africa market update - august 2016

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


Table of Contents


AUGUST 2016 | MARKET UPDATE – AFRICA

Cover image: http://www.blog.kpmgafrica.com/wp-content/uploads/2013/05/megacities1.jpg

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NIGERIA 4

KENYA 5

TANZANIA 6

UGANDA 8

RWANDA 9

GHANA 7

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


902 Million179 Million

20.0 Million25.5 Million797 Million

554,360,00065.0 Million

25.3 Million

5.0 Million1.2 Million

265 Million

320,00040,000

19.9 Million

Capital Invested by Country (USD)

AFRICA DEALS LANDSCAPE JANUARY 2016 - JULY 2016

Capital Invested by Sectors

46,0002.7 Million

82,000

20.4 Million

7.8 Million75 Million

11.8 Million146.6 Million

Capital Invested by Deal Type

Deals Snapshot• On July 15th, 2016, the government of Ethiopia sold a 40.0% stake of Na�onal Tobacco Enterprise to Japan Tobacco• On July 14th, 2016, ConocoPhillips sold 35.0% stake in the Three Con�guous Blocks (Senegal) to Woodside Petroleum for USD

430.0 Million • On May 12th, 2016, Emerging Markets Payment Holdings was acquired by Network Interna�onal through a USD 340.0 Million LBO

Source: PitchBook, StratLink Africa

South Africa

Ethiopia

Egypt

Namibia

Uganda

MozambiqueRwanda

Botswana

Burkina Faso

Kenya

Madagascar

TanzaniaMauri�us

MoroccoTunisia

LiberiaNigeria

120,000322.0 Million

430 Million Senegal

Congo50,000Zimbabwe

EritreaCentral African Republic

Malawi

Zambia

Sierra LeoneGhana

Secondary Transac�on - Private... Mergers & Acquisi�on..

Growth & Expansion ..................... Buyout/LBO .................

Add-on ............................................. Corporate Dives�ture ....

Acquisi�on Financing ...................... PIPE ................................

Asset Acquisi�on ............................. Others .............................

26.7% 16.7%

12.7% 12.7%

7.6% 7.4%

2.6% 2.3%

1.5% 9.8%

4.4%Communica�ons & Networking

4.1%Commercial Banks

13.3%Others

15.4%Commercial Services

13.6%Retail Healthcare 2.9%

Metals, Minerals & Mining 11.9%

Metals, Minerals & Mining 5.9%

2.5%Pharmaceu�cals& Biotech

Consumer Non-Durables 26.0%

2.3%1.5%

26.7%

16.7%

12.7%

12.7%

7.6%

7.4%

2.6%

9.8%



Manufacturing Capacity Utilization Rate Slides Further

Manufacturing continues to punch below its weight with the capacity utilization rate having fallen to 52.7% in Q1 2016 compared to 60.5% in Q1 2015. This is attributable to challenges that have been experienced with regard to foreign exchange risks as well as energy supply shortages that have constrained the sector’s performance. Whereas monetary policy adjustments are likely to ease accessibility of foreign currency to the favor of manufacturers, the weakened Naira raises the challenge of higher cost of factor inputs. We expect this to continue inflicting a drag of the aggregate economy through Q4 2016, presenting additional headwinds for policy makers to grapple with.

Deteriorating Conditions Threaten Risk Outlook

We maintain a cautious position over the country’s political risk environment in view of potential spill-overs from an adverse macroeconomic environment. Inflation has soared to a decade-long high of 16.5% in June 2016, undermining households’ spending power amidst an environment of rising unemployment. Additionally, the economy stares at the threat of contraction in 2016 as growth engines such as the manufacturing sector suffer stagnation thereby dragging aggregate momentum.

Between 2014 and 2015, aggregate household spending posted a 22.4% decline to USD 203.8 Billion, as consumers adopted belt tightening measures to weather the economic downturn. If left unaddressed, these pressures could begin manifesting in the socio-political domain with citizens growing dissatisfied with the status quo.

POLITICAL OUTLOOK

BUSINESS NEWS ENVIRONMENT

NIGERIA

Naira Narrows Margin between Official and Parallel Exchange Rate

The divide between the official and parallel exchange rates continues to narrow following abandonment of the currency peg in June 2016. In July 2016, the Naira averaged 285.0 units of exchange to the greenback in the official market against 352.4 in the parallel market a trend that is likely to prolong through August 2016 in view of removal of limits to bid-offer spreads in the foreign exchange market on July 18th, 2016 . The following are key points to observe: • In line with our expectation, the Central Bank

sent a hawkish signal in the July 25th – 26th, 2016 meeting in a bid to support the local unit against pressures. This is likely to be trend through Q4, 2016 as the devalued currency is watched closely to forestall potential risks to the economy

• The narrowing divide between the two exchange rates places the government at a better position to align monetary policy with developments defining the business environment

ECONOMIC OUTLOOK

Short-term Investors Jittered by Inflation

Between June 2016 and July 2016, yields nudged upwards in the short-term end of the curve while posting marginal rise in the medium to long term. Movement in the short-term is informed by widespread concern over the unrelenting rise in inflation which is likely to be accelerated further by the weakened Naira.

DEBT MARKET UPDATE

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Foreign Direct Investment (FDI) Inflows Crosses USD 1.0 Billion in 2015

Despite posting one of the slowest year-on-year growth in ten years, FDI inflows crossed the USD 1.0 Billion in 2015. Kenya’s FDI as a percentage of the East Africa region’s (including Ethiopia) has steadily risen over the last decade from 1.3% in 2005 to 21.5% in 2015. We expect this growth to continue as Kenya’s diversified economy places it strategically as an alternative market as investment flows shift from being predominantly resource-targeted.

In Q1 2016, the economy accelerated by 5.9%, 90.0 bps higher than the same period in 2015, with key engines of growth being the hospitality and construction sectors which grew by 12.1% and 9.9%, respectively. These sectors continue to generate new investment opportunities that will support growth in FDI in the near term. We remain concerned over slow growth in the manufacturing sector, having expanded by 3.6% in Q1 2016 down from 4.1% in the same period in 2015, which is undermining a potentially strong growth engine in the economy.

UNCTAD Conference Cements Kenya’s Position

Kenya’s hosting of the fourteenth United Nations Conference on Trade and Development in July 2016 serves to further solidify its position as a trade and commercial services hub within the East and Central Africa region. This conference came on the back of the country’s hosting of the Global Entrepreneurship Summit in 2015 in which outgoing USA President, Barrack Obama, visited the country. The conference put the wider Eastern Africa region on the map as the Western and Southern regions grapple with the threat of the general economic downturn spilling over into the socio-political environment. In 2015, Ghana witnessed protests over the energy crisis whilst in Nigeria, the slash in fuel subsidies has threatened to elicit protests from a section of unions.

POLITICAL OUTLOOK

BUSINESS ENVIRONMENT

KENYA

Shilling to Face Benign Pressure

In January 2016, we tabled prognosis for a broadly favorable economic environment characterized, principally, by a resilient shilling whilst facing risks from fiscal consolidation challenges. The shilling has been trending within our target band (101.0 – 103.0) for the past six months with a discernible downtrend over the last three months. This can be ascribed to a blend of short and medium-term factors:

Short-term: General Anticipation of Expansionary Policy

As indicated in our July 2016 update, this is a likely reflection of a rise in liquidity, notably between June and July 2016 that came on the back of a dovish signal from the Central Bank in view of the 100.0 bps slash in the benchmark rate, to 10.5%, in May 2016. Anticipation of further expansion between Q3 and Q4 2016, against a tightening environment in advanced economies, is also bound to be informing deceleration in foreign capital inflows.

ECONOMIC OUTLOOK

Long-Term Yields Rise on Low Demand and Inflation Risk

Yields declined in the medium-term end of the curve (1 Year - 5 years) whilst rising in the long-term end. The trend suggests that the 80.0 bps in inflation between May 2016 and June 2016 to 5.8% could be compelling investors to revise their risk assessment with regard to medium to long-term expectations whilst remaining confident of the short-term. Demand for medium to long-term papers has also been subdued lately, effectively depressing yields.

DEBT MARKET UPDATE


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Tanzania’s Exit from Trade Pact a Test to Regional Integration

The exit of Tanzania from the Economic Partnership Agreement (EPA) that was expected to be signed in the just concluded United Nations International Conference on Trade (UNCTAD) in Nairobi by the European Union (EU) and other East Africa Community (EAC) member states serves as a litmus test to the regional integration process. The EPA has faced opposition from both Tanzania and Uganda, on the back of what the two countries have termed as unfavorable trade terms. Tanzania cites economic and constitutional uncertainties of the exit of Britain from the EU which supposedly weakens its bargaining power since Britain is Tanzania’s core market from the EU. This threatens to widen the wedge splitting EAC member states in the perceived factions of those willing to further the integration agenda versus those unwilling to do so. However, in the long run, the key detriment stemming from Tanzania’s action is likely to be deceleration of the EAC integration process in view of distrust and inconsistency in the general application of agreements by member states.

POLITICAL OUTLOOK


Magufuli takes the Mantle as CCM Chair

President John Magufuli has taken over the mantle as ruling Chama Cha Mapinduzi (CCM) chairman from former President, Jakaya Kikwete, a responsibility that may prove to be one of his toughest political tests yet, given recurrent criticism of the party’s members in public offices over corruption allegations. Magufuli is now saddled with the challenge of providing leadership to a party which is still emerging from an election cycle that saw internal dissent threaten its dominance in the political landscape.

TANZANIA

Up-Turn in Gold Prices Promises to Relieve Fiscal Pressures

We could witness improved fiscal conditions in the medium to long-term if the up-turn in gold prices in the global market is sustained over the coming months. This development is likely to trigger investors’ revision of a broadly negative position of the country’s fiscal risk position. It could also prop Tanzania’s pursued credit ratings that should pave the way for the country’s debut Eurobond issuance. We expect the general price trend of gold to continue heading north through Q3 2016 based on the following consideration: • Perceived turbulence and uncertainty in global

markets that is like to continue pushing investors towards perceived safe assets

• With the greenback having moderated, the price of gold is likely to remain on the uptick

ECONOMIC OUTLOOK

Low Appetite for T-Bills on Tight Liquidity

Low appetite for treasury bills prevailed through July 2016 on the back of tight liquidity in the money market that undermined investor participation in the short-term government borrowing instruments leading to under-subscription of auctions with the exception of the 364-Day tenure. Consequently, yields in the short-term market continued rising with the interbank rate rising by 80.0 bps, month-on-month, to average 13.8% in July 2016. Similarly, inflation registered mild uptick to 5.5% in June 2016 from 5.2% recorded in May 2016.

DEBT MARKET UPDATE


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Ghana Emerges as Largest FDI Recipient in West Africa

2015 marked the first year since 1990 in which Ghana attracted more FDI than Nigeria and emerged as the top FDI destination in West Africa. Over the last decade, Ghana’s allure as a destination has grown with the economy’s proportion of the region’s FDI inflow rising from 2.0% in 2005 to 32.3% in 2015 . This is a favorable indicator for a country that has been grappling with an adverse macroeconomic environment for the last two years as it signals investor confidence. Ghana’s performance in FDI attraction in 2015 can also be ascribed to Nigeria’s economic downturn and hotly contested general election. We, however, expect that 2016 will be characterized by relative slowdown in FDI inflows in Ghana, a trend that has been witnessed historically within electoral cycles.

Growth Forecast Signals Primacy of Economy in Election

Downward revision of the economy’s growth forecast for 2016 (please see Economic Outlook) augments our view that the country heads to the November 2016 election with the state of the economy standing out as the key issue. The economy’s slowdown, high cost of living characterized by runaway inflation and energy crisis are likely to make the forthcoming poll a referendum on the National Democratic Congress’ economic reform agenda. Other issues that are bound to elicit interest in the run-up to the poll include corruption and security.

Opposition Angle for Hotly Contested Election

In May 2016, the National Democratic Party elected former first lady, Nana Konadu Agyeman-Rawlings, as its presidential candidate, casting her as the change candidate and potentially riding on an established political brand. On the other hand, Nana Akufo-Addo is the flag bearer for the New Patriotic Party, creating the scenario of a re-run of the 2012 contest with incumbent president, John Dramani Mahama.

POLITICAL OUTLOOK


GHANA

Growth Target Reviewed Downward as Headwinds Prevail

In a move bound to rattle investor confidence further, the Ministry of Finance has slashed anticipated economic growth for 2016 to 3.2%, 220.0 bps lower than earlier projected. StratLink Africa Ltd views the following as the key headwinds facing Ghana’s economy:

• Runaway InflationThe erosion of purchasing power by a steady rise in inflation presents a key threat to Ghana’s economy. The predominant concern is not that Ghana is experiencing an episode of double digit inflation but that inflation has surged untamed for a period stretching three years. Reforms such as the scrapping of fuel subsidies, with media reports indicating the phasing out was due for completion at the end of Q3 2015, are bound to be amongst the key drivers of inflation due to the adjustment of price levels in the economy to reflect this change.

• Election Cycle and Cedi PressuresWe expect the tightening cycle to be sustained through 2016 with the general election set for November 2016 approaching and threatening a rise in pressures on the Cedi. The local unit has been ceding ground to the greenback inching closer to four units of exchange to the USD. Growing weakness of the Cedi could further deteriorate inflation in the coming quarters triggered by pass through effects.

ECONOMIC OUTLOOK

T-Bill Yields Flat-Line

Short-term yields have flat-lined after the decline posted in Q4, 2015 with the 91 Day, 182 Day and one year note averaging 22.8%, 24.6% and 23.0%, respectively, in June 2016. This has come on the back of a similar trend in the interbank rate suggesting stable liquidity conditions after an episode of tightening between Q3 2015 and Q4 2015.

DEBT MARKET UPDATE


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Economy’s Loss of Momentum to Undermine Investor Confidence

We expect investors to adopt a gradually cautious stance on the country given the economy’s loss of growth momentum. The economy grew by a paltry 3.5% in Q1 2016 compared to 5.4% in the same period in 2015. Key areas of interest for investors are likely to be the following:

• Agriculture: At 0.3% growth in Q1, 2016, the sector, constituting about 25.0% of GDP, has effectively stagnated and is bound to drag the economy further in 2016. This has had a knock-on effect on the manufacturing sector, which is driven considerably by agro-processing

• Manufacturing and Industry: The sector grew by 2.6% in the period under review, compared to 9.7% in Q1 2015. A major risk to the sector, further to the general slowdown in agriculture, has been resurgence of an unstable environment in the key export market of South Sudan that is likely to have depressed demand for Uganda’s exports. Another risk factors has been a relatively weak local currency which has translated in expensive factor inputs for the sector

POLITICAL OUTLOOK


External Environment: Resurgence of Lord’s Resistance Army Threat

Reports that the Lord’s Resistance Army (LRA) is on resurgence in Central African Republic, abducting at least 344 people in the first six months of 2016, could potentially complicate Uganda’s plans to withdraw its troops from the country. LRA has been a source of recurrent strife in North Uganda and its resurgence in Central African Republic could undermine stability in Uganda. Uganda now faces the twin challenge of addressing the inflow of refuges following deteriorated conditions in South Sudan and maintaining watch over the North’s susceptibility to the LRA resurgence.

UGANDA

ECONOMIC OUTLOOK

Inflation Rises on Low Rainfall

After a general decline since December 2015, inflation edged up in June 2016 to 5.9% from 5.5% in the preceding month and 5.1% in April, 2016. Inflation, which shot up after the currency weakened steeply last year, had stabilized at around 5.0% allowing the central bank to start easing the benchmark rate (the benchmark rate was slashed for the second time in the year by 100.0 bps to 15.0% in June 2016). The recent increase in inflation has been attributed to an increase in energy, fuel and utilities (EFU) inflation which rose by 6.5% in June 2016, 100.0 bps higher than the previous month’s increase. This can be ascribed to a general uptick in global oil prices that has seen the OPEC Basket average price rise from USD 26.5 in January 2016 to USD 45.9 in June 2016.

Food Index on the Rise

However, the food index which accounts for 28.5% of the Consumer Price Index, continued trending downwards but with signs of rising recording a 1.3% decline in June 2016 compared to the larger 5.0% in May 2015.

Lingering Inflationary Pressure from below Average Rainfall

Owing to the projected poor crop harvest attributable to below average rainfall that has been ongoing since May 2016, we anticipate further rise in the food index. Uganda is reported to have recorded a decline in both value and volume of coffee exports in May 2016 attributed to a decrease in short-rain patterns which hampered the final yield.

DEBT MARKET UPDATE

Yields Decline on Relative Liquidity Tightening

Liquidity tightening was maintained in the money market on the back of depreciation by the shilling. The interbank rate rose by 50.0 bps to 14.2% in June 2016 pointing towards efforts by government to stem further depreciation of the local unit.


https://gum.co/ftXN



POLITICAL OUTLOOK

SMEs Receive Boost from New Investment Fund

The Development Bank of Rwanda (BRD) has signed a USD 1.8 Million guarantee facility with the African Solidarity Fund to support small-and-medium enterprises (SMEs) with medium to long-term projects in the real estate, energy, and education sectors. African Solidarity Fund facilitates investment projects that support economic development among its member states, as well as those that create more jobs and help reduce poverty. Rwanda has been keen to enter into agreements aimed at leveraging funds to support development of the private sector through provision of financial security as it looks to maintain a pivotal position in the region.


Cracks Emerge in Exile-Based RNC

Rwanda’s political environment remains stable as it moves closer to the 2017 election with the likelihood that Kagame’s reign will continue due to public support and a weak, almost non-existent, opposition. The country’s opposition is bound to remain weak since efforts to block constitutional amendments by the Green Party were denied by the Supreme Court. The lone opposition party has been receiving a boost from Rwanda’s National Congress (RNC), an opposition party in exile formed by former close allies of President Kagame which announced, in June 2016, a split into a new party called New RNC, further weakening the little opposition left in Rwanda. Despite the weakening opposition which generally undermines the principles of democracy, we assert that continued political stability relative to its peers in the region may afford Rwanda the chance to play a more prominent role in the East Africa Community.

RWANDA

Central Bank Maintains Key Repo Rate at 6.5%

The Central Bank of Rwanda has maintained an expansionary monetary policy, holding the key repo rate at 6.5% on June 28th, 2016(held since June 2014), signaling perceived stability in the monetary environment having managed to contain inflation within the bank’s medium target of 5.0%. The accommodative policy stance is deemed prudent despite looming short to medium-term inflationary pressures on the back of a volatile exchange rate and a slight uptick in oil prices; crude oil prices have been on a steady rise to USD 43.7 per barrel after plunging to a historic low below USD 30.0 per barrel at the start of the year. Investors, however, are bound to hold a favorable view of the economy in view of increased credit to the private sector.

Lurking Inflationary Risks on the Back of a Volatile Franc

The local unit has been on a general slide over the last one month losing grip of resilience exhibited in the first half of 2016. This has, in part, been responsible for the surge in inflation from 2.3% in May 2016 to 5.5% in June 2016.

ECONOMIC OUTLOOK

Government Borrowing Rises as Liquidity Remains Unchanged

Government borrowing reversed the downtrend witnessed in recent months, to rise by 46.5% between May and June, 2016. On the other hand, liquidity conditions held steady with the interbank rate remaining unchanged at 5.9% in June 2016. Minimal movement in the interbank rate suggests the government is, at present, confident of its ability to cushion the Franc from pressure especially in view of the IMF Credit Facility.

DEBT MARKET UPDATE


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StratLink in the NewsKonstantin Makarov provided commentary on prospects for investors targeting emerging markets:

Please click the button to view the full article

Konstantin Makarov provided commentary on two sectors that are bound to be of great interest to Africa focused investors:


Our analysis of Kenya’s monetary policy environment in the remaining quarters of 2016 was cited:


https://www.entrepreneur.com/article/277334?utm_source=Social&utm_medium=Sharebar&utm_campaign=Sumome_share

http://ventureburn.com/2016/07/want-invest-africa-look-two-industries/

http://www.businessdailyafrica.com/Cut-in-CBK-benchmark-rate-ahead-of-2017-polls-unlikely/-/539552/3284112/-/yr47rjz/-/index.html


A financial Advisory CompanyA financial Advisory Company

13August 2015 | MARKET UPDATE – AFRICA www.stratlinkglobal.com

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