20161101 november market update abridged

NOVEMBER 2016 MARKET UPDATE – AFRICANIGERIA | KENYA | TANZANIA | ZAMBIA | UGANDA | RWANDA

A Financial Advisory Company

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


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A financial Advisory Company

NOVEMBER 2016 | MARKET UPDATE – AFRICA

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NIGERIA 5

KENYA 6

TANZANIA 7

UGANDA 9

RWANDA 10

ZAMBIA 8

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


Capital Invested by Country (USD)

AFRICA DEALS LANDSCAPEJANUARY 2016 - OCTOBER 2016

17. Rwanda18. Namibia19. Zimbabwe20. Cameroon21. Uganda22. Madagascar23. Tunisia24. Swaziland25. Botswana26. Niger27. Mozambique28. Liberia29. Mali30. Central African Republic31. Ivory Coast32. Malawi

1. South Africa2. Nigeria3. Egypt4. Ethiopia5. Morocco6. Zambia7. Congo8. Tanzania9. Guinea10. Kenya11. Sudan12. Eritrea13. Mauritius14. Ghana15. Sierra Leone16. Burkina Faso

4 Billion 931 Million

665.2 Million 550.8 Million 413.6 Million 291.7 Million

265 Million 204 Million 154 Million 131 Million

95.2 Million 65 Million



12.1 Million 11.2 Million



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

50,000 40,000

1

2 49

10

12

16

20

21

25

26

24

23

14

19 22

3015

6

7

17

18

8

27

28

29

5

3

Source: PitchBook, StratLink Africa

11

13

32

31



Capital Invested by Sectors Capital Invested by Deal Type

Snapshot of Deals

• On October 24th, 2016, Innovative Microfinance (Ghana) raised an undisclosed amount of venture funding from Goodwell Investment

• Casa Mining (Mauritius) sold a 4.5% stake to Premier African Minerals for USD 300,000 on October 18th, 2016• The Student Hub (South Africa) raised USD 305,280 of angel funding from Maude Gliwa, Bill Paladino and Jacques Ludik on

October 20th, 2016

Source: PitchBook, StratLink Africa

20.3%

20.3%

15.8%

15.8%

12.0%

12.0%

11.7%

11.7%

11.7%

11.7%

6.3%

6.3%

3.9%

3.9%

3.9%

3.9%

14.4%

14.4%

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

Corporate Divestiture............................. PIPE................................................

Secondary Transaction - Open Market... Growth/Expansion...........................

Asset Acquisition........................................ Add on.............................................

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

13.9%

12.7%

12.6%

7.5%

7.4%

7.2%

6.7%

6.0%

5.3%

2.6%

18.1%

Consumer Non-Durables

Capital Markets

Metals, Minerals & Mining

Healthcare Devices & Supplies

Commercial Services

Commercial Products

Retail

Communications & Networking

Insurance

Commercial Banks

Others



Commercial Bank Lending Rates Reverse Downtrend

Investors will be keen to observe the trend of commercial bank lending rates after the downtrend between September 2015 and May 2016 reversed in Q2 2016. High lending rates in an environment of the economic recession will exacerbate the situation and the focus is now on the Central Bank to see how it adjusts monetary policy to provide a cushion. Rising lending rates could also be a signal of commercial banks downgrading their risk perception of the general business environment anticipating further deepening of the downturn.

Note: Please see the Economic Outlook for an in-depth assessment of the monetary policy landscape.

Release of Kidnapped Girls Bodes Well for Government Efforts

The October 2016 release of twenty one, of over two hundred, Chibok Girls kidnapped by the Boko Haram militia in April 2015 following negotiations with the government comes as a major boost for the Buhari administration. The release is significant for a number of reasons:

• One of the major platforms on which All Progressives Congress won the election in 2015 was its promise to address challenges posed by Boko Haram and restore normalcy to the political risk environment

• The militia has been reported to be increasing use of child suicide bombers in recent attacks with the United Nations Children’s Agency reporting that the number of children used in attacks grew to forty four in 2015 from four in 2014. As such, girls held hostage remain at risk of being deployed by the militia in executing attacks and deteriorating the security risk environment. Expediting the release of children still held by the militia will be of paramount importance in the months ahead

POLITICAL OUTLOOK

GDP: USD 545.7 Bln | Population: 177.5 Mln

BUSINESS NEWS ENVIRONMENT

NIGERIA

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Economy Likely to Contract in the Full Year 2016

We view the risk of the economy suffering contraction in the full year 2016 as having become more imminent over the last three months and anticipate contract of between 1.5% and 2.0%. This is informed by the following considerations:

• The plan to tap into international capital markets to meet revenue shortfalls will be instrumental but behind the curve of the economic downturn. As such, the economy is plagued by minimal capacity for fiscal stimulus in the immediate future

• The last two monetary policy decisions suggest the Central Bank is caught in a monetary policy adjustment tight rope as it seeks to fight both high inflation and the recession.

ECONOMIC OUTLOOK

Investors Jittered over State of Economy

The yield for Nigeria’s ten year Eurobond has risen between September and October 2016, sending an indicator of growing jitters by foreign investors over the state of the economy. The yield stood at 7.0% on October 25th, 2016, nearly at par with that of Kenya’s ten year Eurobond, a scenario which has been witnessed, in the recent past, against the backdrop of the Doha Talks 2016 during which OPEC members failed to commit to freeze oil output, undermining hopes of Nigeria benefiting from propped oil prices. Two factors are likely to be informing this approach by investors to the Nigerian market:

• Policy response has been widely deemed to be belated in addressing the economic downturn and this has played a major role in undermining investor confidence in the market. Concurrence of high inflation and recession presents a monetary policy dilemma which investors feel could further complicate policy adjustment

DEBT MARKET UPDATE

https://gumroad.com/l/arPcx?wanted=true



Search for African Union Commission Top Job

Kenya’s Foreign Affairs Cabinet Secretary’s bid for the position of African Union Commission Chairperson has attracted support from the Common Market for Eastern and Southern Africa (COMESA) marking a critical endorsement for Kenya’s position in taking a leading role in mobilizing African countries’ common position on issues of regional and global interest. With about nineteen member states, the bloc constitutes a vital voice ahead of the January 2017 election. The following issues are bound to being among the top priority in charting the continent’s course going forward:

• In the immediate future, we view the evolution of the continent’s stand on membership to the International Criminal Court (ICC) as a matter that is bound to elicit enormous interest both domestically and externally. It should be remembered that in February 2016, Kenya played a central role in the African Union’s adoption of a proposal for member states’ mass withdrawal from the ICC citing disregard of sovereignty and building up on this momentum is likely to be one of the country’s key agenda items

POLITICAL OUTLOOK



KENYA

Rising Consumption Attracts Investors

The Kenyan market continues to attract foreign investors targeting fast growing consumption with the latest being USA burger chain, Hardee’s, plan to open ten additional restaurants within Nairobi. Over the last five years, the Kenyan market has attracted a number of multinationals in the fast-food segment This backs StratLink’s long held view that accelerating consumption is bound to be one of Kenya’s key growth engines of the next five years.

Government Eyes International Market

The government has made public plans to tap into the international markets, through a second Eurobond, to meet growing revenue demands. The timing lends credence to the argument tabled in the October 2016 Africa Market Update (Nigeria) in which we stated that, based on Ghana’s September 2016 over-subscription, governments in sub-Saharan Africa are likely to capitalize on both yield hungry investors and a general downtrend in frontier market yields over the last ten months. The timing also comes against the backdrop of S&P’s revision of the country’s sovereign credit risk rating from negative to stable, sending a favourable indicator to investors.

ECONOMIC OUTLOOK

Yields Decline across all Tenors

Yields maintained a general decline between September 2016 and October 2016 as liquidity remained high with the interbank rate averaging 5.1% in Q3 2016 compared to 17.1% in the same period in 2015.

DEBT MARKET UPDATE

Market Posts Mild Rally

The exchange posted a mild rally between September 2016 and the first half of October 2016 in an indication of recovery from investors’ reaction to the setting of a cap on commercial bank lending rates and a floor on deposit rates which sent the sector’s stocks on a tailspin. The market remains uncertain as to the medium to long-term effect of the new law on commercial banks and investors are bound to maintain a cautious position over stocks in the banking and finance segment of the market. In the latter half of the month, the market was also supported by a rally by the national carrier’s, Kenya Airways, share price following the cancellation of a planned strike by pilots which threatened to paralyze operations.

EQUITY MARKET UPDATE






Opposition’s Boycott of Electoral Processes Presents New Challenge

The Mayoral elections of October 2016 have brought to the fore challenges that continue to undermine the political environment one year after the October 2015 general election. The following were notable developments over the last one month:

• Opposition factions, Chadema and Civic United Front, boycotted the mayoral polls for Kiondoni Municipality with the ruling Chama Cha Mapinduzi (CCM) proceeding with the voting exercise

• Mayoral polls for Ubungo Municipality were suspended indefinitely with the opposition alleging irregularities by the ruling party

Tanzania Continues Solidifying Regional Clout

Tanzania’s onslaught on Kenya’s regional dominance position continues with the latest development being the decision by Rwanda and Burundi to cease importing fuel through Kenya and opting for Tanzania instead. This comes on the back of Tanzania’s victory over Kenya in securing Uganda’s oil pipeline deal earlier in 2016 which is expected to have the country’s (Uganda’s) exports routed through the port of Tanga. Over the last ten years, Kenya’s dominance as a source of imports for the smaller economies (Rwanda and Burundi) has declined as economies such as Uganda and Tanzania improve their industrial capacity and logistics environment.

POLITICAL OUTLOOK


TANZANIA

Upturn in Mining Earnings Drives Q2 2016 Growth

The economy accelerated by 7.9% in Q2 2016 compared to a growth of 5.8% over the same period in 2015, driven, principally, by growth in transport as well as, mining and quarrying industries which grew by 30.6% and 20.5%, respectively. The acceleration in the mining and quarrying sectors can be attributed to the increased mineral production coupled with the upturn in gold prices ─ gold accounts for an estimated 21.0% of Tanzania’s export earnings, making it the single largest source of export revenue.

ECONOMIC OUTLOOK

Yields Flat-Line on Broadly Stable Environment

There was marginal movement in the markets with T-Bill yields and the interbank rate remaining on a general flat terrain between September and October 2016. In the coming months, investors will be keen to observe whether the emerging plateau is an indication of yields having finally normalized after the surge in 2015 triggered by instability in the monetary environment. With the shilling holding firm against the greenback and inflation on the decline, investor confidence over near-term prospects is likely to be propped. Inflation stood at 4.5% in September 2016 compared to 6.1% in the same period in 2015.

DEBT MARKET UPDATE


Bourse Subdued over Economic Climate

The bourse has been on a general downtrend with brokers citing investors’, particularly, foreign investors cashing in gains as a key driver of the trend. Nonetheless, the exchange is performing better compared to peers in East Africa. Activity in the market could be buoyed by the fact that listed entities have been spared the proposed taxation on shares following resistance from both stock brokers and regulators.





Policy Imperatives for the Government

We are optimistic over the country’s political risk outlook in the medium term anchored on largely peaceful general election in August 2016 despite episodes of poll related violence in the run-up to the exercise. With the constitution review process and the general election behind, the government now has ample room to focus on addressing emerging economic challenges. Victory in the election, which was widely viewed as a referendum on Patriotic Front’s response to the economic downturn, provides a firm political base needed by the government to undertake policy reforms. In StratLink’s view, priority issues for the government include:

• Stabilizing the economy in view of an increasingly volatile external environment. This will be largely informed by accelerating efforts to diversify the economy

• Tackling the energy crisis which has derailed the business environment over the last one year


POLITICAL OUTLOOK

ZAMBIA

Revitalizing the Investment Climate

The new government faces the daunting challenge of restoring Zambia’s position within the Southern African map as a key investment destination. Between 2012 and 2015, the country’s proportion of the region’s Foreign Direct Investment (FDI) declined from 30.0% to 9.2%¹, being one of the lowest levels in ten years. Two issues are worthy of consideration in this regard:

• A major challenge for the economy has been the fact that mining contributes about 76.0% of FDI inflows² and the slump in commodity prices (notably copper in this case) has had a negative impact on investor appetite.

• The energy crisis has been a major drawback for Zambia with industry, in particular, taking a beating. In June 2016, the state energy company, ZESCO, announced reduction of load shedding hours from eight to six affording the business community a sigh of relief


New Administration Faces Adverse Monetary Environment

We view stabilization of the monetary environment as the key macroeconomic agenda the new administration faces. Inflation has been on a sustained downtrend for the better part of 2016 with a 400.0 bps decline between February and September to 18.9%, paving way for a gradual shift from a general tight monetary environment. The central bank is likely to hold the policy rate firm at 15.5% in the coming months with a bias for moderate expansion within Q1 2017 to facilitate recovery from a general economic slowdown. Aggregate economic growth for 2016 is likely to hover between 4.0% and 4.5%, against an average of 5.2% over the last fourteen years, suggesting the economy is punching below its weight and in need of a break from the tightening cycle.

ECONOMIC OUTLOOK

Short-Term Yields Trend Upwards

The yield curve for the short-term end of the market corrected between August and September 2016 with the 364 Day paper witnessing a surge of 500.0 bps between August 18th, 2016 and September 29th, 2016 to 25.0%. In view of declining inflation and relatively high liquidity in the market, this is a likely reflection of revised risk pricing by investors in light of the August 11th, 2016 general election which was later contested at the courts eliciting jitters over the country’s short-term horizon.

DEBT MARKET UPDATE






Pre-election Baggage Undermines Risk Environment

Inability to reach consensus over key issues has stalled the proposed dialogue (spearheaded by the Inter Religious Council of Uganda and the Elders Forum) between President Museveni and opposition leader Kizza Besigye which aimed at helping defuse simmering tension following the February 2016 elections. As such, we continue to place the country’s political risk climate under close watch and remain cautiously optimistic that the largely unsettled post-election political environment could improve going forward. The political risk environment has been further undermined by the placement of Kizza Besigye under house arrest once again after his return from a month-long tour in Europe and America.

Cost of Energy to Reduce Further

In 2016, the government has been aggressive in improving the business climate notably through reduction in the cost of energy. Of particular interest will be to see how the manufacturing sector performs in 2016, full year, given the raft of measures adopted to scale down the cost of energy given that industrial users consume the bulk of electricity supplied in the economy. Electricity contributes more than 15.0% of the cost of manufactured goods in Uganda and has made the country uncompetitive in industry, compared to peers like Kenya and, in particular, Ethiopia.

Note: Electricity tariffs are set to come down further following the decision by the Regulatory Authority to slash tariffs for both large industrial and domestic users by 0.7% and 0.4% to USD 0.1 cents/kWh and USD 0.18 cents/kWh, respectively, marking the fourth consecutive quarterly reduction in power tariffs.

POLITICAL OUTLOOK


UGANDA

Central Bank Moves to Avert Threat to Banking Sector

East Africa’s banking sector has been brought under the spotlight yet again following placement of Crane Bank under statutory management in light of undercapitalization ─ as of June 2016 the bank’s capital was less than 50.0% of the minimum statutory requirement of about USD 7.3 Million. This development is significant for three reasons:

• It raises investor confidence in the region’s central banks’ response mechanism: Bank of Uganda is widely deemed to have swung into action swiftly signaling upped antennae by central banks in the region following a turbulent episode in Kenya’s banking sector which threatened to destabilize the economy at the end of Q1 2016. The need for a stable banking sector in East Africa has grown over the years with private sector credit playing an increasingly significant role in driving economic growth with domestic credit provided by the financial sector as a percentage of GDP in East Africa growing from 17.7% in 1995 to 25.2% in 2015. With Crane Bank being Uganda’s fourth largest bank by assets and largest locally-owned commercial bank, a precipitous decline into crisis could have posed threats of systemic proportions to the sector

ECONOMIC OUTLOOK

DEBT MARKET UPDATE

Declining Yields as Liquidity Rises

The yield curve posted a general decline between September and October 2016 as liquidity in the money market rose further with the interbank rate averaging 12.6% in September compared to 13.1% in the preceding month. Similarly, inflation maintained a downtrend to 4.2% in September 2016, compared to 6.7% in the same period a year earlier, with Bank of Uganda’s latest 100.0 bps benchmark rate slash to 13.0% buoying investor confidence over subdued risk in the near term.






Realigning Rwanda’s External Position

While keeping an eye on the race to the 2017 general election, we shift focus to the country’s external position highlighting three developments worthy of note:

• In his recent visit to Mozambique, President Paul Kagame sought extradition of twelve nationals for alleged involvement in the 1994 genocide. In the same period, Rwanda threatened to severe ties with France following the latter’s reopening of the inquiry into the plane crash which triggered the genocide. These developments are critical for Rwanda’s political risk outlook owing to two considerations: One, matters relating to the genocide continue to be a key factor in shaping Rwanda’s regional and international position. Relations between Rwanda and South Africa, for instance, are normalizing after a spat in 2014 following assassination of dissidents who were residing in South Africa. Two, fostering peace and stability ought to be predicated by commitment to truth and reconciliation over the country’s past

Proposed Law Boosts Business Landscape

Efforts to improve the business climate continue eliciting interest with the latest being the bill tabled before the Parliament (October 2016) which aims at streamlining the warehouse receipt system and inject new impetus into the country’s commodities exchange platform ─ the East Africa Exchange. Within the sub-Saharan Africa region, Rwanda has one of the most vibrant commodities exchanges alongside the Ethiopia Exchange and the South Africa Futures Exchange.

POLITICAL OUTLOOK


RWANDA

Inflation Declines

Despite Rwanda’s inflation rate declining to 5.8% in September 2016, 100.0 bps lower than the preceding month, we maintain a cautious view on the near term outlook pegged on continued weakness by the Franc. Inflation remains high by historical levels and is likely to be nudged further up by the surge in food prices.

ECONOMIC OUTLOOK

Franc Slides on Foreign Exchange Shortage

Liquidity in the money market remains relatively tight with the interbank rate having risen by 80.0 bps to 6.7% in September 2016, a necessary move to stem further pressures on the franc and inflation uptick.

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 bonds¹ 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 a link to the latest piece.

Please click the button to view the full article

International Growth Centre: The Commodity Price Rout and Africa’s Unusual Electoral Cycle- In this piece, we discuss how the ongoing electoral cycle in Africa is being shaped by the plunge in commodity prices in the global market with a focus on muted growth in labour productivity as well as a growing number of persons in working poverty.

http://www.theigc.org/blog/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]



©StratLink Africa Limited 2016


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