and infrastructure, Sophie Maggs, most renewable energy projects developing in South Africa raise debt funding from South African lenders.

Among the requirements for lenders to fund a utility-scale project is that at least 85% of the insurance programme is placed with A-rated insurance markets, Maggs explained.

Many of South Africa’s top insurers are rated AA or higher, but they are still precluded by funders as the country’s BB-sovereignty rating acts as a cap.

Hence, the local insurance market is automatically disqualified from the vast majority of renewable energy projects despite being viable in all other regards.

“We’re talking about South African insurance companies that are otherwise very sound. We see strong balance sheets, strong solvency ratios, and the capacity and appetite to take on projects of this nature,” said Maggs.

“But, because of the credit rating, this precludes them from participating in these sorts of projects.”

Crawford Dougall said South Africa’s domestic insurance sector may lose R1 billion in premiums this year as a result of the credit rating conundrum.

This blow to the local insurance sector goes beyond the firms directly involved. “The country is losing out on a lot of insurance premiums, taxes, jobs and all the benefits that come with investment,” said Maggs.

A poor sovereign rating may, in part, block the economic and employment benefits that the fast-growing renewable energy sector promises.

South Africa’s sovereign rating has remained on a downward trend for over ten years.

In 2020, S&P downgraded South African debt to a BB- credit rating with a stable future outlook. It placed South African debt on the brink of becoming very speculative.

There was optimism last year when S&P lifted its outlook for South Africa to positive, giving investors hope that the credit rating would improve with time.

This hope was short-lived, as S&P cut South Africa’s outlook to stable because of deteriorating public infrastructure, load-shedding and poor economic growth.