february 2016 africa market update

2SEPTEMBER 2015 | MARKET UPDATE – AFRICA www.stratlinkglobal.com


Table of Contents


FEBRUARY 2016 | MARKET UPDATE – AFRICA www.stratlinkglobal.com

NIGERIA

KENYA

TANZANIA

UGANDA

RWANDA

ZAMBIA

3FEBRUARY 2016 | MARKET UPDATE – AFRICA www.stratlinkglobal.com




Foiled Boko Haram Attack Augurs well for Risk Outlook

The foiled Boko Haram attack in Bauchi State (January 2016) sends a good gesture on the state of the country’s intelligence and preparedness to combat the insurgency that has claimed lives and occasioned displacement of persons. This comes as a welcome indicator of the country’s political risk which has been dented by recurrent attacks in the recent past.

Multi-National Force: Will it deliver?

A key point of focus going forward will be how the Multi-National Joint Task Force (MNJTF) co-ordinates efforts to combat the insurgency. The force incorporates an estimated 8,700 troops from Chad, Nigeria, Niger, Cameroon and Benin. We expect porous borders, which provide a channel for smuggling of arms, to remain a major challenge in arresting the menace. In 2014, the Comptroller of Nigeria Immigration Service indicated there existed in excess of 1,400 illegal routes into the country against an approved 84 border control posts1. This creates a fragile point in the fight against Boko Haram.

POLITICAL OUTLOOK

ECONOMIC OUTLOOK

NIGERIA

Central Bank likely to Devalue the Naira as Oil Price Tumble Worsens

With oil prices deteriorating further (below the USD 30/barrel mark in January 2016) and the country’s fiscal balance slipping further into the red, we foresee the Central Bank back-pedalling and devaluing the Naira between Q1, 2016 and the end of Q2, 2016. The recent deceleration of growth momentum leaves the economy hurtling towards near stagnation and this is likely to necessitate revision of the central bank’s stance on the currency with a view to boosting proceeds from exports in 2016. Further, the bank must be wary of rattling investor confidence as it did following unorthodox measures of supporting the Naira in 2015.

Note: In September 2015, JP Morgan delisted Nigeria from its Local Currency Emerging Markets Bonds Index in view of foreign exchange restrictions adopted by the Central Bank.

In November 2015, the Central Bank slashed its benchmark rate by 200.0 bps to 11.0%, at a time when inflation had breached the target ceiling of 9.0% by 40.0 bps, suggesting the need to stimulate the economy is being accorded foremost consideration.

Source: Bloomberg, National Bureau of Statistics, StratLink Africa

GDP Growth

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Q1,

201

3

Q2,

201

3

Q23

, 201

3

Q4,

201

3

Q1,

201

4

Q2,

201

4

Q3,

201

4

Q4,

201

4

Q1,

201

5

Q2,

201

5

Q3,

201

5

Domestic Borrowing and Inflation Expectations Keep Yields on the Uptrend

Yields reported a slight uptick between December 2015 and January 2016 despite a rise in liquidity. This is likely to be driven by the surge in domestic borrowing in December 2015 that grew by 78.0% to USD 2.2 Billion ─ the largest domestic borrowing since March 2015 ahead of the general election.

DEBT MARKET UPDATE

Primary Market Borrowing (USD)

Source: Central Bank of Nigeria, StratLink Africa

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov

-15

Mill

ions

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Political Temperatures Rise ahead of 2017 Election

The political scene is heating up ahead of the 2017 general election as factions allied to the government and the opposition barnstorm the country in grassroots mobilization. This notwithstanding, we retain a favourable assessment of the near term risk outlook (the next six months) whilst adopting a more cautious position on the long-term view given the recurrent cases of inter-ethnic border clashes such as that in the Nandi-Kisumu border. Recurrence of such incidences threatens to undermine political stability ahead of the polls and will be a key pointer to look out for in the next one year. The National Electoral and Boundaries Commission is set to embark on voter registration ahead of the polls, an exercise we are confident will be accompanied by requisite civic education in a bid to mitigate lurking risks that have threatened stability in past election cycles.

POLITICAL OUTLOOK

Energy and Roads Infrastructure to Dominate Development Agenda

We expect Kenya to continue cementing its position as the regional commercial and industrial hub given investment plans that target largely the energy and transport sectors. This will be critically important for the country as neighbouring economies such as Ethiopia and Tanzania work towards improving competitiveness. A spot-check on the major projects pipeline for the next five years reveals that up to 48.6% of funding will be designated to energy and roads ─ potentially presenting a major boost in view of the deficit (transport infrastructure and energy) that derail the economy’s investor attractiveness.

Note: Some of the projects are the 300.0 Megawatts Lake Turkana wind power projects, the Lamu Port South Sudan Ethiopia Transport Corridor and the 120.0 Megawatts Kipeto Power Project.

BUSINESS ENVIRONMENT

KENYA

ECONOMIC OUTLOOK

Inflation likely to Rise through Q1 2016

In line with our forecast, the Central Bank left monetary policy instruments (the benchmark rate and the Kenya Banks’ Reference Rate) unchanged in its first meeting of 2016. Despite inflation standing above the target ceiling by 50.0 bps (at 8.0%), the Central Bank is likely to have taken cognizance of the new Excise Duty Act that took effect in December 2015 as a key driver of the ceiling breach. We expect inflation to continue inching north, closer to the 9.0% - 10.0% band, through Q1 2016 on the back of rising food prices attributed to the El Nino rains experienced in Q4 2015 and early January 2016.

The yield curve remains inverted despite a discernible downtrend in the 91 Day and 364 Day papers’ between December 2015 and January 2016. We note that liquidity has been comparatively high in the market supported by government payments, redemption of government securities and Open Market Operation Maturities. In the week to January 22nd, 2016, the Central Bank is reported to have injected USD 94.8 Million in liquidity into the market, keeping the interbank rate in single digits. The yield curve also suggests there is likely to be rising appetite for medium to long-term debt for the remaining quarters of financial year 2015/16.

DEBT MARKET UPDATE






Controversial Labour Laws Threaten Tanzania’s Business Environment

We downgrade our view of the business climate informed by unfavourable labour laws that have elicited concern from investors. The Non-Citizen (Employment) Regulations 2015 have been the major bone of contention, as the government seeks to tighten foreign worker policies, a protectionist move that threatens Tanzania’s relations with its trading partners, particularly, in the East Africa Community (EAC). Tanzania trails peers in key areas such as adult literacy and this regulation threatens to derail the economy’s ability to tap into better skill from neighbouring countries.

Zanzibar Election Re-run Slated for March 2016

Zanzibar is set to carry out a re-run of presidential elections on March 20th, 2016 after the results of the first vote were nullified following allegations of irregularities. The announcement comes amid calls for boycott of the election by the opposition, a development that threatens to deepen the political stand-off while increasing uncertainty on Tanzania’s near-term political and economic outlook. Nonetheless, the new administration has managed to contain unrest in Zanzibar, boding well for investor perception. The election outcome is still crucial for determining Tanzania’s outlook given that the island’s quest for greater autonomy has been a teething issue for the union.

Independent USA foreign aid agency, Millennium Challenge Corporation, is reported to have withheld funding disbursement to Tanzania on account of the political stalemate and concerns over infringement of basic human rights in view of the Cyber Crime Law (2015).

Opposition to Re-Open Referendum Talks

Tanzania’s main opposition party, Chadema, is set to re-open the referendum debate as it focuses on constitutional reforms as its main post-election agenda. The stalemate in Zanzibar is partly attributed to the stalled constitutional reforms, with fears that the island may secede if the opposition-favoured three-tier government proposal is successful.

POLITICAL OUTLOOK


The Economy Accelerates in Q3 2015

Available data indicates Q3 2015 economic growth (6.3%) stood marginally above the historical Q3 average of 6.2% (2006 – 2015), suggesting strong resilience by the economy in view of the elevated political risk at the time. This sets a good foundation for further acceleration in the first half of 2016 especially with monetary headwinds subsiding and the new government engaging aggressive fiscal consolidation efforts. Key engines of growth have been the construction, mining and transport sectors and we expect this to be sustained through the first half of 2016.

ECONOMIC OUTLOOK

There was marginal change in liquidity between December 2015 and January 2016 and this trend was reflected in minimal change in yields of short-term papers between the two months. Yields remain high, however, in what could be a reflection of investors’ caution over the uptrend in inflation which rose to 6.8% in December 2015, twenty bps higher than the preceding month.

DEBT MARKET UPDATE


TANZANIA





General Election set for August 2016

The presidential and parliamentary elections have been slated for August 11th, 2016 in what is widely expected to be a heated contest between the incumbent government and the main opposition party, United Party for National Development (UPND). In view of the narrow margin by which the ruling party won the last election (January 2015), 48.3% versus United Party for National Development’s 46.7%, the likelihood of coalitions across the political arena is imminent with the new constitution requiring the winner to clinch more than 50.0% of votes cast. The state of the economy prods us into caution over the near term political risk in view of tensions that rocked the country in the run-up to the last election. President Lungu’s directive to the Electricity Supply Corporation (ZESCO) to lower electricity tariffs on January 3rd, 2016 has been perceived by many as a charm offensive ahead of the elections especially at a time when the economy is grappling with an energy crisis. Ministry of Energy forecasts suggest the energy crisis is likely to prevail in the near term.

POLITICAL OUTLOOK

Energy Crisis to Persist as Water Levels Decline in Major Reservoir

The energy crisis could deteriorate following the decline of water levels at Kariba dam to 12.0% of capacity as at January 18th, 2016. This comes on the back of adverse weather conditions that have seen drought hit parts of the region. Households and investors in the mining sector are most vulnerable to the deteriorated conditions given their consumption of the country’s energy. World Bank estimates that firms in Zambia suffered losses to the tune of 5.0% of sales in 2013, a proportion that is likely to have escalated over the last one year in view of recurrent outage.


ZAMBIA

Kwacha Holds Firm against the Greenback

The Kwacha found a support level in the 11.1 – 11.3 band of exchange to the greenback in January 2016, propping investor confidence on the near term outlook of the economy. Factors that have driven this resilience include tight monetary policy and relative weakening of the greenback that have reduced the volatility witnessed in the Kwacha’s exchange.

ECONOMIC OUTLOOK

Source: Bloomberg, StratLink Africa

Kwacha to USD Exchange

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

27-J

an-1

5

27-M

ar-1

5

27-M

ay-1

5

27-J

ul-1

5

27-S

ep-1

5

27-N

ov-1

5

27-J

an-1

6

Yields nudged upwards in the short and medium term end whilst remaining relatively stable in the long-term. This is a likely indication of high risk perception by investors in the short and medium term as the economy takes a beating from depressed commodity prices and the forthcoming general election. In the long-term, investor sentiments are likely more favourable banking on remedial policy measures to address the economic challenges. Inflation expectations have equally been significant in leading investors to demand higher yields in the short and medium term.

DEBT MARKET UPDATE






Hiccup on Logistics as World Bank Suspends Funding

The quest for enhanced connectivity through roads infrastructure has hit a snag following World Bank’s suspension of funding for the Transport Sector Development Project following concern over non-compliance by the National Roads Authority (UNRA). Available data indicates that at USD 190.0 Million, World Bank had committed to fund 95.6% of the undertaking and its withdrawal dims prospects. This is likely to evoke uncertainty amongst investors who have been banking on the roads infrastructure upgrade program to boost business.

Key Stress Factors ahead of February 2016 Election

We are cautiously sanguine over the country’s political risk outlook ahead of the February 18th, 2016 general election premised on a number of potential stress considerations:

• There have been incidents suggestive of intimidation of the opposition by the state that could escalate tensions in the remaining weeks. In July 2015, opposition luminaries Kizza Besigye and Amama Mbabazi were arrested for organizing meetings without police permission

• Growing disenfranchisement over the Public Order Management Act (2013) which has negated the freedom of association across the country

• Concern over the integrity and fairness of the election has been a major issue shaping public dialogue and many will be keen to observe how this evolves

Be that as it may, we are confident that the precedent set by Nigeria and Tanzania of largely peaceful electoral processes will be replicated in Uganda.

POLITICAL OUTLOOK


UGANDA

Fiscal Position to Deteriorate

Uganda’s fiscal deficit is likely to deteriorate further away from the regional target ratio of 3.0% of GDP on the back of rising expenditure in view of ambitious infrastructure projects. Stellar performance in domestic revenue mobilization, however, sets a good precedent for the year underway and if sustained could see diminished pressure for domestic borrowing that crowds out the private sector.

Source: IMF, StratLink Africa

Fiscal Balance to GDP Ratio

ECONOMIC OUTLOOK

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%2009 2010 2011 2012 2013 2014 2015

e2016

(f)

Yields exhibited marginal downtrend between December 2015 and January 2016 driven by a mild rise in liquidity. This trend could reverse in the next two months in view of emerging weakness of the shilling that may necessitate tightening by Bank of Uganda. With inflation approaching the 10.0% mark, we expect yields to remain elevated through Q1 2016.

DEBT MARKET UPDATE






Courting New Allies

President Paul Kagame’s January 2016 visit to the Middle East has been widely perceived as an indication that the government could be courting new allies in view of expression of dissatisafaction by a section of Western allies over the revision of term limits. In October 2015, Rwanda’s Foreign Minister held a meeting with his Russian counterpart with a view to enhancing bilateral relations. The United States and the European Union have termed the revision of term limits as undermining democracy and this could see relations with Rwanda deteriorate.

In addition, Rwanda recently formed the Rwanda-Turkey Business Council, that is expected to enhance trade and economic ties between the two countries. As previously reported, foreign development assistance makes up 35.6% of budgetary funding, and the government of Rwanda is likely taking pre-emptive measures in view of a possible backlash from its western allies. The situation is reminiscent of the events around the 2012/13 donor aid shock where Rwanda turned to China to counter the effects of the donor aid cut. On the whole, we view the emerging ties as vital for Rwanda’s broadening of potential markets and heding against possible shocks in the near term.

POLITICAL OUTLOOK

Government Steps in to Streamline Ailing Textiles Industry

Rwanda’s textile industry faced a tumultuous year witnessing continuous decline in growth owing to increased second hand imports into the market. Consequently, government plans to impose 100.0% duty on imported clothing by July 2016, in order to protect the domestic industry. In the same breath, Rwanda is mulling over a joint venture with Chinese investors to establish a garment factory in Kigali as it looks to develop its own textile industry and cut down importation of garments. Available statistics show that in 2015, Rwanda spent USD 100.0 Million, approximately 5.4% of Rwanda’s import bill, on imported wear products, out of which 80.0% were textile imports.

BUSINESS NEWS ENVIRONMENT

RWANDA

ECONOMIC OUTLOOK

Economy Defies 2015 Headwinds

The economy weathered the turbulent macroeconomic environment in 2015 to register robust acceleration growing by 6.1% in Q3, 2015. Whereas this fell below the 8.0% registered in the same period in 2014, we note that 2014’s growth is likely to have been partly driven by the economy’s emergence from the previous year’s slump. Additionally, 2014 had, generally, better commodity prices that supported the economy’s growth. Rwanda’s resilience is partly driven by increased credit to the private sector which served to stimulate the economy. This has been enabled by the accommodative monetary policy stance which has been retained at 6.5% since June 2014.

DEBT MARKET UPDATE

Yields Rise on Relative Liquidity Tightening

Yields in the T-Bill market maintained an uptrend in the period under review despite subdued appetite for domestic debt by the government which saw government borrowing decrease by 520.0bps to USD 60.6 Million, month-on-month. Inflation also declined to 4.5% in December, 2015 from 4.8% reported in the preceding month. The rise could have been driven by two factors. One, available data indicates that the interbank rate stands at 3.7% from 3.5% in November 2015, suggesting relative tightening of liquidity. Two, investors could be pricing in political risk expectations in view of noise around the revision of term limits and a possible backlash from Western allies.






StratLink in the News

StratLink Africa continues to make commentary on emerging issues in frontier and emerging markets. Below please find links to the latest pieces.

Please click the buttons to view the full articles

eNCA News ─ Subdued Economic Growth for Ten Key Markets in sub-Saharan Africa: The piece draws extensively from our January 2016 outlook

London School of Economics Business Review ─ Nigeria Walks a Tight Rope between Inflation and Slowdown: This article assesses Nigeria’s outlook in 2016.

Venture Burn ─ Three Ways China’s Slowdown Yields Opportunities in Africa : In this piece, Konstantin Makarov delves deep into opportunities emerging in Africa following China’s slowdown.

http://blogs.lse.ac.uk/businessreview/2016/01/21/nigeria-in-2016-walking-a-tightrope-between-slowdown-and-inflation/

http://www.enca.com/money/subdued-economic-growth-expected-africa%E2%80%99s-top-10-investment-leaders

http://ventureburn.com/2016/01/3-ways-chinas-slowdown-yields-opportunities-africa/



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