Africa Market Update - July 2018

2JULY 2015 | MARKET UPDATE – AFRICA www.stratlinkglobal.com
A Financial Advisory
Company
JULY 2018 | MARKET UPDATE – AFRICA www.stratlinkglobal.com
NIGERIA
ZAMBIA 5
11
17
26
RWANDA 30
KENYA
UGANDA
TANZANIA 21
Table of Contents
ZAMBIA
• Why the country’s external debt position is stoking jitters
• Monetary tightening lurks in the horizon
NIGERIA
• Ricing oil price, picking disinflation & surging fx reserves set stage for gradual
monetary expansion
• Divergence over 2019 general election schedule tests separation of powers
amongst organs of the government
KENYA
• Kenya works with FAO to reform irrigation policy
• Budget statement focuses on advancing manufacturing
At a Glance
TANZANIA
• Inward looking financial year 2018/19 budget with modest fiscal expansion
• Non-Performing Loans (NPLs) regulation a threat to banks’ profitability
UGANDA
• Concern over high incidence of substandard products
• MPC holds key rate in latest meeting
RWANDA
• Rwanda banks on key tax reforms to boost tax revenue in line with the
2018/19 budget theme of increasing self-reliance in budget funding
http://mutuamatheka.co.ke/wp-content/uploads/2012/04/001_NAIROBI_WEBREADY_MUTUA-MATHEKA-10.jpg
Nairobi, Kenya
© Mutua Matheka
Cover image:

AFRICA DEALS LANDSCAPE
January - June 2018
Source: PitchBook, StratLink Africa
Snapshot of Deals
• Kenya: Britam Holdings received USD 89.3 Million of development capital from Africinvest, Netherlands Development Finance Company, PROPAR-
CO and Deutsche Investitions on May 17th, 2018
• Kenya: Century Developments received USD 200.0 Million of development capital from Kuramo Capital on May 17th, 2018
• South Africa: Ipreo entered a deﬁnitive agreement to be acquired by IHS Markit for USD 1.9 Billion on May 21st, 2018
• Nigeria: Resort Savings & Loans raised USD 250.0 Million of development capital from Milost Global on February 26th, 2018
Deal Activity by Industry (Proportions) Deal Activity by Types (Proportions)
4.5 Billion
1.5 Billion
1.3 Billion
1.3 Billion
861.0 Million
389.0 Million
375.0 Million
142.6 Million
94.2 Million
63.5 Million
56.1 Million
34.8 Million
11.0 Million
10.0 Million
8.7 Million
8.3 Million
1.1 Million
20,000.0
South Africa
Nigeria
Egypt
Morocco
Kenya
Senegal
Ethiopia
Ghana
Madagascar
Mauritius
Tanzania
Namibia
Congo
Ivory Coast
Lesotho
Swaziland
Uganda
Niger
10.5%
8.5%
8.3%
5.8%
5.3%
4.2%
4.1%
3.6%
3.4%
2.9%
43.4%
Healthcare devices
& supplies
Insurance
Communications &
Networking
Metals, minerals
& mining
Capital Markets
Exploration, production
& reﬁning
Commercial
Services
Energy services
Apparel &
accessories
Commercial banks
Others
33.2%
33.2%
22.7%
22.7%
12.5%
12.5%
7.1%
7.1%
6.0%
6.0%
4.3%
4.3%
3.9%
3.9%
10.3%
10.3%
M&A Secondary Transaction - Private
Corporate Divestiture IPO
PIPE Secondary Transaction - Open Market
Asset Acquisition Others
Value of Transactions by Country (USD)

Proportion of Households in Various Bands of Per Annum
Disposable Income
:UGANDA HOUSEHOLDS’ DISPOSABLE INCOMESECTOR LE
Source: Business Monitor International, StratLink Africa
In our July 2018 Sector Lens, we look at the evolution of household disposable incomes in Uganda between 2013
and 2017. A key point to observe is that the proportion of households at the bottom tier (disposable income that
is less than USD 1,000 per annum) has grown whilst that of other tiers has fallen. This can be attributed to the
general decline in labor force participation rate¹ in the country over the same period ─ labor participation rate fell
from 59.8% to 52.3% between 2012 and 2017 with a notable decline (850 basis points to 46.3%) reported in the
rural areas². For investors, this suggests the need to moderate expectations regarding the economy as household
incomes come under pressure triggered by shocks from the macroeconomic environment.
1
The labor force participation rate is calculated by expressing the number of persons in the labor force as a percentage of the working-age population.
2
Uganda Bureau of Statistics – National Household Survey 2016/17
25.6%
30.3%
68.6%
65.4%
4.5% 3.4%
1.3% 0.9%
2013 2017
< $ 1,000 $ 1,001 - $ 5,000 $ 5,001 - $ 10,000 > $ 10,001

FIRST HALF 2018: WHY THE EXTERNAL DEBT POSITION IS STOKING CONCERN & MONETARY
TIGHTENING LURKS IN THE HORIZON
ZAMBIA MARKET UPDATE

Stock Taking after Three Elections in Quick
Succession
The political environment has been favorable in
the first half of 2018 especially coming on the
back of the three months long State of Threatened
Emergency which came to an end in October
2017. After three elections that took place in
quick succession (i.e. January 2015, August 2016
and August 2017), the country now has room to
consolidate the gains realized in the relatively
stable processes and map out policy priorities.
Proposal to Prolong Period for Hearing
Presidential Election Petition
One of the notable developments in recent
past has been the proposal to have the period
provided for hearing a petition on the outcome
of a Presidential election extended from fourteen
to thirty days. This proposal comes against the
backdrop of the ruling by the Constitutional Court
to uphold the 2016 election of President Edgar
Lungu, a decision which was widely perceived to
have been impacted by time constraints.
Steps towards Strengthening the Electoral
System
Whereas there exists no ideal threshold for the
period within which Presidential election petitions
should be heard (the spectrum varies from Kenya’s
fourteen days to Zimbabwe’s six months), we
believe that debate over the suitable duration
is in itself a step forward in strengthening the
management and credibility of electoral processes
in the country. The country adopted a 50.0% plus
one threshold for victory in a Presidential election
ahead of the 2016 poll. The shift to the absolute
majority system is vital in ensuring the President
enjoys a robust popular mandate beyond the polls.
POLITICAL OUTLOOK
Dip in Q1 2018 Credit Erodes Confidence in
Rebound
The business environment continues to punch
below its weight in what we assess is the after-
effect of the adverse environment in 2015 – 2016
and three elections in quick succession. Credit
to the private sector contracted by 3.5%, year-
on-year, in Q1 2018 indicating that whereas a
number of macro indicators might be sending
favorable signals (GDP growth accelerated to 5.0%
in Q4 2017), the micro level is still grappling with
a challenging environment. It is important to note
that this was an improvement from the contraction
registered at the same time in 2017.
Monetary Tightening in the Horizon
With inflation now only 60.0 bps below the target
ceiling of 8.0%, it is likely that we could see the
central bank begin engaging a hawkish stance if
the uptick is sustained. This is likely to present a
greater challenge for the already tightened credit
conditions in the economy. We expect, at the very
least, a 100.0 bps hike in the second half of 2018.
This switch in policy could also be used to arrest
potential pressure on the Kwacha.
BUSINESS ENVIRONMENT
Growth in Private Sector Credit
Source: Bank of Zambia, StratLink Africa
GDP: USD 21.5 Bln | Population: 16.7 Mln
ZAMBIA
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Q1
2017
Q2
2017
Q3
2017
Q4
2017
Q1
2018

Focus on Debt Position
At the start of 2018, we tabled a relatively
favorable outlook for Zambia’s economy. This view
was premised on the fact that by the close of the
second half of 2017, there were signals that the
economy was undertaking much needed fiscal
consolidation. In the second half of 2017, actual
expenditure by the government stood at USD
2.6 billion, 12.2% lower than what was planned
whilst revenue registered a 96.2% performance
rate compared to 83.1% in the same period a year
earlier. Additionally, the country’s fiscal deficit at
USD 596.7 million was 68.2% of that which had
been projected¹.
Debt Sustainability Raises Concern
In the recent past, however, concern over the
country’s debt position has surged triggered by
reports that the IMF had rejected the country’s
borrowing plan². Ever since, the country’s
Eurobond yields have risen relatively fast signaling
deteriorating risk perception which is underpinned
by debt sustainability concern.
Source: Bloomberg, StratLink Africa
ECONOMIC OUTLOOK
Concerns over the country’s external debt and
foreign exchange vulnerabilities have been stoked
further by the decline in foreign exchange reserves
over the last one year. Reserves stood at USD 1.1
billion as at the end of March 2018, 28.8% lower
than it did at the same period in 2017³. As such,
the perception of a weakening capacity to weather
foreign exchange related pressures is likely at the
top of investors’ consideration of risks associated
with Zambia.
Weassessthattherearetwokeyfactorsunderlying
investors’ jitters over Zambia’s debt position:
• Concentration of external debt compared to
peer economies is a major source of concern.
In an environment of depressed currencies, as
has been the case between since 2015 against
the backdrop of the slump commodity prices,
this presents risks with regard to servicing
foreign currency denominated debt obligation
due to rising cost.
Public Debt Composition
Ten Year Eurobond Yields
Source: National Debt Management Strategies, IMF, StratLink Africa
ZAMBIA
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Zambia - 2024 Zambia - 2022
Kenya - 2024 Ethiopia - 2025
1
Ministry of Finance
2
Reuters February 16th, 2018
3
Bank of Zambia Statistics
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Zambia Tanzania Kenya
External DomesƟc

ZAMBIA
Foreign Exchange Reserves (USD)
Africa’s 10 Worst Performing Currencies - USD Exchange
(Spot Returns between Jan 2015 and June 2018)
Average Per Annum Growth in External Debt
(2009 - 2016)
Tax Revenue (USD)
Source: World Bank, StratLink Africa
Source: World Bank, StratLink Africa
• Further to this, Zambia has experienced
relatively fast growth in its stock of external
debt having averaged 15.5%, per annum,
growth between 2009 and 2016. Considered
againstthebackdropofMozambique’sdefault,
this is bound to be fueling adverse perception
on the country’s debt sustainability position.
With tax revenue depressed, Zambia will most
likely be compelled to slow down its uptake of
debt, especially foreign, in the coming years.
Decline in foreign exchange
reserves between March 2017
and March 2018
Kwacha’s depreciation
between January 1st 2015 and
June 22nd, 2018
-28.8%
-36.4%
0.0
0.5
1.0
1.5
2.0
2.5
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
May-17
Sep-17
Jan-18
Billions
-70.0%
-60.0%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
EgypƟanPound
AngolaKwanza
NigeriaNaira
SierraLeoneLeone
CongoleseFranc
MozambiqueMeƟcal
ZambiaKwacha
MalawiKwacha
GhanaianCedi
UgandaShilling
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
16.0%
Zambia
Mozambique
Kenya
Tanzania
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2001 2003 2005 2007 2009 2011 2013 2015
Billions

Government Securities (USD)
Government Scales Down Appetite for Domestic
Debt
Funds raised by the government in Q1 2018
stood at USD 625.0 million, 16.7% lower than
the amount borrowed at the same time in 2017.
We are of the view that the government is toning
down its appetite for domestic debt as inflation
begins ticking upwards and is expected to bid
yields upwards in the remaining half of 2018. In a
bid to ease the upward nudge on yields, appetite
for domestic debt is bound to be kept low going
forward.
There is indication that the bulk of funds mobilized
in the fixed income market between January and
June 2018 have been gobbled up by efforts to
retire maturing debt. As a result, we expect to see
the issuance focus in the remaining part of the
year concentrate on long-term papers with a view
to relieving the weight that has been created by
rising maturities. This could help explain why in
the December 2017 increase in the tender sizes for
government securities, that of bonds was scaled
up by 65.0% to USD 165.4 million compared to the
5.6% for the T-Bills to USD 95.2 million.
DEBT MARKET UPDATE
Stock of Domestic Debt
Sovereign Yield Curve
Note: The inner circle represents September 2016
whilst the outer represents September 2017.
The yield curve has registered marginal movement
for the better part of the first half of 2018. Going
forward, deteriorating inflation expectations are
likely to pile upward pressure which could see an
uptick, notably on the short-term end of the curve.
ZAMBIA
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
Q22016
Q32016
Q42016
Q12017
Q22017
Q32017
Q42017
Q12018
Millions
Funds Raised MaturiƟes
T-Bills Bonds
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
91-day
182-day
273-day
364-day
2year
3year
5year
7year
10year
15year
Sep-17 Dec-17 Mar-18

Lusaka Stock Exchange
Banking Stocks Prop Market
The market has been resilient in the face of a dip
by stocks in the manufacturing sector. This has
been enabled by much better performance by
banking stocks whose index has flat-lined between
Q4 2018 and Q2 2018. The trend exhibited by the
banking stocks index was expected as a result of
moderation of bullish sentiments which drove
the rally witnessed between September 2017
and January 2018. Going forward, we are likely
to see further decline in the All Share Index
owing to pervasive sentiment that the country’s
debt position is unsustainable and could trigger
macroeconomic pressures.
IMF’S November 2017 statement of the country’s
banking and finance sector could also be a source
of investor confidence. Whereas the report raised
concern over crisis preparedness, it observed that
stress tests had revealed the sector was resilient
to credit and liquidity related stress.
EQUITY MARKET UPDATE
Gain by the Lusaka Stock
Exchange All Share Index year-
to-date as at June 13th, 2018
Change in banking stocks
index year-to-date
as at June 26th, 2018
3.4%
-0.8%
Zambia Banking Stocks Index
Zambia Manufacturing Stocks Index
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
4,600.0
4,800.0
5,000.0
5,200.0
5,400.0
5,600.0
5,800.0
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
Jun-18
Millions
Volume - RHS All Share Index
220.0
240.0
260.0
280.0
300.0
320.0
340.0
360.0
380.0
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
1,000.0
1,020.0
1,040.0
1,060.0
1,080.0
1,100.0
1,120.0
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18

NIGERIA MARKET UPDATE
MACROECONOMIC INDICATORS SET STAGE FOR GRADUAL MONETARY EXPANSION

Budget Passage Staves Off Risk
In January 2018, we tabled a case for cautious
optimism with regard to Nigeria’s political
risk profile. This view was premised on three
considerations:
• The 2019 electoral cycle: With the general
election slated for Q1 2019, the likelihood
of rising political rhetoric that could obscure
policy focus was a key pillar of our outlook. In
particular, major policy developments in 2017
risked being derailed by a likely shift to election
mood. These developments included passage
of the Petroleum Industry and Governance Bill
in May 2017 and the cabinet’s approval of the
NationalGasPolicyinJuly2017.Overthepastsix
months, legislative approval of an amendment
that seeks to re-order the 2019 general election
has been a major source of strife with critics
citing interference with the independence of
the National Electoral Commission. Looking
into the remaining half of 2018, this episode
presents a scenario in which Nigeria’s strength
in separation of powers across organs of the
government could be tested especially since
the Federal High Court barred the National
Assembly from any further amendments to the
bill
• Lethargy in passage of the budget and its
execution: Recurrent delay in passing the
budget has emerged as a major challenge for
the government in the recent past. The Senate
finally passed the budget in May 2018, six
months after it was first tabled before a joint
session of the National Assembly. Be that as it
may, this has staved off the risk of slowed down
government operations in the months ahead.
Going forward, the key risk factor the economy
confronts is the widening gap between tax
revenue and expenditure which suggests a
deteriorating fiscal balance. Further to this,
rising recurrent expenditure presents a long-
term risk for the economy
POLITICAL OUTLOOK
NIGERIA
Federal Revenue and Expenditure (USD Bln)
Federal Expenditure
• Unemployment and the accompanying
social pressure: Our third reason for cautious
optimism was rising unemployment and the
accompanying social pressure. Official data
shows that the rate of unemployment soared to
stand at 18.8% in Q3 2017. With the economy
reporting a relatively weak rebound from the
recession and the private sector undermined by
tight credit conditions, this situation is bound to
persist and present a potentially weak spot in
the forthcoming electoral cycle
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2000
2002
2004
2006
2008
2010
2012
2014
2016
Revenue Expenditure
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2000 2005 2010 2015
Capital Expenditure Recurrent Expenditure

Rising Oil Price Eases Foreign Exchange Crunch
As argued in our forecast at the start of the year,
foreign exchange pressures have receded in 2018
with a key driver being the uptick in the price of
oil which has buoyed inflow of hard currency into
the economy. As at June 13th, 2018, gross foreign
exchange reserves at the Central Bank stood at
USD 47.6 billion¹, 22.8% higher than they were at
the start of the year.
Note: In the Economic Outlook, we show how this
has impacted exchange rates at the formal and
parallel markets.
On the whole, however, we maintain the view
that the business environment is not yet out of
the woods. Access to credit now stands as one of
the main challenges facing businesses with banks
having tightened lending conditions in the face of
high non-performing loans and a hawkish stance
by the Central Bank. The next two monetary policy
meetings (July and September 2018) are likely to
be keenly watched with many anticipating the
regulator to signal a shift to gradual unwinding.
BUSINESS NEWS ENVIRONMENT
Price of Crude Oil (USD per Barrel)
Source: Energy Information Administration, StratLink Africa
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
1
Central Bank of Nigeria
Growth in Public and Private Sector Credit
Inflation Inching Closer to Our Target
At the start of 2018, our view on Nigeria’s economy
was anchored largely on the expectation of a
gradual switch to an expansionary monetary policy
within the first half of the year undergirded by the
fact that the rebound witnessed in 2017 had been
propelled by the rebound in oil prices and was
frail. Another reason for this expectation was the
view that lending conditions were considerably
tight and stifled growth of the economy. Available
data shows these tightened conditions prevailed
through the start of Q2 2018 with muted growth
in private sector credit whilst credit to the public
sector continued to contract.
At the end of Q1 2018, we revised our expectation
to anticipation of a policy unwind within Q3 2018,
at the earliest, citing the headwinds of decelerated
disinflation and the risk of capital outflow owing
to perceived and actual risks in emerging and
frontier markets. By May 2018, inflation had fallen
to 11.6% inching closer to our target 9.5%- 10.5%
band by end of July 2018. The advance towards
the Central Bank’s target ceiling of 9.0% further
raises our expectation that of a dovish adjustment
in the near future.
ECONOMIC OUTLOOK
Source: Central Bank of Nigeria, StratLink Africa
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
Oct-17
Jan-18
Apr-18Private Sector Public Sector

NIGERIA
On the foreign exchange front, we began 2018
by tabling a case for a more resilient Naira given
the uptick in the price of oil. Indeed, the premium
between the parallel and official exchange markets
has been subdued with periodic intervention by
the Central Bank such as the USD 293.0 million
injection into the interbank market in the week
ending Friday 18th May, 2018.
Inflation
Naira to USD Exchange Rate
Source: National Bureau of Statistics, StratLink Africa
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Jan-14
Jun-14
Nov-14
Apr-15
Sep-15
Feb-16
Jul-16
Dec-16
May-17
Oct-17
Mar-18
Headline InﬂaƟon Non-food Index
Food Index
0.0
100.0
200.0
300.0
400.0
500.0
600.0
Jun-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Parallel Rate Formal Rate
The Great Correction
Our view of 2018 was pegged on the expectation
of subdued yields based on the government’s
aggressive capital raise in the international
markets (through the diaspora and Sukuk bonds)
in 2017 and the steady decline in inflation which
realigned investor expectations. Indeed, the
sovereign yield curve has declined in the period
through June 2018, notably on the short-term end
of the curve. More importantly, this decline has
led to indications of a correction of the yield curve
from the inversion that dominated the latter half
of 2016 and 2017. This change signals improving
expectations from investors which we believe has
been anchored on three considerations:
• The economy’s rebound from recession has
been a major cause for less bearish sentiment
• The decline in inflation towards single digits
has been pivotal in shaping expectations on the
market
• The exchange rate divergence between the
parallel and official markets has narrowed
steadily and signaled a decline in monetary
pressure on the economy
DEBT MARKET UPDATE
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
3M 6M 1Y 3Y 5Y 7Y 10Y 15Y 20Y
Jun-19-2018 Jan-03-2018

Short-term Borrowing Jan - Jun 2018
NIGERIA
Amount Borrowed in Short-term Debt Jan - May
Government Appetite for Domestic Debt
Subdued
Further to this, the decline in yields has also been
informed by subdued appetite for domestic debt in
the period under review. In the short-term end of
the market, for instance, the federal government
borrowed USD 4.9 billion in the first five months
of 2018, 38.0% lower than it borrowed at a similar
period in 2017.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
91 Day 182 Day 364 Day
Billions
2017 2018
Foreign Investor Activity
Nigeria Stock Exchange 30 Index
Source: Nigeria Stock Exchange, StratLink Africa
Market Moderates
The first half of 2018 has seen the market
moderate following the rally that was sustained
for the better part of 2017. For the first time in
four years, average monthly foreign investor
inflows have outstripped outflows signaling
investor confidence with regard to the state of the
economy. We assess that the moderation of the 30
Index is an indication that the adrenaline that was
principally triggered by adoption of the Investors
and Exporters Foreign Exchange (April 2017)
Window which addressed constraints created by
shortage of foreign currency.
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
2015 2016 2017 2018
Millions
Inﬂow Ouƞlow
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
4,500.0
1,000.0
1,200.0
1,400.0
1,600.0
1,800.0
2,000.0
2,200.0
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
Millions
Volume - RHS 30 Index

Sector Indices Comparison
Despite the Banking Sector Index presenting
relatively attractive returns, we note that the
sector continues to grapple with depressed
profitability driven by the hangover of an adverse
macroeconomic environment and constrained
credit growth. In the year that ended on December
31st, 2018, our estimates indicate that the
market’s aggregate loans contracted by 4.0%, year-
on-year. With global oil prices ticking upwards,
there is hope that sustained, and hopefully more
robust, recovery in the overall macroeconomic
environment could begin to change this trend.
Year-to-date gain of the 30
Index as at June 19th, 2018
5.2%
NIGERIA
60.0
70.0
80.0
90.0
100.0
110.0
120.0
130.0
140.0
Jan-18
Jan-18
Jan-18
Feb-18
Feb-18
Mar-18
Mar-18
Apr-18
Apr-18
May-18
May-18
Jun-18
30 Index
Banking 10 Index
Consumer Goods Index

BUDGET STATEMENT SETS AMBITIOUS GOALS
KENYA MARKET UPDATE

POLITICAL OUTLOOK
KENYA
Kenya and FAO in Joint Policy Review Focusing
on Irrigation
Kenya is one of the priority countries under the
Food and Nutrition Security Impact, Resilience,
Sustainability and Transformation (FIRST) program
which is a joint initiative funded by the European
Union (EU) with the Food and Agriculture
Organization (FAO) providing support toward
creating more enabling policy. FIRST will support
the review and formulation of the new Agricultural
Sector Development Strategy (ASDS) and the
preparation of a National Agricultural Investment
Plan (NAIP). Capacity development and technical
assistance will be provided to the task forces
responsible for formulating the revised policies.
Kenya’s proportion of arable land equipped for
irrigation is low, at 0.6%, relative to African peers
and has remained the same since 2010. With
agriculture accounting for 31.5% of GDP¹ and after
having experienced the detrimental effects of the
drought of 2017, crafting effective policies that
address the irrigation shortfall in the country is of
paramount importance.
Proportion of Arable Land Equipped for Irrigation
(2015)
Source: FAO, StratLink Africa
The State of Kenya’s Political Landscape
The second quarter of the year has come to pass
with relations between the two protagonists of the
2017 electoral cycle remaining seemingly intact.
After having endured the prolonged electoral
cycle of 2017, whose turmoil was magnified by the
faux swearing in of Raila Odinga, the handshake
has managed to cool temperatures in what was
previously a heated political environment.
To this end, President Uhuru Kenyatta and Raila
Odinga have manage to gazette the Building
Bridges initiative which will see a fourteen
member taskforce assess the national challenges
outlined in the “Building Bridges to a New Kenyan
Nation” communique and detail solutions, with
implementation strategies, that will be supported
by wide-ranging stakeholder consultations.
StratLink’s outlook for the political landscape going
forward will be shaped by the following:
• The newfound political stability will bode well
for foreign investment which is known to be
sensitive to political unrest. Focus on policy can
take center stage during the current presidential
term especially in light of the adopted Big Four
agenda which, in line with the recent Budget
Statement, lays out ambitious goals for housing,
healthcare, food security, and especially
manufacturing. The political truce follows the
resolution of Presidential election disputes at
the Supreme Court in 2013 and 2017 in making
milestones that are sure to ameliorate negative
political risk perceptions of Kenya
• Conversely, this development raises doubts
over whether the opposition will manage to
effectively provide checks to those in power
especially considering the recent spate of
corruption allegations that have come to light
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Algeria
Sudan
SouthAfrica
Tanzania
Kenya
Rwanda
Uganda
1
KNBS – 2017 data

KENYA
Manufacturing Sector
Growth in Wage Employment
Source: KNBS, StratLink Africa
Source: KNBS, StratLink Africa
Focus on Manufacturing
The Budget Statement focused on initiatives
to drive the government’s Big Four plan with
emphasis placed on advancing the manufacturing
sector. Initiatives in the sector will focus on textile
and apparels; leather products; agro-processing as
well as manufacturing of construction materials.
The government aims to increase manufacturing’s
contribution to GDP to 15.0% in 2022, from 8.4%
in 2017. However, that same metric has taken a
downward trend since 2013 while the annual
growth in the sector’s value of output has also
slowed from 8.6% in 2015 to 4.0% in 2017.
Manufacturing sector jobs are also expected to
increase by at least 800,000 by 2022 despite
the sector under-performing in terms of wage
employment growth relatively to the economy
as a whole. The government will be sure to face
challenges in going against prevailing trends in
manufacturing in order to achieve its targets.
ECONOMIC OUTLOOK
Budget Statement Released
The National Treasury presented the Budget
Statement for the Financial Year (FY) 2018/19
under the theme “Creating jobs, Transforming
Lives and Sharing Prosperity”.
The government aims to raise USD 19.3 billion
in ordinary revenues for FY 2018/19, up from an
estimated USD 16.3 billion for the current FY. The
BudgetStatementalsoanticipatesafallinrecurrent
expenditure of 26.4% for FY 2018/19 despite the
same figure having expanded by 14.1% on average
over the preceding three financial years.
Note: * figures represent revised budget estimates for FY 2017/18
Source: KNBS, National Treasury, StratLink Africa
Source: KNBS, National Treasury, StratLink Africa
Government Revenues and Expenditures (USD Mn)
Growth in Revenue and Expenditure
10,000
12,000
14,000
16,000
18,000
20,000
22,000
2014/15
2015/16
2016/17
2017/18*
BudgetStatement
2018/19
Ordinary Revenue Recurrent Expenditure
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
2015/16 2016/17 2017/18* Budget
Speech
2018/19
Ordinary Revenue, % Change y-o-y
Recurrent Expenditure, % Change y-o-y
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
10,000.0
12,500.0
15,000.0
17,500.0
20,000.0
22,500.0
2013 2014 2015 2016 2017
Value of Output, USD Mn (LHS)
Value of Output, % Change y-o-y
% ContribuƟon to GDP
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2014 2015 2016 2017
Wage Employment in Manufacturing, % Change y-o-y
Total Wage Employment, % Change y-o-y

Investor Preference for T-Bills Continues
Yields on government securities with maturities
under ten years fell in the month to 22 June,
2018 while yields on bonds with longer maturities
edged up over the same timeframe. This comes
as a result of investors taking a preference for
T-Bills over longer term government securities.
The last two government bonds issued, a 25 year
(FXD1/2018/25) and a 15 year (FXD1/2018/15)
offered in June and May, respectively, drew little
interest from investors with subscription rates of
25.3% for the longer tenure security and 50.5%
for the shorter tenure security. Conversely, the
first three Treasury bill auctions of June, 2018
yielded an average subscription rate of 228.2%
thus driving yields on short term papers down.
The interbank rate rose rapidly in the second half
of June on account of low liquidity arising from
banks settling tax obligations as well as meeting
cash reserve ratio demands.
Bloomberg BVAL Yields Index
Interbank Rate
DEBT MARKET UPDATE
KENYA
No Relief for Equity Prices
The month of June 2018 did not see improvements
in the NSE 20 Index which, as of the 21st of the
month, was down 8.3% relative to a year earlier.
Some of the biggest gainers in the equity market in
June are illustrated in the graph below while some
of the biggest losers over the same timeframe
include KenGen, Nation Media Group, KenolKobil,
Wpp Scangroup and East African Breweries
which lost 11.4%, 6.8%, 5.9%, 5.5% and 4.4%,
respectively.
Nairobi Securities Exchange 20 Share Index
Equity Price Gainers
% Change in Month to 28-Jun-18
10.4%
10.8%
11.2%
11.6%
12.0%
12.4%
12.8%
13.2%
13.6%
3M 1Y 3Y 5Y 8Y 10Y 20Y 30Y
22-Jun-18 25-May-18 25-Jan-18
3.0%
4.0%
5.0%
6.0%
7.0%
04-Jun-18
06-Jun-18
08-Jun-18
10-Jun-18
12-Jun-18
14-Jun-18
16-Jun-18
18-Jun-18
20-Jun-18
22-Jun-18
24-Jun-18
26-Jun-18
0.0
20.0
40.0
60.0
80.0
100.0
3,200.0
3,300.0
3,400.0
3,500.0
3,600.0
3,700.0
3,800.0
3,900.0
01-Mar-18
15-Mar-18
29-Mar-18
12-Apr-18
26-Apr-18
10-May-18
24-May-18
07-Jun-18
21-Jun-18
Millions
Volume NSE 20 Index (LHS)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Co-operaƟveBank
ofKenyaLtd
KenyaAirways
PLC
BritamHoldings
Ltd
SafaricomPLC
BamburiCement
CoLtd
Change in NSE 20 Share index
in month to 21 June 2018
-4.8%

TANZANIA MARKET UPDATE
INWARD LOOKING BUDGET WITH MODEST FISCAL EXPANSION

Policy Outlook: Debt Sustainability
The USD 14.3 billion financial year 2018/19
budget reflected modest fiscal expansionism
by government reflecting President Magufuli’s
efforts to maintain the economic trajectory while
maintaining debt sustainability. Be that as it may,
Tanzania’s debt numbers are set to rise following
proposals by government to borrow about USD 3.9
Billion non concessional loans from domestic and
external sources in the next fiscal year (2018/19)
with USD 1.4 billion representing external
borrowing to partly fund capital investment
for priority projects in energy and transport
infrastructure which are expected to take up
about 37.0% of the total budget. However, a large
debt servicing bill; about 30.0% of the budget, is
bound to heavily weigh on the recurrent budget
which represents about 67.2% of the total budget.
On the revenue front, government expects to
collect USD 7.9 billion tax revenue, in spite of
the proposed tax breaks to firms engaged in local
manufacturing. Thus, President Magufuli’s policies
should be focused towards containing debt
financing and widening the tax base to increase
revenue collections.
Budget Policy Proposals to Boost Revenue
The next fiscal year’s budget will focus on
flagship infrastructure projects besides creating
a conducive environment for investment and
business. Government has proposed several
policy measures aimed at improving the business
environment and strengthening domestic revenue
collections:
• Formalization of the informal sector and
improving the investment environment to
widen the tax base to foster new sources of
revenue
• Provision of a conducive investment
environment through supportive infrastructure,
predictable policy and enabling legal and
regulatory frameworks to attract business and
investment
• Implementation of the recently developed
blueprint for regulatory reform that seeks to
simplify payment of taxes
POLITICAL OUTLOOK
TANZANIA
Non-Performing Loans Regulations a threat to
Banks’ Profitability
The first quarter of 2018 saw a directive from
government to all commercial banks to write off all
bad debts longer than twelve months as opposed
to the previous rule requiring commercial banks to
write off loans older than three consecutive years.
The regulation which, came into effect during the
first quarter of 2018, is part of a series of measures
by the Bank of Tanzania to contain non-performing
loans (NPLs), boost credit to the private sector and
strengthen the financial system. Banks will also be
required to reduce their NPLs ratios to below 5.0%.
Following this development, we are bound to see
a decline in lending to more risky retail clients and
increased preference for risk-free government
securities and corporates who are deemed to
have a stable cash-flow position, thus, impacting
the personal lending portfolio. Overall, general
lending by commercial banks has improved:
Official data indicates that personal loans grew by
56.0% during the third quarter of this year (Jan-
March, 2018) from a contraction of 4.9% over the
same period last year, an indication of commercial
banks’ preference to lend to less risky salaried
employees who offer a more secure portfolio of
borrowers as the banks look for alternative ways
to manage NPLs.
External Debt Stock by Borrowers (USD/Mln)
Source: May 2018 Economic Review, StratLink Africa
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
Apr-17 Apr-18
Central Government Private Sector
Public CorporaƟons

Inward Looking Budget Seeks to Improve on past
Gains
Tanzania’s economy has remained buoyant in
the past five years with real GDP growing at an
average of 6.8%, mainly driven by improvement
in transportation infrastructure, construction and
financial services sectors. The economy expanded
by 7.1% in 2017 from a growth of 7.0% in 2016.
However, spending on public investment remained
wellbelowbudgetedamountsin2017─only33.0%
of Local Government budgetary allocation was
utilized in 2016/17 financial year while only about
30.0% pledged in the form of budgetary support
for the 2017/18 financial year from development
partners has been disbursed─ bringing to fore
the gaps that hamper full implementation of the
budget to realize optimal economic growth as
the government targets a slight increase in GDP
growth to 7.2% in 2018.
In a bid to boost the ongoing industrial drive,
Tanzania’s Ministry of Finance presented an inward
looking USD 14.3 billion budget, for financial year
2018/19, an increase of 2.4% from the previous
financial year with proposals aimed at protecting
locally manufactured products and stimulating
local production. Infrastructure, education and
water received the bulk of spending given that they
are expected to drive future growth. However, a
narrow tax base with a ratio of domestic revenue
to GDP of about 13.6% compared with 17.0% for
sub-Saharan African Countries, has been listed as
one of the probable headwinds to the 2018/19
budget implementation.
Revenue collection targets have consistently been
missed during the past few years thereby, creating
challenges in budget execution. Official data states
that domestic revenue amounted to USD 6.6
billion compared with the annual target of USD
8.8 billion in the first two quarters of financial year
2018, representing a performance of 74.3%. The
under-performance in domestic revenue has been
attributed to among others; tax evasion, difficulties
in tax collection from the informal sector as
well unfavorable tax environment. Therefore,
we are of the view that this budget seeks to not
only maintain macroeconomic stability, but also
to foster a conducive investment environment
through simplification of the tax collection process
which, we believe are key to support budget
implementation given the under-performing
revenue collection which if not checked, is likely to
derail the budget implementation process.
Overall, the need for a wider tax base is ideal in
promoting the growth of businesses and progress
of the economy ─ Tanzania is ranked 137 among
190 economies in the ease of doing business,
according to the latest World Bank annual
ranking, deteriorating from 132 in 2016. Tanzania
should also embrace policy predictability by
spelling out coherent policies that are in line with
the dynamism of the business environment. Thus,
we applaud the government’s decision to amend
the Income Tax Act, harboring hopes that it will
increase revenue by about USD 0.1 million.
Total Revenue as a % of GDP vs Revenue Growth
Tanzania GDP Growth Year-on-year
ECONOMIC OUTLOOK
Source: BMI, StratLink Africa
Source: Tanzania Bureau of Statistics, StratLink Africa
TANZANIA
4.5%
5.5%
6.5%
7.5%
8.5%
9.5%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018e
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018e
Growth % of GDP

Short Term Instrument Yields Trend Downwards
Yields in the short term market continue trending
downwardsasshorttermgovernmentinstruments
remained under-subscribed at less than 50.0%
in the period under review, a pointer towards
decreased investor appetite for the unattractive
yields. The yield for the 91 Days and 364 Days
maturity bills rose by 70.0bps and 80.0bps to
2.5% and 5.6%, while the yield for the 182 Days
maturity bill remained unchanged at 2.7%, in
the period under review. However, inflation fell
slightly to 3.6% in May 2018 from 3.9% recorded
in April 2018. Official data shows that there was
more interest in the longer maturity 364 Day
papers which attracted 34 bids, the 182 Day
papers attracted four bids, while the 91 Day paper
attracted a paltry two bids, in the period under
review, highlighting preference for long term
instruments.
Shilling Maintains Resilience
The Shilling remained relatively stable against
the greenback in June 2018, thanks to periodic
interventions by the Bank of Tanzania that
controlled volatility on the local unit, and saw a rise
in the inter-bank foreign exchange market from
USD 118.5 in March 2018 to USD 139.1 in April
2018, attributed to increase in seasonal demand
for foreign exchange for imports. The Shilling
depreciated marginally by 0.1% between May
and June, 2018 on the back of prudent fiscal and
monetary policy as well as satisfactory trends of
foreign income balance. Be that as it may, the local
Source: Bank of Tanzania, StratLink Africa
T-Bill Weighted Average Yield, year-on-year
TANZANIA
DEBT MARKET UPDATE
unit has faced volatility in recent months against
stronger foreign currencies due to Tanzania’s
weakening export capacity. Hence, there is need
on the part of government, to put in effort to boost
exports to support the local currency.
Transactions in the inter-bank market increased
by 100.0 bps, month-on-month, to an average of
2.4% in May 2018.
Source: Bank of Tanzania, StratLink Africa
Shilling vs USD
Interbank Rate, year-on-year
Shilling depreciation,
month-on-month
Shilling depreciation,
year-on-year
-0.1%
-1.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
2,190.0
2,200.0
2,210.0
2,220.0
2,230.0
2,240.0
2,250.0
2,260.0
2,270.0
2,280.0
2,290.0
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
Jun-18
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
InterbankRate(Red)
VolumeinTZMilions

All Share Index Remains Bearish
Key benchmark indices posted mixed results in
June 2018. The All Share Index remained bearish in
June 2018 shedding off 3.0% month-on-month, to
close the month at 2,304.7 units. Comparatively,
the Tanzania Share Index gained by 0.5% to 4,196.8
units in the period under review. The results
reflect the approach adopted by investors as they
position themselves to mitigate the impacts of the
2018/19 budget. The month under review also
saw the re-listing of the National Investment Co.
Ltd (NICO) on the bourse.
All Share Index, month-on-month
Sector Indices on Mixed Trends
The sector indices were also in the green and
red territory. The Industrial and Allied Index rose
by 80.0 bps to 6,213.0 points; the Banking Index
closed at 2,519.9 points, down by 40.0bps. On the
other hand, the Commercial Services Sector Index
stagnated at 2,331.3 points, in the period under
review.
Source: Dar es Salaam Stock Exchange, StratLink Africa
Sector Indices, month-on-month
TANZANIA
2,200.0
2,220.0
2,240.0
2,260.0
2,280.0
2,300.0
2,320.0
2,340.0
2,360.0
2,380.0
2,400.0
0.0
0.5
1.0
1.5
2.0
2.5
May-18
May-18
Jun-18
Jun-18
Jun-18
Price(Red)
VolumeinTZMillions
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
7,000.00
Industrial
Index
Commercial
Services Index
Banking Index
May-18 Jun-18
All Share Index Change,
month-on-month
year-on-year
-3.0%
7.8%

ENERGY PRICES AND IMPORTS TO EDGE INFLATION UPWARDS
UGANDA MARKET UPDATE

Trade Unions Reach Wage Hike Agreement
The government has managed to avert a strike
planned by civil servants after reaching an
agreement with the National Organization of
Trade Unions (NOTU). In March this year the
NOTU gave the government 90 days to rectify the
salary structure of all public servants in response
to the government’s proposal, which was seen as
discriminatory, to provide pay rises to only certain
public servants while avoiding others.
A Collective Bargaining Agreement (CBA) between
NOTU, a number of affiliated public service unions
and the government was reached whereby salary
increments will be provided to different categories
of civil servants in staggered phases beginning
in the Financial Year 2018/19 and continuing for
five years. The doctor’s strike that took place in
Kenya last year over pay and working conditions
endured for 100 days, involved over 5,000 health
workers and was very costly to stakeholders. This
incident is exactly what the Ugandan government
was aiming to avoid in signing the CBA. However,
enforcing the same going forward will call for
strong and cohesive unions which could certainly
gain greater bargaining power by increasing
membership numbers.
POLITICAL OUTLOOK
UGANDA
Source: BMI, NOTU, StratLink Africa
Employment and Trade Union Members, 2010 (‘000)
Uganda’s Counterfeits Problem
The Uganda National Bureau of Standards (UNBS)
has stated that, according to a survey carried
out earlier in the year, 54.0% of products on the
market are substandard counterfeits or fakes.
Research has found that counterfeiting and piracy
can have wide-ranging and detrimental effects
on trade, foreign investment, employment,
innovation, criminality and the environment while
also generating direct effects on tax revenues and
government expenditures¹.
The UNBS has overseen commendable growth in
sample testing and imports inspections however,
the vast scale of the global counterfeit market
and associated impacts will call for stronger policy
measures to address the problem.
Global Counterfeit Market, USD Billion (2013)
UNBS Conformity Assessments
Source: Frontier Economics, StratLink Africa
Source: UNBS, StratLink Africa
1
Frontier Economics “The economic impacts of counterfeiting and piracy”
0.0
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
14,000.0
TotalEmployment
PrivateSector
Employment
PublicServices(ex
govt)Employment
NOTUMembers
461
353
Total internaƟonal trade
in counterfeit goods
Total domesƟc
producƟon and
consumpƟon of
counterfeit goods
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
No. Samples Tested
in Laboratory, %
Change y-o-y
No. of Inspected
DeclaraƟons
(Imports), % Change y-o-y
2015/16 2016/17

MPC Holds Key Rate
The Monetary Policy Committee (MPC) met on
12 June, 2018 where they decided to maintain
the Central Bank Rate (CBR) at 9.0%. The decision
was supported by low levels of price growth in the
year-to-date with headline inflation having fallen
from 3.0% in January to 1.7% in May.
Both food inflation and core inflation remained
subdued over the period in question however,
energy, fuel and utilities inflation remained
elevated at an average rate of 10.4% for the first
five months of 2018 which is high when compared
to the equivalent average for the whole of 2017
(7.6%) and the whole of 2016 (4.1%).
Source: BOU, StratLink Africa
Inflation Breakdown
Average Energy, Fuel and Utilities Inflation
OPEC Crude Oil Basket Price, USD
Terms of Trade
ECONOMIC OUTLOOK
UGANDA
Risks to Outlook
Rising oil prices threaten to drive up cost-push
inflation in the medium term and have contributed
to the high fuel inflation discussed above. OPEC’s
crude oil basket price² increased by 61.5% in the
year to June 2018.
Deteriorating terms of trade in Uganda, which
dropped by 9.7 between the peak in October 2017
and April 2018, are indicative of import prices
increasing in relation to export prices thus leading
to imports related inflation. StratLink believes that
upward pressure derived from increasing energy
and import prices, rebounding food costs as well
as improving economic activity will see inflation
begin to edge up towards the Bank of Uganda’s
5.0% target in the medium term.
3
Bloomberg
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Food Crops and Related Items
Core InflaƟon
Energy, Fuel and UƟliƟes InflaƟon
Headline InflaƟon
CBR
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2016 2017 Jan-May 2018
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
% Change y-o-y (RHS)
OPEC Crude Oil Basket Price
127.5
130.0
132.5
135.0
137.5
140.0
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18

Pharmaceutical Company to List on USE
The All Share Index recorded slight gains in the
month of June and remains at significantly higher
levels relative to the same period in 2017.
A pharmaceutical manufacturing company based
in Uganda, CIPLA-Quality Chemical Industries, is
poised to carry out an IPO before the end of the
year. This would be the first IPO at the Uganda
Securities Exchange (USE) since Umeme’s in 2012
and is sure to peak investor interest.
Yields Up on High Government Borrowing
The yield curve underwent a significant upward
shift in the month to 22 June, 2018 with rates
going up across T-Bill and bonds with tenures
ranging from three months to ten years.
The main factor driving increased yields has been
increasedgovernmentexpenditureandborrowing.
In March, a supplementary of USD 241 million was
requested by the government. The government
has been steadily increasing the amounts offered
at T-Bill and Bond auctions this year. The amount
offered at T-Bill auctions jumped by 53.6% to USD
55.2 million between January and June this year.
Theincreaseinthesupplyofgovernmentsecurities
has led to a fall in their price thus driving yields up.
All Share Index
Amount Offered at T-Bill Auctions, USD Million
Source: BoU, StratLink Africa
EQUITY MARKET UPDATEDEBT MARKET UPDATE
UGANDA
All Share Index month –
on – month change as at
22 June 2018
All Share Index year –
on – year change as at
22 June 2018
1.2%
25.5%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
3M 6M 1Y 2Y 3Y 5Y 10Y
22-Jun-18 25-May-18 25-Jan-18
0.0
10.0
20.0
30.0
40.0
50.0
60.0
18-Jan-18 21-Jun-18
2,000.0
2,050.0
2,100.0
2,150.0
2,200.0
2,250.0
2,300.0
2,350.0
1-Mar-18
15-Mar-18
29-Mar-18
12-Apr-18
26-Apr-18
10-May-18
24-May-18
7-Jun-18
21-Jun-18

2018/19 BUDGET: INCREASING SELF-RELAINCE IN BUDGET FUNDING
RWANDA MARKET UPDATE

Warm International Relations on the back of a
Stable Political Outlook
Rwandahasmaintainedastable politicaloutlookin
the period under review focusing on consolidating
its relations with development and trade partners
which, remain friendly, owing largely to the
country’s perceived efficient use of donor funds
for overall development and President Kagame’s
administration’s low tolerance for corruption:
Rwanda leads regional peers as the best ranked
in Transparency International’s Corruption Index
at position 48/180; Tanzania follows at 108/180;
Kenya at 143/180 while Uganda is the worst
ranked,comparatively, at 151/180. Likewise, the
election of President Kagame to the significant
role of African Union (AU) chairman is also putting
Rwanda on the global map. We opine that his term
is bound to augur well for general perceptions
about Rwanda amongst development partners,
concerns over Rwanda’s alleged lack of democratic
freedoms and human rights notwithstanding, as
development partners seem to be content with
his (Kagame) progressive economic growth. In
this regard, Rwanda has remained a favorable
recipient of official development assistance and
donor funding even as the country remains keen
on reducing over-reliance on donor funding for
budgetarysupport.Governmentexpectstofinance
84.0% of the 2018/19 budget domestically- 68.0%
through domestic revenue, 16.0% through loans
and expects 16.0% to come from grants.
POLITICAL OUTLOOK
RWANDA
Tax Reforms in the 2018/19 Budget and the
Business Environment
Rwanda has been making deliberate effort to
modernize its tax laws in a bid to create a balance
between increasing domestic revenue collection
and offering a favorable business environment.
This month’s forecast looks at some of the tax
highlights from the 2018/19 budget that may
impact the business environment:
• Small businesses are set to benefit from
reduced taxing threshold to USD 23.0 thousand
down from USD 57.4 thousand which should
boost their bottom-line
• Capital markets participants are set to be
impacted by the proposal to implement transfer
pricing guidelines and introduce a capital gains
tax of 5.0% of sales of transfer of shares. It
remains to be seen what the net effect on
trading on the local bourse will be
• Tightened restrictions regarding expense
deduction for the determination of taxable
income where firms will see various fees, such
as management fees, capped at 2.0% of the
company’s revenue. Any amount above the cap
is considered taxable income
• Several tax measures proposed in the transport
sector as part of fiscal incentives targeting
strategic investors; buses for transportation
of more than 25 persons will continue paying
import duty of 10.0% instead of 25.0%
• Traders in telecommunication equipment are
set to benefit from a 0% import duty instead of
the current 25.0%
• In a move aimed at promoting local
manufacturers of leather and textile,
government has proposed to further increase
taxation on importation of used clothes from
USD 2.5 to USD 4.0 per Kilogram (kg); and from
USD 0.4 to USD 5.0 per Kg, for used shoes
Trends in Comparative Official Aid and Development
Assistance
Source: The World Bank, StratLink Africa
0.0
2,000.0
4,000.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
USDMillions
Kenya Tanzania
Uganda Rwanda

Increased Tax Efficiency to Boost Domestic
Revenue
In view of the reduced aid financing for budgetary
support as well as the lack of specific tax policy
changes proposed to increase tax revenue in the
2018/19 budget, government will be forced to
strike a balance between increasing domestic
tax collection without overburdening citizens
and businesses. In this regard and in line with
the self-reliance policy, the government is relying
on increased tax efficiency using technology, for
instance, advanced electronic billing machines;
increasing compliance and expanding the tax
bracket to include taxation on different properties
rather than raising taxes. Local production of
goods and services will also be encouraged
through various tax measures as highlighted in the
Business section. Likewise our June 2018 Market
Update outlined various changes from the recently
gazetted Income Tax Law that we opine will help
boost the revenue kitty as the Rwanda Revenue
Authority seeks to meet the 2018 fiscal year
revenue projections of USD 1,399.1 million and
grow the same by 10.0% to help fund the USD 2.8
billion budget for the financial year 2018/19. We
laud ongoing efforts to boost domestic revenues
and in part improving the efficiency of Rwanda
Revenue Authority which, in the long term should
help Rwanda to achieve the self-sufficient drive.
2018/19 Budget: Increasing Self Reliance
The government has remained consistent in its
objective of reducing aid dependency in financing
the national budget which stands at USD 2.8 billion
for the next financial year (2018/19), representing
an increase of about 15.5%, year-on-year. The
budget features more domestic funding and is
also bound to benefit from planned efficiency
in tax collection. Rwanda seeks to finance the
budget for the next fiscal year with only 16.0%
through foreign aid, a great improvement from
highs of 80.0% external budget funding. Likewise,
the financial year 2018/19 budget is proposing a
16.0% rise in domestic revenue financing to about
USD 1.9 billion, accounting for 67.5% of the total
budget, pointing towards the fact that Rwanda
is on track to achieving its target of becoming
self-reliant. As a long term measure towards self-
reliance, the budget is putting more emphasis
on supporting local industries to produce more
through supportive fiscal incentives to local
manufacturers under the ongoing ‘Made in
Rwanda Initiative’. For instance; in a move aimed
at promoting local manufacturers of leather and
textile, government has proposed that all capital
machinery used in textile and leather industry
will continue paying import duty of 0.0% instead
of 25.0%. Similarly, certain raw materials used in
industry will continue to pay tax at a rate of 0.0%
instead of 10.0% or 25.0%.
ECONOMIC OUTLOOK
RWANDA
Source: Ministry of Finance and Economic Planning
Source: BMI, StratLink Africa
Sector Budgetary Allocation as a % of Total Budget
Total Revenue and Budget Balance as a % of GDP
11.2%
8.4%
5.1%
5.9%
9.8%
4.3%
1.3%
54.0%
EducaƟon
Health
Agriculture
Energy
Transport
Social TransformaƟon
Water
Others
0 5 10
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
18.0%
19.0%
20.0%
21.0%
22.0%
23.0%
24.0%
25.0%
2010
2011
2012
2013
2014
2015
2016
2017
2018e
Total Revenue Budget Balance

RWANDA
Source: National Bank of Rwanda, StratLink Africa
Amount Borrowed through T-Bills (USD/Mlns)
Marginal Yield Movements
It has been yet another month of low-trending
T-Bill yields in the Rwanda market. We note that
government borrowing in the T-Bill market has
also been on the downtrend with a month-on-
month decline of 49.0% between May and June,
2018 to USD 28.3 million. There was a narrow
liquidity squeeze in the period under review with
the interbank rate recording marginal change
between April and May, 2018, rising by 10.0 bps
to 5.7%. Similarly, inflation jumped to 3.0% in May
from 1.7% recorded in April, 2018 on account of
favorable food prices which should impact future
yield expectations. We are also bound to witness
increased government borrowing in the coming
months to support the 2018/19 budget funding,
thus, supporting higher yields.
The short term government securities posted
marginal movements between April and May,
2018. The 91 Day and the 182 Day papers’ yields
rose marginally by 20.0bps and 17.0bps to 5.5%
and 6.5%, respectively. The 364 Day paper yield,
on the other hand, fell by 40.0bps to 7.0%, in the
period under review.
DEBT MARKET UPDATE
Franc Slips against the Greenback
The Franc faltered against the greenback, shedding
off 140.0bps, month-on-month, to close June
2018 at 872.5 units.
Source: National Bank of Rwanda, StratLink Africa
T Bill Yields
Franc vs USD
Franc depreciation, month-on-
month, as at June26th, 2018
Franc depreciation, year-on-
year, as at June 26th, 2018
-1.4%
-4.2%
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
Jun-18 3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
Oct-17
Jan-18
Apr-18
850.0
855.0
860.0
865.0
870.0
875.0
May-18
May-18
Jun-18
Jun-18
Jun-18

All Share Index Declines
The Rwanda All share Index remained in the red
in June 2018, declining by 1.2% to 131.7 units.
The equity market continues to under-perform
compared to the debt market. We remain
optimistic that the provision by the new income
tax law of a five year concessional corporate tax
rate to companies that list at least 20.0% of their
shares on the Rwanda Stock Exchange will boost
activity at the bourse.
month-on-month
All Share Index Change, year-
on-year
-1.2%
3.7%
RWANDA
Rwanda All Share Index, year-on-year
120.0
122.0
124.0
126.0
128.0
130.0
132.0
134.0
136.0
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
Jun-18

StratLink in the News:
Liberalizing the economy isn’t enough to deal with Ethiopia’s foreign currency crunch
Ethiopia’s liberalization offensive, opening up the state controlled Ethio telecom and Ethiopian Airlines to private
investors, has taken many by surprise. Caught between a watershed political transition and a foreign currency crunch,
opinion remains divided as to whether the move primarily signals a policy shift to relatively fast-pedaled liberalization
under the new administration, or is intended to serve as a way out of the stranglehold of foreign currency scarcity.
It is easy to see where hopes that it will play the latter role are hinging on.
A consortium led by Italian firm Enel Green Power (EGP) is expected to invest about $120 million in the construction of a
100 Mw solar plant in Metehara, Central Ethiopia, having been awarded the contract in October 2017. Due for completion
in 2019, the project is expected to sell power to the state-owned electricity producer, Ethiopian Electric Power, within the
framework of a two-decade long Power Purchase Agreement. Understandably, such private sector participation is viewed
as a pivotal amplification channel for the inflow of hard currency into the economy.
Ethiopia’s foreign currency woes, however, run deeper than the narrow optic of liberalization would suggest. In October
2017 the National Bank of Ethiopia (the country’s central bank) not only hiked interest rates, but, more importantly,
devalued the Birr by 15.5 per cent to exchange at 27.3 units to the dollar. This shock policy adjustment came at a time
when, by and large, the monetary environment was becoming a lot more accommodative of dovish signals in sub-Saharan
Africa, with central banks beginning to unwind the tightening cycle that had prevailed for the better part of 2014 – 2016.
If there was a canary in the coal mine with regard to the headwinds the economy was confronting, run-away inflation and
a foreign currency crunch, that was it.
$6.3 in servicing import obligations for every $1.0 in export revenue
Between 2010 and 2016, Ethiopia grew its exports by a paltry 1.9 per cent (compound annual growth rate) to $2.8
billion. In the same period, imports surged by 11.4 per cent to $16.4 billion, according to the International Trade Centre.
In essence, whereas the economy in 2010 needed $3.7 to service import demands for every $1.0 it generated in export
proceeds, by 2016 this had risen to $6.3 for every $1.0 in export earnings.
To put this into perspective, peer economies in the larger Eastern Africa region paint a different picture – in 2010 Kenya
and Tanzania needed $2.3 and $2.0, respectively, to meet import obligations for every $1.0 they made in export earnings.
By 2016, the two countries needed $2.9 and $1.7, respectively, for the same purpose.
This widening trade imbalance begins to put into perspective the stranglehold of the foreign currency shortage that
Ethiopia finds itself in today – an environment of almost stunted growth in export earning inflows against sustained
increase in import servicing outflows.
The chart below plots the foreign exchange reserves, months of import cover and number of dollars needed to service
import obligations for every dollar earned in export revenue (size of the bubble). It shows that by 2016, Ethiopia’s foreign
exchange reserves amounted to only 1.8 months of import cover. Important to note is that the International Monetary
Fund’s Reserve Adequacy Template prescribes relatively higher reserves (5.0 – 6.8 months of import cover) for countries
with an exchange rate system similar to Ethiopia’s i.e. a considerably managed float system that sees regular intervention
by the central bank to smoothen out volatility. As such, 1.8 months of cover suggests a particularly thin buffer against
shocks for the economy, a fact that has been brought to bear given the nosedive in the price of coffee (which accounts
for 17 per cent of export earnings).

Figure 1. Foreign exchange reserves and months of import cover, 2016
Source: Africa Export-Import Bank. Note: Size of bubble denotes the number of dollars required to service import obligations for every dollar in
export earnings.
Figure 2. International price of coffee (US cents per lb)
Source: International Coffee Organization
The export market concentration bogeyman
The Hirschman-Herfindahl Index (HHI) is a tool used to assess the concentration of a country’s trade (import and export)
in terms of product and markets. The index ranges from 0 to 1 referring to least and most concentration, respectively. One
of the legacies of the 2014 – 2016 commodity price downturn has been to create, in sub-Saharan Africa, an overwhelming
focus on the need to de-risk economies through diversification of export products. Unfortunately, little focus has been
channeled towards diversifying export markets as a balancing wheel for strong and sustainable growth momentum.
In Ethiopia’s case, growing export market concentration has presented a risk. The graph below shows the change in
HHI, both product and market concentration, for Ethiopia and peer economies between 2000 and 2014. What can
be observed is that whereas Ethiopia, like most peers, has diversified export products, it is the only country that has
experienced growing concentration in its export markets. This growing concentration is attributable to deepening Sino-
Ethiopian ties, which have seen China grow to account for 13.4% per cent of Ethiopia’s exports in 2016 compared to 1.1
per cent in 2001, according to the International Trade Centre.

This concentration has left Ethiopia vulnerable to China’s waning appetite for imports, which declined from $1,949.9
billion in 2013 to $1,587.9 billion in 2016. At the same time, loans extended by China to Africa declined from a peak of
$16,669.3 million in 2013 to $11,764.3 million in 2015 with Ethiopia, being the second largest recipient of loans after
Angola, bearing the brunt of the tightened purse strings (data from the China-Africa Research Initiative).
Figure 3. Export product and market concentration
Source: World Integrated Trade Solution database
Where does Ethiopia go from here?
Ethiopia finds itself in a bind. On one hand, anecdotal evidence suggests that the gap between the official and parallel
exchange rate continues to widen, exchanging at 35.0 – 35.5 units to the dollar as of 9 June, 2018. With this parallel
market premium in mind, it is likely that a second, albeit smaller, devaluation of the Birr is within the National Bank of
Ethiopia’s tool box for the short to medium-term horizon.
On the other hand, the devaluation-related inflation pass through effects, at a time of double-digit inflation, takes away
from the allure of such a stance. More consequentially, this moment of distress could present a turning point at which
Ethiopia begins to consider a future in which the country decouples itself from a considerably managed exchange rate
regime in favor of a more flexible system. Perhaps a more flexible regime will enhance the capacity for price discovery and
allow for early detection of a build-up of external imbalance vulnerabilities should similar pressures recur in the future.

Figure 4. Ethiopian birr to the US$ exchange rate
Source: Bloomberg, StratLink Africa Ltd
This article was first published by the London School of Economics Business Review.
Our thoughts on investor activity at the regional (East Africa’s) stock exchanges in the June 2018 Africa Market Update
were cited by the East African Weekly as provided in the link below.
East Africa stock markets’ half-year results show mixed fortunes

STRATLINK - AFRICA TEAM
Konstantin Makarov – Managing Partner
konstantin.makarov@stratLinkglobal.com
Dina Farfel – Partner
dfarfel@stratLinkglobal.com
Julio De Souza - Director of SME and Impact Finance
julio.desouza@stratLinkglobal.com
Kyle Drexler – Associate
kyle.drexler@stratLinkglobal.com
Benson Njeri – Analyst
benson.njeri@stratLinkglobal.com
Julians Amboko – Senior Research Analyst
julians.amboko@stratLinkglobal.com
Gianluca Storchi – Senior Research Analyst
gianluca.storchi@stratLinkglobal.com
Sophia Sifuma – Research Analyst
sophia.sifuma@stratLinkglobal.com
Peter Mutisya – Director Graphic Design
peter.mutisya@stratLinkglobal.com
STRATLINK AFRICA LTD - WHO WE ARE
StratLink is an Africa focused financial advisory company
with Capital Raising Advisory, Corporate Advisory and
Market Research as our core business lines. We believe in
the growth potential of sub-Saharan African economies and
partner with our clients to execute their vision by providing
quality services and access to capital. We recognize
opportunities in the region and connect the fastest growing
middle market companies with leading global investment
banks, private equity firms and family offices. We value the
importance of making informed decisions and leverage our
regional knowledge to the advantage of our clients.
Sub-Saharan Africa: In-depth macro and microeconomic
research
Within our purview of coverage are nine economies –
Kenya, Tanzania, Uganda, Rwanda, Ethiopia, Nigeria, Ghana,
Angola and Gabon. We undertake incisive research and
analysis of each of the countries’ macro and microeconomic
environment, debt and equity markets. We also conduct
sector specific research and analysis shedding insight on
market landscape, existing gaps and opportunities as well
as potential challenges.
Our guarantee: Competent team, reliable data
Our research is anchored in a competent and versatile
team traversing the fields of economics and finance with
qualifications from globally recognized institutions. The
team is backed by subscription to reliable databases such
as Business Monitor International, Bloomberg, Thomson
One Research, World Economics and The World Today.
As such, our guarantee is reliable and up to date data in
an increasingly dynamic region. Further, we reach out to
relevant bodies in concerned markets including Central
Banks, ministries and state departments.
Authoritative voice on regional economics
StratLink has become an authoritative voice for commentary
and opinion on issues pertaining to Sub-Saharan African
economies and investment. Reputable media including
CNBC Africa, Nation Media Group, CCTV and Bloomberg
have reached out to the company for opinion and analysis.
Where we are based
Our head office is in Nairobi, Kenya with satellite offices in
New York, Kampala and Kuala Lumpur.

ContactDetails
STRATLINK AFRICA
StratLink - Africa, Limited.
Delta Riverside, Block 4,
4th Floor, Riverside Drive,
Nairobi, Kenya
nairobi@stratlinkglobal.com
www.stratlinkglobal.com
+254202572792

Africa Market Update - July 2018

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