20151130 december africa market update

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


Table of Contents


DECEMBER 2015 | MARKET UPDATE – AFRICA www.stratlinkglobal.com

KENYA

TANZANIA

ZAMBIA

GHANA

UGANDA

RWANDA

3DECEMBER 2015 | MARKET UPDATE – AFRICA www.stratlinkglobal.com


Africa Global Business Forum 2015: Key Highlights

StratLink Africa Ltd attended the 2015 Africa Global Business Forum, organized by the Dubai Chamber of Commerce, which converged key public and private sector players from Africa as well as investors from across the globe. Key issues discussed during the forum were:

• Is Africa Ready to Drive Global Growth?

Whereas the general sentiment was bullish on Africa’s growth trajectory, the slump in commodity prices was identified as a major risk in the near term with economies such as Nigeria, Zambia and South Africa punching below their growth potential

• Pan-African Business: Becoming a Reality?

There was enormous optimism on Africa’s ability to exploit the potential of untapped intra-regional trade to create new opportunities and bolster growth. Investors decried both tariff and non-tariff barriers to trade including stringent visa requirements that negate the spirit of Pan-African business

• New Growth Drivers: Leveraging Islamic Finance

It was observed that Africa’s low savings rate (an estimated 15.0% savings-to-GDP ratio compared to China’s 40.0%) presented an impediment to financing growth. In this regard, players in Islamic/Shariah compliant space identified the continent as one of immense opportunity for expansion

Note: Dubai Islamic Bank indicated it should be setting up shop in Kenya before the end of 2015, and Mozambique thereafter, as it consolidates its presence in Africa

• Energy Infrastructure: Bullish Outlook

Investors expressed confidence in ongoing investment in energy infrastructure in Africa. Electricity outage was reported to cost the continent about 12.5% of production time against 7.0% in South East Asia and a major impediment to industry.

Note: Kenya is setting up the continent’s largest wind power scheme in Lake Turkana


CENTRAL BANK HOLDS RATE STEADY SIGNALLING CAUTION OVER MONETARY ENVIRONMENT

KENYA MARKET UPDATE

“We view Kenya as a market well primed for investment in food retail, alongside Nigeria, in the next five years...”

4



Global Trade Meeting Consolidates Kenya’s Position in Africa

Kenya will be the first African country to host the World Trade Organization (WTO) Ministerial Conference (December 15th – 18th 2015); a development that consolidates its strategic positioning in the continent. Coming against the backdrop of the July 2015 visit by United States President, Barrack Obama (and serving as the first country in Sub-Saharan Africa to host the Global Entrepreneurship Summit), the country is increasingly being viewed as gaining in geopolitical clout within the continent. The WTO meeting also comes at a time when Africa is pursuing ambitious targets on regional integration with the Tripartite Free Trade Area (TFTA) protocol having been signed in June 2015 in Egypt. This potentially anchors Kenya as a leader in fast-tracking the integration process especially given its position as East Africa’s largest economy.

Despite the strong scores registered by the country in 2015, allegations of pervasive corruption have undermined the domestic investment environment raising questions over the government’s commitment to address challenges derailing the business climate. This will be an area of key focus for investors in 2016.

POLITICAL OUTLOOK

Source: Brookings Institute, StratLink Africa

Market Primed for Food Retail Investment Focus

We view Kenya as a market well primed for investment in food retail, alongside Nigeria, in the next five years given two factors:

• Strong growth in food consumption

Kenya has posted comparatively strong growth in food consumption driven by rising income levels. Food consumption per capita in Kenya grew by 3.8% (CAGR) between 2006 and 2014 to USD 312.8 against Ghana’s 2.0% contraction to USD 450.3. Nigeria, on the other hand, has posted 9.6% growth in the same period to USD 356.2.

• Well Established Formal Retail Segment

Whereas Nigeria has faster growth in food consumption per capita than Kenya, the latter holds an advantage given a more robust formal retail market. Kenya is reported to have Africa’s second largest formal retail market with an estimated 30.0% of retail transactions carried out in formal outfits, behind South Africa’s 60.0%1.

Source: Business Monitor International, StratLink Africa

BUSINESS ENVIRONMENT

TFTA Quick Facts

Domestic Environment Undermined by Corruption

Number of Countries: Population Size:GDP Size: (58.0% of Africa’s GDP)

Food Consmption per Capita (USD)

KENYA

1 Citi Group 2012

GDP: USD 56.3 Bln | Population: 45.5 Mln

0.0100.0200.0300.0400.0500.0600.0700.0800.0

2006

2007

2008

2009

2010

2011

2012

2013

2014

Kenya Ghana Nigeria

26

632.0Mln

~ USD 1.0 Trln



Source: Bloomberg, StratLink Africa


Money Supply Growth

Kenya Shilling to USD

KENYA

2 Central Bank of Kenya November 17th, 20153 Bloomberg November 2015

Local Unit Shows Resilience but Remains below Psychological Mark

Foreign exchange risk remains one of the key areas of focus for investors despite stability by the shilling between October and November 2015. The local unit still stands below the 100.0 units of exchange psychological mark and we expect this to remain a major source of concern for foreign investors.

Some of the largest day-on-day declines by the Nairobi Securities Exchange 20 Share Index in 2015 were reported in July 2015 when the shilling breached the 100.0 mark to the greenback ─ on July 08th, 2015, the index tanked by 1.1% day-on-day after the shilling crossed the 100.0 to the USD mark the previous day. We therefore anticipate enormous focus by investors on the likelihood of the shilling clawing back ground to exchange at rates stronger than 100.0.

Monetary Benchmark Rate Retention: Less of Confidence, More of Caution

Central Bank retained the monetary policy rate at 11.5%2 in what we assess is more an indication of caution over benign monetary pressures than confidence in a potentially improving climate. Whilst the shilling has exhibited marked resilience between October and November 2015, the uptick in inflation is bound to keep monetary conditions hawkish especially in the face of El Nino rains that are likely to nudge the food index upwards. The November 17th, 2015 United States Federal Reserve meeting also observed economic conditions that could favour a rate hike in the medium term (between Q4, 2015 and Q2, 2016). This is also likely to keep Kenya’s Central Bank hawkish going forward.

Money Supply Registers Slowest Growth in Two Years

We note, however, that year-on-year growth in money supply has been declining steadily suggesting transmission effect of monetary tightening. At 14.1%3, year-on-year, growth in September 2015, money supply reported the slowest expansion since January 2014 and bodes well for efforts to tame inflation in the near term.

ECONOMIC OUTLOOK


Inflation vs Monetary Policy Rate

0.0%

5.0%

10.0%

15.0%

20.0%

Feb-

10Au

g-10

Feb-

11Au

g-11

Feb-

12Au

g-12

Feb-

13Au

g-13

Feb-

14Au

g-14

Feb-

15Au

g-15

Infla�on Monetary Policy Rate

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov-

14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

June 2015: Central Bank hikes policy rate to 10.0%

100

90.092.094.096.098.0

100.0102.0104.0106.0

23-Ja

n-15

23-F

eb-1

523

-Mar

-15

23-A

pr-1

5

23-M

ay-1

5

23-Ju

n-15

23-Ju

l-15

23-A

ug-1

5

23-S

ep-1

5

23-O

ct-1

5

23-N

ov-1

5



The strengthening of the shilling is, however, likely to be undermined by rising liquidity in the money market. Net liquidity injection has grown steadily between August and October 2015 to stand at a total of USD 698.0 Mln as at the end of October 2015 from a net withdrawal of USD 11.8 Mln in August 2015.

NSE 20 Share Index Day-on-Day Change

Net Liquidity Injection/Withdrawal (USD)

Source: Bloomberg, StratLink AfricaSource: Bloomberg, StratLink Africa

Source: Central Bank of Kenya, StratLink Africa



91 Day T-Bill Bid-to-Cover Ratio

Auction Results October 26th, 2015

Bloomberg BVAL Curve

The normalization of yields has seen investor appetite in the debt market (notably in short-term papers) decline with the 91 Day T-Bill bid-to-cover ratio declining from 11.2 on November 05th, 2015 to 0.8 on November 19th, 2015.

High appetite has also been witnessed in the primary bonds market with the latest issuance reporting 157.4%.

KENYA

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

02-Ja

n-15

02-F

eb-1

502

-Mar

-15

02-A

pr-1

502

-May

-15

02-Ju

n-15

02-Ju

l-15

02-A

ug-1

5

02-S

ep-1

502

-Oct

-15

02-N

ov-1

5

-10.0

90.0

190.0

290.0

390.0

490.0

590.0

690.0

790.0

Aug-15 Sep-15 Oct-15

Mill

ions

The yield curve showed signs of correction in November 2015 following the inversion registered between September and October 2015. As indicated, liquidity has been on the rise in the market while the government has been under immense pressure to cut back on domestic borrowing.

Note: On October 27th, 2015, the government shelved the planned issue of the M-Akiba bond that targeted raising USD 48.9 Mln.

DEBT MARKET UPDATE

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

3M 1Y 3Y 5Y 8Y 10Y 20Y 30Y

Nov-23-2015 Oct-23-2015

0.0

2.0

4.0

6.0

8.0

10.0

12.0

03-Sep-15 03-Oct-15 03-Nov-15

Description Value

Amount Offered (USD Mln) 195.8

Performance Rate 157.4%

Tenor 1 Year

Amount Received (USD Mln) 308.1

Yield 22.9%



This normalization has also been witnessed in the interbank market with the rate declining from a high of 15.1% on October 21st, 2015 to 6.4% on November 20th, 2015 reflecting improved liquidity conditions in the money market.





Interbank Rate Corrects to Single Digits NSE 20 Share Index (M-o-M)

Banking Stocks Index

NSE 20 Share Index

The market experienced a mild rally driven by a rebound by banking stocks whose index edged upwards by 4.4% month-on-month as at November 23rd, 2015.

The sector’s rebound has been informed by two key factors:

• The sector has shrugged off the impact of the placement of Imperial Bank Ltd under receivership that jittered investors in October 2015 and saw the banking index report the largest day-on-day decline in 2015

KENYA

3.0%

8.0%

13.0%

18.0%

23.0%

28.0%

24-N

ov-1

424

-Dec

-14

24-Ja

n-15

24-F

eb-1

524

-Mar

-15

24-A

pr-1

524

-May

-15

24-Ju

n-15

24-Ju

l-15

24-A

ug-1

524

-Sep

-15

24-O

ct-1

5

EQUITY MARKET UPDATE

0.020.040.060.080.0100.0120.0140.0160.0180.0200.0

3,500.03,700.03,900.04,100.04,300.04,500.04,700.04,900.05,100.05,300.05,500.0

03-N

ov-1

4

03-Ja

n-15

03-M

ar-1

5

03-M

ay-1

5

03-Ju

l-15

03-S

ep-1

5

03-N

ov-1

5

Mill

ions

Volume (RHS) NSE 20 Share Index

NSE 20 Share Index change year-on-year

NSE 20 Share Index change month-on-month

-22.4%

1.6%

0.010.020.030.040.050.060.070.080.090.0100.0

3,800.0

3,850.0

3,900.0

3,950.0

4,000.0

4,050.0

19-O

ct-1

5

26-O

ct-1

5

2-No

v-15

9-No

v-15

16-N

ov-1

5

Mill

ions

Volume (RHS) NSE 20 Share Index

700.0

750.0

800.0

850.0

900.0

950.0

1,000.0

1,050.0

1,100.0

24-N

ov-1

4

24-Ja

n-15

24-M

ar-1

5

24-M

ay-1

5

24-Ju

l-15

24-S

ep-1

5

9NOVEMBER 2015 | MARKET UPDATE – AFRICA www.stratlinkglobal.com


Source: Bloomberg, StratLink Africa Source: Bloomberg, StratLink Africa

Banking Sector Index Day-on-Day Change Equity Bank Share Performance

KENYA

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

02-Ja

n-15

02-F

eb-1

5

02-M

ar-1

5

02-A

pr-1

5

02-M

ay-1

5

02-Ju

n-15

02-Ju

l-15

02-A

ug-1

5

02-S

ep-1

5

02-O

ct-1

5

02-N

ov-1

5

Oct 14th, 2015: Banking Index reports largest day on day decline in 2015

• Equity Bank Ltd posted bullish results with net profit growing 9.3% to USD 108.7 Mln as at September 30th, 2015. The share price appreciated marginally in the month to November 23rd, 2015, nudging north by 0.6%

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

36.0

41.0

46.0

51.0

56.0

3-No

v-14

3-Ja

n-15

3-M

ar-1

5

3-M

ay-1

5

3-Ju

l-15

3-Se

p-15

3-No

v-15

Mill

ions

Volume (RHS) Price


TANZANIA MARKET UPDATE

“Inefficiency at the port hinders trade and economic expansion not just for Tanzania but also, for neighbouring landlocked countries, who rely on the port’s services.”

NEW ADMINISTRATION EMBARKS ON FISCAL CONSOLIDATION

10




Inefficiency and Trade Barriers Undermine Dar Port

Inefficiency and trade barriers have increased the cost of doing business at the Port of Dar es Salaam, the second in East Africa after Mombasa, thus, losing potential business to competitors, particularly South Africa, due to concerns about delays, congestions and logistical bottlenecks. These trade barriers and logistical bottlenecks may be the reason Tanzania continues to trail peers in both the World Bank Trading Across Borders Index 2016 and 2015 World Bank’s Logistics Performance Index.

Logistics Comparison

Zanzibar: Teething Issue for New Administration

Despite a largely peaceful election in October 2015, Tanzania is still dealing with the political impasse that gripped Zanzibar since the annulment of the poll results following claims of irregularities by the opposition Civic United Front (CUF); a development that weighs down on Tanzania’s near-term political outlook. Zanzibar is set to go back to the ballot in three months’ time for a re-run, according to the Zambia Electoral Commission. How the new administration manages the Zanzibar question will be a key factor in determining Tanzania’s risk outlook going forward given that the island’s quest for greater autonomy is one of the key reasons behind the stalemated constitutional review process.

The new administration should also take cognizance of the fact that the 2015 polls reflect a stronger and more united opposition than previous polls, as witnessed in the decline in share of presidential votes cast for the ruling party, CCM. The opposition garnered 41.5% of the total votes cast compared to 37.2% garnered in 2010, reflecting a growing opposition, but not yet strong enough to ouster the ruling CCM.

The inefficiency of the port hinders trade and economic expansion not just for Tanzania but also, for neighbouring landlocked countries, who rely on the port’s services. The extra cost occasioned by inefficiency of the port of Dar es Salaam is estimated to be equivalent to a trade barrier tariff of 21.7% on container imports and 22.8% on exports.

Total additional costs (USD per tonne) - Relative to Port of Mombasa

POLITICAL OUTLOOK BUSINESS ENVIRONMENT

Tanzania Presidential Election Results,%

Source: Electoral Commission, StratLink Africa

Source: World Bank, StratLink Africa

Source: World Bank (2013), StratLink Africa

TANZANIA

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

100.0%

2000 2005 2010 2015

CCM Opposi�on

Time to Cost to Rank Export (Hrs) Export (USD) (Out of 189)

Bulk Container

Tanzania 96 1,160 180

Direct Monetary Cost 11.4 16.2

Direct Monetary Cost 7.9 13.9

Local Imports

Exports

Rwanda 97 183 156

Cost of Storage in the Port 0 5.4

Cost of Storage in the Port 0 5.4

Uganda 77 287 128

Tariff Equivalent (Total) 5.2% 21.7%

Tariff Equivalent (Total) 4.9% 22.8%

Ethiopia 57 144 166

Cost of Waiting at Anchorage 8.6 57.0

Cost of Waiting at Anchorage 8.6 57.0

Kenya 21 143 131

Inventory Cost 3.4% 15.9%

Inventory Cost 3.4% 15.9%



New Administration Pursues Fiscal Consolidation

The decision to suspend foreign travel for public officials sends an indication of fiscal consolidation as one of the key anchors of the new administration. This comes on the back of hitches in disbursement of development partners’ budgetary assistance as well as a drop in domestic revenue mobilization. The Revenue Authority collected USD 1,749.8 Million between July and October 2015, representing 97.5% performance rate; attributable to the depressed global mineral prices given that minerals form the bulk of Tanzania’s exports at 32.6% of total exports4.

Eased Monetary Pressure

The new administration has, however, been afforded a breather by a more stable shilling. The local unit, which has depreciated by 24.6% year-on-year owing to the enormous pressure from the country’s deteriorating current account balance, received respite from the narrowing balance of payment which declined to a deficit of USD 213.1 Million compared with a deficit of USD 267.8 Million in the year ending September 2015 on the back of an improved current account balance, which narrowed by 13.6% to a deficit of USD 4,237.7 Million from the corresponding period in 2014.

Current Account Balance (USD, Mln)

Source: Bank of Tanzania, StratLink Africa

1 The Guardian, November 12th , 20152 World Bank3 The Citizen, November 12th , 2015

4 OEC Tanzania, 20135 As at November 19th, 2015

TANZANIA

Tanzania, similarly, trails regional peers with regard to logistics ranking.

Country Tanzania Ethiopia Rwanda Kenya

2.33 2.59 2.76 2.81

138 104 80 74

1 -Least Score 5 -Highest Score

Score (Out of 5)

Rank (Out of 160)

Source: World Bank, StratLink Africa

Modernisation of the Port to Increase Efficiency

The Tanzania Ports Authority (TPA) has embarked on various projects including a 24-hour service at the port; electronic payment system, safety and efficiency improvement on loading and offloading of cargo, in a bid to increase efficiency in service delivery at the port1. Estimates indicate that modernisation of the port to efficiency comparable to the port of Mombasa could generate approximately USD 1.7 billion of additional revenues per year to the Tanzanian economy, and about USD 800 million to regional economies2. In addition, the construction of 1,344.0 kilometres of a railway line to connect Angola, Lusaka and Lubumbashi would provide these countries with an alternative to the port of Dar es Salaam, prompting the need for Tanzania to revive the central railway line and enable it to carry cargo at the port; President Magufuli is scheduled to launch a USD 7.6 Billion standard gauge railway line before the end of the year3.

ECONOMIC OUTLOOK

-400.0

-200.0

0.0

200.0

400.0

600.0

800.0

1,000.0

Aug-15 Sep-15

Exports Imports Current Account Balance



Earlier in 2015, the Tanzania Shilling has been one of East Africa’s worst performing currencies and emerging stability gives the new administration a sense of relief from elevated monetary pressures.

The decline is attributable to favourable export revenue. The value of exports was reported at USD 9,374.7 Million in September 2015 compared with USD 8,595.0 Million in the corresponding period in 2014, on the back of improved performance from tourism receipts, manufactured goods and traditional exports.

Export Performance of Selected Goods & Services (Mln USD)

Tanzania Shilling to USD, year-on-year



Tanzania shilling appreciation month-on-month

1.9%

Despite relatively high liquidity, yields in the short-term market maintained the uptrend witnessed in October 2015. This could be the result of inflation expectations following the rise between September 2015 and October 2015 to 6.3%. Inflation now stands at its highest (year-to-date) and is likely to keep investors on the lookout for potential rise given the El Nino rains that are affecting parts of the region.

Note: The 91 Day T-Bill yield mimics inflation trends with a discernible lag that suggests investors aligning positions in view of inflation expectations.

T-Bill Yields

Inflation vs 91 Day T-Bill Yield



TANZANIA

100.0

600.0

1,100.0

1,600.0

2,100.0

2,600.0

Gold

Tour

ism

Man

ufac

ture

dgo

ods

Trad

i�on

al E

xpor

ts

2013 2014 2015

1,630.0

1,730.0

1,830.0

1,930.0

2,030.0

2,130.0

2,230.0

2,330.0

2,430.0

Nov-

14De

c-14

Jan-

15Fe

b-15

Mar

-15

Apr-1

5M

ay-1

5Ju

n-15

Jul-1

5Au

g-15

Sep-

15Oc

t-15

Nov-

15

DEBT MARKET UPDATE

6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%

Apr-1

4

Jun-

14

Aug-

14

Oct-1

4

Dec-

14

Feb-

15

Apr-1

5

Jun-

15

Aug-

15

Oct-1

5

91 Day 182 Day 364 Day

6.5%7.5%8.5%9.5%10.5%11.5%12.5%13.5%14.5%15.5%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Apr-1

4

Jun-

14

Aug-

14

Oct-1

4

Dec-

14

Feb-

15

Apr-1

5

Jun-

15

Aug-

15

Oct-1

5

91 Day t-Bill Yield Headline Infla�on (LHS)



Liquidity has improved in the money market with the interbank rate standing at 9.3% as at November 19th, 2015, down 460.0 bps month-on-month.

We note that bid-to-cover ratios for the 182 Day and the 364 Day papers have registered an increase, month-on-month, reflecting the rise in liquidity.

Interbank Rate vs Volumes

T-Bill Bid-to-Cover Ratios





Dar es Salaam Stock Exchange

Dar es Salaam Stock Exchange, month-on-month

All Share Index year-on-year change

All Share Index month-on-month change

Change in Interbank rate, month-on-month

-10.2%

-3.2%

-460.0 bps

TANZANIA

0

20,000

40,000

60,000

80,000

100,000

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%

21-A

pr-1

5

21-M

ay-1

5

21-Ju

n-15

21-Ju

l-15

21-A

ug-1

5

21-S

ep-1

5

21-O

ct-1

5

Volume (TZS Mln) Interbank Rate (LHS)

-0.3

0.2

0.7

1.2

1.7

2.2

2.7


Mar-15 Apr-15 May-15Jun-15 Jul-15 Aug-15Sep-15 Oct-15 Nov-15


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2,350.0

2,450.0

2,550.0

2,650.0

2,750.0

2,850.0

2,950.0

30-S

ep-1

4

30-N

ov-1

4

31-Ja

n-15

31-M

ar-1

5

31-M

ay-1

5

31-Ju

l-15

30-S

ep-1

5

Mill

ions

Volume (RHS) All Share Index

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2,300.0

2,320.0

2,340.0

2,360.0

2,380.0

2,400.0

2,420.0

2,440.0

16-O

ct-1

5

23-O

ct-1

5

30-O

ct-1

5

06-N

ov-1

5

13-N

ov-1

5

Thou

sand

s




The market maintained a bearish trend in November 2015 coming from a heated election environment that was pervaded by a sense of uncertainty amongst investors. With the country still in transition mood, we expect the downturn to persist as investors keep a hawk’s eye on policy direction indications from the new administration. However, sector indices registered fairly positive results in the period under review. The Industrial and Commercial Services indices reported marginal movements, defying the market downturn. On the other hand, the Banking index rose by 23.2% to 3,953.3 units, on the back of profitability reporting by banks. Kenya Commercial Bank registered a 10.0% increase in profit to USD 189.9 Million in the nine months ending September 2015.

Segment Indices

Source: Dar es Salaam Stock Exchange, StratLink Africa

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

IndustrialIndex

CommercialServices

Index

Banking Index

Oct-15 Nov-15


MARKET DOWNTURN RATTLES INVESTOR CONFIDENCE

ZAMBIA MARKET UPDATE

“Despite an adverse macroeconomic climate, Zambia is likely to remain one of Southern Africa’s investor destinations of choice in 2016.”

16



GDP: USD 27.1 Bln | Population: 15 Mln

Caught in an Era of Transition

Zambia’s recent history has been dominated by a sense of political transition and this is likely to be sustained through the September 2016 general election. The passing on of two seating presidents (Levy Mwanawasa, 2008 and Michael Sata, 2014) and Rupiah Banda’s one term stint as President have colluded to place the country in a near constant state of transition and investors will be keen to see how this evolves in 2016. For investors, the position on mining laws, as the government looks to boost revenue mobilization, is likely to be a key issue in 2016 given developments in 2015 that saw levies revised in January before reverting to the previous code following investor outcry in August1.

Tough Road Ahead for Patriotic Front

Patriotic Front’s wafer thin margin of victory in the January 2015 election (48.3% versus United Party for National Development’s 46.7%2) suggests the 2016 general election will be a heated race between the two parties. Patriotic Front’s standing is also likely to be weakened by the adverse economic environment that has elicited dissatisfaction from the public. In May 2015, the government lifted the wage freeze on public servants3 following threats from the Zambia Congress Trade Union to stage demonstrations over the same. This indicates that the state is growing cognizant of the economic realities faced by citizenry and its potential implication on state stability.

POLITICAL OUTLOOK

1 Bloomberg August 15th, 20152 Electoral Commission of Zambia3 Lusaka May 01st, 2015

Private Sector Credit 2014

Zambia Likely to Maintain Allure Despite Headwinds

Despite an adverse macroeconomic climate, Zambia is likely to remain one of Southern Africa’s investor destinations of choice in 2016. This is backed by the two considerations:

• South Africa’s Slump: South Africa is grappling with near economic recession creating a comparatively more uncertain environment in the medium term ─ the economy contracted by 1.3%, year-on-year, in Q2, 2015. Investors are therefore left with little option as far as investment destinations go.

• Revision of Mining Levies: The government’s reconsideration of new mining levies in August 2015 is likely to further strengthen investor confidence on the general policy outlook. This will, however, be subject to developments around the 2016 ballot and outcome


Source: UNCTAD 2014, StartLink Africa

ZAMBIA

Southern Africa 2014 FDI by Country

39.2%

33.6%

17.0%

3.7%

2.8%2.7%0.9%

South Africa Mozambique Zambia

Zimbabwe Namibia Botswana

Malawi



Kwacha’s Tumble Rattles Investor Confidence

We expect investors to remain cautious over the Zambian market in the wake of monetary uncertainty informed by foreign exchange fragility and the September 2015 spike in inflation. The swoon by the Kwacha (local currency) has sucked confidence out of the market with indications pointing towards high risk perception. The yield for Zambia’s ten year Eurobond has soared by 440.0 bps, year-to-date, to 11.4% compared to Kenya’s 200.0 bps to 8.0% and Nigeria’s 90.0 bps to 7.5%4, indicative of international investors’ higher risk perception towards Zambia than peer economies.

Ratings Downgrade Undermines Confidence

Investor confidence has been shaken by wild depreciation of the Kwacha notably in August and September 2015 during which the local unit reported the largest depreciation, month-on-month, in 2015. The September 25th, 2015 credit ratings downgrade by Moodys from B1 (Stable Outlook) to B2 (Negative Outlook)5 also undermined investor confidence further, potentially accelerating capital flight from the economy.

ECONOMIC OUTLOOK



Source: World Bank, EIU, StratLink Africa

Kwacha/USD Exchange Change (M-o-M)

Global Price of Copper (USD/MT)

Ten Year Eurobond Yields

ZAMBIA

Vulnerability to Volatility in Copper Prices

The Kwacha is likely to remain under pressure through Q1, 2016 given subdued prices for copper in the global market - Copper accounts for about 70.0% of the country’s export earnings6.

Latest available data shows a steady decline in gross international reserves between April 2014 and June 2015, suggesting depressed inflow of foreign currency into the economy. This explains the pressure build up on the local unit in the year-to-date which is likely to be sustained in the near-term.

4 As at November 10th, 20155 Moodys Investor Service September 25th, 2015

6 Bloomberg October 2015

4.5%5.5%6.5%7.5%8.5%9.5%

10.5%11.5%12.5%13.5%

12-N

ov-1

412

-Dec

-14

12-Ja

n-15

12-F

eb-1

512

-Mar

-15

12-A

pr-1

512

-May

-15

12-Ju

n-15

12-Ju

l-15

12-A

ug-1

512

-Sep

-15

12-O

ct-1

5

Zambia Kenya Nigeria

-40.0%

-35.0%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct-1

5

5,100.0

5,600.0

6,100.0

6,600.0

7,100.0

7,600.0Q

1,20

14

Q2,

2014

Q3,

2014

Q4,

2014

Q1,

2015

Q2,

2015

Q3,

201

5



Spill-overs from Kwacha Weakness Ripple through Economy

October 2015’s spike in inflation (from 7.7% in September 2015 to 14.3% in October 2015) was driven, in part, by the deterioration of the Kwacha that has occasioned a rise in the cost of imported commodities. This explains the 300.0 bps hike of the benchmark rate by Bank of Zambia in November 2015 to 15.5%7.

Other factors that are likely to have driven the spike in inflation are:

• Impact of energy crisis ─ The energy crisis and rationing of electricity has compelled a number of firms to rely on more expensive alternatives whose impact is being passed on to end consumers

• Surge in food prices ─ Food inflation galloped from 8.1% in September 2015 to 16.2% in October 20158, triggering the spike in overall price levels. This comes on the back of reports of adverse weather conditions that are likely to have impacted negatively on food production

Rising Cost of Foreign Currency Denominated Debt Undermines Fiscal Consolidation

The government has designated USD 529.2 Million for servicing domestic and external debt interest in 2016, representing a 35.8% increase, year-on-year. This compares with a 15.2% increase between 2014 and 20159 and is a likely reflection of the rising cost of servicing foreign currency denominated debt in view of the plunge by the Kwacha. Coming at a time when the government is engaging austerity measures (in August 2015, the government is reported to have stopped electricity tariff subsidies to large industry consumers10), high debt servicing costs undermine fiscal consolidation.

Fiscal Deficit as % of GDP


Source: Bloomberg, Central Bureau of Statistics, StratLink Africa

Source: International Monetary Fund, StratLink Africa

ZAMBIA

Gross International Reserves (USD)


2,500.0

2,700.0

2,900.0

3,100.0

3,300.0

3,500.0

3,700.0

3,900.0Ap

r-14

Jun-

14

Aug-

14

Oct-1

4

Dec-

14

Feb-

15

Apr-1

5

Jun-

15

Mill

ions

Decline in gross international reserves between April 2014 and June 2015

-27.2%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

Jul-1

4

Sep-

14

Nov-

14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Infla�onMonetary Policy RateFood Infla�on

7 Bloomberg

8 Central Bureau of Statistics 9 Pwc, KPMG Budget Highlights 2013/14, 2015/1610 ECOWAS Tribune August 14th, 2015

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%2009 2010 2011 2012 2013 2014 2015

(f)



Note: Nigeria’s yield curve has reflected a similar shape (hump) for the better part of 2015. This comes on the back of below target oil prices that have exerted fiscal and foreign exchange strain on the economy.

DEBT MARKET UPDATE

Interbank Rate vs Exchange Rate

Source: Bloomberg, Bank of Zambia, StratLink Africa

Zambia Yield Curve

Nigeria Yield Curve

Source: Bank of Zambia, StratLink Africa

Source: Bloomberg, Central Bank of Nigeria, StratLink Africa

Liquidity conditions have been tightening in the money market as Bank of Zambia looks to support the beleaguered Kwacha. Bank of Zambia’s 400.0 bps hike of the statutory reserve ratio to 18.0% effective April 08th, 201511 occasioned a steep rise in the interbank rate between March and May 2015.

Yields in the fixed income market have been on a general uptick in 2015 with a hump in the first half of the year in what can be ascribed to two key factors:

• Investor anticipation of general economic slowdown given mounting fiscal and foreign exchange risk from in view of depressed copper prices. This compels investors to demand a premium for the near term inflicting upward pressure on yields in the short-term end of the curve. Zambia’s economy is reported to have grown by 1.25% in Q1, 2015 indicating decelerated momentum from 1.5% in Q1, 201412. • Rising appetite for domestic borrowing by the

government notably through short-term papers. T-Bill sales have risen, year-on-year, by 35.8% in the first nine months of 2015 compared to a rise of 23.5% in the same period between 2013 and 2014. This is also likely to be an indicator of the fiscal challenges suffered in view of below target prices of copper and a subdued business environment that could be depressing tax remittance by corporates.

ZAMBIA

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

05-Ja

n-15

05-M

ar-1

5

05-M

ay-1

5

05-Ju

l-15

05-S

ep-1

5

05-N

ov-1

5

Interbank Rate (LHS) Kwacha/USD

Bank of Zambia hikes statutory reserve ratio by 400.0 bps to 18.0%

11 Reuters March 23rd, 201512 Daily Mail August 15th, 2015

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

3 M

nths

6 M

nths

1 Ye

ar

2 Ye

ar

3 Ye

ar

5 Ye

ar

7 Ye

ar

10 Y

ear

Jan-15 Jul-15 Sep-15

12.5%

13.5%

14.5%

15.5%

16.5%

17.5%

18.5%

1M 2M 3M 6M 9M 1Y 2Y 3Y 5Y 7Y 10Y

15Y

20Y

Feb-19-2015 Aug-10-2015

Sep-10-2015








Treasury Bills Sale (USD)

Growth (Y-o-Y) in Money in Circulation

LSE All Share Index change year-on-year

Banking and Manufacturing Indices

Lusaka Stock Exchange All Share Index

-

50.0

100.0

150.0

200.0Ja

n

Feb

Mar Ap

r

May Jun Jul

Aug

Sep

Mill

ions

2013 2014 2015

• Whereas inflation expectations are likely to have been tamed in the recent past, the recent spike in inflation could see a revision of investors’ perception of the monetary environment. This is also likely to be aggravated by the rise in growth of money supply that could feed into inflation pressure going forward. We expect that this is also nudging yields upwards in the debt market.

The stock market remains on a downtrend undermined by a number of factors:

• In January 2015, the government hiked the levy for open pit mines from 6.0% to 20.0% while that for underground operations was raised by 200.0 bps to 8.0% (Both have since been reviewed)13. The hikes derailed investor interest and threatened to slow down growth momentum given the importance of mining in the overall economy. This development also came on the back of political transition in the January 20th, 2015 polls, which we assess left many investors adopting cautious positions.

• Stocks for banking and manufacturing have been on a downtrend for the better part of the year. On the manufacturing front, we note that the ongoing energy crisis has occasioned negative impact on industry. Additionally, national electricity distributor, Zesco, is expected to hike its tariffs by as much as 248.0%14 and is likely to be see investors price in the anticipated impact of a potential rise in the cost of industry.

4.0%9.0%

14.0%19.0%24.0%29.0%34.0%

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

5,700.0

5,800.0

5,900.0

6,000.0

6,100.0

6,200.0

6,300.0

20-O

ct-1

4

20-D

ec-1

4

20-F

eb-1

5

20-A

pr-1

5

20-Ju

n-15

20-A

ug-1

5

20-O

ct-1

5

Mill

ions


Zambia hikes mining levies, dampening investor outlook

LSE All Share Index change year-on-year

LSE All Share Index change month-on-month

-6.2% -0.6%

0.050.0100.0150.0200.0250.0300.0350.0

5,750.0

5,760.0

5,770.0

5,780.0

5,790.0

5,800.0

9-Oc

t-15

16-O

ct-1

5

23-O

ct-1

5

30-O

ct-1

5

6-No

v-15

Thou

sand

s


49.0

49.5

50.0

50.5

51.0

51.5

52.0

52.5

53.0

01-Jan

-1501-

Feb-15

01-Ma

r-15

01-Ap

r-15

01-Ma

y-15

01-Jun

-1501-

Jul-15

01-Au

g-15

01-Sep

-1501-

Oct-1

501-

Nov-1

5

Banking Index Manutacturing Index (RHS)

16.016.517.017.518.018.519.0

13 www.mining.com 14 Bloomberg November 10th, 2015

ZAMBIA


STAGE SET FOR 2016 ELECTION: STATE OF ECONOMY LIKELY TO DOMINATE 2016 POLL

GHANA MARKET UPDATE

“Coming at a time when the country faces fiscal and foreign exchange strain as well as an impending election, oversubscription of the Eurobond, albeit being low by historical trends, provides the much needed vote of confidence by investors.”

22



GDP: USD 48 Bln | Population: 26.8 Mln

Stage Set for 2016 Poll: State of Economy Likely to Dominate Election

Incumbent President, John Dramani Mahama, has been cleared to be the flag bearer of the National Democratic Congress (NDC) in the November 2016 poll. Mahama is set to face off with New Patriotic Party’s (NPP) Nana Akufo-Addo in a race that is expected to have the embattled state of the economy as the point of focus. The economy has slowed down during Mahama’s tenure, dragged by high inflation, foreign exchange pressures and fiscal imbalances. Real economic growth has declined from 8.8% in 2012 when he assumed office to 4.0% in 20141.

October 2015 Eurobond Buoys Investor Perception

100.0% oversubscription of the USD 1.0 Bln October 2015 Eurobond hints at favourable investor perception of the beleaguered economy; boding well for Ghana in 2016. Noting that economies such as Angola have been compelled to shelve plans to issue Eurobonds in 2015 owing to unfavourable economic climate, the performance rate of the fifteen year bond props the country’s standing in the perception of foreign investors.

Ghana’s Eurobond Issuance History

POLITICAL OUTLOOK

Real GDP Growth

1 Business Monitor International 2 Institute of Statistical, Social and Economic Research Ghana

GHANA

The ongoing energy crisis that has undermined productivity in the economy is also likely to stand out as a teething issue in the election. The economy is estimated to lose between USD 320.0 Mln and USD 924.0 Mln in lost productivity in 20152 as a result of load shedding. This has occasioned its impact in loss of jobs thereby creating a disenfranchised electorate.


Source: Media Reports, StratLink Africa

Source: Business Monitor International, StratLink Africa

The government is likely to capitalize on this performance to strengthen waned confidence on the state of the economy going forward. Coming at a time when the country faces fiscal and foreign exchange strain as well as an impending election, the oversubscription, albeit being low by historical trends, provides the much needed vote of confidence by investors.

Oversubscription Comes on the Back of Anticipated Rate Hike by USA Fed

The oversubscription also comes against the backdrop of a likely rate hike by the USA Federal Reserve and is a good indicator of sustained investor interest in the economy at a time when advanced economies are widely anticipated to offer lucrative returns in the near future.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Growth has slowed under Mahama

Issuance Oversubscription Yield

Oct-07 400.0% 8.5%

Sep-14 200.0% 8.1%

Aug-13 220.0% 7.9%

Oct-15 100.0% 10.2%



Cedi Shows Resilience Buoyed by Cocoa Board Loan

The Cedi has maintained resilience in October 2015 and November 2015. We attribute this trend to the receipt of USD 1.8 Bln in loan proceeds by the Cocoa Board in September 2015 that is likely to have occasioned massive inflow of the greenback into the economy.



GDP Growth

Cedi to USD Exchange

Source: National Statistical Service, StratLink Africa


Cedi depreciation year-on-year as at November 23rd, 2015

-18.8%

Central Bank Moves to Tame Inflation

Bank of Ghana hiked its benchmark rate by 100.0 bps on November 16th, 2015 to 26.0% taking the rate north by 800.0 bps year-to-date. This signals persisting fragility in the monetary environment with inflation having crept up to 17.4% as of October 2015. Pass through effects of the Cedi’s weakness against major currencies is likely to still be weighing in on inflation albeit having been diminished by resilience witnessed in the last two months.

Note: We maintain a cautious position on the investment climate given macroeconomic uncertainty, notably from a monetary standpoint.

Accelerated Growth in Q2 2015 Created Room for Tightening

We assess that the government has also been afforded headroom for more tightening given relatively strengthened acceleration of the economy in Q2, 2015. Economic growth in Q2 2015 stood 130.0 bps higher than the same period in 2014, suggesting the economy is weathering the potential drag of Q1 2015 tightening well.

ECONOMIC OUTLOOK

16.2%16.4%16.6%16.8%17.0%17.2%17.4%17.6%17.8%18.0%

15.5%16.5%17.5%18.5%19.5%20.5%21.5%22.5%23.5%24.5%

Nov-

14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Infla�on (RHS) Monetary Policy Rate

0.0%

5.0%

10.0%

15.0%

20.0%

Q22009

Q22010

Q22011

Q22012

Q22013

Q22014

Q22015

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

24-N

ov-1

4

24-Ja

n-15

24-M

ar-1

5

24-M

ay-1

5

24-Ju

l-15

24-S

ep-1

5

24-N

ov-1

5

GHANA



Yields have continued to decline on the short-term end of the market in what could be reflection of austerity measures being adopted by the government. The government is reported to have slashed the budget for agriculture by USD 10.5 Mln in November 20153; a move that could suggest decreasing need for domestic borrowing. Data from Bank of Ghana also indicates that the overall budget balance as a percentage of GDP stood at 1.1% in Q2, 2015 compared to 2.2% in the same period in 2014.

Note: The visit by IMF staff between October 21st and November 5th, 2015 emphasized need for restoring fiscal stability. Part of the focus is likely to have been on the comparatively high cost of short-term borrowing and the need to address the same.

Tightening Liquidity Could Send Yields Upward

We, however, expect yields to rise in near term driven by tightening liquidity conditions in the money market. The interbank rate has been on the uptick, edging closer to the 25.0% mark, reflecting the hike of the benchmark rate. Bank of Ghana is also likely to remain cautious over rising liquidity in the money market given the fragility of the Cedi

The 91 Day T-Bill yield has declined by 170.0 bps between January and November 2015 to 24.1% whilst that of the 182 Day has declined by 100.0 bps to 25.4%. Declining yields favour the country given the growth in short-term yields as a proportion of total domestic debt over between June 2014 and June 2015.

In the last one year, the stock of domestic debt has shifted away from the medium and long-term papers towards the short-term

DEBT MARKET UPDATE

Short-Term Yields

Domestic Debt Composition

Interbank Rate


Source: Bank of Ghana, StratLink Africa


23.5%24.0%24.5%25.0%25.5%26.0%26.5%27.0%

02-Ja

n-15

02-F

eb-1

502

-Mar

-15

02-A

pr-1

502

-May

-15

02-Ju

n-15

02-Ju

l-15

02-A

ug-1

5

02-S

ep-1

502

-Oct

-15

02-N

ov-1

5

91 Day 182 Day

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

100.0%

2014 2015

Short-Term Medium-Term Long-Term

3 Ghanaweb.com

24.8%

24.9%

25.0%

25.1%

25-A

ug-1

5

08-S

ep-1

5

22-S

ep-1

5

06-O

ct-1

5

20-O

ct-1

5

03-N

ov-1

5

17-N

ov-1

5

GHANA




Stock Exchange Composite Index

Ecobank Ghana Share Performance0.0500.01,000.01,500.02,000.02,500.03,000.03,500.04,000.04,500.05,000.0

1,900.0

2,000.0

2,100.0

2,200.0

2,300.0

2,400.0

2,500.0

03-N

ov-1

4

03-Ja

n-15

03-M

ar-1

5

03-M

ay-1

5

03-Ju

l-15

03-S

ep-1

5

03-N

ov-1

5

Thou

sand

s

Volume (RHS) Ghana Composite Index

Source: Ghana Stock Exchange (M-o-M)



Ghana Composite Index Month-on-Month Change

-0.7%

The stock market experienced a mild bull run towards the end of October 2015 on the back of favourable performance by Ecobank Transnational Inc. which reported USD 398.0 Mln pre-tax profit in the nine months to September 2015, posting a marginal 2.0% decline from the same period a year earlier. The market, however, remains depressed by the strained economic environment which we assess has occasioned an exit by foreign investors. In the near term, declining yields in the short-term fixed income papers could see the composite index hold resilient.

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

1,960.0

1,970.0

1,980.0

1,990.0

2,000.0

2,010.0

2,020.0

23-O

ct-1

5

30-O

ct-1

5

06-N

ov-1

5

13-N

ov-1

5

20-N

ov-1

5

Thou

sand

s

Volume (RHS) Ghana Composite Index

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

6.5

7

7.5

8

8.5

9

9.5

31-O

ct-1

4

31-D

ec-1

4

28-F

eb-1

5

30-A

pr-1

5

30-Ju

n-15

31-A

ug-1

5

31-O

ct-1

5

Thou

sand

s

Volume (RHS) Share Price (Cedi)

GHANA


PERSISTENT RISE IN INFLATION SIGNALS MONETARY PRESSURE

UGANDA MARKET UPDATE

“The plunge in global oil prices threatens to derail the economy which was banking on new found discoveries to bolster growth.”

27




Looming Elections as History Looks set to Repeat Itself

The race to the February 18th, 2016 Presidential poll is catching steam in what looks to be a three-horse race involving President Museveni, Amama Mbabazi and Kizza Besigye. Incidences indicative of efforts to intimidate the opposition continue to evoke concern over the near term outlook. We are of the view that the focus has shifted from whether President Museveni will win the election to whether it will be a credible and peaceful process.

Probable Alliance between Mbabazi and Besigye

Although Mbabazi and Besigye failed to agree to a joint candidate, both camps are still hopeful some form of collaboration will be agreed upon and implemented before the elections following recent talks in London between the two opposition luminaries1. Museveni is set to benefit from NRM’s entrenched advantage of incumbency and the historically fractured opposition.

Policy Focus beyond February 2016

Foreign investors are likely to focus on two issues in policy consideration with regard to Uganda beyond the 2016 poll:

• Oil Price Shock: With 6.5 Bln barrels of proven oil reserves, Uganda is poised to become one of Africa’s key players in commercial oil production. With production earmarked for 2017, investors will be keen to see how the next administration aligns its policy in view of depressed prices

• Foreign Relations: President Museveni has lately raffled feathers with sections of development partners notably for his position on the anti-gay discussion in the country. Investors will be keen to see how this develops beyond the next election and whether Uganda warms up deteriorated relations

Decline in Oil Revenues Heralds FDI Slowdown

Crude oil prices have experienced a protracted decline since mid-2014, in part reflecting lower growth in global demand, a development that may undermine Foreign Direct Investment (FDI) inflows to the oil sector. A decline in FDI inflows may aggravate exchange rate depreciation pressures in view of Uganda’s fragile current account position with oil constituting about 20.0% of Uganda’s import bill of USD 5.76 Billion (2013)2.


Source: UNCTAD, Business Monitor International, StratLink Africa

1 BMI October 29th , 2015

Note: Uganda had the largest share of FDI as a ratio of GDP in 2014, in relation to comparator economies at 4.5%; Kenya had 1.1%; Tanzania at 4.3% and Rwanda at 2.2% .

The plunge in global oil prices threatens to derail the economy which was banking on new found discoveries to bolster growth. As reported in our previous updates, exploration companies such as Tullow Oil are reported to have slashed their budgets in view of subdued prices.

Crude oil prices are projected to average USD 60.0 and USD 70.0 per Barrel in 2015 and 2016, respectively.

2 FOEC Uganda 3 The East Africa, May 25th , 2015

FDI Inflow vs GDP Growth

3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%11.0%12.0%

-

200.0

400.0

600.0

800.0

1 000.0

1 200.0

1 400.0

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

FDI Inflow (USD Mln) GDP Growth (RHS)

UGANDA



Falling Export Revenue as Inflation Worries Persist

Uganda’s economic outlook is deteriorating in view of rising inflation, declining export revenue and uncertainty about elections. The economy is also facing fiscal pressures from falling export revenue which is expected to decline by USD 200.0 million following a decline in global commodity prices4. This threatens fiscal challenges for the economy in the year ahead. Total export earnings are projected to stand at USD 2.4 billion in 2015 down from USD 2.7 in 2014.

Note: IMF has revised the country’s economic growth forecast for 2015/16 to 5.0% from 5.8%, reflecting growing risks.

No Reprieve in the near-term as Inflation Spikes Further

Reduced supply of food crops and increasing electricity tariffs have accelerated the annual headline inflation to 8.8% in October 2015 compared to the 7.2% that was recorded for the year ended September 2015. Annual food crops inflation almost doubled to 20.2% in the period under review compared to the 10.2% increase recorded in September 2015. Energy, fuel and utilities inflation also rose to 11.9% compared to the 3.8% registered a year earlier, on the back of increasing electricity tariffs.

tax to GDP ratio, is about 13.0% - 14.0%5. Nonetheless, available data indicates that between July and September 2015 Rwanda Revenue Authority reported 117.6% performance rate6 to USD 720.5 Million up from USD 612.8 Million in the period under review, a year earlier.

Improved Domestic Revenue Receipts

Lurking risks notwithstanding, reprieve for Uganda’s fiscal position in the medium-term is anchored in the country’s ability to enhance tax revenue. In 2014, tax ratio to GDP stood at 12.7% which we note is comparatively low by regional standards - Rwanda’s

Revenue Raised vs Targeted, (USD)

Annual Headline Inflation

Source: Uganda Bureau of Statistics, StratLink Africa

Source: Uganda Revenue Authority, StratLink Africa

4 State of Economy Report September 2015 5 World Bank, International Monetary Fund6 Bloomberg News November 9th , 2015

Notably, taxes on international trade over performed by USD 2.9 Million, in part reflecting the positive impact of exchange rate depreciation.

ECONOMIC OUTLOOK

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

Oct-1

3

Dec-

13

Feb-

14

Apr-1

4

Jun-

14

Aug-

14

Oct-1

4

Dec-

14

Feb-

15

Apr-1

5

Jun-

15

Aug-

15

130.00

180.00

230.00

280.00

330.00

380.00

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Mill

ions

Raised Target

UGANDA



Shilling Appreciates against the Greenback

The shilling maintained the appreciation streak against the greenback in November 2015 backed by monetary policy tightening and a comparatively weak greenback. The stabilising shilling may have informed the easing liquidity in view of the interbank rate movement. The interbank rate declined by 350.30 bps to 5.1% in October 2015.

The 91 Day, the 182 Day and the 364 Day, yields rose by 210.0, 190.0 and 140.0 bps to 18.8%, 19.6% and 19.1%, respectively, between September 2015 and October 2015. Liquidity could continue rising in the money market given the strengthening of the shilling that is likely to see Bank of Uganda’s soften its hawkish stance.

Note: The USA Federal Reserve is widely expected to hike its benchmark rate in December 2015 and this is likely to pile pressure on the shilling.

T-Bill Yields Rise on Risk Consideration

Yields continue to rise despite improving liquidity conditions in the money market in what we assess can be ascribed to two things:

• With elections set for early 2016, investors are likely to be pricing in risk considerations and demanding a premium. Sentiments of a growing opposition and patronizing state are likely to be fuelling investor uncertainty reflecting in the rising yields

• The surge in inflation to 8.8% in October 2015 has created an environment of diminished confidence in the policy responses aimed at mitigating monetary volatility. This has been further driven by the weakened shilling

DEBT MARKET UPDATE

Overall Interbank Rate

Shilling to USD, year-on-year

T-Bill Yields

Source: Bank of Uganda, StratLink Africa

Source: Bank of Uganda, StratLink Africa


Uganda shilling appreciation, month-on-month

+8.5%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

Feb-

14

Apr-1

4

Jun-

14

Aug-

14

Oct-1

4

Dec-

14

Feb-

15

Apr-1

5

Jun-

15

Aug-

15

Oct-1

5


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct-1

5

2,600.0

2,800.0

3,000.0

3,200.0

3,400.0

3,600.0

3,800.0

Nov-

14De

c-14

Jan-

15

Feb-

15M

ar-1

5

Apr-1

5M

ay-1

5

Jun-

15Ju

l-15

Aug-

15

Sep-

15Oc

t-15

Nov-

15

UGANDA




Uganda Securities Exchange All Share Index

1,700.01,750.01,800.01,850.01,900.01,950.02,000.02,050.02,100.02,150.0

24-O

ct-1

424

-Nov

-14

24-D

ec-1

424

-Jan-

1524

-Feb

-15

24-M

ar-1

524

-Apr

-15

24-M

ay-1

524

-Jun-

1524

-Jul-1

524

-Aug

-15

24-S

ep-1

524

-Oct

-15




-7.6%

-1.0%

The market maintained the bearish trends into November 2015 losing by 1.0% to close the month at 1,754.9 units. A key driver of this trend is likely to be the fixed income market with rising yields across all tenors between September and October compared to preceding months. This is likely to have occasioned flight by investors to the fixed income market. Another key factor could be the forthcoming election that is occasioning cautious optimism from investors on the direction of the market.

UGANDA


EYES ON FISCAL BALANCE AS TRADITIONAL EXPORTS POST MIXED PERFORMANCE

RWANDA MARKET UPDATE

“Rwanda is set to increase tax on importation of used leather shoes from the current 35.0% to 70.0% effective January 2016 in a bid to promote locally made leather products.”

32



Tax on Used Leather Products set to Rise as Rwanda looks to Protect Local Industries Rwanda is set to increase tax on importation of used leather shoes from the current 35.0% to 70.0% effective January 2016 in a bid to promote locally made leather products3. The government targets establishing local factories for tannery and other leather products as the country looks to reduce the import bill.


A Step Closer to the Constitutional Referendum

After the October 8th 2015 decision by the Supreme Court to dismiss the case challenging the lifting of term limits, President Kagame is a step closer to a third term following a unanimous approval of the referendum by both the senate and parliament. As previously reported, Kagame staying on for a third term presents short term investor assurance of policy conituinity which will further enhance the ease of doing business in Rwanda.

Economic Shocks Risk from Development Partners

Policy continuity assurance nothwithstanding, the biggest challenge stems from the potential strain in diplomatic relations. A section of the country’s develeopment partners have been vocal in criticisng Kagame’s likely bid for another term. The United States has threatened to review ties if the constitutional amendment process is successful1. Foreign development assistance makes up 35.6% of all government revenues2 and the anticipated dented donor enthusiasm elicits memories of the 2012/13 donor aid shock that stunted economic growth down to 4.6%.

The government is on a bold mission to arrest the export of raw hides and skins and import of costly leather products which has crippled domestic industry. Additionally, the government intends to reduce taxes on import of select raw materials.

Note: In March 2014, the government partnered with the government of Italy in establishing the Leather Processing Center. This suggests the government targets making the leather industry one of strategic significance going forward.


Source: National Bank of Rwanda, StratLink Africa

Source: Minsitry of Finance, World Bank, StratLink Africa

1 The Daily Nation November 19th, 20152 BMI

3 All Africa News November 25th , 2015

RWANDA

Key Sources of Development Assistance

Nine-Month Average Value (USD)

World Bank USA

Global Fund United Kingdom

Africa Development Bank Others

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Jan-Sept 2014 Jan-Sept 2015

Mill

ions

Imports of Ar�cles of Clothing

Exports of Hides & Skin



Fiscal Relief as Tea Export Revenue Surges 43.0%

Rwanda’s export revenue is set to receive a boost from increasing tea revenues which are reported to have surged 43.0%4 in the first nine months of 2015 owing to increased tea prices and volumes. Tea is among Rwanda’s top five exports constituting 8.7% of total exports. This comes as a major fiscal relief for the country which is shrugging off effects of the 2013/14 donor aid shock.

All the papers in the T-Bill market registered an increase in yields in October 2015. We note that unlike previous months, there has been a rise in domestic borrowing appetite exhibited by the increase by 58.1% to USD 63.7 million, month-on-month, as of October 2015.

The 91 Day paper, 182 Day paper and 364 Day paper yields increased by 13.0 bps, 106.0 bps and 3.0 bps to 4.1%, 5.6% and 6.7%, respectively, in October 2015.

The average tea export volumes increased to 20.2 Million kilogrammes in the first nine months of 2015 compared with 17.6 Million kilogrammes over the same period in 2014. In the same period, the average price per kilogramme rose to USD 2.9 from USD 2.3.

Note: IMF downgraded Rwanda’s economic growth to 6.0% in 2016, lower than the previously projected 7.0% driven, in part, by risks from depressed commodity.

Source: National Institute of Statistics of Rwanda, StratLink Africa

Rwanda’s Formal External Trade (USD Millions)

Monthly Exports for Tea, 2015

Amount Borrowed through T-Bills (USD Mln)



Minerals Underperform Expectations

The mining sector is confronting headwinds as indicated by plummeting value of exports between January –September, 2015 and over the same period a year earlier. Cassiterite, Coltan and Wolfram declined in value by 52.4%, 34.8% and 30.2% to USD 27.9 Million, USD 48.9 Million and USD 14.7 Million, respectively, between January and September, 20155. Furthermore, mining revenue, the highest earner of export revenue, is projected to decline by about 50.0% from the expected USD 290.0 Million in financial year 2016 compared with the USD 210.0 Million received in financial year 2015, according to the country’s ministry of finance.

Note: Rwanda’s revenue from minerals could be undermined by listing of the country under conflict-minerals list. We perceive this a key risk to the country’s fiscal position going forward.

4 Bloomberg News November 10th , 2015 5 National Bank of Rwanda

RWANDA

ECONOMIC OUTLOOK

(500.00)

(400.00)

(300.00)

(200.00)

(100.00)

-

100.00

200.00

300.00

400.00

500.00

600.00

Q1,

201

3

Q2,

201

3

Q3,

201

3

Q4,

201

3

Q1,

201

4

Q2,

201

4

Q3,

201

4

Q4,

201

4

Q1,

201

5

Q2,

201

5

Exports Imports Trade Balance

2.02.22.42.62.83.03.23.43.6

1.0

3.0

5.0

7.0

9.0

11.0

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Mill

ions

Tea Tea Price USD/Kg

DEBT MARKET UPDATE

35.0

45.0

55.0

65.0

75.0

85.0

95.0

105.0

Oct-1

4No

v-14

Dec-

14Ja

n-15

Feb-

15M

ar-1

5Ap

r-15

May

-15

Jun-

15Ju

l-15

Aug-

15Se

p-15

Oct-1

5



Franc depreciation, year-on-year



-8.7%

-1.0% -1.5%

Source: Bank of Rwanda, StratLink Africa




T-Bill Yields Rwanda Franc vs USD, year-on-year

Rwanda Stock Exchange All Share Index

Interbank Rate

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov-

14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15


Improving Liquidity Conditions

The interbank rate is reported to have closed October 2015 at 3.5%, 20.0bps lower than the previous month. Bank of Rwanda is likely to have been less aggressive in mopping liquidity in the money market than its regional peers owing to relative resilience by the Franc.

Improving Liquidity Conditions

The interbank rate is reported to have closed October 2015 at 3.5%, 20.0bps lower than the previous month. Bank of Rwanda is likely to have been less aggressive in mopping liquidity in the money market than its regional peers owing to relative resilience by the Franc.

Comparative stability notwithstanding, the Franc has been volatile lately depreciating by 8.1% year-on-year, as at 19th November, 2015.

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov-

14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

680.0690.0700.0710.0720.0730.0740.0750.0760.0770.0780.0

Nov-

14De

c-14

Jan-

15Fe

b-15

Mar

-15

Apr-1

5M

ay-1

5Ju

n-15

Jul-1

5Au

g-15

Sep-

15Oc

t-15

Nov-

15


120.0

125.0

130.0

135.0

140.0

145.0

150.0

155.0

160.0

165.0

Oct-1

4No

v-14

Dec-

14Ja

n-15

Feb-

15M

ar-1

5Ap

r-15

May

-15

Jun-

15Ju

l-15

Aug-

15Se

p-15

Oct-1

5



The market remains depressed despite posting comparatively better performance in November 2015 than the preceding month. The benign decline can be attributed to results posted by Bank of Kigali in Q3, 2015 and the nine month period to 30th September, 2015. The bank’s net income increased by 13.7% to USD 22.4 Million and 23.9% to USD 7.4 Million, in the nine months and Q3 2015, respectively. Consequently, the All Share Index declined by 1.5% month-on-month, in November 2015 compared with the 5.3% shed off a month earlier. Nonetheless, the share performance of Bralirwa, the largest counter by market capitalisation on the bourse, tanked by 16.7%, month-on-month, to close November 2015 at USD 0.4. The company is suffering from the high cost of production that is depressing its revenues ─ the company’s 2015 first half pre-tax profit declined by 25.0% to USD 7.0 million.

Bralirwa Share Performance Month-on-Month

190.0

200.0

210.0

220.0

230.0

240.0

250.0

Oct-1

5

Oct-1

5

Oct-1

5

Nov-

15

Nov-

15


Bralirwa share price month-on-month change

-16.7%



StratLink in the News

StratLink Africa Ltd continues to make commentary in the media on topical issues such as opportunities in emerging markets; intra-regional trade in Africa; ongoing elections in Africa and growing Sino-Africa ties.

Please click the buttons to view the full articles

Venture Burn ─ Three Ways Investors can Navigate Africa’s Mobile Markets: In this piece we take cognizance of the role cell phones are playing in revolutionizing fintech in Africa and offer insight into how investors can optimize on the development.

Quartz ─ Africa’s Commodities Slump is a Gold Mine for Investors: This article explores the opportunities engendered by the slump in global commodity prices which is widely viewed as a major risk to Africa’s outlook.

London School of Economics Business Review ─ As the Global Economy Slumps, Africa Countries Embrace Intra-regional Trade: This article takes a nascent assessment of how African economies are reaching for greater regional trade to mitigate shocks from the global economy.

Venture Burn ─ Why China’s New Position in Africa is good for Investors: I this piece, we explore evolving trends in Sino-African relations and discuss why the ties are good for investors.

Seeking Alpha ─ Why Emerging Markets still Make Great Investments: In 2015, emerging markets have widely been viewed with skepticism by investors. This piece looks into opportunities hidden in the present downturn.

CNBC Africa ─ Assessing Tanzania’s Electoral Cycle: In this interview, we discussed factors that were likely to shape Tanzania’s October 2015 election. In line with our assessment, the new administration has begun with fiscal consolidation.

http://www.stratlinkglobal.com/blog/assessing-tanzanias-electoral-cycle-2015/

http://blogs.lse.ac.uk/businessreview/2015/11/20/to-deal-with-slow-growth-african-countries-embrace-intra-regional-trade/

http://seekingalpha.com/article/3575846-opportunities-in-crisis-why-emerging-markets-still-make-great-investments

http://qz.com/529410/africas-commodities-slump-is-a-gold-mine-for-investors/

http://ventureburn.com/2015/11/3-ways-investors-can-navigate-africas-mobile-markets/

http://ventureburn.com/2015/11/3-ways-chinas-position-in-africa-is-good-news-for-other-foreign-investors/



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