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MARKET UPDATE – AFRICA

THIS REPORT INCLUDES ECONOMIES OF KENYA, UGANDA, TANZANIA, RWANDA, ETHIOPIA AND GABON

July 2014

2

KENYA MARKET UPDATE

3


POLITICAL OUTLOOK

Mpeketoni Attack Heightens Risk Perception

Kenya’s risk perception suffered yet another setback as attacks in the town of Mpeketoni, off the Kenyan Coast, on Sunday 15th June, 2014 claimed more than 60 lives. Despite the government intimating political instigation as a possible cause of the attack, Somalia based Al Shabaab militia have claimed responsibility.

The attack came two days after the United Kingdom shut its consular office in the coastal city of Mombasa citing security reasons. We reiterate our view that investors will act cautiously in the short term, monitoring the state of affairs. An example of growing investor concerns was the relocation of the second annual conference on Africa Investment Funds and Asset Management scheduled August 27th – 28th, 2014 from Nairobi to Dar es Salaam, in view of security concerns. The World Bank has downgraded its 2014 growth projections for Kenya from 5.2% to 4.7%, driven by rising insecurity below our estimates of 5.1%.

BUSINESS NEWS ENVIRONMENT

Business operators, notably in Nairobi and at the Coast, are voicing concern as effects of insecurity are having a substantive impact on their bottom line. Kenya Association of Hotel Keepers and Caterers reported that an estimated 5,000 workers were laid off in the towns of Watamu and Malindi in May 2014, as affected units either closed or downsized. As of June 2014, Kenya Bankers Association reported reduced business in branches in the Eastleigh business hub of Nairobi, which has been a target of terror attacks.

The country’s business climate has dampened based on recurrent attacks. We observe that the government is stepping up efforts to mitigate insecurity especially in the 2014/15 budget allocation towards security. We believe this should help improve the business climate in the medium term with limited impact in the short term.

ECONOMIC OUTLOOK

Q114 Economic Growth Decelerates

Kenya’s economy grew by 4.1% in Q114 down from 5.2% in the same period in 2013 and 4.7% for the full year of 2013. The dip has been attributed to a slowdown in the agriculture and tourism industries, with agriculture growing by 2.7% in the quarter under review compared to 6.8% in Q1 2013. During the quarter, growth was largely driven by manufacturing, transport and communications sectors that expanded by 5.0% and 6.0% respectively.

We believe that despite Kenya’s characteristic resilience in the past, 2014 presents a daunting year for the economy in view of the heightened security risk and decelerated performance by agriculture.

Quarter-on-Quarter Economic Growth Trend

Source: National Bureau of Statistics, StratLink Africa

Deteriorating Security Dampens Growth

Kenya’s deteriorating security situation has been key to driving the deceleration of growth in the quarter under review. Despite ranking the country’s risk outlook as B1 Stable in May 2014, credit rating agency, Moody’s, observes that susceptibility to deteriorating security poses a major threat to growth in 2014/15.

6.20%

1.40%

5.00%

3.80%

5.20%

4.10%

0%

1%

2%

3%

4%

5%

6%

7%

Q1

20

09

Q1

20

10

Q1

20

11

Q1

20

12

Q1

20

13

Q1

20

14

4


Budget 2014/15: Strategic Intervention

The government’s 2014/15 spending plan has focused on interventions in areas of national security and improving the agriculture sector with a view to bolstering economic performance.

We note that for the first time in two years the government scaled up its allocation to irrigation programs in the country, making an 18.8% increase to USD 108.26 million. This comes hot in the heels of a recent meteorological department report, which indicated that 2014 rains have thus far been depressed across the country, a further setback to the country’s food security.

Agriculture Sector Annual Growth Rates


We note that the agriculture sector faces a host of challenges; including erratic weather patterns that depress production and low global prices of key exports such as tea and coffee. The dairy industry, on the other hand, is beset by a periodic mismatch between market demand and supply occasioning losses to producers as surplus milk is disposed during periods of excess supply. Opportunities for investors are emerging as the government invited bids for construction work of water delivery infrastructure in the one million acres Galana Kulalu Irrigation scheme.

Security Spending: Beefing Up Surveillance

In 2014/15, security spending has been a key priority for regional governments that have deployed national armies towards beefing up African Union Mission to Somalia (Amisom). In Kenya, allocation towards security took centre stage as the government sought to improve the business/investment climate.

The budget provides for a 123.3% year-on-year increase to USD 76.14 million towards leasing of vehicles to boost police patrol efforts. Kenya’s government has ruled out withdrawal of defence troops from Somalia as a means of averting future attacks by the Al Shabaab militia, necessitating an increase in expenditure to upgrade surveillance.

Kenya’s National Security Budget (KES)

Source: National Treasury, StratLink Africa

Whereas we believe the increased allocation towards security is welcome, budget absorption remains a major challenge in registering desired results in Kenya. In FY2012/13 absorption rates for development and recurrent expenditure stood at 66.0% and 94.0%, respectively1. This presents a key risk to the potential of the increased allocation in helping to mitigate insecurity and its impact on the economy.

1 Institute of Economic Affairs 2013

-4.30%

6.30%

3.80%

2.90%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

20

08

20

10

20

12

20

13

Impact of 2007/08 post-election violence

886

949 923

1,225

750

850

950

1,050

1,150

1,250

20

11

/12

20

12

/13

20

13

/14

20

14

/15

Mill

ion

s

38.26%

5


DEBT MARKET UPDATE

Monetary Policy: Stabilising the Shilling

Maintaining a stable shilling informed the country’s monetary policy in the period under review. This came on the back of a depreciating shilling that trended within a six month low of 88 units to the US dollar in the week ending June 18th, 2014. Our initial assessment indicates that the local unit came under pressure from declining tourism earnings and muted tea earnings occasioned by volatile global prices (Between March and May 2014, global tea prices declined from 247.9 US cents per kilogram to 219.5 US Cents at the end of May 2014).

These events have seen the country’s current account balance come under pressure, with the Central Bank of Kenya (CBK) assuring markets that the local unit was being closely monitored. In the same light, we have seen the country’s import cover weather these headwinds by demonstrating its stability over the period at 4.29 months (above the required minimum 4 months), as of June 27th, 2014 compared to 3.46 months as of December 23rd, 2011, when the country suffered a similar bout of depreciation.

Kenya Shilling Exchange against USD

Source: Bloomberg, StratLink Africa

We remain sanguine on the local unit’s prospects going forward, informed by positive sentiments emanating from global markets on the success of the recently issued Eurobond. We expect the shilling to exchange in the 87.00-89.00 range to the greenback for the remainder of the calendar year.

Eurobond Oversubscription

High investor appetite, particularly from the USA, UK and Europe, saw the Eurobond being oversubscribed by 4.4x.

Performance Kenya’s Eurobond

Source: Country Statistics, IMF Data

The USD 2.0 billion instrument attracted bids worth USD 8.8 billion. The high appetite by foreign investors can be attributed to a number of factors, notably the yield chasing fund managers in developed markets.

Coming against the backdrop of high security risk perception in the country, we believe the high uptake affirms investor confidence in the long term prospects of the Kenyan economy. This is likely to be informed by the country’s investment in infrastructure development, to which USD 1.4 billion of the Eurobond proceeds are expected to be invested. Appropriately allocated and utilized funds will augment Kenya’s position as a regional investment hub going forward.

85.5

86

86.5

87

87.5

88

88.5

30

-Jan

-14

13

-Fe

b-1

4

27

-Fe

b-1

4

13

-Mar

-14

27

-Mar

-14

10

-Ap

r-1

4

24

-Ap

r-1

4

8-M

ay-1

4

22

-May

-14

5-J

un

-14

19

-Ju

n-1

4

0.75

0.4

1

1

2

11

3

4

4.3

8.8

0 5 10 15

July 2012-Zambia

April 2013- Rwanda

July 2013 Nigeria

April 2014 Zambia

June 2014- Kenya

Bids, USD bn Face Value, USD bn

6


Domestic Bond Market

The domestic market has been on a lull characterized by a low uptake of instruments. We believe investors adopted a wait and see stance ahead of the Eurobond issuance as a gauge of international investor confidence and the reading of the budget to assess the fiscal priorities for FY14/15.

Kenya Sovereign Yield Curve


Yields took an upward trend across all tenors. The five, ten and fifteen year instruments gained 78, 36 and 42 bps, month-on-month, closing at 11.9%, 12.5% and 12.7%, respectively in June 2014. In the primary market, CBK re-opened the twenty year bond and issued a five year bond, offering of USD 342.28 million. The two attracted bids worth USD 273.45 million with a cumulative subscription of 79.7%.

FXD2/2014/5 & FXD1/2012/20 Amount offered (USD Mlns) 342.3

Amount received (USD Mlns) 273.5 Amount accepted (USD Mlns) 260.7 Performance Rate 79.7% Weighted Average Rate 5 Year 11.9% Weighted Average Rate 10 Year 13.4%

Source: CBK, StratLink Africa

Uptick Replicated in STIRs

Yields in the short-term end of the market exhibited similar trends with the 91 Day, 182 Day and 364 Day instruments rising by 264, 170 and 94 bps, month-on-month, to close June 2014 at 11.4%, 11.6% and 11.2%, respectively.

91 Day (USD Mlns)

Date Offered Received Bid-to-Cover

5-Jun-14 45.57 37.21 0.82

12-Jun-14 45.57 160.28 3.52

19-Jun-14 45.57 131.27 2.88

26-Jun-14 45.57 54.98 1.21

Source: Central Bank of Kenya, StratLink Africa

In view of reduced domestic funding needs, following the successful Eurobond issuance, we assess that investors have re-evaluated their position pricing in macroeconomic issues such as inflation accounting for the uptrend in yields.

In line with our May 2014 projection, inflation edged upwards to 7.39% in June 2014 from 7.30% in the preceding month. The upward pressure was brought about by increased cost of energy and utility items, with the index rising by 0.7% against a 0.3% drop in the food and non-alcoholic beverage index. This is due to the upward review of electricity tariffs by the Energy Regulatory Commission in May 2014.

Looking ahead, we expect the housing and energy index to continue inflicting upward pressure on inflation, especially in view of the move in the 2014/15 budget to increase import duty on steel and iron by 15.0% and 25.0%, respectively. As such, yields are likely to trend further upwards. We will, however, be keen to observe the monetary policy approach taken by the government as inflation edges towards the Central Bank’s upper limit of 7.5%.

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

3M

6M 1Y

2Y

5Y

10

Y

15

Y

20

Y

25

Y

30

Y

30-Jun-14 31-May-14

30-Apr-14

7


EQUITY MARKET UPDATE

NSE 20 Share Index Trend


+6.68% NSE 20 Share Index change year-on-year

+0.08% NSE 20 Share Index change month-on-month

NSE 20 Share Index June 2014 Trend


The market began June 2014 on a downtrend before picking up midway and sustaining a bullish trend to the end of the month. In the former phase of the month, the exchange witnessed deceleration of activity by foreign investors. This is likely to have been driven by investors awaiting the annual budget to assess the government’s priority spending areas. We believe allocation to the energy and infrastructure sectors (22.6% of total budget) stoked investor confidence with the market taking an upturn in the post-budget reading phase.

In June 2014, foreign investor buy orders at the exchange dropped by 14.8% to USD 118.2 million from May 2014’s USD 138.8 million. In the same period, foreign investor sales declined by 13.7% to USD 91.1 million.

Foreign Investor Activity at NSE (KES)

Source: Africa Investment Bank, StratLink Africa

Centum: Full Year Results to March 2014

Investment Group, Centum, reported a 22% growth in net profit to USD 39.9 million for the period ending March 31st, 2014. From an asset class analysis perspective, private equity contributed 53% of company returns, whereas real estate infrastructure and quoted private equity contributed 23% and 24%, respectively.

The strong performance in private equity was driven by improved results from investee companies that saw the portfolio value grow to USD 160.68 million as at March 2014, a 292% growth from the same period in 2009.

0

20

40

60

80

100

120

140

160

4750

4800

4850

4900

4950

5000

30

-Jan

-14

28

-Fe

b-1

4

31

-Mar

-14

30

-Ap

r-1

4

31

-May

-14

30

-Ju

n-1

4

Mill

ion

s

Volume - RHS Last Price

0

10

20

30

40

50

60

70

80

4740

4760

4780

4800

4820

4840

4860

4880

4900

30

-May

-14

6-J

un

-14

13

-Ju

n-1

4

20

-Ju

n-1

4

27

-Ju

n-1

4

Mill

ion

s

Volume - RHS Last Price

0.00

0.50

1.00

1.50

2.00

3-J

un

-14

10

-Ju

n-1

4

17

-Ju

n-1

4

24

-Ju

n-1

4

Bill

ion

s

Foreign Buys Foreign Sales

8


We believe moves such as the firm’s investment in a 35% stake in microfinance institution, Platinum Credit, have been rewarding in view of impressive performance by the country’s financial services sector.

In the period under review, earnings per share grew by 20.4% to KES 4.54 while net asset value per share grew by 42.1% to KES 34.47.

Net Asset Value Growth (KES Billions)

Source: Centum Financials, StratLink Africa

We note that the results come on the back of completion of the group’s 2009 – 2014 strategy that has seen CAGR of 109% in net asset value to USD 262.7 million between 2009 and 2014. Centum’s share value has appreciated by 12.15% year-to-date to close June 2014 at KES 41.25.

Centum Share Performance 2011 - 2014


7 9

11

15

21

9

13 14

16

23

0

5

10

15

20

25

20

10

20

11

20

12

20

13

20

14

Target Actual

0

1

2

3

4

5

6

7

10

15

20

25

30

35

40

45

30

-Ju

n-1

1

31

-Oct

-11

29

-Fe

b-1

2

30

-Ju

n-1

2

31

-Oct

-12

28

-Fe

b-1

3

30

-Ju

n-1

3

31

-Oct

-13

28

-Fe

b-1

4

30

-Ju

n-1

4

Mill

ion

s

Volume - RHS Price (KES)

9


Regional Investment Outlook

Highlights of United Nations Conference on Trade and Development (UNCTAD)

World Investment Report 2014

10


Regional Investment Outlook

Developing economies continue to lead the globe in Foreign Direct Investment (FDI) inflows accounting for 54% (USD 778 billion) of flows in 2013. FDI flows into Africa grew by 4% year-on-year to stand at USD 57 billion. UNCTAD reports that the growth has primarily been driven by deepening regional integration. In 2013, aggregate global FDI flows stood at USD 1.45 trillion, representing a 9% year-on-year increase, with the 2014 flows projected to reach USD 1.6 trillion.

Africa: FDI Flows (USD Blns)

Source: UNCTAD 2014, StratLink Africa

Africa FDI: Key Markets

UNCTAD identifies East and Southern Africa as the key pockets driving growth of FDI flows in Africa. In East Africa, FDI flows increased by 15% to USD 6.2 billion, whereas in Southern Africa flows are reported to have almost doubled to USD 13 billion. Notable FDI destination growth centers include:

South Africa and Mozambique: In the two countries, infrastructure growth and development are the main engines driving FDI inflows. Additionally, in Mozambique investment in the gas sector has been pivotal in attracting flows.

Kenya: The country is increasingly becoming a choice investment destination driven by the manufacturing and transport sectors. Going forward, prospects of oil exploration are expected to further draw in FDI flows.

FDI Inflows (USD Mlns)


Investment Outlook: Ethiopia’s Promise

The country’s textile and apparel sub-sector has exhibited great potential for growth since it was identified as a priority area under the 2003 Industrial Development Strategy. The sub-sector is expected to be a key driver of FDI flows in the next decade.

The country benefits from a large population that provides ready and cost-effective labour to drive growth in the leather industry. The government’s imposition of a 150% duty on export of semi-finished skins is boosting value addition in the domestic market.

FDI Inflows (USD Mlns)

Source: IMF 2014, StratLink Africa

48

55

57

6

7

8

9

10

11

12

13

42

44

46

48

50

52

54

56

58

20

11

20

12

20

13

Inflows Outflows - RHS

-

2 000.0

4 000.0

6 000.0

8 000.0

10 000.0

20

09

20

10

20

11

20

12

20

13

Mozambique South Africa

-

200.0

400.0

600.0

800.0

1 000.0

1 200.0

20

09

20

10

20

11

20

12

20

13

Ethiopia Kenya

11


TANZANIA MARKET UPDATE

12


POLITICAL OUTLOOK

Laying Ground for 2015 Elections

The National Electoral Commission is set to kick off a voter registration exercise in preparation for the 2015 general election and the referendum on a new constitution. The registration, scheduled to take place between August and September 2014, targets using the biometric voter registration technology to help alleviate challenges faced in past elections such as ghost voting. The exercise is projected to cost USD 177 million.

Observer reports on Tanzania’s past elections identify logistical hiccups as a key challenge to the election process. This is occasioned by the vast size of the country, large number of registered voters and remoteness of majority of polling stations. If successfully implemented, the new mode of registration will boost the country’s prospects for credible elections and elevate the political risk outlook. The country enjoys a stable political climate at present with minimal risk to investment.

BUSINESS NEWS ENVIRONMENT

Manufacturers have canvassed a set of proposals on taxation with a view to boosting the domestic industry in 2014/15. Confederation of Tanzania Industries (CTI) is pushing for introduction of 50% excise duty on imported African textiles, dubbed Kanga and Kitenge, as well as 20% excise duty on new and used imported shoes. On the flip side, it has called for a reduction of excise duty on locally made ready to drink products. World Trade Organization reports that in 2012, Tanzania’s value of merchandise imports stood at USD 11.3 billion, against merchandise exports worth USD 5.5 billion. The new measures are aimed at boosting consumption of domestically produced commodities. Investors dealing with imports on the said products should anticipate a rise in the cost of doing business, if the proposals are implemented.

ECONOMIC OUTLOOK

Budget 2014/15: Focus on Agriculture

Budget 2014/15 comes against the backdrop of low performance by the agriculture sector. In 2013, Tanzania’s economy grew by 7.0%, ten bps higher than growth in 2012 as the agriculture sector’s growth rate stagnated at 4.3% year-on-year. Key features in budget 2014/15 include an increase in capital expenditure from 30.9% of total budget in 2013/14 to 32.5% and increased allocation to agriculture, whilst other sector allocations were decreased.

Budgetary Allocation (Tzs Blns)

Source: Ministry of Finance, StratLink Africa

Agriculture to Drive Pro-poor Growth

Government reports indicate agriculture constitutes about 25% of Tanzania’s GDP, 85% of exports and provides employment for an estimated 80% of the total labour force. As such, performance of the sector is crucial to the country’s economic growth and development prospects.

Strategic interventions in the country’s agriculture sector have been pivotal in mitigating poverty prevalence. The Southern Agricultural Growth Corridor of Tanzania (SAGCOT) public private partnership initiative has seen rice yields increase four-fold, to eight tones per acre between 2010 and 2013 in the Kilombero region - the country’s food basket.

1,426.9

1,090.0

2,169.0 2,109.0

908.1

1,084.70

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

20

13

/14

20

14

/15

Energy and Minerals TransportAgriculture

13


Further, fertilizer subsidy programs by the government increased small-holder farmers’ accessibility to fertilizers, through price reduction, by an estimated 50% between 2008 and 20102.

Tanzania Mainland Poverty Prevalence


We believe the focus on agriculture in the 2014/15 budget seeks to further the gains made through such interventions. This will be central in reducing income inequality, especially in rural Tanzania, which is dominated by small-holder subsistence farmers.

Boosting Farmers’ Access to Credit

The budget further points out disbursement of an undisclosed amount of funds towards enhancing the operationalization of Tanzania Agriculture Development Bank. The bank advances loans to farmers and is expected to step up efforts to help famers access export markets for their produce.

It is estimated that up to 75% of Tanzania’s agricultural output is drawn from small-holder farmers. In 2012, constraints in accessing credit, due to low income and lack of collateral, was identified as the second biggest challenge to growth in agriculture in Tanzania and the wider East Africa3.

2 AGRA IFDC Nepad Survey 2011

3 International Fund for Agricultural Development

The share of commercial banks’ credit to the agriculture sector has been on the decline for the last three years, whereas that of trade and construction has been increasing driven by growing enterprise. Going forward, we believe a lot more focus should be directed towards agri-business.

Private Sector Credit by Sectors

Trade Agriculture Construction

Dec-11 20.6% 12.3% 4.3%

Dec-12 21.1% 10.8% 4.7%

Dec-13 21.3% 9.5% 5.1%


Construction Industry: Potential Slowdown

Despite steady growth in commercial banks’ credit disbursement to the building and construction industry; we forecast a potential slowdown in 2014/15. This is predicated on the removal of cement from the list of capital goods that are tax exempt. The move is likely to occasion a rise in the cost of cement in the country even as it enables domestically produced cement to compete favourably with imported brands.

Being a net importer of cement, the Tanzanian market is headed for a cost increase in light of the amendment proposed by the 2014/15 budget. As of June 2014, an imported 50 kg bag of cement was reported to be retailing at USD 7.8, whereas the domestically produced counterpart was retailing between USD 8 and USD 9.3 due to high production costs.

Cement Imports vs Exports (‘000 Tones)

Source: IMF 2014, Stratlink Africa Analysis

38.6%

35.7% 34.4%

28.2%

23.1%

5.0%

9.0%

13.0%

17.0%

21.0%

25.0%

22.0%

26.0%

30.0%

34.0%

38.0%

42.0%

19

92

20

01

20

07

20

12

20

13

Poverty RateFood Poverty Rate -RHS

200 400 600 800 1,000 1,200 1,400 1,600

50

100

150

200

250

300

350

20

09

20

10

20

11

20

12

20

13

(P)

Imports - RHS Exports

14


DEBT MARKET UPDATE

Inflation Outlook: Inflation is likely to trend upwards following a gradual increase in the food and non-alcoholic beverage components that grew from 7.2% in March 2014 to 7.8% in April 2014, according to the latest update by Bank of Tanzania (BoT). Whereas aggregate inflation has remained within the 6% territory, we observe a consistent uptick that is poised to continue.

Inflation Trend


STIRs Trends

Yields in the T-Bill market continued on a downward trend albeit with leaner margins than in the month to May 2014. The 91 Day instrument shed 39 bps (compared to 122 bps in the month to May) to close at 10.6%. The 182 Day and 364 Day instruments lost 27 bps and 11 bps (compared to 22 and 20) to close at 12.8% and 13.0%, respectively.

T Bill Yields


Yields for the three instruments are showing signs of departure from the downtrend and plateauing off trend in the coming months. We assess that investors are expecting inflation to continue trending upwards thereby adjusting their positions in the market. As such, yields are likely to rise in the coming months.

Investor appetite in the market has been low characterized by bid-to-cover ratios standing at 0.4, 1.0 and 0.9 for the 91 Day, 182 Day and 364 Day instruments, respectively in the June 25th, 2014 auction. This has been consistent with tightening liquidity conditions in the money market that have seen the interbank rate rise from 7.9% at the end of May 2014 to 11.7% at the end of June 2014.

Interbank Market

Source: Bank of Tanzania, StratLink Africa

We note that there have been no reports of Bank of Tanzania intervening in the market to prop up the sliding shilling.

It has been a month of mixed performance for the shilling. Whereas the local unit registered no change on a month-on-month basis holding steady at 1,650, while shedding 0.92% on a year-on-year basis against the greenback, the last week was characterized by steady appreciation.

6.0% 6.0%

6.1%

6.3%

6.5%

5.8%

6.0%

6.2%

6.4%

6.6%

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

91 Days 182 Days 364 Days

0

10

20

30

40

50

60

70

80

90

100

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%3

0-J

an-1

4

20

-Fe

b-1

4

13

-Mar

-14

3-A

pr-

14

24

-Ap

r-1

4

15

-May

-14

5-J

un

-14

26

-Ju

n-1

4

Volumes - RHS (TZS Blns)

Interbank Rate

15


We assess that the appreciation of the shilling has been driven by the settlement of taxes, as both corporates and individuals faced the Monday 30th June, 2014 due date for the second instalment of tax for 2014. This resulted in high demand for the shilling. Going forward, we expect the shilling to depreciate driven by declining revenue from key exports such as tea, coffee and tobacco.

Tanzania Shilling vs US Dollar Exchange



It has been a bullish month at the exchange with the All Share Index gaining 36.7% and 8.1% on a year-on-year and month-on-month basis, respectively, to close at 2,172. We assess that the opening of the country’s debut oil and gas initial public offer, Swala Oil and Gas, on June 09th, 2014, excited the market, thereby driving a rally. The company has floated 9.6 million ordinary shares at a price of USD 0.297 per share. High appetite has been reported for the offer which closes on 4th July 2014 citing applications from over one hundred new investors.

Dar es Salaam Stock Exchange Year-on-year


Going forward: We expect changes favourable to the domestic industry in the 2014/15 budget statement to keep industrial and allied counters on a rally. Reduction of export levy in raw hides and skins from 90% to 60% per kilogram and earlier mentioned changes to import duty on clothing and cement to boost the domestic industry.

Sector Market Indices

06.23.14 06.23.13 Change

Industrial and allied

4,054.76 1,998.15 102.90%

Finance and investment

3,509.21 1,860.10 88.70%

Commercial services

1,990.22 1,602.66 3.00%

Source: Dar es Salaam Stock Exchange, StratLink Africa

1600

1610

1620

1630

1640

1650

1660

1670

1680

1690

1700

30

-Jan

-14

20

-Fe

b-1

4

13

-Mar

-14

3-A

pr-

14

24

-Ap

r-1

4

15

-May

-14

5-J

un

-14

26

-Ju

n-1

4

0

5

10

15

20

25

1800

1900

2000

2100

2200

30

-Jan

-14

28

-Fe

b-1

4

31

-Mar

-14

30

-Ap

r-1

4

31

-May

-14

30

-Ju

n-1

4

Mill

ion

s

Volume Last Price

16


UGANDA MARKET UPDATE

17


POLITICAL OUTLOOK

Overcast as State Infringes Press Freedom

Freedom of speech and democracy may be constrained ahead of the 2016 general election, as the government bars a local media house from covering presidential events. Nation Television Uganda’s suffered the ban after reporting that President Yoweri Museveni slept during a parliamentary session. Government spokesperson, Dennis Katungi, termed the report by Nation TV as “unprofessional and embarrassing”. In 2013, the media house’s print section, Daily Monitor, was shut down for two weeks by the government following an article alleging the planned ascendancy of Museveni’s son to Presidency.

Low tolerance of political dissent and clamping down of press freedom have historically kept Uganda’s political risk profile high. This will be a key factor in determining foreign investor risk perception, especially as the 2016 elections approach. Perceived increase in dissent intolerance could dampen the country’s investment outlook. International investors will be keen to observe trends in this regard.

BUSINESS ENVIRONMENT

Two consortia, from Russia and South Korea, have emerged as the final bidders of the intended USD 2.5 billion oil refinery with the announcement on the choice investor anticipated in July 2014. The government is preparing for exploration of the country’s oil reserves estimated at 3.5 billion barrels. Oil production is expected to commence in 2017 with the refinery processing capacity pegged at 60,000 barrels per day.

We anticipate heightening investor interest in the economy as it advances towards oil exploration. In 2013, Ernst and Young reports the extractive industry led in attracting private equity interest in Sub-Saharan Africa, driven especially by oil and gas that accounted for 58% of the total value of deals.

ECONOMIC OUTLOOK

Budget 2014/15: Improving Business Climate

Budget 2014/15 focuses on preparing Uganda to harness the potential presented by the budding oil sector. The Ministry of Finance has proposed the abolition of thirty seven licenses and fast-tracking of the enactment of the Investment Code (Amendment) and Public Private Partnerships Bills, to ease the requirements of establishing business ventures. The oil refinery to be located in Kabaale Township will be established on a 60%-40% ownership structure between the private investor and government.

Foreign Direct Investment (USD Mlns)


Following Ghana’s Path?

Ghana’s commercially viable oil reserves at the point of discovery were estimated at 1.8 billion barrels. Between 2005 and 2008, foreign direct investment flows in Ghana grew by 533% to USD 1.22 billion, whereas in Uganda they grew by 92% to 729 million. This indicates the potential for growth in investment presented by the oil discovery in Uganda. Over the years, the contribution of crude oil to Ghana’s economy has grown steadily. Declining global prices have, however, seen its contribution decline between 2012 and 2013.

-

500.0

1 000.0

1 500.0

2 000.0

2 500.0

3 000.0

3 500.0

20

00

20

02

20

04

20

06

20

08

20

10

20

12

Uganda Ghana

Ghana discovers oil in 2007

18


Ghana: Crude Oil and Mining (% of GDP)

Source: Bank of Ghana, StratLink Africa

Improving Transport Infrastructure

Coming at the tail end of the National Development Plan 2010–2015, we anticipated growth in the allocation to transport infrastructure to expedite completion of projects in this sector. Growing and improving transport infrastructure has been cited as a key contributor to the 2012/13 and 2013/14 5.1% and projected 6.2% GDP growth respectively4.

Transport Infrastructure Budget (USD Mlns)


Improving the country’s transport infrastructure has been a strategic initiative under the National Development Plan. High transport costs, owing to underdeveloped infrastructure have been identified as a key impediment to the expansion of the country’s

4 Ministry of Finance, Bank of Uganda

production capacity and enhancing value addition5 by inhibiting linkage of market centres and economic agents that could otherwise spur growth. This can be rectified by improvement of the country’s transport and logistics infrastructure that will make it a choice transit point between East and Central African economies boosting trade volumes.

Presently, Uganda’s national unpaved road network in fair condition stands at 66% while that of paved network is at 77%. The government targets scaling up the two to 75% and 85%, respectively, in the medium term to boost the business environment.

Fiscal Performance

In 2013/14, Uganda’s revenue collection stood at USD 3.13 billion representing 94% of target. The below target performance can be attributed to economic growth that fell below the government’s projection that consequently saw key sources such as income and value added taxes underperform.

Top 5 Aid Sources 2011/12 (USD Mlns)

Source: OECD Data, StratLink Africa

In 2014/15, a key risk to revenue performance stems from strained relations between Uganda and its main development aid lender, USA. On June 19th, 2014, USA imposed new sanctions against Uganda following the anti-gay law with reports indicating redirection of USD 3 million intended for the public health system.

5 Africa Development Bank Economic Outlook

2013

0.40%

6.70% 6.80% 6.10%

2.30%

8.40% 8.80% 7.90%

0%

2%

4%

6%

8%

10%2

01

0

20

11

20

12

20

13

Crude Oil Mining

636.38

923.27 967.84

13.00%

15.20%

17.90%

400

500

600

700

800

900

1000

12.0%

14.0%

16.0%

18.0%

20.0%

20

12

/13

20

13

/14

20

14

/15

Allocation (RHS) % of Total Budget 396

188 160 149 144

0

100

200

300

400

500

USA IDA EU UK AfDB

USA IDA EU UK AfDB

19


DEBT MARKET UPDATE

Inflation Declines to 4.9%

June 2014 inflation stood at 4.9%, fifty bps lower than 5.4% in May 2014. The drop has been attributed to a general decrease in the food index that decreased by 7.1% year-on-year. The National Bureau of Statistics has reported improved supply of food items due to favourable weather conditions and lower energy cost.

Moving forward, we anticipate an uptick in inflation following the end of the short rains season that tends to suppress inflation before an uptick. Historical trends reflect a rise in inflation starting June after the short rains season.

2004 – 2014 Inflation Trends


We expect that these trends in inflation will be priced-in by debt investors in their trading decisions, resulting in relatively higher yields demanded for debt instruments.

Yield Curve


Yields dropped by leaner margins between May and June 2014, compared to the preceding month-on-month changes, with the long end of the yield curve exhibiting stability. The 91 Day instrument shed 29 bps between May and June, to stand at 9.1%, compared to a 60 bps drop in the month to May 2014. On the other hand, the 364 Day paper shed 33 bps to close at 12% compared to a 78 bps drop in the preceding month. The longer end of the curve has been largely stable with the ten year paper shedding a marginal one bp to stand at 13.7%, whilst the five year paper gained nine bps to close the month at 13.5%.

Pegged on an expected uptrend in inflation, we foresee yields rising in the coming months. The comparatively lower margin of decline in yields between May and June 2014, indicates investors are already adjusting their position in the market with regard to inflation trends.

Liquidity in the money market increased on the back of a fifty bps slash of Bank of Uganda’s benchmark lending rate to 11% in June 2014.

We expect this trend to continue in the short to medium term as commercial banks capitalize on the reduced borrowing rate.

Interbank Rate Trend

Source: BOU, StratLink Africa

0%5%

10%15%20%25%30%35%

1-J

un

-04

1-J

un

-05

1-J

un

-06

1-J

un

-07

1-J

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1-J

un

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1-J

un

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1-J

un

-11

1-J

un

-12

1-J

un

-13

1-J

un

-14

8.5%

9.5%

10.5%

11.5%

12.5%

13.5%

14.5%

3M

6M 1Y

2Y

3Y

5Y

10

Y

30-Jun-14 30-May-1430-Apr-14

6%

7%

8%

9%

10%

11%

12%

13%

Mar

-14

Mar

-14

Mar

-14

Ap

r-1

4

Ap

r-1

4

May

-14

May

-14

7 Day Overall

20


In light of increased liquidity, we expect Bank of Uganda to intervene in the money market with a view to propping up the local unit. In the month under review, the shilling came under pressure as the main export, coffee, suffered from declining global prices. We further assess that renewed sanctions by the USA has played a role, albeit marginally, in the sliding of the shilling.

Uganda Shilling vs US Dollar Exchange Rate


-0.58% Uganda Shilling depreciation year-on-year

-2.73% Uganda Shilling depreciation month-on-month


The market continued on its upward trend driven largely by resumption of trading of Umeme Ltd, upon the conclusion of the sale of shares worth USD 12.93 million to domestic and regional investors. In June 2014, Umeme Ltd registered a turnover of USD 6.8 million, accounting for 94.6% of the total turnover at the exchange. The Uganda Securities Exchange All Share Index gained 6.9% year-on-year and 5.6% month-on-month to close June 2014 at 1,657.34.

Uganda Stock Exchange All Share Index


Umeme Ltd: Medium Term Strategy

In the full year to December 31st, 2013, Umeme Ltd reported a 46.5% growth in net profits to stand at USD 32.2 million. We assess investors are banking on the company’s medium-term growth strategy that targets investing USD 440 million towards heightening electricity distribution efficiency.

2440

2460

2480

2500

2520

2540

2560

2580

2600

2620

2640

30

-Jan

-14

13

-Fe

b-1

4

27

-Fe

b-1

4

13

-Mar

-14

27

-Mar

-14

10

-Ap

r-1

4

24

-Ap

r-1

4

8-M

ay-1

4

22

-May

-14

5-J

un

-14

19

-Ju

n-1

4

1300

1350

1400

1450

1500

1550

1600

1650

1700

1750

28

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n-1

3

28

-Au

g-1

3

28

-Oct

-13

28

-De

c-1

3

28

-Fe

b-1

4

30

-Ap

r-1

4

30

-Ju

n-1

4

21


RWANDA MARKET UPDATE

22

POLITICAL OUTLOOK

Renewed Tension with the Congo

Rwanda finds itself on the spot yet again over relations with the Democratic Republic of Congo (DRC). The International Conference on Great Lakes Region’s (ICGLR) Extended Joint Verification Mechanism (EJVM) has accused sections of the Rwandese Army of provoking their DRC counterparts into a border conflict that claimed the lives of five DRC soldiers on June 11th, 2014. EJVM was formed in September 2013 to monitor border clashes between Rwanda and DRC, following the M23 rebel conflict in Eastern DRC.

In 2013, Rwanda’s economic growth decelerated to 4.6% from 8.0% in 2012 attributed to with-holding of donor funding by development partners. We believe Rwanda’s suspected involvement in developments that could destabilize the DRC through border conflict could lead to a recurrence of action taken by development partners in 2012/13. Withdrawal or delays in disbursing aid flows would dampen the investment climate by potentially slowing down economic growth.


The Development Bank of Rwanda and the African Guarantee and Economic Co-operation Fund have renewed their agreement to help small and medium size enterprises access credit. This follows the lapsing of the 2007 agreement that saw the Fund extend USD 1.6 million towards small and medium enterprises. The SME sector accounts for 98% of business ventures registered in Rwanda and 41% of private sector employment in the country6. Easing access to credit by SMEs has been identified as vital to improving the country’s business climate under the Vision 2020 economic blue-print. Looking ahead, we anticipate more effort towards this end to improve investments.

6 Ministry of Commerce and Industry

ECONOMIC OUTLOOK

Budget 2014/15: Infrastructure and Exports

The government’s 2014/15 spending plan focuses on the implementation of the country’s Economic Development and Poverty Reduction Strategy II (EDPRS II). Thematic areas of the strategy, including financing infrastructure projects and boosting export productivity, have been allocated 52% of the USD 2.6 billion budget. We believe this focus is timely, coming on the back of a rebound in the economy posting 7.4% GDP growth in Q114.

Quarterly GDP Growth Rate


EDPRS I: Successful Implementation

The 2014/15 budget is geared towards advancing the gains made in the implementation of the country’s Economic Development and Poverty Reduction Strategy I that lasted from 2008 to 2013. The government reports that at the conclusion of the strategy period, 85% of the targets had been met with a policy implementation success rate of 96% i.e. 485 out of a targeted 504 policy actions have been carried out. The strategy’s overall objective was to reduce the population living in poverty from 56.9% in 2005/06 to 46% in 2012/137.

7 Ministry of Economy and Finance

4.7%

7.4%

2.9%

4.1%

7.4%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

23

EDPRS I Performance

Indicator Baseline (2006)

Target (‘12/13)

Actual

GDP growth 6.5% 8.1% 6.3%

National investment (% of GDP)

16.3% 24.4% 21.4%

Poverty rate 56.9% 46.0% 44.9%

Private sector credit

(% of GDP) 10.0% 15.0% 13.9%


Under the Economic Transformation allocation of the 2014/15 budget, the government targets boosting infrastructure and productivity through exports. This aims at enhancing the economy’s earnings as it improves the domestic investment climate by creating vital linkages through upgraded infrastructure.

Priority Allocation – 50% of Total (RwF Blns)


The budget allocations are consistent with the country’s economic growth drivers as reported for Q114. In the quarter under review, trade and transport led in growth at 11.0% with industry, services and agriculture following at 9.0%, 8.0% and 5.0%, respectively. We expect more effort to be targeted at sustaining growth at the Q114 level in the succeeding quarters. Already, Bank of Rwanda has realigned its monetary policy to spur credit access to the private sector as shall be explored further under the Debt Market Update.

Sector Quarterly Growth Rates


Coffee Prices Dampen Export Outlook

The government’s 2014 economic growth and budget implementation performance projections are partly anchored on anticipated growth in export earnings. The Ministry of Economy and Finance expects that export earnings in 2014 will grow by 7% to USD 751 million, while imports will grow by 16% to USD 2.15 billion.

Whereas the budget lays emphasis on funding infrastructure projects connecting Rwanda to key export markets, we believe that declining global coffee prices could dampen a favourable outlook. In May 2014, global prices dropped by 4.05% to 163.94 US Cents per pound as output from Brazil began rebounding due to improved weather.

Main Exports as % of Total Exports

Source: KPMG Survey, StratLink Africa

438.9

252.8

170.3

0

100

200

300

400

500

EconomicTransformation

RuralDevelopment

YouthEmployment

-4%

0%

4%

8%

12%

16%

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Trade and Transport Industry

Services Agriculture

15.10% 16.50% 17.56%

14.4% 15.2% 15.1%

12.0% 12.2% 12.5%

9.8% 11.0% 12.1%

0%

20%

40%

60%

20

12

20

13

20

14

(P)

Coltan Tin Tea Coffee

24

DEBT MARKET UPDATE

Inflation Outlook: We foresee a downward trend in inflation anchored on trends in the food and non-alcoholic beverage price movements. The index (food and non-alcoholic beverages) dropped by 1.16% to 100.6 in the month to May 2014 driven by improved weather conditions. This is likely to slow down inflation in the June – July 2014 period in view of a lag effect.

Inflation Trend


We assess that the anticipation of the downtrend by investors caused a decline in yields across all tenors in the short-term end of the country’s debt market.

STIRs Decline across All Tenors


Yields for the 91 Day, 182 Day and 364 Day instruments shed thirty three, forty three and fifty seven bps, month-on-month, to close June 2014 at 5.0%, 5.6% and 6.5% respectively. Investor appetite for the instruments remained subdued through the month with the 91 Day auctions of June 05th, 12th and 19th recording bid-to-cover ratios of 1.0, 1.0 and 1.8 respectively.

Monetary Policy: Further Loosening

Bank of Rwanda slashed its key repo rate by 50 bps to 6.5% aimed at easing credit access to stimulate growth of the private sector. The bank reports that in the first five months of 2014, new authorized loans grew by 46% to USD 398 million, compared to a 13.7% contraction in the same period in 2013.

Key Repo


We foresee increased liquidity in the money market following the slashing of the key repo rate. This will be driven by loosening of money supply and increasing access to credit by commercial banks. Liquidity in the market has been stable in the last few months with the interbank rate closing June 2014 at 5.69% compared to 5.65% in April 2014.

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

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No

v-1

3

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May

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6.0%

7.0%

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9.0%

Jan

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Jan

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Feb

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Mar

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Mar

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Ap

r-1

4

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May

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Jun

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91 Day 182 Day 364 Day

6.0%

6.2%

6.4%

6.6%

6.8%

7.0%

7.2%

7.4%

7.6%Ja

n-1

2

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

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Ap

r-1

4

25


Rwanda Stock Exchange (RSE) All Share Index


The exchange recorded marginally better performance in June 2014 compared to May 2014 with the All Share Index gaining 10.9% and 0.7% on a year-on-year and month-on-month basis respectively to close at 146.2.

RSE All Share Index June 2014


We observe that this has been driven by positive investor sentiments with Bralirwa unveiling a new automated soft-drinks production line that is expected to scale up the company’s production capacity from 2,400 to 42,000 bottles per hour. The counter dominated activity at the exchange, accounting for about 72% of turnover in June 2014.

Bralirwa Share Performance


136

138

140

142

144

146

148

150

30

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13

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b-1

4

27

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b-1

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13

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24

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8-M

ay-1

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19

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23

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Mill

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Volume - RHS Price

26

ETHIOPIA MARKET UPDATE

27

POLITICAL OUTLOOK

Respite on Grand Renaissance Dam

Strained relations between Ethiopia and Egypt over the construction of the Grand Renaissance Dam may ease going forward. This follows the inauguration of Abdel Fattah el Sisi as President of Egypt on June 08th, 2014, who has promised to steer the two nations’ relations off the confrontational path. The new Egyptian President has stressed the need for strengthening ties between the two countries citing resourceful historical and bilateral relations.

The early part of 2014 was characterized by deteriorating relations between the two states as Egypt opposed the construction of the dam citing disruption of River Nile’s flow. Co-operation between Egypt and Ethiopia is vital to a stable political and investment climate in the Nile Basin Region. Our focus going forward will be on the agreements arrived at, as both parties pledge to commit to dialogue.


Private banking players in Ethiopia have appealed to the National Bank of Ethiopia to review its directive compelling them to purchase treasury bonds. The Ethiopian Bankers Association says the directive is straining lending capacity of banks, slowing down growth of private sector enterprise. The Association claims that since the enforcement of the directive, loans to private sector have declined by 11% (2009 – 2014). As at May 2014, purchase of government securities accounted for 27% of Ethiopia’s commercial banks’ loan volumes compared to 21.8% in Kenya (March 2014). We expect unwillingness by government to review the directive to constrain private sector growth. The 2011/12 Global Competitiveness Report ranked difficulty in accessing credit as the greatest obstacle to private sector growth in Ethiopia in 2011. There is need to identify alternative sources to fund government deficits without constraining private sector growth.

ECONOMIC OUTLOOK

Budget 2014/15: Concluding the Agenda

The Ministry of Finance and Economic Development (MoFED) tabled the annual budget with a marginal drop in the country’s allocation to capital expenditure from 40.39% in 2013/14 to 39.18% in 2014/15. We believe this is driven by the near conclusion of the Growth and Transformation Plan (GTP) 2010 - 2015, whose focus has been on upgrading infrastructure in the country. The government pegs the implementation of the budget on a projected GDP growth of 11%. We, however, believe projections of between 7% and 8% would be more within reach as the GTP period draws to an end. The private sector involvement in the economy needs to increase, to spur additional growth. Since 2000, Ethiopia has posted robust economic growth driven by high public spending as the nation sought to upgrade infrastructure and become more competitive as a choice regional investment destination.

Federal Budget (USD Blns)

Source: MoFED, StratLink Africa

In the short to medium term, decreasing government expenditure as a proportion of the total budget while the GTP concludes, is likely slow down the country’s growth momentum. Our long-term view, however, is that Ethiopia will remain among the region’s fastest growing economies as it unlocks opportunities in economic liberalization and domestic consumption.

3.28 3.57

8.12

9.11

0

2

4

6

8

10

12

14

20

13

/14

20

14

/15

Capital Expenditure Total Budget

28

Government Expenditure vs GDP Growth

Source: IMF, Central Statistical Agency, StratLink Africa

Revenue Collection

The government’s performance in tax collection has been trending downwards in the recent past. MoFED8 reports that its revenue collection has dropped from 87% in 2012/13 to 71% in the first nine months of 2013/14, attributing the drop to gaps in tax administration in the country. We are of the view that ongoing tax reforms will enable the country to boost its revenue collection performance.

Tax to GDP Ratio (%) 1999 - 2013

Income Goods & services

International Trade

Ethiopia 3.70 2.42 4.82

Kenya 7.53 8.50 1.89

Uganda 3.30 6.89 1.13

Tanzania 3.54 6.23 1.12

EAC Average

4.79 7.21 1.38

Source: IMF, StratLink Africa

Whereas Ethiopia stands above peer economies in tax revenue collected from international trade, it falls below them in tax collected from income, goods and services.

8 Ministry of Finance and Economic Development

This points to gaps in compliance and administration, especially in income tax which is deemed more progressive and therefore creating room for growth in revenue collection performance.

Infrastructure: Quality vs Quantity

Ethiopian Railways Corporation (ERC) has compelled the China Railway Engineering Corporation to replace 5.6 km of the 34.24 km long Addis Ababa Light Rail Transit Project following disregard of standards stipulated by the project’s overseeing consulting firm. Upon completion (due in January 2015), the government expects trains to operate up to eighteen hours per day with a carriage capacity of 60,000 passengers per hour.

Coming in the wake of numerous infrastructure projects across the region, we believe Ethiopia is setting a laudable precedent with regard to quality assurance on mega development projects. This will be critical in staving off potentially large maintenance costs borne by tax payers in the years ahead.

EXCHANGE RATE MOVEMENT

Exchange Rate Trend Analysis


-4.86% -0.56%

18.80%

18.50%

16.90%

17.30%

16.10%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

16.0%

17.0%

18.0%

19.0%

20

10

20

11

20

12

20

13

20

14

(P)

Govt Expenditure,% of GDP

GDP Growth - RHS

19.1

19.2

19.3

19.4

19.5

19.6

19.7

20

-Jan

-14

3-F

eb

-14

17

-Fe

b-1

4

3-M

ar-1

4

17

-Mar

-14

31

-Mar

-14

14

-Ap

r-1

4

28

-Ap

r-1

4

12

-May

-14

26

-May

-14

9-J

un

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Ethiopian Birr has depreciated month-on-month basis

Ethiopian Birr has depreciated on a year on year basis

29

Birr Exhibits Bouts of Resilience

The Ethiopian Birr continues to experience interspersed resilience against major currencies. This is a marked departure from the past trend of steady depreciation. We assess that this trend is being driven by the near completion of the GTP that had occasioned massive importation of capital goods, thereby increasing demand for foreign currency. Going forward, we anticipate that the local unit will continue having periods of plateau and depreciation consistent with the slowly recovering balance of payments. MoFED projects that in 2014/15 the value of exports will grow by 20.5%, whereas that of imports will grow by 13.1%. The countries imports as a percentage of GDP have declined from a high of 31.4% in 2008 to 28.6% in 2013, whereas exports have grown from 11.6% to 14%9. This reflects improving balance of payments for the economy that should help strengthen the Birr going forward.

9 IMF Regional Outlook 2014

COMMODITIES EXCHANGE UPDATE

Declining Coffee Prices Dampen Outlook

We downgrade our bullish outlook on returns at the Ethiopian Commodities Exchange following the decline in global coffee prices in May 2014 after six consecutive months of an upward trend. The United States Department of Agriculture states that the impact of a drop in Brazil’s output may be cushioned, following a spell of rain, which if prolonged, may help mitigate the impact of the preceding dry spell. Global Coffee Prices (US Cents/Pound)

Source: ICO 2014, StratLink Africa

100.99

106.56 110.75

137.81

165.03

170.58

163.94

90

110

130

150

170

190

No

v-1

3

De

c-1

3

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

-4.05% month on month drop

in price

30

GABON MARKET UPDATE

31

POLITICAL OUTLOOK

2016 Election: The Politics of Dynasties

Anticipation of the 2016 election is shaping Gabon’s political terrain as the country’s opposition drives sentiment on ending the reign of the Bongo family. By 2016, the Bongo family will have been at the helm of the country’s leadership for forty nine years, with Alhaj Omar Bongo reigning as President from 1967 to 2009. He was thereafter succeeded by his son, Ali Omar Bongo. There are indications of strengthening opposition forces following the return of opposition party, National Union’s luminary, Andrea Mba Obame in August 2012 after fourteen months of self-imposed exile. It is expected that former Chairman of the African Union Commission, Jean Ping, will also contest for the Presidency.

Presently, the country’s political climate is stable with minimal risk of a deteriorating investment climate. However, noting that the fiercely contested 2009 election evoked violence in parts of the country, we will be keen to observe the political pulse as the 2016 election approaches.


Gabon has made strides in the Ease of Doing Business10 ranking, standing at position 163 in 2014 up from 170 in 2013 (out of 185 countries). The country is reported to have streamlined procedures of starting a business, cutting the time taken from 57 days in 2013 to 50 days in 2014. The country stands above its peer, Angola, which ranked at 170 up from 172 in 2013. The government is streamlining the business environment as it pursues economic diversification. Establishment of the Export and Investment Promotion Strategy in 2012 has been vital in spurring investment. Going forward, we expect efforts to improve the business climate to foster growth especially in the petroleum, manganese and timber industries.

10 World Bank’s

ECONOMIC OUTLOOK

Macroeconomic Environment Drives Growth

The economy of Gabon is projected to have grown by 5.9% in 201311, driven by a stable macroeconomic environment with inflation averaging at 0.4%12 and strong revenues from the country’s oil exports that fuelled public investment. We anticipate higher growth margins in the short to medium term, directly linked to the licensing of thirteen new oil blocks in October 2013 that are expected to double oil production to 500,000 barrels per day (bpd) upon full operation. In the long-term, growth will be pegged on the successful implementation of the economic diversification strategy.

Real GDP Growth Trends

Source: International Monetary Fund, StratLink Africa

Pursuing Economic Diversification

Efforts to diversify Gabon’s economy are being stepped up as the country faces the reality of a general decline in oil production in the long-term. Reports from USA Energy Information Administration indicate that oil production in the country has declined from a peak of 387,000 bpd in 1997 to 245,000 bpd in 2012. This trend has necessitated measures to diversify the economy for sustainable long-term growth.

11

International Monetary Fund 2014

12 Africa Development Bank 2014

6.20%

6.90%

5.50%

5.90%

8%

7.40%

6.60%

6.30%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

20

10

20

11

20

12

20

13

Gabon Nigeria

32

Oil as Percentage of Nominal GDP 2013

Source: IMF, Nigeria Government, StratLink Africa

Oil and petroleum products account for about 45% of GDP, 60% tax revenues and 80% of exports13. As such, Gabon is exposed to risks of over-reliance on oil including the volatility of global prices. The country’s structural rebalancing strategy targets harnessing potential in the country’s mining and manufacturing sectors.

We note, however, that since the adoption of the Trade Policy Review in 2007, the country has made significant strides towards economic diversification. The country’s growth of non-oil GDP accelerated between 2010 and 2011.

Real Non-Oil GDP Growth Trends

Source: IMF, Nigeria Government, StratLink Africa

13

United States Geological Survey 2012

Diversification: Leveraging on Agriculture

Gabon’s urbanization rate and per capita income levels point to a lucrative market for investment in the consumer goods sector. The country has one of Sub-Saharan Africa’s highest urbanization rates (at 85.6% versus Nigeria’s 50.2% in 2012) and a per capita income of USD 15,000 as at 2012. This translates to a potentially high domestic consumption economy with enormous opportunity for investors given the low inflation levels that serve the dual purpose of lowering the cost of doing business and lifting consumers’ purchasing power.

Gabon can learn from the United Arab Emirates (UAE), which has progressively diversified its economy by tapping into services and manufacturing sectors. Moving forward, we expect exploration of agriculture to be the next frontier for diversification. With the government’s target of increasing the sector’s contribution to GDP from 4% in 2013 to 15% by 2020, we are likely to witness increased investment in the sector.

UAE Economy: Dominant Sector Composition Time Series

Source: UAE Country Report 2013, StratLink Africa

14.40%

45%

0%

20%

40%

60%

80%

100%

Nig

eri

a

Gab

on

Others Oil

8.50% 8.80%

7.70% 7.90%

6.10%

12.20%

10.40%

9.10%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

20

10

20

11

20

12

20

13

Nigeria Gabon

68%

44%

22% 25%

1%

9%

12% 13%

9%

9%

14% 11%

22%

38%

52% 51%

0%

20%

40%

60%

80%

100%

19

75

19

95

19

98

20

12

Others Commerce and Tourism

Manufacturing Crude Oil

33

Fiscal Balance Outlook

In 2013, Gabon joined other Sub-Saharan countries with fiscal deficits as a result of declining oil revenues coupled with rising capital expenditure. This strengthens the need for economic diversification if the country were to maintain a favourable fiscal outlook. We, however, do not expect any negative impact on the investment climate as the country’s debt-to-GDP ratio stands at 22.9% against Sub-Saharan Africa’s 34% average.

Between 2009 and 2012, the country’s public expenditure grew by 70%, against an 80% growth in oil revenues, driven by growing capital expenditure14. The expenditure has risen on the back of the National Infrastructure Master-Plan 2011 – 2016, which targets investing USD 20 billion in upgrading the country’s infrastructure, designating 30% for roads.

Fiscal Balance (Including Grants), % of GDP

Source: IMF 2014, StratLink Africa

14

IMF Country Assessment 2013

Current Account Outlook

We believe Gabon’s current account surplus, will prevail in the short-term buoyed by oil revenues. Moving forward, however, a reversal in this trend is likely as the country’s oil production falls on the back of declining reserves. In 2013 global crude oil prices dropped marginally to USD 104 per barrel from USD 105 in 2012. World Bank projects further decline to USD 100 per barrel by 2015.

Current Account Analysis

Source: BMI, StratLink Africa

Gabon’s current account balance is set to deteriorate in the coming years based on the trends in balance of trade payments. Exports of goods and services, as a percentage of GDP, have declined from 58% in 2005 to 55% in 2013. On the other hand, imports of goods and services have grown from 25.3% to 33% in the same period15.

Efforts towards diversifying the economy to plug in new sources of revenue will be vital in determining the long term trend of the current account balance. Presently, there are no considerable risks that could paint a bleak picture on the investment climate.

15

IMF Regional Outlook 2014

2.40%

1.50%

-2.30%

-2.60%

0.80%

-1.80% -1.80% -1.80%

-3%

-2%

-1%

0%

1%

2%

3%

20

11

20

12

20

13

20

14

(P)

Gabon Nigeria

1.4

1.7

1.5

1.1

0.5

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

20

10

20

11

20

12

20

13

20

14

(P)

Current Account Surplus (USD Blns)

Current Account Surplus (% of GDP) - RHS

34

StratLink-Africa Team

Konstantin Makarov – Managing Director

[email protected]

Dina Farfel – Partner

[email protected]

Zoravar S. Dhaliwal – Senior Consultant

[email protected]

Poonam Vora - Associate

[email protected]

Henry Chege – Senior Analyst

[email protected]

Samuel Odero - Analyst

[email protected]

Julians Amboko – Analyst

[email protected]

Alex Gachuiri – Analyst

[email protected]

mailto:[email protected]








35

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