africa market update - july 2016

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


Table of Contents


JULY 2016 | MARKET UPDATE – AFRICA

Cover image: http://635.gtbank.com/2015/03/african-10-top-powerhouse-economies/

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NIGERIA 4

KENYA 5

TANZANIA 6

UGANDA 8

RWANDA 9

ZAMBIA 7

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


827.3 Million35.9 Million


746.2 Million


25.3 Million


320,00040,000

19.9 Million

Capital Invested by Country (USD)

AFRICA DEALS LANDSCAPE JANUARY 2016 - JUNE 2016

Capital Invested by Sectors

10,0002.2 Million

820,000

20.4 Million



Capital Invested by Deal Type

Deals Snapshot• Dalma�an Adver�sing (South Africa) was acquired by M&C Saatchi for an undisclosed amount on June 21st 2016• PEG Ghana raised USD 4.3 Million of Series A2 venture funding in a deal led by Energy Access Ventures on June 16th, 2016• SpacePointe (Nigeria) raised USD 1.2 Million of Series A angel funding from undisclosed investors on June 9th, 2016

Source: PitchBook, StratLink Africa

South Africa

Ethiopia

Egypt

Namibia

Uganda

MozambiqueRwanda

Burkina Faso

Kenya

Madagascar

TanzaniaMauri�us

MoroccoTunisia

LiberiaNigeria

322.0 Million

Congo

Eritrea

Malawi

Zambia

Sierra LeoneGhana

Merger & Acquisi�on ................... Buyout/LBO ..............

Growth & Expansion .................... Add-on ......................

Corporate Dives�ture .................. Secondary Transac�on..

IPO ................................................... PIPE ..............................

Asset Acquisi�on ............................. Share Repurchase ........

18.4% 17.3%

15.7% 10.3%

10.0% 7.6%

5.7% 3.1%

2.0%

Others ............................................. 8.8%

1.1%

6.4%Communica�ons & Networking

2.6%Commercial Banks

9.8%Others

1.8%So�ware

18.4%Commercial Services

17.9%Retail

Healthcare 4.2%

Metals, Minerals & Mining 8.6%

9.4%Pharmaceu�cals& Biotech

Consumer Non-Durables 17.8%

1.5%Capital Markets

1.6%Insurance

18.4%

17.3%

15.7%10.3%

10.0%

7.6%

5.7%

3.1%

2.0%1.1%

8.8%



Informal Economy Portends Investment Opportunity

Arts Entertainment Recreation and Agriculture are the two economic areas with the largest proportion of informal activity, presenting both a challenge and opportunity for the economy. The opportunity lies in the fact that, through progressive reforms, there exists a lot of room for attraction of investors into these sectors in the years ahead whereas the challenge lies in the fact that there exists little incentive for the existing informal players to formalize operations as it would imply higher cost through licensing and remittance of taxes.

Devaluation Elevates Confidence in Policy Environment

The federal government continues to register progress on the political platform with the devaluation of the Naira (June 20th, 2016) coming on the back of the passage of the record USD 30.0 Billion 2016 budget after protracted delay (three months). Both developments send a signal that policy makers take cognizance of the gravity of the economic downturn and are undertaking remedial measures.

Good Boost for All Progressives Congress’ Reform Profile

Coming just one year after President Buhari assumed office, such policy adjustments are critical in reshaping an investment landscape pervaded by waning confidence in the economy’s ability to equal its challenges. This helps build momentum of the new administration’s profile which has already been touted for its stance on anti-corruption measures which it has championed through the push for a Treasury Single Account to streamline payments from state ministries and departments.

POLITICAL OUTLOOK

BUSINESS NEWS ENVIRONMENT

NIGERIA

Central Bank Abandons Currency Peg

Abandonment of the currency peg for a managed floating regime comes as a favourable signal for the investment community which has been grappling with foreign currency shortage. The change of stance by the Central Bank conforms to our projection in February 2016 that the regulator would be compelled to devalue the local unit between Q1, 2016 and Q2, 2016, bowing to pressure from an adverse macroeconomic environment. The devaluation was welcomed by foreign investors being deemed as a favourable indication on alignment of policy with day-to-day developments in the economy.

ECONOMIC OUTLOOK

Domestic Market less Rapt by Naira Devaluation

Whereas yields in the international market pointed at improved perception by investors following devaluation of the Naira, movements in the domestic market suggest investors’ lingering concern over the state of the economy. The yield curve nudged further up in June 2016 in what can be ascribed to the sustained uptick in inflation that has defied monetary intervention. Inflation rose further in May 2016 to stand at 15.3%, 120.0 bps higher than the preceding month. Additionally, the contraction of the economy in Q1 2016 has elicited sentiment that the economy could be slipping into recession as the oil price shock takes a toll of growth drivers.

DEBT MARKET UPDATE

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http://www.stratlinkglobal.com/download/20160203%20Abridged%20February%20Africa%20Market%20Update.pdf

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Regional Plan to Ban to Boost Domestic Apparel Sector

The plan by East Africa member states to ban importation of second hand clothes effective 2018 raises prospects of both opportunity and challenge in markets such as Kenya. With regard to opportunity, this is bound to create room for growth of the domestic industry creating new avenues for investment. Sectors such as leather in Kenya will have widened room for growth both domestically and within the region.

Country Remains under ‘Watch’ Despite Show of Unity

An apparent show of unity between factions of the opposition and the government have served to defuse the build-up in political temperatures. In May 2016, concern emerged over the state of the political environment as opposition led protests rallying a call for the resignation of commissioners of the electoral commission and police retaliation turned chaotic in Nairobi and other parts of the country. Whereas this development is welcome and bodes well for the political risk environment, it remains to be seen whether it will be sustained through the pre-election period. StratLink Africa retains the country’s political risk environment under close watch with a focus on the institutional preparedness of the country to navigate the 2017 general election. Utterance of potentially inflammatory remarks by a section of the political class is a particular cause for concern.

POLITICAL OUTLOOK

BUSINESS ENVIRONMENT

KENYA

Budget 2016/17 Sheds Light on Banking Sector Stability

Budget 2016/17 came against the backdrop of an economy shaken by a succession of scares in the banking sector following the placement of Dubai, Imperial and Chase Banks under receivership. In light of this, emphasis on strengthening stability in the banking sector was elevated in this year’s budget including proposals to:

• Increase the penalty for violation of the Banking Act prudential guidelines four-fold to USD 197,693.2 (Kes 20.0 Million) as well as an allowance for additional penalties each day the violation continues

• Re-submit to the National Assembly measures aimed at increasing capitalization requirements for banks

ECONOMIC OUTLOOK

Liquidity Conditions Tighten

In the period under review, yields registered marginal downward movement across all tenors with the largest change reported in the three year paper that saw its yield decline by 50.0 bps to 13.0%.

DEBT MARKET UPDATE

Market Remains Subdued

The market remained subdued through June 2016 as bearish sentiments persisted amongst investors with the shilling ceding ground marginally after a resilient phase between April and May 2016. Investors are likely to have been engaging in a waiting game ahead of the tabling of budget 2016/17 to assess policy proposals that could have impacted the capital markets.

EQUITY MARKET UPDATE





Budget to Promote Business Environment

Creating an enabling business environment is one of the key priorities highlighted in Tanzania’s Annual Development plan for 2016/17 given that the country trails regional peers in World Bank’s Ease of doing Business 2016, despite leading in attracting foreign direct investment. As a result, Tanzania has set aside 15.0% of the USD 13.5 Billion budget for improving infrastructure in order to support the business environment and retain foreign investment into the country.

POLITICAL OUTLOOK


Opposition asserts its Authority Amidst claims of Diminishing Freedoms

President John Magufuli’s administration has come under sharp criticism following accusations of alleged abuse of the Cyber Crime Act to propagate intolerance of speech and media freedoms. This came after it was reported that the government had banned live coverage of parliamentary proceedings and all political rallies planned by the opposition. The allegation undermines Magufuli’s otherwise widely acclaimed performance as well as the political risk environment. It also derails efforts aimed at forging national unity beyond the hotly contested 2015 general election that divided the country along competing political factions.

TANZANIA

Expansionary Budget to Stimulate Growth

The government unveiled the 2016/17 national budget entailing a USD 13.5 Billion expenditure plan, an increase of 31.1%, year-on-year, focusing on industrial and infrastructural development. Moreover, government is looking to reduce the budget deficit from the current 4.5% of GDP to less than 3.0% in 2017 through prudent fiscal policy that trims on excesses in expenditure.

Note: In 2016/17, domestic revenue is expected to account for 62.3% of the total budget.

ECONOMIC OUTLOOK

Yields Exhibit Mixed Movement

Yields for the 182 Day and 364 Day papers exhibited signs of rising in June 2016 in an environment of tightened liquidity conditions that saw the interbank rate rise by 100.0 bps, month-on-month, to average 13.3% in June 2016. This came even as inflation remained favourably anchored within the 5.0% - 5.5% band, with a marginal rise to 5.2% in May 2016. Budget 2016/17 projects a 21.1% increase in borrowing by the government (with USD 2.5 Billion to be sourced from the domestic market) that could inflict a general upward pressure on yields going forward.

Source: Bank of Tanzania, StratLink Africa

DEBT MARKET UPDATE

T-Bill Yield Trend

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Apr-

14

Jul-1

4

Oct

-14

Jan-

15

Apr-

15

Jul-1

5

Oct

-15

Jan-

16

Apr-

16

91 Day 182 Day 364 Day





Solar Auction Bodes well for Business EnvironmentThe outcome of the World Bank-led solar power auction won by Neoen SAS and First Solar Inc bodes well for the economy which is grappling with the after effects of a protracted energy crisis. The two companies’ bid to generate electricity at 6.02 cents per Kilowatt Hour and are expected to build a 45.0 Megawatt solar plant to help meet growing demand for energy in the country.

Growing Focus on Non-hydro EnergyThis begins to raise confidence that the country is making steps towards addressing the ongoing energy crisis that has affected the investment climate. It also serves as a crucial signal of growing interest in the non-hydro renewable energy sector of the economy which promises to diversify further the pool of energy sources.

Election Cycle enters Homestretch

The country has entered the homestretch of the election cycle with the official campaign period commencing on May 16th, 2016. The election is bound to elicit enormous interest as it is widely perceived as a referendum on the administration of incumbent President, Edgar Lungu, which is grappling with an adverse macroeconomic environment. Lungu, who took office following the Presidential by-election of January 2015, assumed power a time when copper prices were on a nose dive in the global markets and China, one of Zambia’s key export markets, was decreasing its activity and demand for raw materials. As such, the economy has been buffeted by fiscal and monetary pressures that have seen inflation soar and the government tighten its belt on diminished export earnings.

POLITICAL OUTLOOK


Central Bank Remains Hawkish as Inflation Declines and Election Jitters Loom

Bank of Zambia maintained a hawkish stance in its May 2016 meeting despite decline in inflation between February 2016 and May 2016 signaling a cautious position on the monetary environment. This could, in part, be informed by the drought afflicting Southern Africa and is feared to drive food inflation upwards as well as need to have the tightening cycle transmit through the monetary system. We do not anticipate expansionary change in the monetary policy until after the August 2016 general election as the Central Bank maintains a watchful position on the state of the economy and potential spill-overs from the political environment.

ECONOMIC OUTLOOK

Available data indicates the yield curve humped sending an indication of possible jitters by investors over the state of the economy in the medium term.

Foreign investor holdings have been declining faster in the short-term than in the long-term papers, further lending credence to the view of likely jitters over the economy’s trajectory in the short-term.

DEBT MARKET UPDATE

Source: Bank of Zambia, StratLink Africa

Yield Curve (May 20th, 2016)

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

2 Year 3 Year 5 Year 7 Year 10 Year 15 Year

ZAMBIA





Import Substitution to Promote Manufacturing

Uganda, like its East Africa counterparts, has shifted focus to import substitution policy to grow the country’s manufacturing sector. Manufacturing was reported as one of the sectors that registered the lowest performance in financial year 2015/16 with the sector’s growth posting a measly 0.4% in the year under review from 11.0% in the previous year. Consequently, the government increased the specific duty rate on worn clothes and shoes from 0.2 USD/kg to 0.4 USD/kg in the 2016/17 budget, in line with EAC Summit directive requiring EAC Partner States to gradually phase out importation of used clothes and footwear in the region. In addition, the government proposed to increase the environment levy on used clothes, shoes and other articles from the current 15.0% to 20.0% in the next financial year.

POLITICAL OUTLOOK


Security Strategy under Focus as Somalia Pull-out looms

Uganda’s regional security strategy is bound to come under sharp focus in the coming months as the government revealed plans to withdraw its troops from Somalia by December 2017, a move which could bring to an end Uganda’s nine-year peace keeping mission in the strife torn country. The country’s troops are the largest contingent of the African Union-sponsored peacekeeping mission, about a third of the 22,000 troops, and the withdrawal could reverse the progress of the AU mission. Previously, Uganda failed to follow through on its threat to pull out of all peacekeeping missions in 2012, following allegations by the United Nations that it was backing rebels in eastern DR Congo.

UGANDA

ECONOMIC OUTLOOK

Construction to Drive Economy in 2016/17

Budget 2016/17 posts a 9.2% increase, year-on-year, on planned government expenditure to USD 7.8 Billion in line with the country’s National Development Plan II which seeks to scale up public investments, with a focus on agriculture, public works, transport and energy, pointing towards diversification as the economy gradually shifts from reliance on agriculture to manufacturing and services. Construction and public works, which are considered a vital growth pivot in the face of lurking macroeconomic pressures, received the lion’s share of the budget.

DEBT MARKET UPDATE

Marginal Rise in Yields on Liquidity Tightening and Inflation SignalThere was relative liquidity tightening in the money market between April and May, 2016 with the interbank rate rising by 130.0 bps to 13.7% in May 2016. As such, yields posted a marginal rise prompted, as well, by subtle inflation uptick ─ inflation increased marginally by 30.0 bps to 5.4% in the period under review

Source: Bank of Uganda, StratLink Africa

Monthly Interbank Rate (Average)

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

Apr-

15

Jun-

15

Aug-

15

Oct

-15

Dec-

15

Feb-

16

Apr-

16





POLITICAL OUTLOOK

Rwanda Looks to Boost Local Manufacturing in the 2016/17 Budget

Textiles, garments and leather industry, are among the high priority sectors envisioned to foster Rwanda’s economic growth in 2017 financial year, receiving 27.0% of the USD 2.6 Billion budget. Rwanda is looking to implement taxation measures in 2016/17 that will make good its promise to promote local manufacturing and reduce importation of goods, particularly, second-hand clothes and shoes. As reported in our February 2016 Market Update, Rwanda’s textile industry faced a tumultuous year witnessing decelerated growth owing to increased second hand imports into the market.


Stable Political Environment

Rwanda’s political outlook remains stable, despite strained relations with neighboring states (Burundi and the Democratic Republic of Congo) presenting a favourable environment even as the country heads to the 2017 general election. In the meant time, President Kagame has also reached out to the East in a bid to court new allies given the recent spat with long-term trade allies notably the United States of America and the United Kingdom (UK).

UK Extends an Olive Branch

The UK has extended an olive branch to Rwanda as it looks for stronger bilateral ties; a development that underscores Rwanda’s position as a strong frontier destination for trade and investment. The UK is looking to leverage on Rwanda’s conducive business environment (Rwanda leads East Africa peers in World Bank’s Ease of Doing Business Index 2016) through introduction of direct flights between the two countries, to tap into available opportunities which many other economic rivals like China and other Asian nations are targeting.

RWANDA

Budget Focus: Exports Promotion and Fiscal Tightening

Expenditure for the period July 2016 – June 2017 is projected to increase by 12.6% to USD 2.6 Billion as government looks on further improving the business environment through fiscal adjustments. A key target for the year underway is to slash the fiscal deficit from the present 5.4% of GDP to 3.9% in 2017, signaling rationalization of expenditure in the months ahead. However, the government still faces revenue mobilization hurdles as it anticipates decrease of donor funding with the grants projected to reduce by 2.5% to USD 487.1 Million, year-on-year, in 2016/17.

ECONOMIC OUTLOOK

Liquidity Tightening Endures as Government Borrowing Plunges

Government borrowing maintained the downtrend witnessed in the past three months, dipping further by 20.6% to USD 27.3 Million between April and May, 2016. On the other hand, liquidity tightening prevailed in with the interbank rate rising by 32.0 bps, month-on-month, to an average of 5.9% in May 2016. The franc maintained resilience against the greenback in the period under review attributable to the tightening liquidity. Consequently, the T-Bill yields registered a general rise in the period under review.

DEBT MARKET UPDATE





Note on Brexit and sub-Saharan Africa

The outcome of Britain’s June 2016 referendum that favored the country’s exit from the European Union has roiled global markets, notably in equities and foreign exchange. In sub-Saharan Africa, we anticipate the following to be key areas of interest:

• With the Sterling Pound having suffered precipitous depreciation, it could present an opportune window for economies in sub-Saharan Africa to service Sterling Pound denominated debt at a cheaper rate. This is, however, complicated by the fact that a number of economies are reeling from subdued commodity prices and with little room for fiscal adjustment

• Economies in sub-Saharan Africa could potentially have greater leverage in negotiation of trade terms with Britain going forward in view of the fact that the latter has lost the pivot of being part of the expanse European Union market

• Should Brexit mark the onset of further fragmentation of the European Union, select sub-Saharan Africa economies such as Kenya stand to lose a major export destination that could affect the balance of payments

Our team provided commentary on the World Economic Forum blog on lessons Africa could draw from Brexit with a focus on managing immigration.

Please click the button to view the full article

Elsewhere, Senior Research Analyst, Julians Amboko, provided commentary on policy options available for Egypt in light of its new status as Africa’s second largest economy.

Please click the button to view the full article

https://www.weforum.org/agenda/2016/06/what-africa-can-learn-from-britain-s-failed-experiment-in-regional-integration/

http://blogs.lse.ac.uk/businessreview/2016/06/24/egypt-as-no-2-whats-next-for-africas-new-second-largest-economy/


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