east africa growing interest in investment opportunities

East Africa: Growing Interest

in Investment Opportunities An Outlook on growing appetite in EA Investment Opportunities

Sub-Saharan Consulting Group. Innovative Business Solutions for Emerging Frontiers

East Africa: Growing Interest in Investment Opportunities

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Contents

I. Regional Overview

a. East Africa Community 4

II. Investment Climate

a. Projections and Trends 5

b. Inflation 6

III. Investment Opportunities

a. Increasing Investment Competitiveness for Oil 7

b. Information, Communication, and Technology 8

IV. Investment Risks

a. Inflationary Pressures 9

b. The Role of the EAC in Political Risk 10

c. Growing political uncertainties for investors 10

V. East Africa Common Market Potential

a. Achievements 12

b. Challenges 13

c. Job Fears 13

d. Benefits in Trade 14

VI. Developing stronger investor confidence: Recommendations 15

VII. Appendix

a. Member Countries of Regional Groupings 16

b. Africa’s Distribution of Resources 17

c. Natural gas in Africa 17

d. Operators in East Africa 18

e. Total Investment by Country 19

f. Internet Users and Mobile Subscriptions in EAC 20

g. EAC Common Market Development 21


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Featuring content from

The IMF’s Regional Economic Outlook: Sub-Saharan Africa: Oct 2011,

The Economist Intelligence Unit’s Africa: Open For Business,

The Economist Intelligence Units’ GCC trade and investment flows,

The East African Community. 4th EAC Development Strategy.


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Edited and Compiled by Sharon Obuobi


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Regional Overview

East Africa Community

The East African Community (EAC) is the regional intergovernmental organization of the

Republics of Kenya, Uganda, the United Republic of Tanzania, Republic of Rwanda and

Republic of Burundi with its headquarters in Arusha, Tanzania.

The EAC is fastest-moving trade bloc in Africa at the moment. It introduced a common market

in July 2010 with the hopes of enhancing trade and economic growth in the east. However

critics say that the impact will be gradual, as many laws still need to be harmonized, and

Tanzania has preserved some opt-outs. The EAC also plans to fast track the introduction of a

single currency by 2012, but given the need to harmonize fiscal and monetary policy, critics

suggest that 2015 may be a more realistic deadline.

According to the EAC, intra-EAC trade grew by 40% between 2005 and 2009. Uganda’s exports

to Kenya increased more than tenfold from USD15.5 Million in 2004 to USD172 Million in 2009,

while Tanzania’s exports to Kenya over the same period nearly tripled, from USD 95.5 Million

to USD 300 Million. This pattern is expected to be enhanced with the Common Market, which

came into effect in July 2010. This increased trade and investment among the EAC Partner

States has broadened prospects for economic growth and development.


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Investment Climate

Projections and Trends

East Africa is forecast to be the fastest-growing region in Africa. The Economist Intelligence

Unit predicts that although Kenya has no natural resources, it is the key financial and business

hub, and the Kenyan economy is expected to grow by 5-6% from ongoing development and

reforms. Across the border, Uganda’s discovery of oil will boost development and growth, and

the country will join the oil club in a few years.


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Furthermore, key mineral producers like Tanzania, will also perform well, as will strong

agricultural economies like Ethiopia. Africa will become an increasingly important food supplier

to global markets. Countries without major resources but with a strong reform record, such as

Rwanda, will also join the ranks of high growth achievers.

Inflation

According to the IMF’s Regional Economic Outlook, there has a sharp increase in inflation in

some east African countries as shown below:

Across the EAC region, consumer price inflation was predicated to average 8.5% percent in

2011 compared with 10.2% percent in 2012. Higher food and fuel prices have contributed to

the surge in inflation. Although the number of countries in which food inflation is currently

above 10 percent has increased in recent months, the number has remained well below the

nearly 35 countries in which this was observed in 2008.


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Investment Opportunities

In Recent News: Increasing Investment Competitiveness for Oil

Financial Times: Big oil groups join scramble for east Africa: By Guy Chazan, March 12, 2012

Statoil set the oil industry abuzz late last month when it announced it had found large

volumes of natural gas off the coast of Tanzania, confirming east Africa’s reputation as one of

the energy world’s most promising new frontier. Statoil had lockdown facilities on all its rigs

and support vessels to keep staff safe in the event of a pirate attack, while a small flotilla,

operated by security contractors and Tanzanian navy personnel, guards the drilling site.

The threat of piracy might loom large, but it has not prevented a new scramble for east Africa,

led by some of the world’s biggest oil companies. Suddenly Mozambique and Tanzania, which

until recently did not even feature on the world energy map, have become some of the gas

industry's hottest real estate.

Royal Dutch Shell and PTT Exploration, the state-controlled Thai energy group, launched rival

offers for Cove Energy, a small Africa-focused oil and gas explorer with an 8.5 per cent stake in

a big gas field in Mozambique. Two state-owned Indian groups, GAIL and ONGC, have also

expressed an interest in bidding for Cove, though an announcement by the Mozambique

authorities last week that they might impose a capital gains tax on the sale of the London-

based group could deter potential bidders.

The biggest finds were offshore Mozambique, by Anadarko Petroleum and Cove, and Eni of

Italy. Their two fields combined could contain up to 60tn cubic feet of recoverable resources of

gas – nearly as much as Kuwait’s entire reserves. That should be enough to turn Mozambique

into a key exporter of liquefied natural gas, or LNG, to China and India’s fast-growing

economies. And with the region still relatively unexplored, there could be plenty more where

that came from, analysts say. Fewer than 500 wells have been drilled in east Africa, compared

with some 20,000 in the north and nearly 15,000 in the west of the continent, according to

explorer Afren. The large LNG plant that Anadarko has proposed building there will cost about

$25bn, more than twice the country’s gross domestic product. “Mozambique is one of the


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poorest countries in Africa, and if it gets this right, it could be one of the richest,” says Mr

Ashby-Rudd at Standard Bank.

Anadarko has announced it is looking to sell some of its stake in the Mozambique field, and

Cove put itself up for sale in January. As the majors pile in, the pace of drilling is picking up.

Morgan Stanley expects 23 wells to be drilled off Kenya, Tanzania and Mozambique this year,

almost double the number in 2011. “Eastern sub-Saharan Africa has a lot of potential to grow

quickly, and create a lot of value for us,” says Eni’s Mr Descalzi. “It’s a very exciting moment,

both for us and the countries we’re in.”

See Appendix, figures C for Natural gas predictions in Africa and D for a map of mentioned Operators in East Africa

Information, Communication and Technology (ICT)

The EAC has identified Information and communication technology (ICT) is an increasingly

priority area of the EAC Common Market in its pursuit of economic growth and development

among partner states. The ICT is critical towards socio-economic and political developments in

the region. In addition, ICT is considered as a channel through which the EAC common market

will improve global access of people and competitiveness of goods and services from the

region.

Appendix D shows the growth in internet use and mobile subscriptions in East Africa. Kenya is

identified as the country with the largest number of users and subscriptions followed by

Uganda and Tanzania. Although Rwanda and Burundi recorded relatively low figures,

increasing internet use and mobile subscriptions have been reported. However the total EAC

internet use increased significantly from about 2.1 to 6.75 million in Rwanda and 9.7 to 39.7

million in Burundi, both from 2005 to 2008.


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Investment Risks

Along with the positive reports and prospects for the majority of countries in sub-Saharan

Africa who are set to sustain fairly healthy growth rates in 2011 and 2012, there are still some

investment risks that must be considered. The drought in east Africa and the surges in food

and fuel prices are causing considerable difficulties in other parts of the sub-Saharan African

region, particularly to the urban poor. According to the Economist Intelligence Unit, the other,

more potent threat to the region’s economic prospects is the debt overhang in many

advanced economies that is threatening to significantly slow down global growth further in the

coming months.

Inflationary pressures

According to the IMF, recent inflation observations for east African countries point to

inflationary pressures which are increasing to worrying levels—nearly 40 percent in Ethiopia,

and over 16 percent in Kenya and 21 percent in Uganda. As explained in the Regional

Economic Outlook, the surge in inflation in these countries points to the dangers of delaying

the monetary policy response to shocks. Similarly, the failure to shift fiscal policy from the

expansionary footing on which it was placed during the downturn in 2009–10 to a more

neutral stance consistent with debt sustainability considerations is eventually going to be even

more detrimental to sustaining high growth and development. Although elections so far in the

election-heavy year of 2011 have had much less economic impact than feared, political factors

remain an important risk within the region. Much like in other situations worldwide, financial

systems are vulnerable to both global and domestic pressures.


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The Role of the EAC in Political Risk

The EAC states that democracy is critical in the achievement of sustainable economic growth

and development. It explains, that the greatest hindrance to democratic consolidation in EAC is

the perennial conflicts within the horn of Africa and the great lakes region, terrorism and

piracy threats including the proliferation of small arms and influx of refugees into the region.

The EAC is documenting its participation in initiatives to improve peace and stability in the

region with a view to increasing economic development prospects. These include peace and

security missions in Somalia and Democratic Republic of Congo; the Sudanese Comprehensive

Peace Agreement (CPA), the Great Lakes region, and the Intergovernmental Authority on

Development (IGAD) initiatives through which security and stability of the greater Eastern

Africa region will be pursued. Within the EAC, Partner States are envisioning the formation of

the East African Political Federation to advance socio-economic and political development

among the five Partner States in line with AU aspirations.

Growing political uncertainties for investors

FDI inflows correlate inversely with the levels of political risks associated with any country. The

political risk indicator is a composite of diverse issues covering governability, socioeconomic

environment, ethnic tensions, constitutes components. The sum total of the component’s

indexes rankings indicates whether a country is of high or low risk politically. On the basis of

the International Country Risk Guide (ICRG) indicators, the higher the score, the lower the risk.

With the understanding that country specific scores between 0 to 49.5 per cent are associated

with very high risk; 50 to 59.5 per cent is high risk; 60 to 69.5 per cent is moderate risk and 80

to 100 per cent is very low risk, the EAC has recognized three of its states that have been

ranked under the ICGR system. Uganda, Kenya and Tanzania have registered gradual but

steady increases during the period under review.

For the period 2006-2010:

Uganda was ranked 55- 56


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Tanzania was ranked 62- 64

Kenya was ranked 56- 58.

On the basis of these ratings, the EAC believes that there is room for improving governance,

rule of law and socio-economic issues in the region in order to improve investment conditions

in the region due to the realization that high political risk negatively affects economic

performance of a country or region and in particular investment flows.


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East Africa Common Market Potential

According to the East Africa Community, the key achievement under the Common Market has

been the successful conclusion of the negotiation, signing and ratification of the EAC Common

Market Protocol. The EAC explains that the strategic thrust of the CM Protocol has been that

of enhancing and institutionalizing the guaranteed provisions in the Protocol through

harmonization of policies, legal and regulatory framework and establishment of supportive

institutions to facilitate private sector investments, efficient and effective service delivery and

wide stakeholder involvement.

Achievements

In terms of the achievements, the EAC has stated that, in addition to the Partner State

autonomous liberalization the SAPs and the WTO offers; the preparatory process for the

implementation of the EAC Treaty has resulted in the achievements of:

Gradual currency convertibility and macro-economic convergence

Adoption of common travel documents, work permits and fees for education, tourism,

etc

Common negotiating frameworks

Substantial progress in harmonization of academic and professional qualifications

Free movement of capital and harmonization of transport facilitating instruments.

The EAC testifies that this has also resulted in increased cross border student exchange,

alternative methods of mobilizing additional development resources from the stock markets,

joint sporting activities including interuniversity sports, free movement of natural persons and

labour.


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Challenges

A number of challenges stand in the way of realizing the full benefits of the Common

Market. These include:

Inadequate institutional, national and regional level capacities to domesticate regional

policies and information access

Low levels of awareness across Partner States

Inappropriate legal and regulatory frameworks, continued nationalistic tendencies,

weak private sector, differences in education systems, cultural diversities, language

barriers, differences in level of economic development including limited participation

of the various stakeholders

Weak capacities of implementing agencies

Inadequate safeguard measures and dispute settlement mechanisms

Incomplete harmonization of examination and certification

Inappropriate labour policies and legislation

Weak urban planning policies and disparities in intra-regional trade.

Job Fears

Some member states are concerned that they might have to cope with an influx of better-

trained Kenyan workers. The concern over an inflow of migrant labour, especially from Kenya,

is shared in other countries in the region.

In an interview for the BBC, Jacqueline Mkindi, the executive director of the Tanzania

Horticultural Association whose members produce fruit, flowers and vegetables for export said,

"Free movement of labour should be encouraged, but to a certain level - not to deprive local

people from accessing local jobs. If you have a large number of Tanzanians losing jobs - then

people will not feel okay with the common market."


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Frederick Masiga, business editor for the Daily Monitor newspaper in the Ugandan capital,

Kampala was also interviews and was quoted saying, "most Ugandans think their jobs will be

taken over by their neighbour, Kenya. It's a quite understandable view, because so many

Kenyans are already established in Uganda. Some Ugandans feel that once the borders are

opened and you get people flowing across the border and looking for jobs, they are going to

be out-competed in the labour market."

Thus the challenge for the EAC will be the regulation of migrating labour from partnering

countries, in order to avoid an increase in local unemployment.

Benefits In Trade

Despite the worries about migrant labour, most businesses support the move to a common

market and are keen to see an end to the delays and costs of getting their goods across

borders. Consumers hope that this will resolve challenges like the difference in operation hours

between Kenya and Tanzania. The common market aims to build on this - to enable the free

movement of people, capital and services and abolish import duties. The hope is that member

states will adopt a common currency by 2012, allowing them to move towards a political

federation.

See Appendix E for the breakdown of the Common Market projected development stages


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Developing stronger investor confidence: Recommendations

Due to the high level of increased investment competition for East Africa’s oil and natural gas,

the pressure to ensure stronger investor confidence in this area seems reduced. Some

recommendations to develop this further would be to:

Reinforce profitability of investment projects

Communicate the EAC’s dedication to a politically safe and economically healthy

environment

Communicate the economic sustainability of FDI investments

Communicate the confidence of European, and South African banks in investment

opportunities (See Africa Investment Outlook)


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For applicable, practical information on mitigating the risks of doing business in east Africa,

the IFC has published a detailed report entitled, “Doing Business in the East African

Community”. This report will be provided along with this research report.

For information on Key Considerations, please see the Key Considerations section in the Africa

Investment Outlook research report.

Appendix

A. Member Countries of Regional Groupings


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B. Africa’s Distribution of Resources

C. Natural gas in Africa


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D. Operators in East Africa


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E. Total Investment by Country


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F. Internet Users and Mobile Phone Subscription in EAC


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G. EAC Common Market Development

Development Objective: To fully implement the EAC Common Market Protocol (CMP)


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Diagrams in-text

A. Real GDP Growth Forecasts

"GCC trade and investment flows: The emerging-market surge." Economist Intelligence Unit.

(2011): n. page. Print.

B. Consumer Prices

Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional

Economic Outlook. Oct (2011)

C. Africa GDP vs world GDP



Diagrams in Appendix

A. Member Countries of Regional Groupings



B. Africa: Key Resources

"Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit.

(2012): n. page. Print

C. Natural Gas in Africa

Chazan, Guy. "Big oil groups join scramble for east Africa." Financial Times 12 Mar 2012, n. pag.

Print.

D. Operators in East Africa

Chazan, Guy. "Big oil groups join scramble for east Africa." Financial Times 12 Mar 2012, n. pag.

Print.

E. Total Investment by Country


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F. Internet Users and Mobile Phone Subscription

The East African Community. 4th EAC Development Strategy. Arusha: , 2011. Print.

G. EAC Common Market Development


Other Sources

"Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit.

(2012): n. page. Print



Chazan, Guy. "Big oil groups join scramble for east Africa." Financial Times 12 Mar 2012, n.

pag. Print.


O’Neill, Dominic. "Investment Banks Eye the Last Frontier: Africa." Euromoney. 00142433

(2011): ABI/INFORM Global; ABI/INFORM Trade & Industry; ProQuest European Business. Web.

24 Mar. 2012.

"Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:

Regional Economic Outlook. Oct (2011). Print.

east africa growing interest in investment opportunities

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