2012 I Issue 1 I 1We Share Lake Victoria / We share Swahili Language / Now we share The Exchange

Africa’s Emerging Markets

Issue 1 | 2012 Display until July 31 2012

Whetting Investor Appetite for the African Market

Africa's Emerging Markets | Transforming Kenya’s Arid Land | Non Tari� Barriers

CIC Listing Interview Nelson Kuria | Interview B. Thakrar | NSE Reports | Super Crunchers

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2012 I Issue 1 I 3

PublisherEXCHANGE TEAMChief EditorCarol Karuguckarugu@nse.co.ke

Sub EditorFanon Mwendafmwenda@nse.co.ke

French TranslationEmma Wenaniwenani.emma@gmail.com

The Exchange Committee MembersJoseph Kitamirike (Chairman, CEO - USE)Peter Mwangi (Member, CEO - NSE) Donald Ouma (Member - NSE) Jonathan Bushara (Member - USE)Emanuel Nyalali (Member - DSE) Celestin Rwabukumba (Member - RSE)

ContributorsEvelyne OgutuDr Issac RutenbergKinoti GatobuCathy Mputhia Sammy K. WaweruDavid LeahyDavid MugweMoses MuneneHanderson Mwandembo

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Since i got ListedWhy we can’t Wait

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Regional AnalysisA Transformation in

Corporate Reporting Africa’s Emerging Markets

Non Tariff MarketsStart up Company

Transforming Kenya’s Arid Land

Super CrunchesListing of CIC Insurance Company

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Market Movement

The Start of an era

Whetting Investor Appetite

East Africa

Intellectual Property

By Kinoti Gatobu

How Anything can be Predicted

Mr Nelson Kuria

Scangroup

CIC Insurance

Contents

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Chairman’s NoteThe theme of the Exchange magazine’s first issue for 2012 is “AFRICA’S EMERGING MARKETS – ‘whetting investor appetite for the African capital markets ’. There has been much talk about Africa’s growth story. While there is broad agreement on this issue, I would like to provide some clarity, by pointing out some facts. I will quote extensively from a presentation “Thinking about Africa’s Economic Prospects Going Forward: From policy and political reform to transformative growth beyond commodities”, done by David Cowan, Africa Economist for Citibank.

Based on IMF and World Bank data, average annual GDP growth in Africa was 1.9%, 2.3% and 4.8% in the last three decades, 1981 – 1990, 1991 – 2000 and 2001 – 2010. This time, it has lasted much longer, and seems more fundamental. It has been led by reforming countries such as the East Africa Community members, Ghana, Senegal and Zambia and “big” countries like Ethiopia, Nigeria and to some extent South Africa. Growth in the Democratic Republic of Congo and the Sudan has lagged, but is still more positive than historically. The growth pick up has had some impact on poverty levels and led to the emergence of what is still a low income, but a potentially large market. According to the African Development Bank (AfDB), 300 hundred million households earn more than US$700 a year, but 60% of Africa’s middle class, approximately 180 million people, remain barely out of the poor category, with an income of US$2 – US$4 per day. Only 60 million people, spread across a large number of markets, earn more than US$3,000 a year. David, attributes some fundamental changes to have been behind this economic growth.A favorable external environment, or positive terms of trade gain for some countries probably accounts for around a third of the increase in this new growth. This has been supported by ongoing structural reforms which started in the early 1990s, key tenets of which were better economic policy and greater political stability.

This allows for a simple catch up effect, from a low base. New private sector investments, traditionally in the commodities sector have spread to consumer goods. The most visible has been mobile phones. The big global brands have noticed, Walmart and McDonalds have recently bought more widely into Sub-Saharan Africa. The sources of investment have also changed. In 1994, South Africa led, but now there are noticeable inroads being made by Brazil, India and China. While there has been a growing body of evidence, led by the United Nations Conference on Trade and Development (UNCTAD), that shows that

private sector investment in Africa is highly profitable, productivity levels in Africa are lower than the rest of the world. Investment in Africa does not yield the same impact on economic growth as in other parts of the world. Three factors help explain this:-

1. The need to reduce the high cost of doing business in Africa;

2. There is a major need investment in infrastructure to overcome the neglect of the 1980s and 1990s;

3. The lack of “real” integration into the global economy. Africa needs to fundamentally strengthen its ability to ride on the coat tails of global, and arguably, Asian growth going forward. Buiter and Rahbari forecast that world trade (led by Asian growth) will grow by 6.1% per annum from 2010 – 2030, compared to 5.4% from 1990 – 2010.

So far the dominance of the service sector, and domestic consumption, means that trade has been a far less important engine of growth in Africa. If growth is viewed from a sectoral perspective, agricultural sector growth has lagged behind overall growth; horticulture stands out as an exception. African countries desperately need a real agricultural strategy and a green revolution. David argues that agriculture is Africa’s most neglected, but potentially important and competitive sector in the global economy, going forward.Outside of some smaller sectors, led by horticulture, agricultural sector growth has generally lagged overall growth rates in the last decade. Especially, in a world where food prices are stuck at historically higher levels. But there is a need to move beyond the hype of land grabs and food security demands.

The need is to produce a model that reflects many interests, of which a most interesting example may be in Tanzania. As part of the “kilimo kwanza” policy the aim is to create a huge agricultural corridor which includes a combination of large, medium and small scale farmers in an integrated agricultural whole The Southern Agricultural Growth Corridor of Tanzania (SAGCOT) initiative, supported by roads, fertiliser, seeds and irrigation infrastructure. Plot size is a poor indicator of competitiveness. Kenyan horticulture is a very good example of how the private sector is the driver of smaller farmers’ integration into the global economy, not government agencies. There is evidence that Africa is at the beginning of the delayed demographic dividend. As it enters this phase, growth will naturally pick up. The presentation proposes possible models of growth going forward.“Traditional” manufactured export led growth - Mauritius has led the way. Can other African

countries follow? They would probably have to be coastal. Cote d’Ivoire, Ghana, Kenya and Madagascar could all be examples.

Natural resource based growth - Add value and tax appropriately. The model is Botswana, and if you are a small state with a substantial mineral endowment this is probably the best route. It is a governance and economic management route. David Cowan mentions Gabon and Zambia as fitting the bill. I would include Uganda. This route is both harder, and easier, if you are a large state. Government and economic management issues are more challenging. But if you have a large population it is much easier to attract manufacturing and services investment selling into the local market. Nigeria and DRC may follow this route.Natural resource based export diversification. What you are doing is diversifying within the primary sector and adding value to exports. Ethiopia, Mozambique and Tanzania could apply to this group.Labour export and high value service sector - Countries who will depend on the prosperity of their neighbours and also potentially tourism, and are crucially smaller landlocked countries. Senegal and Rwanda could apply to this group.

While David, remains optimistic about growth going forward, he cautions that it may be in the next few years, growth actually slows a little, or does not pick up significantly. Asian growth is weakening a bit, and the domestic policy stimulus has to be taken away. So it may not be logical to assume that growth will pick up towards 7% beyond the next couple of years, but it may to be stuck around the 5-6% level for the next couple of years. This however, may be a useful point for Africa to consolidate the gains it has made and for governments to start thinking more seriously about their growth strategies.Many African governments are going to have to think clearly about closing fiscal deficits in the coming years. The bottom line is that spending has risen and will be difficult to curtail going forward.

Therefore, the key need to raise greater revenue. Raising taxes on commodity production will be important, but more crucial will be wide scale and comprehensive tax reform. We are at the limits of how much growth itself will drive new revenue. David points to the EAC-5. In 2004, government revenue was 15.4% of GDP. This had risen to 17.9% of GDP by 2010. The key component will be widening the tax net as the formal sector is already relatively heavily taxed. Urban property taxes; bringing the informal sector into the tax net. Senegal sets an example. At

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Chairman’s Note

present, there is an argument, certainly in East Africa, that monetary policy has had to be “over tightened” in 2011 in response to rising inflation as reducing the fiscal deficit is much harder and arguably a medium term issue.

In the coming year, the editorial team and contributors to the Exchange magazine, look forward to sharing with you the thoughts and opinions of persons like David, on how events unfold in Eastern Africa and indeed the rest of the continent.

JOSEPH S. KITAMIRIKECHAIRMAN

EAST AFRICAN SECURITIES EXCHANGES ASSOCIATION

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Over the last years, a selected number of companies have started to integrate CSR reporting into the annual report. As of today, only 3 percent of the companies worldwide are reporting on an integrated basis. However, this figure

is increasing. Moreover, there is a shift in integrating corporate responsibility into the business. For an increasing number of leading companies corporate responsibility starts to be at the heart of the business – in the company strategy, in governance and values and in the products. No longer is corporate responsibility only about managing reputation risk, it is seen by many as a means to value creation for shareholders, employees and other stakeholders.

Finally, regulatory and other reporting initiatives are embracing the concept of integrated reporting. The EU Directive on Transparency requires companies to report on relevant CSR information, as does the King III Code for South African companies. The Global Reporting Initiative and sustainable investors associations such as EUROSIF are also supporting the concept. XBRL reporting incorporates other-than financial business-impacting information into the model and frameworks are being developed to connect annual reporting and CSR reporting, such as the Connected Reporting Framework developed by the Prince of Wales’ Accounting for Sustainability Project.The basic assumption behind these initiatives is that reporting on CSR

performance should be part of mainstream reporting, as a logical outcome of the integration into daily business It seems time for a transformation in corporate reporting: from a focus on financial information to a concept where all types of relevant information for assessing and evaluating a company’s quality, performance, value and impact are reported in a comprehensive way. At KPMG we believe there is a clear need for this transformation. However integrating reporting ‘for the sake of integrating’ is set to fail and disappoint stakeholders. In our view only companies with a profound connection of their sustainability efforts with their strategy and the management cycle should start taking steps towards integrated reporting. Companies should also ensure that the needs of all relevant stakeholder groups who use the information are satisfied. We refer to these as the management perspective and the communication perspective respectively, which should fuse together in order to create successful integrated reporting.

Recently, KPMG organised a meeting with 20 leading organizations to discuss the opportunities, the challenges and possible pitfalls on the road to integrated reporting. It was a clear conclusion by the participants in this meeting that integrated reporting is the way forward in corporate reporting.

A Transformation in Corporate Reporting

We are at the start of an era of convergence in reporting. Traditionally company reporting primarily consists of financial information. The balance sheet, the profit and loss account and the accompanying directors’ report together outline the company’s performance. In the past decades a shift has occurred in how companies report on the impact they have on their stakeholders. By the end of the last century trendsetting companies started to explain their impact on the environment and wider society in CSR (Corporate Social Responsibility) reports and a growing number of companies are now following their example. Over the last decade CSR reporting has grown significantly – from 35 percent in 1999 to 80 percent of the companies listed in the Global Fortune 250 in 2008.

By David Leahy

The Start of an eraA Transformation in Corporate Reporting

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Whetting Investor Appetite Africa’s Emerging Markets

Sub-Saharan Africa consists of 48 countries with a total population of over 800 million people. The IMF estimated that GDP growth in

this region would hit 6.6 percent in 2010. Access to mobile phones has grown five fold since their introduction at the turn of the century and this has changed how business is done in terms of enhanced safety and quick

turn around. Banks are doing all they can to meet the appetite for investment capital. Banking systems are now tailored to serve across the social and economic spectrum and in the remotest areas. Foreign investment by those in the Diaspora and foreigners alike is at an all time high, and according to analysts loans to the region have increased five fold since the year 2000 to over $55

billion. In a 2012 report, African Business Pages states that between 1992 and 2002, the capitalization of African stock markets more than doubled from $113 billion to $245 billion.

Many believe that Africa still has a long way to go in exploiting its massive potential, but past experience has proven that the best investment opportunities lie where

Africa’s Emerging Markets: Whetting Investor Appetite For The African Capital Market

In the 2008 Emerging Economy report, the Centre for Knowledge Societies defined emerging economies as “regions of the world that are experiencing rapid informationalization under conditions of limited or partial industrialization.” Emerging markets lie at the intersection of non- traditional user behavior, the rise of new user groups and community adoption of products, and services and innovations in product technologies and platforms. Emerging markets are found in Latin America, South East Asia, Russia, the Middle East and Africa.

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perception differs from reality. Take the case of Russia and Central Europe in the early 1990s. The analogy is that in 1996, the entire market capitalization of Russia and Central and Eastern Europe was less than $30 billion much less than the market capitalization of Microsoft. Twelve years later, Russia had a market capitalization of over $1 trillion and Russians were buying up the most expensive properties in London.

A decade ago, talk was rife of capital flight from African countries to European capitals but today we are witnessing massive capital infusion from foreigners and Africans in the Diasporas. In Kenya, capital inflow is witnessed by the massive infrastructural developments in form of commercial and residential buildings, roads and the much discussed Lamu Port, road and rail line to Ethiopia and Sudan and the Sudan-Lamu pipeline. These are excellent avenues for investment should the government go the concessional way.In a 2007 research study titled Emerging Markets in Africa, J.R. Kehl of the Department of Political Science- Rutgers University notes that Emerging Markets present an exciting challenge for international finance and foreign investment, “New markets hold both promise and peril.” Barry and Lockwood (1995) argue that emerging markets have the potential for remarkably high returns, while simultaneously harboring substantial risks. The markets are characterized by high average returns, high volatility, and excellent diversification prospects. The research posits that the most effective and accurate way to identify emerging markets is to evaluate the performance of countries according to the macro economic and macro political factors that are most important to foreign investors. That being so for African countries to be the destinations of real investment in real time the respective governments have to shape up several aspects of their countries political and economic life.

J.R. Kehl’s study reveals that political stability is recognized as important by more investors than any other macro level political or economic factor. “Political stability is important to investors because it provides predictability and decreases the eruption of political violence; which is disruptive to life, work, production, consumption, and trade. For example, political violence has decreased dramatically in Ghana over the past fifteen years, in stark contrast to the eruptions of violence in other parts of the western region such as Liberia, Sierra Leon, and Nigeria. Thus, while the latter experiences an

increase in international finance, an improved international credit rating, expansion of World Bank projects and foreign investment; the former have been experiencing diving credit ratings and divestment as a result, in large part, of political and economic instability”, Kehl writes. Economic stability is another factor that increases a country’s appeal to investors and in this are Kehl’s study cites Botswana, Namibia and Swaziland as countries that made remarkable strides in market growth due to economic stability.

The size of the local market is identified as the third most important factor to investors, which represents the significance of a resource base as well as a consumer base. Mauritius and Seychelles, for example, are appealing to investors because they have resource-based industrial development and trade, as well as a relatively wealthy consumer base. The labour market, specifically low labour costs and skilled labor availability, are valuable assets to new markets. Most African countries have a relatively low cost of labour, particularly when compared to the international average cost of labour.

In a nutshell Kehl’s and other studies agree that Africa can be the best case of an emerging market if it’s leadership was to facilitate political stability, economic stability, affordable labour costs, transparency, lack of corruption, dependable legal framework, skilled labour availability, good infrastructure and government agency support services. According to Kehl, the emerging markets in Africa are Botswana, Benin, Cape Verde, Burkina Faso, Ghana, Gabon, Lesotho, Gambia, Mauritania, Madagascar, Mauritius, Mali,

Namibia, Mozambique, South Africa, Sao Tome, Swaziland, Senegal and Seychelles. South Africa is the only sub-Saharan country that had been accepted as an emerging market prior to Kehl’s 2007 study while Mauritius and Seychelles are generally considered comparatively wealthy markets.

The IMF upgraded Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia to the rank of emerging markets.

Once African countries iron out the grey areas, Africa will be the new frontier for emerging market investors. In 2007, Javier Santiso, the Chief Development Economist at the OECD writing in the OECD Observer noted that a look at Africa reveals some impressive movements. Flows of investment into the entire African continent are gathering pace to countries like Kenya, Ghana and Botswana.

Mr. Santiso gave the example of the Russian-based investment bank, Renaissance Capital, which announced that it was well on the way to creating “a fully-fledged, pan-regional investment bank.” It will have research and asset management operation, with offices in Lagos and Nairobi. In South Africa, Pamodzi Investment Holdings is supported by US financial institutions and the London-based fund Blakeney Management. Pamodzi has been committed to Africa for well over a decade, now investing in Angola, Mozambique and Ethiopia, betting on the countries that have managed to pull themselves out of years of violent conflict.

China, Korea and several Middle Eastern countries are bringing billions of dollars into sub-Saharan Africa. North Africa is also investing in Sub Saharan Africa; Libya was famous for this under the immediate former regime. Surely, a novel thing is in the offing in Africa. Is it idealism? Will it last?

According to Kehl, the emerging markets in Africa are Botswana, Benin, Cape Verde, Burkina Faso, Ghana, Gabon, Lesotho, Gambia, Mauritania, Madagascar, Mauritius, Mali, Namibia, Mozambique, South Africa, Sao Tome, Swaziland, Senegal and Seychelles.

If African countries can organize, their affairs Africa can be the destination of choice for flows from Europe, Asia, the Americas, the Middle East and North Africa.

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