africa market update - october 2016

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


Table of Contents

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OCTOBER 2016 | MARKET UPDATE – AFRICA

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NIGERIA 5

KENYA 6

TANZANIA 7

UGANDA 9

RWANDA 10

GABON 8

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


Capital Invested by Country (USD)

AFRICA DEALS LANDSCAPEJANUARY 2016 - SEPTEMBER 2016

1. South Africa2. Ethiopia3. Egypt4. Nigeria5. Morocco6. Congo7. Zambia8. Guinea9. Kenya10. Sudan11. Eritrea12. Ghana13. Burkina Faso14. Tanzania15. Rwanda

2.6 Billion 550.8 Million 537.3 Million 469.8 Million 413.0 Million 265.0 Million 226.7 Million 150.0 Million 104.7 Million

95.2 Million 65.0 Million 27.5 Million 25.4 Million 21.8 Million 20.5 Million

16. Sierra Leone17. Namibia18. Zimbabwe19. Mauritius20. Uganda21. Madagascar 22. Swaziland23. Botswana24. Niger25. Mozambique26. Liberia27. Mali28. Central African Republic29. Ivory Coast30. Malawi

20.0 Million 20.0 Million 12.1 Million 9.3 Million 8.5 Million 5.0 Million 1.5 Million 1.2 Million 1.2 Million

460,000 320,000 140,000 130,000

50,000 40,000

1

24

9

10

1216

13

20

2125

26

24

23

14

11

19

22

30

156

7

1718

8

27

2829

5

3

Source: PitchBook, StratLink Africa



Capital Invested by Sectors Capital Invested by Deal Type

Snapshot of Deals

• To Let (Niger) raised USD 1.2 Million of Series A venture funding from Frontier Digital Ventures on September 20th, 2016

• Marcel Golding acquired a 20.0% stake in Vunani Capital (South Africa) for USD 3.5 Million on September 19th, 2016

• Transcentury Ltd (Kenya) received USD 19.7 Million from Kuramo Capital on September 16th, 2016 through private placement

• Essar Exploration & Production (Nigeria) was acquired by Canadian Overseas Petroleum on for an undisclosed amount September 14th, 2016

• Gorutumu Mining (Mali) was acquired by Kodal Minerals for USD 140,000 on August 30th, 2016

• 1.48Mt Lithium Resource Assets (Ghana) was acquired by IronRidge Resources for an undisclosed amount on September 6th, 2016

Source: PitchBook, StratLink Africa

20.9%

8.7%

7.8%

4.0%

22.3%

15.1%

8.5%

5.2%

7.5%

4.6%Communications & Networking

3.3%Commercial Banks

15.3%Others

10.6%Commercial Services

9.4%Commercial Products

18.1%Capital Markets

2.1%Retail

Healthcare 1.9%

1.7%

Metals, Minerals & Mining 7.0%

Consumer Non-Durables

Consumer Durables

18.6% 22.3%

20.9%

15.1%

8.7%

8.5%

7.8%

5.2%

4.0%7.5%

Secondary Transaction - Private ........... Merger & Acquisition ...

PIPE ........................................................ Buy Out/LBO .................

Secondary Transaction - Open Market ... Corporate Divestiture ...

Add-On ..................................................... Growth/Expansion ........

Others ......................................................

7.4%Insurance



Agriculture Defies Recession Tide

Disaggregation economic performance in Q2 2016 by sectors reveals two key points for investors’ consideration:

• Agriculture was the best performing sector in Q2 2016 growing by 4.5% lending credence to StratLink’s assessment that investors ought to take cognizance of Nigeria’s diversification efforts which seek to steer the economy away from reliance on oil. We maintain the view that this sector is poised for enormous interest from both the public and private sector that will continue to drive its expansion in the medium term

Recession: Test for Buhari Administration

The recession has undermined confidence in the Buhari administration especially as many hold the view that the Central Bank’s monetary policy had a hand in accelerating the deterioration. The recession has eclipsed the much touted fiscal consolidation efforts and undermined confidence in the administration’s ability to steer the economy away from economic headwinds. Pulling the economy out of recession will be a key test for the government and determinant of perception, both domestically and externally, in the remaining part of the new administrations term in office.

POLITICAL OUTLOOK

GDP: USD 545.7 Bln | Population: 177.5 Mln

BUSINESS NEWS ENVIRONMENT

Source: National Bureau of Statistics, StratLink Africa

NIGERIA

Sector Growth Q2, 2016

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

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Government Targets Yield Hungry Investors

In our September 2016 Market Update, we argued against the possibility of Nigeria floating a Eurobond before the end of 2016. The Federal Government has since made public plans to raise up to USD 1.0 Billion through floating a Eurobond before the end of 2016. These development has been informed by the fact that the government is looking capitalize on relatively favourable global markets with the yields of sub-Saharan Africa Eurobonds having been on the downtrend over the last five months. This has made it favourable for commodity price shock afflicted economies to tap into the global capital markets to mitigate fiscal pressures. Nigeria is also looking to reap from yield hungry investors’ appetite in view of Ghana’s over-subscription in the August 2016 issuance in which it attracted orders to the tune of USD 4.0 Billion for a USD 750.0 Million issuance.

ECONOMIC OUTLOOK

Curve Inversion Signals Concerns over Short-term

The yield curve remained inverted through September 2016 pointing at a dimmed near-term expectation by investors as the economy faces a recession. Investors are also likely to have faced growing uncertainty as the Central Bank held its September 2016 policy meeting in a dilemma laden environment as the recession weighed in heavily for a dovish stance whilst concerns around the Naira, as indicated in the foregoing section, inclined it more towards further tightening.

DEBT MARKET UPDATE

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Uneasy Calm over Evolving Interest Rate Environment

The business environment is in a state of uneasy calm informed by uncertainty on the implications of the evolving monetary environment on the economy. The September 2016 slash in the monetary policy rate has scaled down the ceiling of commercial bank lending rates by 50.0 bps to 14.0%. A key trend to observe going forward will be commercial banks’ appetite for long-term instruments in the fixed income market attracting yields north of 14.0%

Political Factions Step Up Activity

We maintain a favourable outlook on the near term (six months) political risk outlook whilst adopting a more circumspect position over the medium-term (twelve months).

On the domestic front, two developments are worth consideration:

• It has been a bee hive of activity in the political scene with the two leading factions stepping up activity ahead of the 2017 general election. The launch of the Jubilee Alliance Party on September 10th, 2016 marks a bold step at consolidating the President’s political base at a time when the leading opposition faction, Coalition for Reforms and Democracy seems beleaguered by competing interests amongst its three principals. Both factions are set to face the litmus test of stability in the anticipated nominations of candidates.

• The vetting of Chief Justice (CJ) applicants has been concluded raising optimism of the appointment of a new CJ within October 2016, as targeted by the Judicial Service Commission. This adds on to the tailwind realized in reaching a deal of the exit of embattled commissioners to the electoral oversight body – IEBC. Both developments pave the way for institutional preparedness ahead of next general election

POLITICAL OUTLOOK



KENYA

Slow Growth in Credit Prompts Dovish Stance

Between June and July 2016, StratLink’s assessment of the economic environment, presented a two pronged view on the monetary landscape:

• Minimal room for fiscal expansion was bound to shift focus on monetary policy as the key tool in nudging growth forward. This notwithstanding, we held the view that the inflation fears were bound to keep the likelihood of rate slashes remote between Q3 and Q4 2016

• Additionally, we argued that emerging weakness of the shilling was a likely signal that foreign investors were in anticipation of a rate slash in the near term especially as speculation abounded of the unlikelihood of a USA Fed rate hike in September 2016

ECONOMIC OUTLOOK

Yields Decline across all Tenors

The yield curve registered a downtrend across all tenors as liquidity in the market rose from the episode of tightening witnessed over the last three months. The interbank rate averaged 3.5% in September 2016 compared to 4.9% and 5.8% in August and July, 2016, respectively. In the week ending September 16th, 2016, the Central boosted liquidity in the market by rolling over reverse repo maturities.

DEBT MARKET UPDATE

Market Subdued on Banking Law After-Effects

The market continued reeling from after-effects of investor reaction to the setting of caps on commercial bank lending rates with banking sector counters sustaining a bearish trend. In the month under review, the Central Bank issued clarification that banks are to use the monetary policy rate (CBR), and not the Kenya Bankers’ Reference Rate (KBRR), as the benchmark rate. The move helped allay the uncertainty that had dominated the industry in view of the law.

EQUITY MARKET UPDATE






Constrained Democratic Space amid Stalled Constitution Reform

We assume a cautious stance over Tanzania’s political risk outlook following the recently introduced Cybercrime Act (2015) which is reported to be occasioning a crackdown on web-based critics of the government. Approximately ten people have been charged with insulting the president on social media, leading to growing agitation for improved democratic space. Moreover, rallies that had been planned by the opposition by opposition were banned after allegations of police harassment in previous meetings. The postponement of the nationwide marches that were slated for September 1st 2016 served to defuse the political tension in the country, albeit briefly as the rallies were rescheduled to October 1st, 2016.

Tanzania Boosts Financial Inclusion

Tanzania was ranked top in sub-Saharan Africa and sixth globally for providing the most conducive environment for financial inclusion (Economics Intelligence Unit, 2015), attributable to deepening penetration through mobile-enabled platforms. However, there is still a gap in terms of financial inclusion, despite various initiatives hitherto deployed by public and private sectors. By 2012, only 17.0% of adult population (about 3.7 million) had access to bank accounts. However, leveraging on mobile telephony technology with about 30 Million subscribers has significantly enabled nearly 40.0% of the adult population to have active mobile payment accounts by 20141. However, in a bid to boost financial inclusion levels, Tanzania, in partnership with International Telecommunication Union (ITU), has pioneered a vibrant digital financial services system (interoperability)2 which enables mobile money subscribers to transfer and receive money from multiple sources including bank accounts safely and cost-effectively.

POLITICAL OUTLOOK


TANZANIA

Enduring Tight Liquidity Constricts Lending

Tight monetary conditions are hindering commercial banks’ ability to lend, thus, constricting credit supply in the economy. The pace of growth of broad money supply slowed albeit, moderately to 12.5 % in the year ending June 2016 compared with 13.1% registered in the corresponding period in 2015. The deceleration was largely a result of contraction of credit to private sector which recorded year-on-year growth of 19.1% compared with 21.0 percent³ recorded over the same period a year ago.

ECONOMIC OUTLOOK

Yields Decline on Relative Liquidity

Yields in the T-Bill market decreased marginally in September 2016 on the back of a relative rise in liquidity. The interbank rate declined by 110.0 bps month-on-month, to average 16.1% in September 2016. Nonetheless investor appetite is picking up with auctions witnessing over-subscription, save for the 91 Day bill auction which recorded a paltry 0.7% subscription, in the period under review.

DEBT MARKET UPDATE


Bourse Remains Bullish

The market has remained bearish with investors keen to observe how the requirement, in accordance with the Electronic and Postal Communication Act (2010) to have telecommunication companies list at least 25.0% of their assets at the exchange will impact the market going forward. This provision targets boosting transparency with the entities while raising the government’s revenue mobilization prospects.





Favourable Outlook despite of Post-Election Violence

The aftermath of the August 27th, 2016 general election was marred with violence in parts of the country following rejection of the official outcome, which declared President Bongo re-elected, by a section of the opposition. This notwithstanding, we remain optimistic about the country’s long-term outlook given the following consideration:

• Fragility in the political landscape was of less severity than we anticipated with relatively speedy return to normalcy hence allaying fears of a potential slump into protracted turmoil. This is a major boost for the country which is facing an adverse economic environment

• Bongo’s re-election creates room for policy continuity in Gabon which is much needed in view of the economic downturn. This is favourable especially in view of a comparatively aggressive economic diversification agenda

• Gabon is one of Central Africa’s most attractive investment destinations given a history of political stability and relatively high purchasing power which make it alluring with regard to long-term prospects


POLITICAL OUTLOOK

GABON

Cautious Investors as Post-Election Jitters Linger

The business community will be watching evolution of policy in the post-election environment with a focus on fears that the economy could grind to a recession. StratLink’s view is that a key challenge facing the business community is volatility in inflation that renders the investment climate unpredictable.

Decelerating Demand Threatens Reversion to Deflation

In Q1 2015, the economy experienced deflation with inflation averaging -0.4% between January and March². A key driver of this trend is likely to be decelerating demand in view of the adverse macroeconomic environment and diminishing incomes.


Guarded Short-term Expectations, Optimism over the Long-term

We shift focus to the country’s debt market to gauge investor perception of the economy. The short and long-terms ends of the yield curve moved in opposite directions in the first six months of 2016, a development that could have either of two implications:

• Best Case: it could be a likely indicator that investors were wary of short-term risks in view of the August 2016 poll whilst exhibiting relatively bullish expectations on the long-term. It is important to observe that this also came on the back of the country’s credit ratings downgrade by Moody’s from Ba3 to B1 (Negative outlook) in April 2016 which is likely to have undermined investor expectations of the economy’s trajectory in the near term. A favourable view of the long-term could be premised on subdued inflation and a stable local unit, painting a favourable picture of the monetary environment

Source: Bloomberg, StratLink Africa

CFA Franc to USD

ECONOMIC OUTLOOK

560.0

570.0

580.0

590.0

600.0

610.0

620.0

630.0

640.0

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Constitutional Reform Debate Rages on

We expect the underlying political stability to be maintained in the medium-term even as the debate on setting an age limit on the Presidency rages. In the September 2016 Africa Market Update, we highlighted the move by the ruling National Resistance Movement (NRM) to petition President Museveni with a proposal seeking to amend article 102 (b) of the constitution to remove the age limit of 75 years. The move has been renounced by the opposition and civil society bodies occasioning protests from civil rights groups. On September 14th, 2016, parliament is reported to have rejected a proposal to introduce a bill seeking to change the constitution to remove the retirement age for judges form the current 70 years, a bill that has been seen by government critics as a precursor to the removal of the 75 years age limit for presidential candidates. We expect the ongoing debate about constitutional amendment to continue with increasing protests from civil rights groups and the opposition.

Transformational Agriculture Promotes Reduced Poverty Levels

Agricultural transformation has been lauded for helping reduce poverty levels in Uganda. The World Bank poverty assessment report for 2006-2013 shows that the proportion of the population living below the national poverty line declined from 31.1% in 2006 to 19.7% in 2013. Similarly, the country was listed as one of the fastest countries in sub-Saharan Africa to reduce the share of its population living on USD 1.9 per person per day or less, from 53.2% in 2006 to 34.6% in 2013. Increasing government and private sector focus has been instrumental in supporting agricultural income sources. Agriculture still remains the backbone of the economy, representing about 80.0% of export earnings, making the sector one of priority focus with regard to government policy, therefore, providing room for potential investment in the industry.

POLITICAL OUTLOOK


UGANDA

Uganda Ponders Capping Interest Rates

Uganda is contemplating adoption of a ceiling on commercial bank lending rates. Members of parliament and civil society organizations are reported to be pushing a private member’s bill to amend the Financial Institutions Act to have commercial bank interest rates capped to a ceiling of 500.0 bps above the Central Bank rate⁵ which currently stands at 14.0%.

ECONOMIC OUTLOOK

Rise in Short-term Borrowing

T-Bill yields are likely to continue exhibiting an upturn over the coming months in light of the World Bank’s recent cash freeze that may occasion increased domestic borrowing by government. Yields in the short-term rose in August 2016 even as inflation declined by 30.0 bps to 4.8% in the same month. The 91 Day, the 182 Day and the 364 Day papers’ yields fell marginally by 40.0 bps, 20.0bps and 40.0 bps to 13.9%, 14.2% and 14.4, respectively, in the period under review.

DEBT MARKET UPDATE

The bourse remained bearish in September 2016, with the All Share Index declining by 9.3% to close the month at 1,482.3 units. The market is bound to remain subdued through Q4 2016 especially in view of rising yields in the short-term fixed income instruments which could attract investor interest from the exchange.







Rwanda Rejoins the Central African Block

Rwanda’s political outlook remains positive as the country moves closer to the 2017 election. Meanwhile, President Kagame is still keen on winning more allies in a bid to increase the country’s bilateral trade ties even as Burundi banned cross-border trade with Rwanda. In the same breath, Rwanda has officially rejoined the Central African regional block, the Economic Community of Central African States (ECCAS) after a ten-year hiatus, a development that positions it well politically, economically and diplomatically in the region as it has opened more opportunities for the country to boost economic ties with the other ten member states. Similarly, the re-admission has seen Rwanda open new diplomatic ties with nations like Chad, who initially did not have diplomatic representation in Rwanda. Joining multiple economic blocs could, however, raise implementation challenges if bi-lateral trade arrangements result in contradictory or inconsistent regulations with other blocs that Rwanda is already part of such as, the East Africa Community (EAC).

Government Steps up Support for the Local Textile Industry

As highlighted in our previous reports, the textile industry in Rwanda has faced a tumultuous year and government has steadily been implementing measures to boost the sector to regionally competitive levels, including cutting down on textile imports. In its 2016/17 budget proposal, government increased taxes on used clothes from USD 0.2 to USD 2.5 per kg. Equally, import tariffs on used footwear were raised from USD 0.5 to USD 5.0 per Kg, a decision that took effect on July 1st 2016.

POLITICAL OUTLOOK


RWANDA

Promising Q2 2016 Economic Growth

Rwanda’s economy accelerated by 5.4% in the second quarter of 2016 buoyed by growth in the services sector. This notwithstanding, the economy experienced contraction in industry, a worrisome development given that Rwanda is banking on the sector to propel the economy to middle-income status by 2020. Moreover, the aggregate economic growth was 180.0 bps less than the same quarter a year ago. While the services and agriculture sectors posted an accelerated growth, by 9.0% and 3.0%, respectively, in the period under review, industry sector faltered, contracting by 2.0% against a 10.0% growth registered during the same quarter of 2015.

ECONOMIC OUTLOOK

Franc Slides on Foreign Exchange Shortage

Liquidity in the money market remains relatively tight with the interbank rate having been largely unchanged at 5.9% in August 2016 even as the depreciation of the franc continued, albeit, marginally, shedding by 100.0 bps, month-on-month to lose the month at 805.2 units to the greenback. On the other hand, inflation eased marginally by 50.0 bps to 6.4% in the period under review, thus, may have informed the interbank rate movements.

DEBT MARKET UPDATE

Exchange Remains Bearish

The Rwanda Stock Exchange All Share Index remained flat throughout September 2016, declining marginally by 60.0 bps to close the month at 128.4 units. We expect the listing of I&M bank scheduled for Q4 2016 as well as Pioneer Corporate bonds⁴ should stimulate trading at the bourse from both foreign and local investors.






StratLink in the News

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

Please click the buttons to view the full articles

Business Daily (Kenya): Kenya ranked ninth among 28 African states in FDI - In this piece, StratLink’s research was cited in analysis of foreign direct investment and deal trends within sub-Saharan Africa

London School of Economics Business Review: The commodity price rout and Africa’s unusual electoral cycle- In this piece, Senior Research Analyst, Julians Amboko, delves into the ongoing electoral cycle in sub-Saharan Africa explaining emergence of unusual voting patterns

London School of Economics Business Review: Nigeria in Recession - In this article, Senior Research Analyst, Julians Amboko, provides assessment of the Nigerian economy in view of the slump into recession and provides a forward looking perspective on likely policy changes

http://www.businessdailyafrica.com/Kenya-ranked-ninth-among-28-African-states-in-FDI/539552-3386108-14bx663z/index.html

http://blogs.lse.ac.uk/businessreview/2016/09/16/nigeria-in-recession-the-devaluation-came-day-late-a-dollar-short/?utm_content=bufferfbc00&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

http://blogs.lse.ac.uk/businessreview/2016/08/30/the-commodity-price-rout-and-africas-unusual-electoral-cycle/



STRATLINK - AFRICA TEAM

Konstantin Makarov – Managing [email protected]

Dina Farfel – Partner [email protected]

Kyle Drexler – Associate [email protected]

George Waithaka – Senior Corporate Finance Analyst [email protected]

Lewis Muguro - Analyst [email protected]

Benson Njeri – Analyst [email protected]

Julians Amboko – Research Analyst [email protected]

Sophia Sifuma – Research [email protected]

Peter Mutisya – Director Graphic [email protected]


Contact Details

STRATLINK AFRICA

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