Africa market update may 2014 stratlink global


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Africa Market Update: this report includes economies of Kenya, Uganda, Tanzania, Rwanda, Ethiopia and Nigeria

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Africa market update may 2014 stratlink global

  3. 3. StratLink - Africa, Ltd POLITICAL RISK ANALYSIS State of Affairs: Taking a Year’s Stock It has been a season of stock-taking and assessment of the Jubilee Government as it wrapped up one year in office on April 09th 2014. In the year under review, the government’s perception domestically and internationally has been significantly buoyed by an apparent weakening of cases against the President and Deputy President at the International Criminal Court (ICC). In March 2014, the ICC adjourned commencement of hearings against President Uhuru Kenyatta to October 07th , 2014, defying the defence lawyers’ request to have the same suspended indefinitely. The prosecution’s efforts have been crippled by withdrawal of witnesses. Internally, the government is seen to be treading a minefield with regard to insecurity and corruption. Deportation of at least 82 suspected illegal Somali immigrants on April 10th , 2014 came against the backdrop of recurrent incidences of terror linked attacks and foiled attempts especially within Nairobi and Mombasa. On development projects, suspected corruption and financial improbity have marred the commencement of the Standard Gauge Railway construction and the planned issuance of laptops to public primary Standard One pupils. BUSINESS ENVIRONMENT Kenya National Treasury and the International Fund for Agriculture have entered a deal towards establishment of a USD 9.9 million risk sharing facility to incentivise issuance of affordable credit to small-holder farmers by lending institutions. In the arrangement, the National Treasury aims at having at least USD 49.6 million lent to small-holder farmers between 2014 and 2017. Agriculture is the backbone of Kenya’s economy, accounting for 25% of Gross Domestic Product (GDP). 75% of Kenya’s agricultural output is attributable to small- holder farmers1 with farm sizes averaging 2.5 hectares. Increased access to credit will empower small-holder farmers to engage in increased value addition of their produce. 1 Africa Development Bank ECONOMIC OUTLOOK Core View: The economy has been earmarked for middle-income status way ahead of the 2030 target. This will follow a rebasing exercise scheduled to be completed by September 2014 that will see the economy rebased to 2009 from 2001. The rebasing comes as the economy’s growth momentum is picking up, albeit marginally, following a 4.7% GDP growth in 2013 compared to 4.6% in 20122 . Kenya’s GDP Size and Growth Trend Source: BMI, KNBS, Stratlink Analysis The rebasing is expected to see the country’s aggregate GDP size grow by 16.27% to USD 50 billion from 2013 whereas the country’s per capita income will grow by 20% to USD 1,1363 . World Bank Classification of Economies Classification GDP Per Capita (USD) Low Income <=1,035 Lower Middle Income 1,036 – 4,085 Upper Middle Income 4,086 – 12,615 High Income =>12,615 Source: World Bank, Stratlink Analysis We assess that the re-basing of the country’s economy has been necessitated by changing trends in the last decade. In 1999, for instance, less than 3% of households in Kenya owned a telephone. By 2011, 93% of the country’s households owned at least one mobile handset with 73% being active mobile money service subscribers4 . 2 Kenya National Bureau of Statistics 2014 3 Kenya National Bureau of Statistics 2014 4 World Bank 12.6 18.8 32.2 43.6 50.0 0 2 4 6 8 .0 20.0 40.0 60.0 2000 2005 2010 2013 2014 (P) GDP Size (USD Billions) - LHS GDP Growth Rate (%)
  4. 4. StratLink - Africa, Ltd Developments and penetration of technology had a considerable impact on the country’s economy. Mobile money transfer has grown to play an increasingly central role in Kenya’s economy since the roll out of the first platform in 2007. By December 2011, person- to-person transactions via mobile money platforms in the country accounted for 30% of GDP5 . Use of Mobile Money Service Analysis Source: Central Bank of Kenya, Stratlink Analysis Further, the service sector is increasingly playing a key role in the economy as the country continues to shift from being agro- based to service driven. It is our view that the need to capture this shift has to large extent informed the re-basing of the economy. Implications of Re-basing the Economy Available data indicates that re-basing the country’s economy will see the public debt to GDP ratio drop from 50.7% as at December 2013 to about 48.76%. Despite being above the IMF recommended benchmark for debt- to-GDP ratio of 40% for developing economies, Kenya will have the benefit of scaling down its debt burden by about 194 basis points. In March 2014, the International Monetary Fund and the World Bank issued a joint statement cautioning against the country’s rising debt levels (Please refer to our April 2014 issue for analysis of Kenya’s debt position). The decrease in debt-to-GDP ratio will reflect in a better debt sustainability position for the economy. 5 World Bank Kenya’s per capita income will also be shored up to USD 1,136 in view of the rebasing. Although this would be expected to translate to higher living standards and consumption by citizens, we assess that the impact will be minimal, if any. This is because the situation at hand does not represent real growth in per capita income but merely a revaluation of the already existing basket. We observe that attainment of middle- income status does not reflect real growth of the country’s economy. As such, Kenya should maintain a focus on implementing the national development agenda, Vision 2030, to ensure that growth and development are sustained and quality of life of citizens matches the new economic status. DEBT MARKET UPDATE STIRs Record Marginal Declines: April saw STIRs register marginal declines on account of the prevailing macroeconomic stability, albeit marginal appreciation in inflation and increased appetite for long term domestic debt instruments. The 91 Day, 182 Day and 364 Day treasury bills closed the month at 8.79%, 9.77% and 10.11% down from 8.85%, 9.87% and 10.32% respectively for the month ending March 2014. Short-Terms Interest Rates Trend South Source: Central Bank of Kenya, StratLink Africa There has been a shift to longer term bonds that can be seen from subdued bid-to-cover ratios at 1.00 between March and April 2014 indicating low bidding by investors. 16.31 166.57 473.41 732.21 1,169.15 1,544.80 1,901.55 0 400 800 1200 1600 2000 0 5 10 15 20 25 30 2007 2008 2009 2010 2011 2012 2013 Value of Transactions (KES Billions) Customers (Millions) - LHS 8% 9% 10% 11% Jan-14 Jan-14 Feb-14 Feb-14 Mar-14 Mar-14 Apr-14 Apr-14 91 Day 182 Day 364 Day
  5. 5. StratLink - Africa, Ltd 91 Day Bid to Cover Ratios Analysis (KES ‘000) Date Received Accepted Bid-to- Cover 07.03.14 10,523 5,279 1.99 14.03.14 7,367 7,366 1.00 21.03.14 1,048 1,042 1.00 28.03.14 4,401 3,422 1.29 04.04.14 1,020 1,020 1.00 11.04.14 1,209 1,209 1.00 17.04.14 3,519 3,498 1.00 25.04.14 2,895 2,406 1.2 Source: CBK, StratLink Africa The bond market has maintained its first quarter 2014 rally with the market recording a lowering of the yield curve by 07-57bps between 1yr to 20yr maturities. The recent 5yr auction saw the average redemption yield at 10.87%, the cut-off rate at 10.95% with the bond recording a performance rate of 202.67%. The 5yr yield tumbled 10-30bps in the first week of trading effectively pulling with it the 10-15yrs bonds of higher maturity. Results of Five Year Treasury Bonds Issue FXD 1/2014/5 Tenor 5 Year Total Amount offered (Kshs. M) 15,000 Total bids received (Kshs. M) 30,270 Performance Rate (%) 203 Total Amount Accepted (Kshs. M) 17,513 Source: CBK, StratLink Africa Given the solid short term macros released by the Monetary Policy Committee (MPC), we expect stability at current yields. On the liquidity front; there has been high liquidity in the money market anchored by maturation of Repo and Term Auction Deposits. Commercial banks recorded a surplus of Kshs. 4.5 billion in their settlement accounts in relation to the monthly average cash reserve requirement of 5.25 percent (Kshs. 103.1 billion) at the Central Bank in the week to April 30, 2014, compared with a deficit of Kshs. 1.7 billion recorded in the previous week. Kenya Shilling vs USD Exchange Source: Central Bank of Kenya, StratLink Africa -3.70%Margin by which Kenya Shilling has depreciated in the year-to-date The local unit has come under pressure in April 2014. In the month under review, the shilling touched a high of 86.44 units and a low of 87.10 units (against a low of 86.75 in March 2014) to the greenback. This trend has come against the backdrop of high liquidity in the market attributable, in part, to government payments and net redemption of government securities. The earlier discussed action by the Central Bank of Kenya to intervene in the market and mop up excess liquidity has served to defend the local unit. EQUITY MARKET UPDATE NSE 20 Share Index Year-to-Date Source: Bloomberg StratLink Africa Analysis 81 82 83 84 85 86 87 88 89 Apr-13 Jun-13 Aug-… Oct-13 Dec-13 Feb-14 Apr-14 0 20 40 60 80 100 120 140 160 4200 4400 4600 4800 5000 5200 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Millions Volume - RHS Last Price
  6. 6. StratLink - Africa, Ltd +3.86%Margin by which NSE 20 Share Index has changed in the year-to-date +0.06%Margin by which NSE 20 Share Index has changed in the month-to-date NSE 20 Share Index Month-to-Date Source: Bloomberg StratLink Africa Analysis Market Commentary The market has been rather volatile in April 2014. The NSE 20 Share Index has oscillated between a high of 4,983.83 and a low of 4,896.40 in the month under review. The peaks in the trend of the index are due to the release of results by listed companies for the year ended December 2013. Accordingly, we have witnessed investors re-evaluating their portfolio holdings in line with revised expectations. In the coming days, we expect Q114 financials by the banking sector to offer requisite indications on the economy’s trajectory going forward. Corporate Action Equity Bank Net Profit Grows by 20.41% in Q114 Equity Bank, posted a PAT of USD 44.5 million (20.41% growth) on the back of a 30% growth in loans primarily to SME’s and a 60% growth in its agents effectively bolstering cost-to- income ratio. Moving ahead, we are of the view that the entry of the bank into the mobile telephony space should be of key interest to investors. Telecommunications market regulator, Communications Commission of Kenya, granted Equity Bank a license to become a Mobile Virtual Network Operator. In our assessment, entry into the lucrative mobile money space augurs well for the bank given its robust customer base. Equity Bank Share Performance at NSE Source: Bloomberg, Stratlink Analysis TPS Serena: Weathering Adverse Business Climate TPS Serena, a key player in Kenya’s tourism and hospitality industry, reported a 35.44% growth in net profit to USD 7.7 million for the year ended December 2013. In the period under review, the company’s turnover grew by 28% to close at USD 78.3 million. Coming against the backdrop of a series of shocks, the performance by the company is impressive. 2013 was a particularly challenging year for the country’s tourism and hospitality industry. In the first half of 2013 alone, arrival numbers at Jomo 0 20 40 60 80 100 120 140 160 4800 4840 4880 4920 4960 5000 31-Mar 7-Apr 14-Apr 21-Apr 28-Apr MillionsVolume - RHS Last Price 0 2 4 6 8 10 12 14 16 20 22 24 26 28 30 32 34 36 38 40 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Millions Volume Last Price - LHS
  7. 7. StratLink - Africa, Ltd Kenyatta International Airport plummeted by 12.24% on a year-on-year basis to 495,6606 . The drop was driven by travel bans issued by various countries as tourists and investors took a wait-and-see stance in anticipation of the March 2013 General Election. The August 2013 inferno at JKIA that destroyed the international arrivals terminal and the September 2013 Westgate Mall attack further dampened the country’s risk perception. We believe that the industry’s outlook will remain dull until the lurking threat by the Al Shabaab militia is brought to a halt. Nairobi Securities Exchange to Self-list by June The Nairobi Securities Exchange is now set for self-listing by June 2014. This follows completion of the demutualization of shares exercise that has last kicked off in October 2013. The listing which was set for June 2013 has suffered recurrent delays owing to unresolved considerations largely between the exchange and the Capital Markets Authority. The exchange is expected to float 81.37 million shares each of USD 0.046 (KES 4) through an Initial Public Offer. The move is set to edify the exchange’s corporate governance standing and thereby boost investor confidence as they expect to begin interacting with the exchange’s financials. 6 Kenya National Bureau of Statistics
  8. 8. StratLink - Africa, Ltd ONE ON ONE Stratlink Africa Ltd attended the launch of the International Monetary Fund’s Regional Economic Outlook Report 2014 themed ‘Fostering Durable and Inclusive Growth’. In this month’s One on One issue, we bring you excerpts of key presenters in the forum including Kenya’s Finance and Treasury Cabinet Secretary, Henry Rotich and IMF’s Director for African Department, Antoinette Sayeh. (Note: Statements are paraphrased) Antoinette Sayeh: Growth of Sub-Saharan Africa’s economy is expected to pick up to 5.5% in 2014 from 4.9% in 2013. Drivers of growth have been and will continue to be large investment in infrastructure, the strengthening extractive sector and foreign direct investment flows. The region’s average inflation rate also dropped from 9% in 2012 to 6.5% in 2013 brought about by more stable global food and fuel prices. Majority of the region’s economies are moving from the phase of sustaining growth to that of interrogating the quality of growth and this will be a key discussion point among policy makers moving forward. SSA still faces challenges of making its growth more inclusive. One major point of concern, however, remains the widening fiscal deficit across the region. SSA Median Fiscal Deficit as % of GDP 2006 0.70% 2008 1.40% 2013 3.6% Source: IMF, Stratlink Analysis This has largely been a cause of two trends in the region:  Policies favouring expansion of capital expenditure.  Recomposition of public expenditure away from investment that has resulted in further increase of public debt. In this regard, we emphasize that it is important economies in the region target having their tax revenue keep pace with, and where possible exceed, investment spending. This will better enable them to check on growing deficits. Domestic risks to the outlook include:  Rising fiscal imbalances that could destabilize growth  Deteriorating security conditions in such states as South Sudan and Central Africa Republic Externally driven risks include:  Decelerating growth in emerging markets such as India and Brazil which have become large consumers of SSA’s output  Scenario of tightening liquidity within the global market especially with tapering by USA that may stir uncertainty on interest rates path  Expected decline in prices for the region’s key commodities. Henry Rotich: Kenya’s growth recovery has been steady and sustained since 2008. The government has managed to maintain inflation within single-digit levels and keep commercial bank interest rates aligned to the Central Bank of Kenya’s benchmark rate. In the year to March 2014, usable foreign exchange reserves stood at USD 6.6 billion up 20% from March 2013. This represents up 4.5 months of import cover and puts us at a better position to manage our currency trends in foreign exchange. We have adopted an Economic Transformation Agenda that intends to rein in on the high cost of living, stagnation of the country’s exports, stem the rising wage bill and make the business climate more globally competitive.
  9. 9. StratLink - Africa, Ltd TANZANIA MARKET UPDATE
  10. 10. StratLink - Africa, Ltd POLITICAL OUTLOOK The Union Beyond 50 Years: Whither Tanzania? As the union between mainland Tanganyika and Zanzibar marks 50 years, the country finds itself at cross-roads with regard to the structure of government. The choice between maintaining a two-tier government structure or abandoning it for a three-tier system has formed, arguably, the most contentious bit of the ongoing constitution reform process. President, Jakaya Kikwete, has strongly supported the former terming the three-tier system as a recipe for “problems and possibly breaking up the union eventually”. In our analysis, the bone of contention is the degree of autonomy that Zanzibar is bound to receive under the three-tier system of government. Presently, the twenty matters including foreign affairs, defence and citizenship are under the union’s jurisdiction. The draft constitution truncates the matters to seven, ceding control of such issues as land and natural resources to state governments7 . State versus union control will finally be a key determinant of economic strength between Tanganyika and Zanzibar. The investor community will be keen to align its interest along this line. BUSINESS NEWS/INTERVIEWS The government is wooing domestic and foreign investors to capitalize on the country’s Export Processing Zones and Special Economic Zones to boost returns. Investors will be better positioned to harness market potential through preferential trade agreements undertaken by Tanzania including AGOA8 . Tanzania’s trade deficit has widened sevenfold from 2000 to stand at USD 6.4 billion at the close of 20119 .The country now seeks to bridge the divide between imports and exports by creating a more favourable environment for investors. This development is key for domestic investors as they scout for larger markets. 7 Eastern Africa Center for Constitutional Development 8 Ministry of Industries and Trade 9 East African Community Statistics ECONOMIC OUTLOOK Q313 Economic Growth Decelerates as Service Sectors Dominates Momentum Tanzania’s economy grew by 6.5% in the year ending September 2013, down from 7.2% a year earlier. The deceleration has largely been attributed to a dip in the manufacturing sector which grew by 5.8% in Q313, compared to 11.6% in Q31210 . In the period under review, transport and communication sector recorded the highest growth at 11.6%, financial intermediation (11.6%), mining and quarrying (10.4%), construction (7.3%) and agriculture (6.1%). Q312 vs Q313 Growth Engines Analysis (%) Source: Bank of Tanzania, National Bureau of Statistics, Stratlink Analysis Tanzania’s GDP Comparison by Sector Analysis (%) Source: National Bureau of Statistics, Stratlink Analysis 10 Bank of Tanzania Quarterly Bulletin 0.00 4.00 8.00 12.00 16.00 TransComm Financial Services Manufacturing Construction Agriculture Q312 Q313 29 18 45.5 7.5 23.7 22.7 44 9.6 0 10 20 30 40 50 Agriculture Services Industryand Construction Others 2001 2005 2010 2012
  11. 11. StratLink - Africa, Ltd Over the years, we have witnessed growth in the services sector as the agriculture sector’s contribution to GDP lessens. Between 2001 and 2012, agriculture as a share of GDP has dropped from 29% to 23.7% whereas services have grown from 18% to 22.7%. The services sector will play an increasingly central role in the growth of the economy and become the focal attraction of investors in the years to come. This will be driven by its growth margins and growing potential in the economy. DEBT MARKET UPDATE Marginal Movement in STIRs Yields There was minimal movement in short-term interest rates during April 2014. The 91 Day and 364 Day instruments retained the March 2014 auction yields of 12.17% and 13.33% respectively while that of the 182 Day instrument gained a marginal 4 bps to stand at 13.26%. Bid-to-cover ratios for the instruments were fairly high with the 182 Day and 364 Day registering 2.31 and 1.70 in the April 23rd 2014 auction. This is indicative of fairly aggressive bidding by investors in the market. Bank of Tanzania reports that yields in the market trended downwards between January and March 2014 against the backdrop of heightened market demand. STIRs Flatten Out in April 2014 Source: Bank of Tanzania, Stratlink Analysis Bonds Market Activity The primary market has been active with a number of issues. The Treasury issued two medium term instruments borrowing a total of USD 47.54 million. Both issues were oversubscribed. Bank of Tanzania Sovereign Bond Issues in April 2014 Bid to Cover Tenor Coupon Amount (USD mn) 1.32 10 yr. 11.40% 28.75 1.2 5 yr. 9.18% 18.79 1.37 15 yr. 13.5% 18.79 Source: Bank of Tanzania, Stratlink Analysis Investor uptake dipped in April 2014 compared to the preceding month. On March 19th , 2014 Treasury issued a two year tenure bond with a coupon of 7.82% offering USD 18.78 million that attracted a bid-to-cover ratio of 1.55. The issue of a seven year tenure bond with a coupon of 10.08% offering USD 29.79 million attracted a bid-to-cover ratio of 1.51. 5 Year Bond Yield to Maturity Trends Source: Bank of Tanzania, Stratlink Analysis The flattening out of the Tbill yields as well as the relatively little volatility in the 5 year bond yields (within a range of 14.07 – 15.51 during the year to April 2014) points to stability in the market with regard to government securities. The interbank lending market has also witnessed higher amounts borrowed overnight but lower frequency compared to March 2014 during which lower volumes were borrowed at a higher frequency. 8 10 12 14 16 18 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 91 Days 182 Days 364 Days 14.99 14.86 14.07 15.51 15.44 14.53 14.91 12 13 14 15 16 17 18 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14
  12. 12. StratLink - Africa, Ltd Interbank Market Rates (%) vs Volumes Traded (TzSh billions) Source: Bank of Tanzania, Stratlink Analysis Foreign Exchange Front Tanzania Shilling vs USD Trade Source: Bloomberg, Stratlink Analysis -0.86% Margin by which Tanzania Shilling has shed against USD in the year-to-date -0.24% Margin by which Tanzania Shilling has shed against USD in the month-to-date The local unit lost its appreciating tempo exhibited towards the end of March 2014. The depreciation of the shilling has largely been attributed to growing demand for the greenback from the country’s oil sector as it services its import bills. On April 02nd , 2014 the Energy and Water Utilities Authority revised the prices of petroleum products upwards. Diesel, Kerosine and Petrol saw their prices edge upwards 5.36%, 0.57% and 0.48% respectively in light of rising global oil prices. The domestic unit is experiencing depreciation owing to the spill-over effects from the country’s current account deficit. Available data from the national bureau of statistics indicates that the deficit grew by 34% to USD 4.975 billion in the year to January 2014 to stand at 17% of GDP. In the same period, the value of oil imports grew 27% to USD 4.32 billion. EQUITY MARKET UPDATE Dar es Salaam Stock Exchange All Share Index Source: DSE Stock Exchange, StratLink Africa +33.05% The year to date return on the DSE All Share Index. +4.37% The one month returns on DSE All Share Index. The index gained 3.16% in February to close at 1923.57 points. 0 20 40 60 80 100 0 2 4 6 8 10 12 14 Oct-13 Oct-13 Nov-13 Dec-13 Dec-13 Jan-14 Feb-14 Feb-14 Mar-14 Apr-14 Volumes Traded Interbank Rate - LHS 1540 1560 1580 1600 1620 1640 1660 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 0 20 40 60 80 100 120 1400 1500 1600 1700 1800 1900 2000 2100 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Millions Volume - RHS Last Price
  13. 13. StratLink - Africa, Ltd Dar es Salaam Stock Exchange All Share Index Month-to-Date change Source: DSE Stock Exchange, StratLink Africa Dar es Salaam Stock Exchange Leads in Bullish Run Index Closing Value Year-to- date Growth Dar es Salaam All Share 2,043.56 33.05% UGSE All Share 1,607.96 5.06% RSE All Share 145.04 12.06% NSE All Share 151.13 28.00% Source: Bloomberg, StratLink Africa Analysis A bullish run has prevailed across the region’s equity markets in the last one year. The Dar es Salaam Stock Exchange has emerged as the leader in the year to date growth across the region. This has been occasioned by favourable investor sentiment that is widely optimistic about the region’s potential for growth in the short to medium term. We have also witnessed considerable regional expansion of listed companies especially in the banking sector which has been a driver for growth and positive future prospects. CRDB Declares USD 0.009 Dividend in FY13 CRDB Bank has announced a recommended total payment of USD 18.5 million in dividends for the year ending December 2013, representing a 17% growth from the 2012 pay- out. CRDB Investment Profile FY12 vs FY13 (TZS Mlns) Item 31.12.13 31.12.12 Change Total Assets 3,545,438 3,074,840 15.30% Total Deposits 2,966,647 2,557,903 16.00% Loans, advances and overdrafts 1,993,106 1,806,865 10.30% Net income after tax 85,087 80,543 0 1 2 3 4 5 1800 1850 1900 1950 2000 2050 2100 Mar-14 Apr-14 Apr-14 Apr-14 Apr-14 Millions Volume - RHS Last Price
  14. 14. StratLink - Africa, Ltd UGANDA MARKET UPDATE
  15. 15. StratLink - Africa, Ltd POLITICAL OUTLOOK Anti-Gay Law: Towards Quid pro Quo? Uganda and the EU seem to be ceding ground on tough stands regarding the controversial anti-gay law. In the month under review, 28 members of the European Union unanimously stated that, “other options to resolve divergence of opinion ought to be identified, as cutting aid is unnecessary”. Finland’s International Development Minister, Pekka Haavitso, says the EU has not suspended aid assistance owing to the strategic significance of Uganda in regional stability efforts. Separately, the Ugandan government committed to protect civilians who came under the threat of mob justice owing to their sexual orientation. Coming against the backdrop of EU members such as Netherlands and Norway threatening stern action, the latest move signals a re- consideration of the bloc’s initial position. In the course of March 2014, Uganda’s business climate was experiencing a dampening perception that saw the shilling depreciate steadily. This has changed in April 2014 in light of reviewed stands by development partners and is likely to shore up the local unit further. The focus now shifts to bodies such as the World Bank which with-held aid following the signing of the law. BUSINESS NEWS ENVIRONMENT Yoweri Museveni hosted the President’s Investors Round Table in Entebbe in April 2014, pledging to beef up efforts to boost the country’s investment climate. The Round Table took place on the side-lines of the National Investment Summit that sought to boost investment flows. Uganda has led the East African region in FDI inflows standing at USD 1.8 billion in the year to September 201311 . However, in 2013, the government was widely criticized for shutting down operations of a local daily for a fortnight. As such, the government is keen to reassure investors of a conducive environment for enterprise and business growth in the country. 11 UNCTAD, Uganda Investment Authority ECONOMIC OUTLOOK As Uganda’s National Development Plan Phase I (2010/11 – 2014/15) enters its homestretch, a key assessment point has been the country’s progress in realizing its growth in per capita income. In this issue, we take a deep dive and analyse how the country has fared in this regard. The government took stock of the National Development Plan 2010/11 – 2014/15 which forms the first of a series of five year plans set to transform the country’s economy. The plan’s overarching goals include reducing the country’s population living in poverty from 31% (2005/06) to 24.5% by close of 2014/15 and further, boost per capita income from USD 506 (2008/09) to USD 900 by 2014/1512 . GDP Size and Growth Analysis 2010 - 2015 Source: BMI, Stratlink Africa Analysis Between 2010 and 2012, the country registered an average real GDP growth rate of 5.3%13 per annum against a projected regional average of 6.9% (East Africa Community plus Ethiopia)14 . Uganda’s below regional average performance is largely attributable to 2012 that saw the country’s economic growth decelerate to 2.8% against the backdrop of a spike in inflation that stood at an average 18.7% in 2011 and 14.6% in 201215 . 12 Ministry of Information and National Guidance Uganda 13 World Bank 2014 14 Business Monitor International Projections 2014 15 Africa Development Bank 17.2 18.2 21.3 22.9 26.4 29.5 .0 2.0 4.0 6.0 8.0 10 20 30 40 2010 2011 2012 2013 2014(P) 2015(P) Nominal GDP (USD Billions) Real GDP Growth Rate (%) - RHS
  16. 16. StratLink - Africa, Ltd GDP per Capita Income Analysis Source: BMI, Stratlink Africa Analysis Between 2010 and 2013, Uganda’s per capita income has oscillated marginally above and below the regional average. The country’s per capita income levels have grown by 20.5% in the period to stand at USD 675 in 2013. A lot needs to be done to reach the country’s per capita target of USD 900 by 2014/15. We believe that a policy mix accelerating economic growth through key sectors such as agriculture and services will enable the economy realize the target. Consumption vs Per Capita Income Analysis Source: BMI, Stratlink Africa Analysis Uganda’s rise in per capita income has been reflected in aggregate consumption. The economy’s growth in private final consumption has increased in general, mimicking year-on-year growth in the per capita income levels. This points to great prospects as investors should expect to see rising consumption levels by households with the consumer purchasing power rising. This will be boosted further if inflation remains in check. Taming Inflation to Boost Consumption Bank of Uganda projects annual average inflation will range between 7% and 8% in 2014 before ebbing downwards to remain in range between 6% and 7% in 2015. This will be vital in cushioning consumers and investors from high costs and enabling the economy to optimize on purchasing power. Inflation vs BoU Benchmark Rate Source: Bank of Uganda, National Bureau of Statistics, Stratlink Africa Analysis The bank has employed a prudent monetary policy that has enabled it to mitigate inflationary pressures. Inflation has dropped to single digits through 2013 from a high of 30.5% in October 2011 against a regional average (EAC plus Ethiopia) of 20%16 at the time (2011). Like most of her peer economies, Uganda faces the challenge of sustaining inflation within the single digits territory in an environment of vulnerability to external and internal shocks. How this is managed is likely to be the key focus of monetary policy moving ahead. DEBT MARKET UPDATE Monetary Policy Update: Bank of Uganda (BoU) set its benchmark lending rate unchanged at 11.5% during the month of May 2014. In December 2013, the bank lowered the rate by 50 bps to 11.5% and has sustained it through April 2014. 16 Africa Development Bank 500 550 600 650 700 2010 2011 2012 2013 Uganda Per Capita Income Regional Per Capita Income Average -5 5 10 15 20 25 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Private final consumption, US$bn GDP per capita, % y-o-y 2% 4% 6% 8% 10% 12% 14% Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 BoU Rate Inflation
  17. 17. StratLink - Africa, Ltd Yield Curve Changes (%) Source: Bloomberg, Stratlink Africa Analysis In the month of April, STIRS registered a general decline, with the exception of the 91 Day Tbill that rose by 61.19 bps to 10.31% from 9.70% in March 2014. On the other hand, the 182 Day and 364 Day instruments shed 43.3 and 10.9 bps to stand at 12.07% and 12.92% respectively. Available Tbill auction results indicate that the 91 Day, 182 Day and 364 Day instruments registered bid-to-cover ratios of 1.27, 1.79 and 1.78 respectively indicating fairly aggressive bidding by investors. The move by BoU to maintain the CBR at 11.5%, on the back of an appreciating local unit and declining inflation, point to a solid near term outlook. On the flipside, with the country having opened its capital accounts to attract funding for its nascent oil sector, caution will have to be exercised so as to stem potential spill over effects occasioned by monetary policy interventions by advanced countries resulting in higher funding costs and a heightened risk of reversal of capital flows. This in our view could see yields rise in the long-term. Uganda Shilling Gains Ground The domestic unit bounced back following a slide occasioned by the infamous anti-gay legislation. In the month under review, the UGX/USD traded within the 2,505/2,563 range with current data pointing to possible reversion in the unit on account of the tenuous nature of the current account and as mentioned in the debt market update, a tightening of monetary policy in developed countries. These in our view present a high degree of uncertainty regarding the trajectory of the exchange rate. The Uganda Shilling has Gained Ground against the USD: A function of increasing dollar supply Source: Bloomberg, StratLink Analysis +3.56% Year-on-year gain of Uganda shillings against the USA dollar +1.22% Month-on-month gain in the Uganda shilling against the USA dollar. Investors most likely to be affected by this uncertainty are those in import and export business. A fluctuating currency subjects the two to shifting costs as they trade in foreign currency. EQUITY MARKET UPDATE USE All Share Index gains 5.06% year-on-year and 6.94% month-on-month. The market has been bullish, albeit, less than its regional peers such as Kenya and Tanzania whose All Share Indices have been up 28% and 33%, respectively. Activity at the exchange has largely been driven by the manufacturing and financial services sector. British American Tobacco (BATU), energy distributor, Umeme, DFCU Bank and Stanbic Uganda have been key drivers of trade consistently accounting for at least 90% of turnover. 8 10 12 14 16 3M 6M 1Y 2Y 3Y 5Y 10Y Apr-14 Mar-24 Jan-14 2350 2400 2450 2500 2550 2600 2650 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14
  18. 18. StratLink - Africa, Ltd Uganda Securities Exchange All Share Index Source: Bloomberg, StratLink Africa Stanbic Uganda Reports Slow Year in 2013 as Bank of Baroda Digits Look Up; Stanbic Uganda has attributed 2013’s decelerated performance to high operating costs coupled with low uptake of loans and slow growth of deposits. Stanbic Uganda Share Performance Source: Bloomberg, StratLink Africa Analysis In the full year to December 2013, the bank’s Earnings per Share dipped by 22% year-on- year to USD 0.0006 (UGX 1.56). Further, the bank’s loans and deposits dropped by 3% and 15% respectively. Bank of Baroda Share Performance Source: Bloomberg, StratLink Africa Analysis The fortunes were, however, markedly different for Bank of Baroda. The bank’s loans and advances to customers grew by 25.35% to USD 173.41 million years-on-year. In a similar vein, customer deposits surged by 23.5% to stand at USD 257.76 million year-on-year. We have not witnessed much change in the two counters’ share prices through April 2014. Except for the one-off bullish trends exhibited by the Stanbic Uganda towards the end of 2013 and early phase of 2014, the share’s price has flattened out. By the same token, Bank of Baroda exhibited volatility between February and March 2014 before flattening out. 1000 1200 1400 1600 1800 2000 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 0 100 200 300 400 500 600 700 800 900 1000 22 24 26 28 30 32 34 36 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Millions Volume - RHS Last Price 0 2 4 6 8 10 12 90 100 110 120 130 140 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Millions Volume - RHS Last Price
  19. 19. StratLink - Africa, Ltd RWANDA MARKET UPDATE
  20. 20. StratLink - Africa, Ltd POLITICAL OUTLOOK Genocide: Stirring Icy Relations 20 Years on An air of acrimony between France and Rwanda dominated the 20 years anniversary of the 1994 Genocide. The Rwandese government barred the French Ambassador from participating in the commemoration ceremony, citing complicity by the French government during the genocide. President Paul Kagame has pointed an accusatory finger at the French government for involvement in the massacre. In the recent past, matters linked to the genocide have come to haunt Rwanda. Through Q114, the Rwandese government has sought to vindicate itself of allegations of orchestrating the mysterious disappearance of persons believed to have been linked to the 1994 Hutu regime. In this regard, the country has locked horns with France and South Africa. We observe that there are no notable risks to Rwanda’s investment climate due to the above developments. BUSINESS NEWS/INTERVIEWS Rwanda Bureau of Standards is implementing an Import Products Conformity Assessment program that seeks to protect local manufacturers. Effective May 2014, goods will be inspected prior to being shipped to Rwanda as opposed to the current approach that inspects at the country’s border17 . The move will play a central role in protecting the economy’s manufacturing industry from unfair competition. Manufacturing accounts for around 7% of GDP against a regional average of 9.1%. The drop has been attributed to a collapse of industries in light of the 1994 genocide and dumping18 . The outlook for investment in local manufacturing is bright, pegged on steady and successful implementation of the program primed to be key in Rwanda’s Vision 2020. The blue-print identifies a strong manufacturing sector as a lead growth driver in the country’s development agenda. 17 Ministry of Trade and Industry Rwanda 18 International Growth Center ECONOMIC OUTLOOK Core View: It is our opinion that the slump in the country’s growth momentum to 4.6% in 2013 is a one-off and unlikely to ward off investor interest. Rwanda’s economy has had robust growth during the period from 2003 to 2013, averaging at 7.3%19 . Further, growth is projected to pick up to 6% in 2014 buoyed by the service sector and resumption in donor funding. Dismal performance in 2013 has largely been attributed to a slowdown in Q313 that was attributed to the rescheduling of donor aid by development partners. In this issue, we shall explore this issue in-depth with a focus on the economy’s reliance on donor aid funding. Contextualizing the Slump: Two Fronts At 4.6%, Rwanda’s growth has not only stood at one of its lowest points since 2000 but also falls significantly short of the National Bank of Rwanda’s projection of 6.6% and 270 bps below 2012 growth of 7.3%. Rwanda vs Regional GDP Growth Rate (%) Source: National Bank of Rwanda, BMI, World Bank In addition, Rwanda’s growth has fallen below that of peer economies in the region with Kenya having grown by 4.7%20 and Uganda projected to have grown by 6.2%21 respectively in 2013. 19 BMI Statistics 20 Kenya National Bureau of Statistics 21 World Bank 2013 .0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Rwanda Regional Average
  21. 21. StratLink - Africa, Ltd The regional average economic growth for East Africa including Ethiopia for 2013 stands at 5.9%22 . Q313: Main Driver of Aggregate 2013 Slump In Q313, Rwanda’s growth dropped to 3.9% from 5.7% in Q213 and 7.3% in Q31223 . This came in view of re-scheduling of aid flows by development partners following widespread allegations that the Rwandese government was supporting M23 Rebels in the Democratic Republic of Congo. Rwanda Grant Support in Relation to GDP Source: IMF, Stratlink Analysis Rwanda Loan Support in Relation to GDP Source: IMF, Stratlink Analysis Re-scheduling of aid flows in Q313 occasioned a considerable impact on the execution of development projects in the economy. National Bank of Rwanda reports that the 22 BMI Statistics 23 National Institute of Statistics greatest impact was manifested in the slow- down of the service sector. Whereas the country’s budget support loans and grants as a percentage of GDP have been on a steady decline, the International Monetary Fund expects project support loans to double to 3.6% of GDP between FY12/13 and FY14/15. We believe Rwanda is a lucrative market for investors in the both medium and long-term with growth expected to correspond with the EAC regional growth. DEBT MARKET UPDATE Evolution of STIRs Source: National Bank of Rwanda, Stratlink Analysis Interest rates in the short-term fixed income market have declined through April 2014 with the exception of the 182 Day instrument that picked slightly. The 91 Day and 364 Day instruments shed 9 and 10 bps respectively between the start and close of the month to stand at 5.23% and 7.75% respectively. 91 Day Tbill Bid to Cover Ratios (‘000 RWF) Date Received Accepted Bid to Cover 03.06.14 5,000,000 5,000,000 1.00 03.13.14 10,506,000 4,500,000 2.33 03.20.14 7,400,000 5,000,000 1.48 03.27.14 8,660,000 5,000,000 1.73 04.03.14 8,500,000 5,000,000 1.7 04.10.14 4,000,000 4,000,000 1.00 04.17.14 8,300,000 6,000,000 1.38 04.25.14 2,000,000 2,000,000 1.00 Source: National Bank of Rwanda, Stratlink Analysis 4.10% 3.80% 7.90% 3.70% 4.10% 7.80% 0.00% 5.00% 10.00% Budget Support Grants Capital Grants Total Grants 2012/13 2013/14 2014/15 (P) 0.40% 1.80% 2.10% 0 3.60% 3.60% 0.00% 1.00% 2.00% 3.00% 4.00% Budget Support Loans Project Support Loans Total Loans Support 2012/13 2013/14 2014/15 (P) 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% Jan-14 Jan-14 Jan-14 Feb-14 Feb-14 Mar-14 Mar-14 Apr-14 91 Day 182 Day 364 Day
  22. 22. StratLink - Africa, Ltd Investor uptake within the market has been fluctuating with bid-to-cover ratios of the 91 Day instrument oscillating between 2.33 and 1.00 between March and April 2014. The interbank market has been stable at 5.79%. Liquidity trends in the money market have been stable although there have been indications of skewness in the recent past. Key Repo vs Interbank Rate Analysis Source: National Bank of Rwanda, Stratlink Analysis International Finance Corporation to Issue Bonds Starting May 2014 The International Finance Corporation has revealed plans to commence issuance of bonds denominated in Rwanda Francs effective May 201424 . IFC says it will roll out the instruments as part of its agenda to expand its debt program in Africa. In its debut issuance, the corporation is expected to float a USD 22 million instrument with a maturity of five years. In light of the precedent set in 2013 at the roll out of the program, we assess that uptake of the instruments is bound to be aggressive. The issuance of USD 24 million worth of Zambian Kwacha denominated bonds by the IFC in 2013 that saw about 5 times oversubscription sets a good precedent. This is likely to have investors rally into the bonds market and slow down activity in the short- term interest market. 24 Standard Bank, CfC Stanbic Bank, Bank of Kigali The corporation will use proceeds from the bonds to fund its projects denominated in the local unit within the country. Currency Front: Local Unit Depreciates Source: Bloomberg, Stratlink Analysis 8.06% Rwanda Franc depreciation against the USD in the year-to-date 0.37% Rwanda Franc depreciation against the USD in the month-to-date The domestic unit continued to come under depreciation pressures. In the period under review, the Rwanda Franc touched a high of 678.81 and a low of 684.02 respectively against the greenback. In the April 2014 issue, we delved at length into the pressures that the country’s import capital expenditure is exerting on the Rwanda Franc. We reiterate our assessment that the domestic unit is bound to depreciate as long as the country maintains considerable investment in capital expenditures as it seeks to drive its development. In Q313, for instance, the country’s trade deficit widened by USD 1.2 billion year-on- year driven by importation of capital goods25 . This widening imbalance has occasioned high demand for the greenback resulting in further slides by the Rwanda Franc. 25 National Institute of Statistics Rwanda 4% 6% 8% 10% 12% Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Key Repo Interbank Rate 620 630 640 650 660 670 680 690 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14
  23. 23. StratLink - Africa, Ltd EQUITY MARKET UPDATE The stock exchange exhibited a bearish trend largely in April 2014 owing to an end of the reporting season by listed companies that had seen stock prices trend northwards in March. Further, Bralirwa, a prominent counter in the market, reported a profit drop in its full year to December 2013. We, however, believe that market sentiments remain elevated anchored by plans by the government to increase foreign investor participation in the exchange by easing capital controls. Rwanda All Share Index (RASI) One Year Movement Source: Bloomberg, StratLink Africa +12.06% The RSE All Share Index has gained by 12.62% over the last one year RSE All Share Index Sheds 0.54% in April 2014 Source: Bloomberg, StratLink Africa -0.54% The RSE All Share Index has dropped by 0.54% over the last one month Bralirwa Full Year 2013 Profit Drops Bralirwa’s profit for the year to December 2013 dropped by 18.8% attributable to low sales volumes that dropped by 0.6%, limited price increase and high cost of sales. The company further reports a 29% dip in beer export volumes26 due to increase in duties levied by the Democratic Republic of Congo which is the largest export market. We assess that this development has been a key driver to the bearish trends in the market. Bralirwa is a prominent counter at the exchange that stokes high investor appetite in day-to-day trading. Moving ahead, we expect the company to scout for other markets within the region as prospects with DRC remain uncertain. 26 Bralirwa Full Year 2013 Results 125 130 135 140 145 150 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 143 144 145 146 147 148 149 Mar-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14 Apr-14
  24. 24. StratLink - Africa, Ltd ETHIOPIA MARKET UPDATE
  25. 25. StratLink - Africa, Ltd POLITICAL OUTLOOK Crackdown on Government Critics The government has come under criticism for what has been termed as intolerance of opposition and freedom of expression. Multiple arrests of independent journalists and bloggers, and opposition voices in the last month have indicated Ethiopia’s tight fisted policy on freedom of expression, a year before the general elections. This has triggered off international concern to end the abuse and pressure Ethiopian leaders to respect constitutional and media freedom rights. Despite a section of the European Parliament piling pressure on the Ethiopian government to review the Anti-Terrorism Proclamation which had led to the arrest of a section of journalists and members of the opposition July 2013, there have been no visible changes effected. Concern about the government of Ethiopia’s acts of repression of fundamental rights and freedom are likely to dampen the country’s recent liberalization efforts and dampen political risk perception. In the 2013 Economic Freedoms Index27 , Ethiopia dropped by 2.6 points to a score of 49.4 against the Sub- Saharan Africa and global averages of 53.7 and 59.6 respectively28 . BUSINESS ENVIRONMENT National Oil Ethiopia has expressed interest in helping finance construction of a refinery that would help the region optimize on its budding oil sector. The marketer says there is need for concerted effort towards upgrading the region’s oil infrastructure in view of recent discoveries in Uganda and Kenya. A harmonized approach in laying infrastructure will be crucial in a bid to stave-off possible idle capacity and strengthen regional integration goals. An assessment of the generation capacity is vital at this point to ensure the region optimizes on its capacity. 27 Index measures degree of economic freedoms. The higher the index, the more the freedom space 28 Heritage Foundation 2013 ECONOMIC OUTLOOK Growth and Transformation Plan 2010 – 2015: Three Years’ Score Card With only two years before the timeline of the country’s economic blue-print elapses, the government tabled before the parliament a report assessing progress made in the three years of implementation. GDP Size and Growth Rate Analysis Source: BMI Statistics, StratLink Analysis Inflation: Persisting Strains In the period under review, the government identified inflation, below target performance by the agriculture sector and dismal engagement of the private sector as the key challenges of realizing the macro-economic targets29 . Despite managing to scale down inflation to single digit figures from March 2013, Ethiopia’s inflation rate remains above its East Africa peers. In 2013, Ethiopia’s inflation averaged 8.5% against Kenya, Uganda and Tanzania that averaged 5.8%, 5.46% and 7.9% respectively30 . This has had the net effect of subjecting investors and consumers to a comparatively higher cost of living and doing business within Ethiopia. 29 Ministry of Finance and Economic Development 2014 30 National Bureaus of Statistics .0 4.0 8.0 12.0 16.0 .0 100.0 200.0 300.0 2008 2009 2010 2011 2012 2013(P) 2014(P) GDP (USD Billions) GDP Growth (%) - RHS
  26. 26. StratLink - Africa, Ltd Inflation: Ethiopia vs Regional Peers (%) Source: National Bureaus of Statistics, BMI, StratLink Analysis Growth in Domestic Savings: Key Milestone The Ministry of Finance and Economic Development, however, reports success in boosting the savings culture within the economy. Between FY09/10 and FY12/13, savings as a percentage of GDP grew by 1,250 bps placing it 2.70 percentage points above the Growth and Transformation Plan target of 15%. Savings as a Percentage of GDP Source: MoFED31, StratLink Africa Analysis. Growth in savings will lead to higher bank deposits and hence increased lending to the public sector both through direct and indirect (via the 27% levy on new loans by private banks to invest in government securities that 31 Ministry of Finance and Economic Development fund public expenditure) sources. This will lead to increased economic growth. Between 2000 and 2010, the savings to GDP ratio for South East Asia stood at an average 30% (against a global average of 19%) and this has played a central role in the region’s economic emergence32 . With average savings to GDP ratio at 17% in Sub-Sahara Africa, Ethiopia has made considerable gain since the inception of the GTP in 2009/10. Other Key Economic Indicators Indicator 2009 2013 Variance Urban unemployment 18.9% 16.5% -2.4% Per Capita Income USD 377 USD 550 +45.9% Population below poverty line 29.6% 26.0% -3.6% FDI inflows USD 288.3 mln USD 970.4 mln +236.6% Source: UNCTAD, MoFED, StratLink Africa Analysis. It is our view that the GTP has been a critical catalyst to the growth and development of Ethiopia. Despite a slowdown in GDP growth between 2010 and 2013, the economy averaged 9.8% growth in the period, well above East Africa’s 5.7% average33 . Degree of Market Openness The country’s service sector now contributes the lion’s share of the GDP and is poised to further economic gains if vital components of it such as banking and finance are liberalized. Liberalization of the economy will create greater room for competition especially with the growing service and industry sectors. 32 World Bank 2012 33 Business Monitor International .0 10.0 20.0 30.0 40.0 50.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Ethiopia Kenya Uganda 5.20% 17.70% 20.00% 0% 5% 10% 15% 20% 25% 2009/10 2012/13 2015/16 (P) Actual Savings: GDP Ratio Target Savings: GDP Ratio
  27. 27. StratLink - Africa, Ltd Ethiopia’s Economy by Sectoral Composition Source: KPMG Q1’13 Survey, StratLink Africa Analysis. Market Openness Indicators (%) Source: Heritage Economic Freedom Report 2013, StratLink Africa Analysis. The Heritage Economic Freedoms Index applies as follows: 1) Trade Freedom – Measures the degree to which tariff and non-tariff barriers impact trade activities in an economy 2) Investment Freedom – Measures the constraints of flow to investment capital in an economy 3) Financial Freedom – Measures banking efficiency and government control of the banking and finance sector In key indicators of market openness, Ethiopia lags behind the regional average. This creates great room for the country to grow in the coming years through remedying the status quo. EXCHANGE RATE MOVEMENT Ethiopian Birr exchange to the US$ Source: Bloomberg, StratLink Africa. Month-on-month Trends Source: Bloomberg, StratLink Africa 4.14% 1.74% We observe that although the local unit has continued to depreciate through April 2014, the rate of depreciation has decreased marginally through the month. Whereas between the start and close of March 2014 the Birr shed 0.336% against the greenback, it shed 0.327% in April 2014 marking a 9 bps decrease in depreciation. In this and preceding issues, we have argued that the country’s current account deficit, which has weighed down the local unit, is likely to decrease as the Grand 44.50% 41.80% 13.60% Service Agriculture Industry 72.95 56.25 47.5 64 25 20 0 20 40 60 80 Trade Freedom Investment Freedom Financial Freedom EAC Average Ethiopia 18.4 18.6 18.8 19 19.2 19.4 19.6 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 19 19.1 19.2 19.3 19.4 19.5 19.6 3-Mar 10-Mar 17-Mar 24-Mar 31-Mar 7-Apr 14-Apr 21-Apr Ethiopian Birr has depreciated month-on-month basis Ethiopian Birr has depreciated on a year on year basis
  28. 28. StratLink - Africa, Ltd Transformation Plan draws to a close. As such, we expect to continue witnessing decreasing depreciatory pressure on the local unit as this continues. Please see the April 2014 issue for a detailed analysis of the country’s current account position. COMMODITIES EXCHANGE UPDATE Change of Guard at ECX The Ethiopian Commodities Exchange (ECX) Board of Directors appointed Ato Shimelis Habtewold as interim CEO to the exchange following the resignation of Ato Anteneh Assefa in March 2014. Soaring Global Coffee Prices Bring Respite to Ethiopia’s Declining Coffee Revenues Global coffee prices hit the highest level since March 2012 against the backdrop of high volatility through the month of March 2014. This has been triggered by widespread uncertainty of the Brazilian crop. Brazil, the world’s largest coffee producer, is expected to suffer a decline in output in 2014 following adverse weather conditions coupled with a reduction in the area under production. ICO Composite Market Prices Source: ICO, StratLink Analysis In March 2014, coffee prices stood at an average of US Cents 165.03/lb, representing 20% growth from February 201434 . Ethiopia, Africa’s largest and the world’s eighth largest, coffee producer is poised to be a key beneficiary of the soaring global prices. 34 International Coffee Organization March 2014 Report Ethiopia’s Coffee Exports (1,000 60Kg Bags) Source: USDA, StratLink Analysis The upward trend in global prices offers a breather to farmers and the government of Ethiopia. Export earnings in the year 2012/13 suffered a 10.6% drop to USD 745 million driven by low global prices35 . 35 Ethiopia Coffee Exporters Association 90 110 130 150 170 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 3,140 3,280 3,280 3,050 3,100 3,150 3,200 3,250 3,300 2011/12 2012/13 2013/14(P)
  29. 29. StratLink - Africa, Ltd NIGERIA MARKET UPDATE
  30. 30. StratLink - Africa, Ltd POLITICAL RISK ANALYSIS Abuja Blast Exposes Insecurity Underbelly In what has been termed as the worst attack on Nigeria’s administrative hub, Abuja, a bomb exploded at a bus terminus claiming at least 71 lives. The government has blamed the incident on militant Islamist group, Boko Haram, which has been on the rampage for over four years seeking to overthrow the government. There have been a series of attacks that have been linked to the militant group such as the 2011 Christmas Eve attack that claimed at least 43 lives and a suicide bomb attack that left at least 23 dead at the United Nations building in Abuja. In the last month, the insurgents abducted 276 girls from a school in North-Eastern Nigeria. Inability to stem Boko Haram’s activities increases Nigeria’s political and insecurity risks, which could cause investors to re- evaluate their risk perception of the country. We assess that it places Nigeria in a precarious position ahead of the 2015 general election as the country courts a real possibility of instability. Despite Nigeria being one of Africa’s most promising markets for investment, the business outlook is expected to be cautious as a result of the rising insecurity. BUSINESS Nigeria remained among the top three choice investment destinations in SSA36 in 2013. In the year, the country registered the third highest number of Private Equity deals (9) behind South Africa (10) and Kenya (12). Between 2011 and 2013, Nigeria had the highest valued PE deal within a single country worth USD 750 million. PE interest in has been skewed towards the extractive industry accounting for 58% of the worth of deals in 2013 at USD 2,13237 million. This augurs well for Nigeria which has a strong oil sector. With the GDP rebasing, investors are likely to keenly view the manufacturing, agriculture and education sectors as well. 36 Sub-Sahara Africa 37 Deloitte Private Equity Survey 2014 ECONOMIC OUTLOOK Core View: Nigeria has emerged as Africa’s largest economy following a rebasing exercise that saw its GDP size leap-frog by 78.56% to USD 509.9 billion by-passing South Africa at USD 384 million38 . Much like Kenya, we hold that this has brought forth changes in key macro-economic indicators that could lure investment appetite into the country. In this issue, we shall take a deep dive into such considerations and prod trends that point to systemic challenges. Nigeria Economic Growth Analysis Source: BMI, Stratlink Analysis Between 2005 and 2013, Nigeria’s economic growth rate averaged 6.6% per annum. In the same period, South Africa registered an average GDP growth of 3.3% while Angola posted 10.6%39 , placing Nigeria mid-way within the spectrum of rapidly growing and slow growth resource rich economic in Sub- Sahara Africa. We observe that rebasing the country’s economy to 2010 from 1990 has occasioned some changes worthy of consideration for investors. Leap in Per Capita Income Nigeria’s per capita income has experienced an 85.2% growth to USD 2,984 from USD 1,612 before rebasing. Despite the considerable leap, this still leaves the economy below its resource rich peers in the Sub-Saharan African region by way of 2014 projections. Nigeria’s new per capita income will still be a paltry 39% of Angola’s and 46% of South Africa’s. This is largely attributable to 38 Nigeria Bureau of Statistics, World Bank 2014 39 Business Monitor International .0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 .0 50.0 100.0 150.0 200.0 250.0 300.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 GDP Size (USD Billions) - RHS GDP Growth Rate (%)
  31. 31. StratLink - Africa, Ltd Nigeria’s population which at about 168 million people – is thrice as large as South Africa’s (52.27 million) and eight fold that of Angola (20.82 million)40 . Per Capita Income Analysis Source: BMI, World Bank, Stratlink Analysis Investment Outlook: New Growth Pockets The rebased economy gives greater weighting to such sectors as telecommunication and financial services. This is because the sectors are playing an increasingly central role in the growth of the economy. The domestic entertainment industry has also featured prominently as a key driver behind the rebasing. We expect that investors will be eyeing these sectors as pockets of growth in the years ahead. Nigeria FDI Inflows (USD Millions) Source: BMI, UNCTAD, Stratlink Analysis 40 World Bank Statistics Decrease in Public Debt Burden In our April 2014 issue, we highlighted that Nigeria is among the Sub-Saharan African economies with a low public debt burden at a debt-to-GDP ratio of 20%. Rebasing the economy reduces the ratio to about 10.6% of GDP. In 2013, Fitch Ratings placed Nigeria’s long-term foreign and local issuer default ratings at BB- and BB painting stable outlook. We expect this rating to be maintained or improved slightly on account of the rebasing. Comparative Analysis of Changes in Public Debt to GDP Ratio Source: BMI, IMF, Stratlink Analysis Decrease in Current Account Surplus On the flip side, however, Nigeria’s current account surplus now stands at a modest 4% of GDP down from the previous 7.5%41 . Nigeria maintains a surplus position driven largely by a favourable balance of trade and increased net current transfers42 . Government Breaks Trend and Proposes Slash in Defence and Security Spending 2014 The Budget proposal for 2014 recommends an 8.26% decrease in defence spending to USD 2.11 billion, from 2013. As such, expenditure designated for defence and security will drop from 12% to 8% of government spending between 2013 and 2014 respectively. This will mark the first time since 2006 that the country slashes its budget allocation for defence and security. 41 Business Monitor International 42 Central Bank of Nigeria 2000 4000 6000 8000 10000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014(P) Angola Nigeria South Africa 4 000.0 5 000.0 6 000.0 7 000.0 8 000.0 9 000.0 10 000.0 2005 2006 2007 2008 2009 2010 2011 2012 50.70% 20.00% 48.76% 10.60% 0% 10% 20% 30% 40% 50% 60% Kenya Nigeria Old Rebased
  32. 32. StratLink - Africa, Ltd Military Spending as % of GDP Source: World Bank, Stratlink Analysis Whereas an increase in defence spending is not a guarantee of heightened security, it will be an area of marked interest that the country is scaling down its spending amidst growing uncertainty. Widespread atrocities by militants and the upcoming elections will be a major challenge to an ill prepared and ill equipped defence and security apparatus. DEBT MARKET UPDATE Looking Ahead: Monetary Policy Stance The Central Bank’s Monetary Policy Committee met on March 24th and 25th , 2014 and observed that money market interest rates were within the targeted monetary policy corridor. The committee further agreed to continue with a tight monetary policy especially in light of increased inflationary pressures. The committee therefore retained its benchmark lending rate at 12% while raising cash reserve ratio from 50% to 75%43 . This is set to decrease the stock of excess cash that commercial banks have and therefore help rein in on excess liquidity in the money market. 43 Central Bank of Nigeria Economic Assessment Drop in Yields across All Tenors (%) Source: Bloomberg, Stratlink Analysis Yields in the debt market took a downturn after a modest pick-up in March 2014. In the short-term debt segment, the 91 Day, 182 Day and 364 Day instruments shed 158 bps, 164.3 bps and 115.6 bps to stand at 11.61%, 12.27% and 13.85% respectively. 91 Day Tbill Bid to Cover Ratios (Naira Mlns) Date Received Accepted Bid to Cover 05.03.14 27,728.32 22,970.71 1.21 19.03.14 42,500.94 33,266.32 1.28 26.03.14 22,548.84 21,534.34 1.05 09.04.14 50,907.57 20,159.21 2.52 23.04.14 75,002.95 34,888.90 2.14 Source: Central Bank of Nigeria, Stratlink Analysis In April 2014, investor appetite for the STIRs picked up with bid to cover ratios for the 91 Day instrument crossing the 2.00 mark. Available data also indicates that bond market activity has been high. 3 Year Bond Bid to Cover Ratios (Naira Mlns) Date Received Accepted Bid to Cover 12.02.14 91,000 45,000 2.02 12.03.14 71.22 35.00 2.03 23.04.14 83.22 25.00 3.33 Source: Central Bank of Nigeria, Stratlink Analysis The drop in yields has largely been driven by high liquidity in the market as evidenced by the high bills and bonds subscriptions. 0.70% 0.90% 1.40% 1.20% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 2004 2005 2006 2007 2008 2009 2010 2011 2012 Nigeria South Africa 10 11 12 13 14 15 16 1M 2M 3M 6M 9M 1Y 2Y 3Y 5Y 7Y 10Y 20Y February-14 March-14 April-14
  33. 33. StratLink - Africa, Ltd Interbank Rates Trend Analysis (%) Source: Bloomberg, Stratlink Analysis The interbank market has been fairly volatile in the last three months, indicating interspersed liquidity. The months of February and March 2014 were particularly spiked, an indication of possible skewness of liquidity amongst the banks. In the week to April 18th 2014, the bank reported intervening in the market to mop up excess liquidity to a tune of USD 1.3 billion. This came in succession to a prior mop up of USD 383.54 million in March 2014. Nigeria Naira Buoyed by Mop Up Whereas this has supressed interbank rates, from a high of 17.75% and a low of 10.75% in March 2014 to a high of 15.54% and low of 10.75% in April 2014, it has occasioned a strengthening domestic unit in the foreign exchange market. Interest rates in the short-term market and interbank rates are expected to remain volatile with the Central Bank using its monetary tools for periodic intervention to cut back on excess liquidity. Strengthening of the local unit against major currencies is likely to remain a key driver of the bank’s actions as it seeks to lower the cost of importation. In the year to April 2014, the Naira’s strongest value has stood at 157.27 units to the greenback in May 2013. Naira vs USD Exchange Rate Source: Bloomberg, Stratlink Analysis -3.88% Margin by which Naira has shed against USD in the year-to-date +2.10% Margin by which Naira has gained against USD in the month-to-date EQUITY MARKET UPDATE It has been a bearish quarter at the market with the exchange suffering spill-over effects from extraneous developments. In the quarter under review, the USA Federal Reserve began a cut-back of its quantitative easing program that has occasioned a slowdown in foreign investor activity. Further, matters pertaining to the controversial dismissal of Central Bank Governor, Lamido Sanusi, in February 2014 cast Nigeria in negative light to both investors and development partners. NGSE All Share Index Trend Source: Bloomberg, Stratlink Analysis 9 11 13 15 17 19 Dec-13 Dec-13 Dec-13 Jan-14 Jan-14 Feb-14 Feb-14 Mar-14 Mar-14 Apr-14 Apr-14 152 156 160 164 168 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 32000 34000 36000 38000 40000 42000 44000 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14
  34. 34. StratLink - Africa, Ltd +15.08% NGSE All Share Index year-to-date change -6.65% NGSE All Share Index Q114 Change Q114 NGSE All Share Index Q114 Change Source: Bloomberg, Stratlink Analysis Beginning March 2014, however, we have witnessed signs of a rebound in the market and we expect that this will persist. The country’s economic prospects are looking skyward as investors are likely to position themselves to reap from benefits from the re-basing exercise. Corporate Action Zenith Bank Targets USD 1 Billion in Medium Term Notes Zenith Bank reported 2% growth in net profits to USD 146.59 million for the period to Q114. The bank has revealed plans of floating up to USD 1 billion in Medium Term Notes with proceeds earmarked for ‘general banking purposes’. In April 2014, the bank also appointed Mr.Olusola Oladipo as Executive Director. Unity Bank Q114 Profits Leap by 25% Unity Bank’s net profits Q114 grew by 25% to USD 16.58 million. During the period, net interest income grew by 14.4% to USD 49.43 million. The bank’s Earning per Share has grown by 14.31% to USD 0.0004. Zenith vs Unity Banks’ Share Performance Source: Bloomberg, Stratlink Analysis Zenith’s stock has been generally bullish as investors anticipated release of good results by banking corporations. There was a discernible upward trend in Zenith Bank’s share price that was through April 2014 on the back of the Q14 results. Unity Bank’s share, on the flip side, was unchanged. The bank undertook a share reconstruction that saw it issue one reconstructed ordinary share at 0.50 Naira for every three held. Wapco Nigeria Joins ‘High Priced Stocks’ On April 17th 2014, Lafarge Cement Company, Wapco, joined the league of high priced stocks at the exchange. High priced stocks are shares that have traded at least USD 0.62 (N100) per share on average in at least four out of the last six months. The exchange now has ten counters in the ‘High Priced Stocks’ including Dangote Cement, Guinness Plc, Nestle Plc, Nigeria Breweries, SIM Capital Fund, Skye Shelter Fund, Nigeria Energy Sector Fund, Total plc and Lafarge’s Wapco Cement. 36000 37000 38000 39000 40000 41000 42000 43000 2-Jan 16-Jan 30-Jan 13-Feb 27-Feb 13-Mar 27-Mar 10-Apr 24-Apr 0.4 0.5 0.6 0.7 0.8 15 18 21 24 27 30 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Zenith Bank Unity Bank - RHS
  35. 35. StratLink - Africa, Ltd Snapshot of ‘High Priced Stocks’ Share Performance Source: Bloomberg, Stratlink Analysis 50 100 150 200 250 300 Jan-14 Jan-14 Jan-14 Feb-14 Feb-14 Mar-14 Mar-14 Apr-14 Apr-14 Dangote Guiness Plc Nigeria Breweries Wapco Cement
  36. 36. StratLink - Africa, Ltd STRATLINK AFRICA LTD IN THE NEWS As part of its corporate culture, Stratlink Africa Ltd strongly believes in being an active contributor in platform that helps inform public opinion, guide national and regional discourse and help shape public policy. This is increasingly important in a market pervaded by marked economic shifts and an evident knowledge gap begging for informed perspectives with regard to a rapidly changing economic environment. As such, the company periodically engages in commentary with regional and international media. Stratlink Africa Ltd maintains a focus on Eastern and Western Africa economies which have emerged as vital poles of enterprise and investment growth for the continent. Here below is a sample of the most recent interaction in this regard: Implications of Rebasing the Nigerian Economy Managing Director, Konstantin Makarov, was interviewed by CCTV News and shed insight into the implications of the rebasing of Nigeria’s economy.  April 2014 Regional Market Update The company’s April 2014 Market Update has been widely used a reference point in guiding outlook on the region’s growth prospects. The analysis of Kenya’s debt and equity markets has proven especially resourceful to the public domain inviting widespread citation by media.  /539552/2299362/-/item/0/-/snu8xjz/-/index.html  earnings/-/539552/2279732/-/item/1/-/eokrbuz/-/index.html Diversification of Capital Markets in the Region Research Analyst, Julians Amboko, was engaged by Bloomberg Markets in guiding the understanding the implications of ALTX Africa Group Ltd rolling out a derivatives exchange in Uganda’s capital market.  second-market-plans-derivatives.html
  37. 37. StratLink - Africa, Ltd StratLink-Africa Team Konstantin Makarov – Managing Director Dina Farfel – Partner Zoravar S. Dhaliwal – Senior Consultant Poonam Vora - Associate Henry Chege – Senior Analyst Samuel Odero - Analyst Julians Amboko – Analyst Alex Gachuiri – Analyst
  38. 38. StratLink - Africa, Ltd StratLink Africa Ltd Disclaimer Notice The material prepared by StratLink Africa Ltd ("StratLink ") is our opinion. StratLink believes that it fairly and accurately represents the subject matter reported upon. This communication is neither an offer to sell, nor a solicitation of an offer to buy or sell, any financial instrument mentioned herein. The text, images, and other materials contained or displayed on any StratLink product, service, report, e-mail, or website are proprietary to StratLink and constitute valuable intellectual property. This report is issued only for the information of, and may only be distributed to professional investors, or major institutional investors (as defined in Rule 15a-6 of the US Securities Exchange Act of 1934), and dealers in securities. This publication is confidential and for the information of the addressee only and may not be reproduced in whole or in part, nor copies circulated to any party, without the prior written consent of StratLink. StratLink accepts no liability for any loss resulting from the use of the material presented in this report. This disclaimer of liability may be prohibited, or limited, by specific statutes, laws, or regulations. StratLink affiliates, shareholders, directors, officers, partners, and consultants shall have no liability, contingent or otherwise, for any claims or damages arising in connection with any errors, omissions, or inaccuracies. This report is not to be relied upon in substitution for the exercise of independent judgment. StratLink may have issued, and may in the future issue, reports that are inconsistent with, and which reach different conclusions than, the information presented in this report. Reports may reflect different assumptions, views, analytical methods, and analysts who prepared them, and no part of the analysts compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this report. All views, opinions, and estimates contained in this document may be changed after publication at any time without notice. Past performance is not indicative of future results and should not be taken as an indication or guarantee of future performance. No warranty, express or implied, is made regarding such performance. The investments and strategies discussed here may not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor. All representations, information, opinions, and estimates contained in this report reflect a judgment of the analyst, effective as of its original date of publication by StratLink, and are subject to change without notice. The price, value of, and income from any of the securities mentioned in this report can fall as well as rise. The value of securities is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities. Investors in securities and other instruments, the values of which are influenced by currency volatility, must assume this risk. StratLink personnel, or other professionals, may provide oral or written commentary or trading strategies to our clients that reflect opinions that are their own and are contrary to the opinions expressed in StratLink’s research. StratLink is under no obligation to ensure that such other reports are brought to the attention of any recipient of any report. StratLink and its respective affiliates, officers, directors, partners, and consultants, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. To the extent applicable and permitted by law or regulation, StratLink believes that the direct author of this report has no position in, fiduciary interest proscribed, nor has been compensated by the subject(s) of this report, or other entities for the content, other than through direct compensation by StratLink. ©StratLink Africa Limited 2014