Africa Market Update - February 2017

FEBRUARY 2017 MARKET UPDATE – AFRICA (Abridged)NIGERIA | KENYA | TANZANIA | UGANDA | RWANDA | ANGOLA

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

NIGERIA 5

KENYA 6

TANZANIA 7

RWANDA 9

ANGOLA 10

UGANDA 8

http://www.africlandpost.com/angola-launches-crackdown-amid-plunging-oil-prices/Cover image:

© Ademar Rangel

Table of Contents

http://www.africlandpost.com/angola-launches-crackdown-amid-plunging-oil-prices/

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


Central Banks Step Gingerly on a Balance of Domestic and External Risks…

Major central banks in sub-Saharan Africa ushered in 2017 with retention of benchmark rates (Reserve Bank of South Africa, Central Bank of Nigeria, Bank of Ghana, Central Bank of Egypt¹ and Central Bank of Kenya) at a time when prevailing macroeconomic conditions would have ordinarily triggered anticipation of more dovish signals. This position is likely to have been informed by two key considerations:

• The December 2016 USA Federal Reserve rate hike and prospect of a sustained exit from the zero-range interest rates horizon in the coming months saw the greenback rally whilst subjecting most emerging and frontier market currencies to mounting pressure. Relatively bullish expectations around Trump’s policy outlook also helped drive the greenback to a rally in the period preceding January 20th, 2016

• With commodity prices on a general uptrend, central banks are likely to be growing increasingly wary of the waning buffer against a rise in inflation that has been enjoyed in view of the general commodity price rout

• For countries caught between economic recovery and a shift to more flexible exchange rate regime (Nigeria and Egypt), monetary policy adjustment remains a matter of treading a tight rope between helping catalyze growth and shielding currencies from wild swings in an increasingly volatile global economy

Best and Worst Performing Currencies: Year to Date Change (to USD) as at Jan 30th, 2017

Source: Bloomberg, StratLink Africa

1 December 29th, 2016 MPC Meeting

-6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

Sierra Leone Leone

Mozambique New Me�cal

Mauri�an Rupee

South African Rand

Botswana Pula

Angolan Kwanza

Rwandan Franc

Malawian Kwacha

Ugandan Shilling

Ethiopian Birr

Kenyan Shilling

Nigerian Naira

Gambian Dalasi

Tanzanian Shilling

Egyp�an Pound

Ghanaian Cedi

Congolese Franc



Capital Invested by Country (USD)

AFRICA DEALS LANDSCAPEJANUARY 2017

Source: PitchBook, StratLink Africa

7.8 Million

7.5 Million127.0 Million

10,00035.0 Million

270,000Egypt

UgandaKenya

TanzaniaMauritius

2 Billion

Swaziland

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

Major Deals – January 2017• Energy exploration company, Eni (Egypt), sold a 30.0% stake in Zohr Acreage to Rosneft for USD 1.6 Billion

• International Financial Services (Mauritius) was acquired by Sanne Group for USD 127.3 Million

• International Finance Corporation acquired a 10.4% stake in Britam Holdings (Kenya) through private placement

• Off Grid Electric (Tanzania) received USD 7.5 Million of debt financing from Developing World Markets

91.8%1.6%0.2%

6.0%0.4%

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

PIPE ................................................. Seed .....................................

Angel ...............................................

0.2%

0.4%

0.4%

91.4%

1.6%

6.0%

Media

Energy Equipment

Other Financial Services

Pharmaceuticals & Biotech

Capital Markets & Institutions

Business Products & Services

91.8%

6.0%

1.6%0.4% 0.2%

Morocco



Stable Environment with Mild Pressures

We hold a favorable outlook on the political risk environment in the coming months with the following bound to shape perception:

• Investigation into the January 17th, 2017 accidental bombing of a refugee camp that occasioned loss of tens of lives is likely to be a key factor shifting focus back to the competence and preparedness of the military to combat militia such as Boko Haram and Niger Delta Avengers. Nigeria’s capacity to arrest the threat of militia has been tested over the last five years with Boko Haram orchestrating atrocities against civilians, mostly, in the Northern part of the country

POLITICAL OUTLOOK

GDP: USD 481.1 Bln | Population: 187.0 Mln

NIGERIA

Dollar Aridity Continues to Bedevil the Market

Scarcity of the greenback continues to dominate the business environment as investors encounter challenges in meeting dollar denominated obligations. This remains one of the key challenges facing the business environment in the country. Two things are important in this regard:

• Tailwind: This is bound to prevail through the end of Q1 2017 with a key factor to watch out for being the touted Eurobond that could help ease the pressure upon successful issuance

• Headwind: From a structural perspective, however, the fact that the country’s trade balance is still in the negative and imports growing faster than exports (please refer to the Economic Outlook for more detail on this) suggests Nigeria is likely to face this challenge for the better part of 2017, subject to trends in global oil prices.

BUSINESS NEWS ENVIRONMENT

External Position Remains in Deficit despite Improvement

We maintain a largely dimmed view of the Naira in view of the following considerations:

• The country’s external position remains in deficit in spite of the fact that there has been general improvement over the last two quarters. A key factor to watch out for in the period to Q2 2017 will be the extent to which the Organization of Petroleum Exporting Countries (OPEC) deal boosts oil prices and whether the ongoing rally will be sustained in a manner that would provide a prop for economies like Nigeria

ECONOMIC OUTLOOK

Yield Curve Inversion Persists

The yield curve remained inverted through January 2017 as inflation crept further north to 18.6% in December 2016. Concern over the short-term horizon of the economy abounds with little to suggest general improvement on the monetary front especially as reports of dollar aridity continue to cloud investors’ optimism about recovery of the economy’s key engines of growth such as manufacturing.

DEBT MARKET UPDATE

Bourse Holds Firm against Pressures

The market held firm against pressures with the 30 Index posting a generally flat terrain in January 2017. We assess this trend has been supported by relatively strong performance by banking sector stocks which posted a general rally in the month under review. The rally by banking stocks is a likely reflection of two critical developments:

• Investors opting for the market in view of uncertainty around Kenya’s banking sector and the adoption of a ceiling and floor on lending and deposit rates, respectively

EQUITY MARKET UPDATE

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New Team at the Helm of Electoral Oversight Body

The first month of 2017 was characterized by key developments that are bound to be pivotal in shaping the country’s political risk climate in the coming months. On the whole, we maintain a close watch over developments with a focus on realignments within both government and opposition factions especially within potential swing voting blocs. Two developments surrounding the electoral oversight body and registration of voters as well as the President’s ascent of the controversial amendment on electoral laws stood out in the month under review.

• The President signed into law the Election Laws Amendment Act (2016) that polarized parliament owing to the provision allowing the Electoral oversight body to put in place complementary mechanisms for voter identification and transmission of results. This is bound to remain an emotive issue for the country with factions of the opposition alleging plans to undermine the credibility of the electoral process

POLITICAL OUTLOOK


KENYA

Protracted Lethargy of the Business Climate Looms

StratLink foresees two major risks to the business environment over the coming months:

• Protracted Lethargy: Generally, the fourth quarter is relatively slow in Kenya’s business environment. With the general election set for August 2017, the implication is that the business environment is likely to face protraction in the deceleration of the economic environment with most investors likely to adopt a wait and see stance ahead of the polls which take place at the start of Q3 2017. The investment community will be particularly interested to observe how the next administration approaches sticky policy concerns such as the adoption of a ceiling and floor to commercial bank lending and deposit rates, respectively


Monetary Environment under Pressure

We hold a dimmed view of the country’s monetary environment with shilling opening 2017 on a rout whilst there are indications of a build-up of upward forces on inflation given adverse weather conditions that are bound to create supply side constraints from a food perspective. There is likelihood on weakened resilience by the shilling in the coming months underpinned by the following considerations:

• The rise in global oil prices triggered by the November 2016 Organization of Petroleum Exporting Countries (OPEC) deal to slash production suggests Kenya’s external position is unlikely to benefit from a favorable relatively import bill as it has in the recent past. With crude petroleum and petroleum products accounting for about 20.8% of the importation of principal commodities, the surge in oil prices is likely to reflect in higher demand for dollars by importers thus piling pressure on the shilling

ECONOMIC OUTLOOK

Liquidity Tightens amidst Weakening Foreign Exchange Environment

Yields rose marginally in the short-term end of the market between December 2016 and January 2017 as liquidity tightened in the money market in a likely move by the Central Bank aimed at stemming the slide by the shilling. The interbank rate climbed to an average of 7.7% in January 2016 compared to an average of 6.0% in December 2016. In line with this, subscription in the T-Bill market has been relatively low with aggregate bids received for the 182 and 364 Day papers in the January 23rd, 2017 issue standing at 68.9% of the amount offered.

DEBT MARKET UPDATE






Deepening Concern over the Government’s Stance on Dissent

The government’s warning of possible closure and prosecution of media houses deemed to be encouraging dissent adds to the concern of mounting intolerance by the state. The Tanzanian government has in the recent past come under sharp scrutiny for stifling freedom of expression especially following enactment of the Cyber Crimes Act (2015) which has attracted criticism for alleged constriction of democratic space in the country. In the period under review, two other developments led to deepening concern over President Magufuli’s regime:

• Opposition leader, Edward Lowassa was detained briefly for allegedly holding an illegal meeting, a fact that served to fan further concern that the country could be steering towards reversion of gains made towards protecting fundamental freedoms

POLITICAL OUTLOOK

TANZANIA

Shock to Agriculture to Derail Business Climate

Growth in the agriculture sector slumped to 0.3%, near stagnation, in Q3 2016 compared to 5.1% in the corresponding quarter of 2015, signaling a shock to key drivers at the tail end of 2016. Two factors are likely to be underlying this trend:

• Decelerating growth momentum in credit to the sector, with a 940.0 bps between 2012/13 and 2014/15, is indicative of declining appetite by investors in the sector which could signal perceived risks. The sector has been the only one posting such a strong and sustained downtrend in private sector credit and is bound to face subdued growth through Q2 2017


High but Weak Growth

Despite posting relatively high economic growth in Q3 2016 (latest available statistics), we view the performance as an indication of high but weak growth informed by downward forces as discussed below:

• At 6.2%, growth stood 110.0 bps lower than that posted in the same quarter in 2015, a year that was characterized by high monetary instability and elevated fiscal pressures in the economy. Near stagnation in the agriculture sector, as mentioned in the foregoing section, was a key factor informing this downtrend in aggregate economic growth

ECONOMIC OUTLOOK

Yields on the short-term end of the market maintained a flat terrain between December 2016 and January 2017 even as liquidity rose with the interbank rate averaging 10.4% in January 2017 compared to 13.6% and 13.5% in December 2016 and November 2016, respectively. Appetite for instruments offered was relatively high with the ten year bond attracting a performance rate of 114.9% whilst the January 25th, 2016 T-Bill auction saw the 182 Day and 364 Day papers report 208.0% and 346.0%, respectively.

DEBT MARKET UPDATE


The market continues to be subdued as the main counter, Tanzania Breweries Ltd accounting for 45.4% of market capitalization, posts bearish performance. The manufacturing sector of the economy has been facing an adverse operating environment, growing by 4.5% in Q3 2016, 170.0 bps lower than the economy’s aggregate growth.





Recent Appointment Stirs Up Succession Debate

President Yoweri Museveni’s appointment of Major General Muhoozi Kainerugaba, his son, as Special Advisor in January 2017 is a key indicator for the political risk profile owing to the following:

• On the surface, it has been widely deemed as part of efforts by the President to groom persons within his family in light of growing debate over the country’s succession politics following the last election in which he secured a fifth term in office. In June 2016, Museveni appointed Janet Kataaha Museveni, his wife, as Education Minister

• More consequentially, this development throws a spanner into the works within the ruling National Resistance Movement (NRM) which, in the run up to the 2016 general election, faced internal fault lines as stalwarts like Amama Mbabazi bolted out of the party. This is bound to have been a key driver of Museveni’s comparatively poor performance in the last election, and one which the opposition will be keen to leverage.

POLITICAL OUTLOOK


UGANDA

Local Manufacturers Bear the Brunt of the South Sudan Conflict

The conflict in South Sudan has negatively impacted manufacturing in Uganda given significant cross-border trade between the two countries. South Sudan is the third largest export destination for Uganda, receiving about 10.6% of Uganda’s exports as at 2014. The government reported that Uganda’s economy was losing about USD 0.8 Million daily due to the resumption of conflict in South Sudan. Roofings Limited, the largest steel manufacturing plant in East Africa and controlling about 60.0% of the steel market in Uganda, is reported to have lost about 50.0% in sales due to the conflict in South Sudan, reflecting the negative impact of the ongoing war on local industries.


Optimistic Outlook despite Headwinds

The International Monetary Fund projects Uganda’s economy will grow by 6.0% in 2016 and about 5.0% in 2017, buoyed by ongoing infrastructure developments, recovery in investments in the oil sector and new trade opportunities from integration in the East Africa Community. However, this projection maybe overstretched given Uganda’s economy has been sluggish in the past year on the back of harsh macroeconomic environment. Q1 2017 adjusted real GDP (July-September, 2016) contracted by 0.2% compared to a growth of 1.0% in the same quarter a year earlier.

ECONOMIC OUTLOOK

Marginal Rise in Yields on Increasing Liquidity

Liquidity in the money market continues to rise despite signs of volatility in the foreign exchange market. The interbank rate declined by 71.0 bps, month-on-month, to 11.2% as at December 2016. Nonetheless, yields rose, marginally, in the period under review, in likely response to the rising inflation which steadily rose from 4.2% in October to 5.7% in December, 2016

DEBT MARKET UPDATE


Banking Stocks Gain Marginally as DFCU Takes Over Crane

The market heaved a sigh of relief as DFCU Bank took over Crane Bank, following placement of the latter under statutory management in October 2016, with banking stocks gaining marginally on the day of the takeover. The banking stocks index closed January 2017 at 905.0 units, 2.3% higher than the low registered on November 1st, 2016, a week after placement of Crane Bank under statutory management. Banking stocks are, however, bound to remain subdued in the coming months as investors hold a cautious stance over the state of the sector.





Opposition Seeking to Present a United Front in August Election

Rwanda’s political environment is pervaded with the August 2017 election debate. The eleven opposition parties that previously backed the 2015 constitutional amendment on term limits that allows the incumbent to seek re-election for a seven year term in 2017 and two five-year terms thereafter, have backtracked on their decision and are now in favor of an opposition coalition to field a single presidential candidate to face-off with President Kagame. The Democratic Green Party of Rwanda, the sole opposition party that opposed the constitutional amendment, had previously indicated its decision not to boycott elections but instead field a candidate to challenge President Paul Kagame. The decision to coalesce under one umbrella by the opposition elicits mild political excitement in view of President Kagame’s high popularity levels ─ in light of the resounding endorsement during the 2015 referendum as well as votes garnered in previous election.

Banking on Dovish Stance The business environment is banking on dovish signals sent by Bank of Rwanda to stimulate the economy coming against the backdrop of indications from the Finance Ministry that the government would need additional support from the International Monetary Fund to help balance the external position.

Rate Slash Signals Change of Stance

Bank of Rwanda’s key repo rate now stands at 6.25%, following a twenty five basis points slash in the December 2016 monetary policy meeting. Coming as the first rate slash since 2014, the move signaled a change of stance by the market regulator that could potentially help stir up the business climate at a time when commercial bank lending rates have been creeping up to stand at 17.0% as at December 2016.

POLITICAL OUTLOOK



RWANDA

Declining Deficit as Revenues Pick-Up

The economy started the year on a positive note with a decline in the country’s fiscal and trade deficits supported by improving revenue mobilization and declining government expenditure. The fiscal deficit narrowed to 3.5% of GDP in 2015/16 on the back of improved tax collections and lower government spending. Total imports decreased by 8.7% to USD 439.4 Million, while exports decreased marginally by 1.5% to USD 112.5 Million, in the period under review

ECONOMIC OUTLOOK

Yields posted a general declining trend across all tenors in the period under review, despite inflation uptick on the back of relatively tight liquidity. Investors still exhibit high appetite for government instruments as the equities market continues to be subdued. The rising inflation may nudge yields upwards in the near-term.

DEBT MARKET UPDATE


Crystal Ventures Props Market

The market remains subdued with Crystal Ventures standing out as the out-performer in January 2016, maintaining the high registered in December 2016 following the rally witnessed between Q3 2016 and Q4 2016. With Bank of Kigali and Bralirwa on the downtrend, however, the market is set to remain subdued in the coming months.






Calm Environment ahead of General Election

The political climate was quiet in January 2017 even as the country gears for the August general election that could be potentially consequential in the event that incumbent President Jose Eduardo dos Santos and the ruling MPLA party are voted out. At the moment, the political landscape is dominated by policy response to the economic downturn with attentional focused on the impact that the deal by OPEC member states could have in helping address the strain faced over the last one year. One key advantage for Angola is that over the years, its production of oil, unlike Gabon’s, has been on a general uptick and the country is poised to draw greater benefit from a resurgence in prices.

POLITICAL OUTLOOK

ANGOLA

Banks Appeal for Bailout Package

The banking sector comes under sharp focus following the appeal for a bailout package from the government in view of the knock-on effects of subdued oil prices on the economy. Available data shows that banks’ excess reserves at the Central Bank declined by 75.3% between January 2016 and November 2016 to USD 380.7 Million, sending a signal with regard to the state of the sector as the economy faces headwinds.

ECONOMIC OUTLOOK

With crude oil maintaining the lion’s share of Angola’s export revenue and uncertainty of the recovery of global oil prices on the back of the OPEC production slash deal, we will keep a keen eye on the banking sector and how it evolves in the coming months. A key challenge for the sector, much like Nigeria, will be scarcity of the greenback in a market that has, for a long time, used the currency and only recently experienced strong de-dollarization efforts by the government.

Source: Central Bank of Angola, StratLink Africa

Economy by Sector Composition

Oil Merchant Services Construc�on

Agriculture Manufacturing Others

46.9% 22.1% 8.6%

7.0% 6.8% 8.6%

Angola Exports

Source: Central Bank of Angola, StratLink Africa

Crude Oil Diamonds Refined Oil

94.6% 3.2% 1.2%

Gas Others

0.3% 0.7%





StratLink in the News

In the period under review, StratLink’s research department gave insight on Ghana’s macroeconomic climate, in view of the new administration’s blue print for recovery, highlighting both strengths from a historical standpoint and potential weaknesses in light of an evolved environment.

Please click the button to view the full article:

Ghana won’t be able to fix its economy if it uses last decade’s rule book

http://blogs.lse.ac.uk/businessreview/2017/01/25/ghana-wont-be-able-to-fix-its-economy-if-it-uses-last-decades-rule-book/



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]

Sophia Sifuma – Research [email protected]

Easton Ochieng’ – Intern Research Analyst [email protected]

Peter Mutisya – Director Graphic [email protected]



©StratLink Africa Limited 2017


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