africa market update - march 2017

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


MARCH 2017 | MARKET UPDATE – AFRICA www.stratlinkglobal.com

NIGERIA 4

KENYA 5

TANZANIA 6

RWANDA 8

ZAMBIA 9

UGANDA 7

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© Julian Love

Table of Contents

3MARCH 2017 | MARKET UPDATE – AFRICA www.stratlinkglobal.com


Capital Invested by Country (USD)

AFRICA DEALS LANDSCAPEJANUARY - FEBRUARY 2017

Source: PitchBook, StratLink Africa

8.0 Million

7.5 Million130.0 Million

900 Million38.0 Million

390,000Egypt

Congo

Uganda

Kenya

4.0 MillionIvory Coast

Tanzania

Mauritius

9.0 MillionLesotho

2 Billion922 Million

Nigeria 110,000

Swaziland

502 MillionSouth Africa

Deal Activity by Industry (Proportions) Deal Activity by Types (Proportions)

Major Deals – February 2017• Eland Platinum Mine (South Africa) was acquired by Northam Platinum for USD 13.4 Million on February 24th, 2017

• Awale Resources (Ivory Coast) was acquired by Mariana Resources for USD 4.04 Million on February 24th, 2017

• Dale Capital Group (Mauritius) received USD 2.0 Million in development capital from undisclosed investors on February 14th, 2017

9.9%

0.2%

63.8%

6.0%

Others

2.3%Communication & Networking

Commercial Products

Capital Markets

Business Products & Services

Morocco

Secondary Transaction - Private... Buyout/LBO................

Merger/Acquisition......................... Management Buyout...

PIPE.................................................. Others...........................

82.2%

82.2%

10.6%

10.6%

2.2%

2.2%

0.8%

0.8%

1.3%

1.3%

2.9%

2.9%

20.9%Minerals & Mining



Recovery of USD 160.0 Mln: Boost for War on Graft

Recovery of USD 160.0 Million of funds allegedly lost through corruption in February 2017 was significant for two reasons:

• It came as a positive indicator of the government’s fight against graft and stepped up efforts to seal fiscal leakages as the country grapples with economic downturn

• The timing of the recovery also comes as a major boost for the economy looking to tap into the international markets through a USD 1.0 Billion Eurobond. It casts the image of reforms efforts bearing fruit, boding well for investor perception of the economy

POLITICAL OUTLOOK

GDP: USD 481.1 Bln | Population: 187.0 Mln

NIGERIA

Banking on the Central Bank’s Stimulus

The business environment remains in a lull even as news of the Central Bank’s stimulus package elicited hope that the market could be relieved of dollar scarcity and reported slowdown in investment across key sectors. Interest indicate that conditions remain tight for business’ access to credit with interest rates trending as high as 17.0%.

Unlikely Near-Term Improvement in the Monetary Environment

Whereas we do not anticipate improved monetary conditions in the near term (with inflation in double digits, the Central Bank is unlikely to slash rates in a bid to nudge lending rates downwards), the agriculture and manufacturing sectors will be of interest to observe through Q2 2017 in view of the stimulus. The manufacturing sector, in particular, is likely to come under sharp focus given the slowdown witnessed in 2016 that saw the sector contract by 4.4% in Q3.

BUSINESS NEWS ENVIRONMENT

USD 2.3 Bln Disbursed to Stimulate Recovery

The Central Bank has made public disbursement of USD 2.3 Billion in a bid to stimulate recovery of the economy. Some of the main sectors targeted in this exercise are manufacturing and agriculture. This move mirrors StratLink Africa’s position in the ‘Review 2016 and Outlook 2017’ issue in which we tabled three key arguments in assessing the business environment:

• The fact that growth in the non-oil sector was falling below expectations, effectively stagnating in Q3, 2016, and presenting the government with an economic recovery head ache as it looked to countervail the slump in the oil sector

• Agriculture was emerging as a bright spot and that it was highly likely the government would be keen to harness the opportunity presented by the sector’s growth in the latter half of 2016

• Dollar aridity remained the key challenge derailing the business environment as investors experienced hurdles in meeting import demands

ECONOMIC OUTLOOK

The short-term end of the yield curve rose further between January 2017 and February 2017 sending a signal that the market was wary of the continued uptick in inflation which saw it stand at 18.7% in January 2017, 170.0 bps higher than it did in the preceding month. This trend is important for two reasons:

• Investors will be keen to observe whether inflation crosses the 20.0% mark in the coming months as it last did in July 2005

• A key point of concern for investors is that with the economy in recession, the Central Bank has little, if any, room for tightening the monetary environment to address inflation pressures

DEBT MARKET UPDATE

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IEBC Concludes Voter Registration

In line with StratLink’s expectation, the second and final phase of mass voter registration ahead of the August 2017 general election posted a much higher performance rate than the first phase, 62.3% versus 35.7%, registering 3.8 Million new voters. The following are worthy of mention in view of the concluded exercise:

• The Race for New Voters

The race for capturing first time voters is set to be a key factor shaping the political landscape over the next six months with Nairobi poised to be a key battle ground since it accounts for the largest proportion as well as a cosmopolitan electorate.

POLITICAL OUTLOOK


KENYA

Disruption in the Mobile Money Market

The mobile money transfer market has become more competitive since the entry of Equitel in 2015. Its share of the value of mobile money transaction grew significantly from 5.6% in Q4 of 2015 to 20.3% in Q3 of 2016 in contrast to M-Pesa’s share that fell from 92.8% to 78.7% over the same period.

PesaLink

Banks have joined forces to launch a new player in this space called PesaLink, an electronic payments platform which allows for real-time money transfers between bank accounts via mobile phones as well as other channels including ATMs, bank branches and internet banking. PesaLink is operated through the Integrated Payment Services Limited (IPSL) which does not charge for transfers below KES 500.0, above which a transaction fee of 10.0 – 12.0 shillings applies, providing an opportunity for banks to undercut M-Pesa depending on whether and how these costs are transferred to customers. This, together with permitted transactions ranging from 10.0 – 999,999.0 shillings, may entice low income users but the service will certainly attract large transactions considering that M-Pesa caps these at 140,000.0 shillings per day.


Inflation Breaches Central Bank’s Ceiling on Food and Fuel Prices

Our January 2017 issue tabled a dim outlook on inflation with the expectation that a combination of a general rebound in commodity prices, rising food index and a sharp rise in money supply were bound to nudge inflation closer to the ceiling of 7.5%. In February 2017, inflation surged to 9.0% breaching the Central Bank’s ceiling by 250.0 bps. Acceleration in the price level has been faster than our expectation in what we assess was informed, principally, by two factors:

• The February 2017 upward review in fuel products which was the highest across most products over the last six months. The consequent rise in the cost of energy is likely to have had a knock-on effect on other sectors thus pushing the price level further up

ECONOMIC OUTLOOK

Government Checks Debt Appetite

There was minimal movement in the yield curve between January 2017 and February 2017 in what is likely to have been informed by moderated appetite for domestic debt by the government. Across most tenures, the government absorbed less funds than received, a likely indication of efforts to avoid expensive credit.

DEBT MARKET UPDATE

Performance Improves on Banking Stocks

February 2017 was a relatively favorable month at the bourse with the NSE 20 Share Index clawing back ground ceded in the preceding month to close at 2,994.0 points. This gain was propelled by the uptick posted by banking stocks with the sector’s index gaining by 8.9%, month-on-month.

EQUITY MARKET UPDATE






Tanzania Looks to Increase Traded ties with Uganda

President Museveni’s visit to Tanzania on 25th, February, 2017, highlighted the recently deepening ties between Uganda and Tanzania which have grown stronger since President Magufuli came to power in October 2015, as the traditional trade ally Kenya gets side-lined. Since beating Kenya to the lucrative deal for the construction of the 1,443.0-Kilometre pipeline to transport crude oil from Hoima in Uganda to Tanga Port, relations between Tanzania and Uganda continue to flourish. In another show of growing relations, Uganda has joined Tanzania in delaying the signing of the European Union-East Africa Community Economic Partnership Agreement deal, even as Kenya and Rwanda already signed.

POLITICAL OUTLOOK

TANZANIA

Tanzania’s Fresh Demands on EPA Deal

Tanzania’s withdrawal from the East Africa Community (EAC)-European Union talks over the Economic Partnership Agreement (EPA) deal was the highlight of the country’s business environment in the latter half of 2016, stoking concerns over the country’s commitment to regional integration. As highlighted in our 2016 Market Review and Outlook, how this story evolves will majorly impact regional trade trends in the region in 2017. Consequently, the EPA deal is hanging in the balance after Tanzania allegedly demanded for a review of the impact of the EPA deal on EAC before it can consider signing it. However, the EAC Customs Union Protocol dictates that the deal can only be operationalized after EAC partners sign the deal as a bloc. Tanzania’s protectionist policies threaten regional integration, therefore, we expect that the debate on EPA deal will pervade the 18th EAC Summit talks to be held in Arusha on April 6th, 2017 to chart the way forward.


Current Account Deficit Narrows by almost half

Tanzania’s current account registered positive movements in 2016, narrowing by 48.8%, year-on-year, to about USD 2.1 Billion, on the back of improved export receipts and declining imports. Receipts from gold exports, the highest export revenue earner, rose by 22.5% to USD 1.5 Billion as gold prices recovered on the back of rising production. Exports rose by 5.3% to USD 5.7 Billion while imports declined by 12.0% to USD 8.7 Billion². Consequently, during the year ending December 2016, the balance of payments significantly improved to a surplus of USD 305.5 Million compared to a deficit of USD 199.1 Million in the corresponding period in 2015.

ECONOMIC OUTLOOK

Yields Decline as Liquidity Rises

Yields in the short-term market declined slightly in the face of relative liquidity ease between January and February, 2017. The interbank rate declined by 100.0 bps to 7.3% in the period under review. On the other hand inflation rose slightly by 20.0bps to 5.2% in January 2017 on the back of the effects of the ongoing drought in the country.

DEBT MARKET UPDATE


Market Maintains Bullish Trends

The market defied the tumultuous operating environment to register positive performance as majority of listed securities stayed in the green. The All Share Index gained by 8.8% month-on month, to 2,335.3 units. However, the share price of Acacia mining company, the largest mining company in Tanzania, plunged by over 13.0% on March 3rd, 2017 their biggest one-day drop since October 2015, after the company halted exports of gold and copper from Tanzania following a ban by the government on unprocessed ore.





Uneasy Calm as Opposition seeks Dialogue with Government

Available data suggests that opposition has sought audience with the government for dialogue to solve the political impasse in the country and help lower the current political temperatures that have remained heightened since the highly contested February 2016 election that has left the country deeply divided.

Pre-Conditions for Dialogue

The contentious issues alleged to be stalling the dialogue talks are the pre-conditions for dialogue set by the opposition including demands that dialogue can only take place in the presence of a mutually agreed upon mediator and the requirement that the President agrees to an international audit of the 2017 elections. Though previous attempts at building a lasting national consensus have failed, both President Museveni and opposition luminary Kizza Besigye should provide an enabling environment for dialogue to take place if the country is to tackle the escalating tension and move forward.

POLITICAL OUTLOOK


UGANDA

Mixed Outlook in the Business Environment

Two Issues Dominate Uganda’s Business Environment

Escalating Inflation: The biting drought continues to inflict upward pressure on Uganda’s inflationary trends as inflation moved 60.0 bps up, month-on-month, to 6.7% in February 2017 , above the bank’s medium-term target of 5.0%, on the back of rising food inflation occasioned by the long dry spell in the country. Likewise increasing money supply offers lingering risks to inflationary trends in the near term: Money supply rose by 11.1% between January and December, 2016.


How effective is the Sustained Rate Slash

2016 was a turbulent year for the Ugandan economy. The economy has been facing mild headwinds from a myriad of factors including the slowdown in economic activity during the 2016 general elections, the high interest rates that negatively affected private sector credit growth, as well as spill-over effects from the conflict in South Sudan, one of Uganda’s most important export markets. These developments coupled with a weaker than expected private sector demand, contributed to the slowdown in the growth of the economy. Moreover, the prospects for the economy in 2016/17, remain low, as the Central bank revised economic growth downwards to 4.5% from the previous 5.0%.

ECONOMIC OUTLOOK

Yields Decline as Liquidity Increases

Liquidity in the money market remains relatively high as the Central Bank maintains expansionary monetary policy. On February 15th, 2017, the Central Bank slashed the benchmark rate by 50.0 bps to 11.5% to increase money supply in the economy, signaling to improving liquidity conditions. In the same breath, the interbank rate declined marginally by 15.0 bps, month-on-month, to 11.0% as of January 31st, 2017.

DEBT MARKET UPDATE


Bourse Remains Bullish

The market maintained bullish trends in February on the back of calm macroeconomic environment. The bourse has survived poor results posted by listed companies: British American Tobacco Uganda’s profit tanked by 65.0%, year-on-year to USD 2.1 Million in 2016 attributable to increased taxation on its products and harsh operating environment. 50.0% of the company’s loss was occasioned by the decision by government to ban exportation of the tobacco leaf in 2015





Rwanda Strengthens Ties with India

On the international front, Rwanda is seeking to strengthen bilateral relations with India after signing three bilateral deals during the state visit by India’s Vice-President to Rwanda in February 2016. The deals include a bilateral air service agreement between Rwanda and India, coming in at a time when RwandAir is planning to commence flights to India. The two nations are also looking to double bilateral trade in five years: India’s Rwanda’s third import origin representing 9.6% of total imports as of 2014.

POLITICAL OUTLOOK


RWANDA

Mineral Sector Could benefit from the Suspension of the Dodd-Frank Act

The mining industry in Rwanda, the largest export earner for Rwanda at about 40.4% of total exports, could benefit immensely from the decision by the United States of America to repeal the Dodd-Frank Act that has seen Rwanda spend over USD 4.0 Million annually on mineral due diligence to ensure compliance with the Act ─ a legislation that was enacted in 2010 to safeguard stability in mineral-rich conflict-prone countries by ensuring that natural resources are not used to fund conflicts.

Act Stifling Nascent Manufacturing Sector

The suspension would eliminate negative international bias against minerals from Central and East Africa nations like Rwanda, a major consequence of the Dodd Frank Act. The Act has been castigated for stifling growth of the nascent manufacturing sector due to the high compliance fees that Rwanda has to incur: Between January and August 2015, USD 3.2 Million was spent on due diligence, representing 4.0 % of the value of minerals produced⁴. However, the flip side of the suspension could mean more scrutiny to Rwanda’s minerals. The minerals involved include cassiterite, wolfram, tantalum and gold ore, which are also Rwanda’s principal mineral exports.


Rwanda Misses Half-Year Revenue Target

Despite putting in measures to widen the tax base, Rwanda continues to miss its tax revenue collection targets posing a challenge to the country’s fiscal balance in the face of increasing drought conditions which are bound to negatively impact export earnings from agricultural exports, second export revenue earner after minerals. The Rwanda Revenue Authority missed its financial year 2017 half-year target, collecting USD 643.8 Million, against a target of 647.0 Million, between July-December, 2017.

ECONOMIC OUTLOOK

The harsh macroeconomic environment notwithstanding, Rwandan investors maintain confidence in the economy as exhibited by the increasing over-subscription in long-term government fixed income instruments. The 12.4% USD 12.1 Million three-year Treasury bond issued in February posted an over-subscription of 201.9%.

DEBT MARKET UPDATE


I&M Lists at the Rwandan Bourse

I&M bank finally listed on the Rwanda Stock Exchange after postponing the listing that was initially slated for December 2016. The offer for sale of 19.81% shareholding held by the government of Rwanda in I&M Bank (Rwanda) Ltd. was launched on 14th, February and it set to close on March 10th, 2017. The offer price for the share has been set at USD 0.1. I&M is one of the two banks on the Rwanda Stock Exchange (KCB and Equity) that have been cross-listed. The Rwandan bourse remains dormant in the face of poor performance of bourse across the region.





Favorable Outlook

StratLink maintains a favorable view of the country’s political risk climate informed by the following considerations:

• Key indicators suggest the macroeconomic environment is on the mend with inflation reverting to single digits whilst the exchange rate has been stable over the last six months. These developments are vital in diminishing the build-up of socio-political pressure from the masses. What we will be keen to observe in the coming months is how the government deals with the challenge of power outage which continues to plague the economy. Additionally, drought affecting parts of the region will be a key risk factor to watch out for as it could reverse gains made in mitigating inflation

International Monetary Fund Visit

The investment community will be looking forward to the International Monetary Fund visit due in March 2017 to see whether the country receives a shot in the arm to spur economic recovery further. This will be important for two reasons:

• With the global economy pervaded with weak recovery, many will be keen to observe the fund’s assessment as an indicator of whether the emerging rebound of Zambia’s economy is transient or sustainable. The key focus in this regard is bound to be debt and fiscal sustainability as the country looks to stimulate key sectors

• With available data showing that the current account remains in deficit despite gradual improvement since Q1 2016, we expect that provision of support to cushion potential foreign exchange headwinds to be amongst the key items shaping discussion.

POLITICAL OUTLOOK



ZAMBIA

Bank of Zambia on an Expansionary Offensive

In December 2016, we projected a bias, by Bank of Zambia, for gradual monetary expansion within Q1 2017. This was informed, primarily, by consideration of three factors:

• Decline in inflation which gave confidence in recovery of the macroeconomic environment

• Need to catalyze the economy following a generally adverse environment in 2015 and the better part of 2016

• Relative resilience by the Kwacha after an episode of wild depreciation in 2015 and the start of 2016. Recovery in copper prices was a key factor underlying this trend

ECONOMIC OUTLOOK

Short-Term Yields Trend Upwards

Two trends have stood out with regard to the yield curve between Q4 2016 and January 2017:

• There was minimal movement across the yield curve in spite of the decline in inflation and general rise in liquidity as indicated by the interbank rate. Upward pressure is likely to be coming from the government’s appetite for debt especially in the short-term end of the market. January 2017 reported an 89.6%, year-on-year, growth in T-Bill sales compared to an average 27.9% between 2013 and 2016 pointing at a rise in demand for short-term debt

DEBT MARKET UPDATE


Bullish Month at Bourse

The market was on rally between January and February 2017 in a likely indication of favorable investor sentiment buoyed by improving macroeconomic conditions. Copperbelt Energy Corp stood out as an outlier counter in the period under review with its price surging by 18.4% year-to date.





StratLink in the News

In the period under review, StratLink’s research department analyzed South Africa’s macroeconomic environment with a focus on changing demographics and rising long-term unemployment.

Please click the button to view the full article:

What the South African anti-foreign riots say about the country’s economy

http://blogs.lse.ac.uk/businessreview/2017/03/02/what-the-south-african-anti-foreign-riots-say-about-the-countrys-economy/



STRATLINK - AFRICA TEAM

Konstantin Makarov – Managing [email protected]

Dina Farfel – Partner [email protected]

Vimal Parmar – Consultant [email protected]

Kyle Drexler – Associate [email protected]

George Waithaka – Senior Corporate Finance Analyst [email protected]

Benson Njeri – Analyst [email protected]

Julians Amboko – Senior Research Analyst [email protected]

Gianluca Storchi – Senior Research Analyst [email protected]

Sophia Sifuma – Research [email protected]

Easton Ochieng’ – Intern Research Analyst [email protected]

Peter Mutisya – Director Graphic [email protected]


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