Africa Market Update - September 2016 abridged

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SEPTEMBER 2016 MARKET UPDATE – AFRICA (Abridged)KENYA | NIGERIA | TANZANIA | ANGOLA | UGANDA | RWANDA

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


Table of Contents

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SEPTEMBER 2016 | MARKET UPDATE – AFRICA

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NIGERIA 6

KENYA 7

TANZANIA 8

UGANDA 10

RWANDA 11

ANGOLA 9

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1 Billion219 Million

20 Million28 Million

934 Million


25 Million


320,00040,000

20 Million

Capital Invested by Country (USD)

AFRICA DEALS LANDSCAPE JANUARY 2016 - AUGUST 2016

Capital Invested by Sectors

46,00022 Million

5 Million

20 Million

9 Million85 Million


Capital Invested by Deal Type

Snapshot of Deals in August 2016• On August 26th, 2016, Tango Mining acquired a 23.0% stake in Kwena Group (South Africa) for USD 904, 848.0 • On August 25th, 2016, Twiga Foods (Kenya) received an undisclosed amount of development capital from DOB Equity • On August 23rd, 2016, Oxbridge Academy (South Africa) was acquired by ADvTech for an undisclosed amount

Source: PitchBook, StratLink Africa

South Africa

Ethiopia

EgyptSudan

Namibia

Uganda

MozambiqueRwanda

Burkina Faso

Kenya

Madagascar

TanzaniaMauri�us

MoroccoTunisia

LiberiaNigeria


Congo

12 MillionZimbabwe

Eritrea

Malawi

Zambia2 Million Swaziland

Sierra LeoneGhana

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

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

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

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

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

19.70% 19.50%

13.60% 11.90%

11.00% 7.10%

2.50% 2.10%

1.50% 11.10%

120,000 CAR50,000 Ivory Coast

6.7%Communica�ons & Networking

4.7%Commercial Banks

19.8%Others

15.3%Commercial Services

14.8%Retail

Healthcare 2.8%

Metals, Minerals & Mining 6.3%

2.4%Pharmaceu�cals& Biotech

Consumer Non-Durables 27.2% 19.70%

19.50%

13.60%11.90%

11.00%

7.10%

2.50%

2.10%1.50%

11.10%

1 Million Botswana



‘Whereas the African Union Observer report offers favourable description of Ethiopia’s May 2015 election, StratLink Africa observes that the report does not describe the exercise as ‘free and fair’

StratLink Africa Research, June 2015

‘Inability by citizens in parts of the country to access social media platforms such as Whatsapp and Facebook following protests in the Oromia region indicates that citizens continue to suffer constrained democratic space. This is a potential pressure point for the country’s stability in the long-term in light of growing clamor, both domestically and externally, for observance of liberties. This further complicates the ruling Ethiopia People’s Revolutionary and Democratic Front’s (EPRDF) challenge in fostering cohesion following the 2015 election in whose outcome was rejected by the opposition’.

StratLink Africa Research, May 2016

Country Risk Position: Pallid Outlook in the Medium Term

We maintain a pallid stance on the country’s political risk environment in the medium-term in view of endogenous risks stemming from protests involving the Oromia and Amhara regions which account for 60.0% of the country’s population. The key risk for Ethiopia lies in the fact that protests that are reported to have been triggered by plans to extend Addis Ababa into parts of Oromia region are presenting a vent for accumulated grievances including dissatisfaction with the Anti-Terrorism Act (2009) widely perceived as a tool used to muzzle opposition.

Going forward, the country faces a mix of risk enhancing and mitigating factors with the former likely to dominate the period through Q4 2016.

Population Composition by Regions

Source: Central Statistical Agency Ethiopia, StratLink Africa

Special Edition: Ethiopia Political Risk Outlook

36.6%

23.4%

20.2%

6.0%

5.9%1.9%

1.1%

0.5%

4.4%

Oromia Amhara SNNP Somali Tigray Affar Benishangul-Gumuz Dire Dawa Others

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Risk Deteriorating Factors

• The country is the midst of adverse weather conditions that have affected agriculture and threaten to exacerbate socio-political pressures

• The May 2015 general election and dominance of the ruling party (EPRDF) in the house of representatives has served to fuel marginalization, perceive and actual, of the opposition

• General moderation of the economy’s growth momentum could see less employment opportunities created in the years to come relative to the decade of robust expansion (2003 – 2014)

• Weak institutions that are widely deemed to be under patronage by the government thereby undermining their credibility in conflict resolution

Risk Mitigating Factors

• Media reports suggest Premier Haile Mariam Desalegn has been engaging the opposition in matters of national interest since EPRDF’s victory in the election. This could help defuse tension build-up in the country

• Low internet penetration, estimated at 4.2% of total population against Kenya’s 45.0%1, contains the likelihood of contagion of protests unlike what was witnessed in countries such as Tunisia (48.1%) during the Arab Spring

Stability in the country’s Eurobond yield suggests investors have not revised risk perception of the economy in view of the developments. We assess that this could be as a result of the Ethiopia’s relatively low susceptibility to event risk unlike peers such as Kenya. The Birr has maintained the volatility witnessed since Q3 2015 in a likely reflection of the state of the current account in light of subdued commodity prices.

Ten Year Eurobond Yields

Source: Bloomberg, StratLink Africa

Birr to USD Exchange

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

15-J

ul-1

5

15-S

ep-1

5

15-N

ov-1

5

15-J

an-1

6

15-M

ar-1

6

15-M

ay-1

6

15-J

ul-1

6

Ethiopia Rwanda

20.5

20.7

20.9

21.1

21.3

21.5

21.7

21.9

22.1

22.3

01-S

ep-1

5

01-O

ct-1

5

01-N

ov-1

5

01-D

ec-1

5

01-J

an-1

6

01-F

eb-1

6

01-M

ar-1

6

01-A

pr-1

6

01-M

ay-1

6

01-J

un-1

6

01-J

ul-1

6

01-A

ug-1

6

1 Internet Live Statistics as at June 2016



Protests Point at Strain on the Business Climate

Protests by against Chevron’s operation in the Niger Delta citing unemployment and inequitable distribution of benefits from oil exploration point at challenges being faced by both locals and the business community in view of the adverse macroeconomic climate.

Niger Delta Militia Undermines Risk Outlook

The country’s security position remains under sharp focus in view of the resurgence of militants’ activity in the oil rich Niger Delta which negatively impacts the political risk outlook. Coming at a time when the economy is facing subdued oil prices, disruption of oil production owing to recurrent attacks by the Niger Delta Avengers risks deteriorating socio-economic conditions in the economy. This development suggests the country’s endogenous political risk environment is bound to remain broadly unfavourable in the coming months.

The proportion of government revenue accounted for by oil

The proportion of foreign exchange earnings accounted for by oil

POLITICAL OUTLOOK

NIGERIA

GDP: USD 545.7 Bln | Population: 177.5 Mln

BUSINESS NEWS ENVIRONMENT

75.0%

95.0%

Economy Slumps into Recession

The economy slumped into recession having contracted by 0.4% and 2.1% in Q1 2016 and Q2 2016, respectively. We maintain a bearish outlook on the economy in the near term driven by declining oil production over the last quarter that has seen output stand at 1.5 Million barrels per day in July 2016. Reports indicate the decline in production can be attributed to instability in the Niger Delta, on the back of militancy by the Niger Delta Avengers, and inhibits the country from capitalizing on rebounding oil prices in the global market.

ECONOMIC OUTLOOK

Yield Curve Inverts on Inflation Spike

Short-term yields surged between July 2016 and August 2016, inverting the yield curve. Worries of runaway inflation have prompted this development as the threat of negative real interest rates, with inflation having risen to 16.0% in July 2016, eroded the investment climate’s allure in the recent past.

DEBT MARKET UPDATE

Bank and Oil Stocks Push Market further South

The market remained on a downtrend through August 2016 despite the Central Bank’s move to grant one-off forbearance for banks to write-off fully provisioned Non-Performing Loans was a signal that sought to ease pressure experienced by banks in view of the adverse macroeconomic environment. We note that this comes on the back of conclusion of stress testing (May 2016) which revealed two banks stood below regulatory capital requirement. Despite this intervention, bank stocks continued to tank

EQUITY MARKET UPDATE

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Kenya Hosts Japan-Africa Conference

Kenya’s hosting of the sixth Tokyo International Conference on African Development (2016) is an additional boost to its position as a pivotal economy in sub-Saharan Africa. Over the last 18 months, Kenya has hosted the Global Entrepreneurship Summit and the United Nations Conference on Trade and Development placing it on the global map.

Slowdown in Japan-Africa Trade as Sino-Africa Trade Rises

This comes against the backdrop of declining trade between Japan and Africa and a strong presence by China as Africa’s major trading partner. Over the last five years, China-Africa trade has grown by 6.5% (CAGR) whilst Japan-Africa trade has decline by 3.3%. The conference will be crucial for investors in both regions to establish links and explore further diversification of destination markets amidst an uncertain global environment.

Deal over Electoral Commission Constitution

The joint parliamentary committee tasked with presenting a way out of the stalemated stance between the government and the opposition on persons spearheading the Independent Electoral and Boundaries Commission reached a deal on August 16th, 2016. This development bodes well for the country’s political risk profile ahead of the 2017 general election coming on the back of a series of protests by the Coalition for Reforms and Democracy (CORD) in July 2016.

Favourable Signal for Public Confidence

In Q2 2016, we cited diminished confidence in electoral governing institutions as a key factor undermining our position on Kenya’s political risk outlook. The deal is a major step in remedying deteriorating confidence and we are optimistic the momentum can be built on over the coming months. A key development to watch over the coming months will be the succession of the Chief Justice and the extent to which it props confidence in the judicature.

POLITICAL OUTLOOK

KENYA


BUSINESS ENVIRONMENT

ECONOMIC OUTLOOK

Interest Rates: Has Kenya’s Market Failed?

Whereas StratLink observes that lending rates in the country are unfavorably high, it believes Kenya’s market mechanism has not failed as to necessitate credit pricing through legal mechanisms. Available data indicates the country has made considerable progress in narrowing the spread between lending and deposit rates over the last two decades, outpacing regional peers such as Nigeria and South Africa. This is an indicator that over a long-term horizon, there is steady progress in remedying credit pricing anomalies within the market. Between 1995 and 2015, Kenya’s spread declined by 830.0 bps compared to 720.0 and 110 by East Africa (regional average) and South Africa, respectively.

Short-Term Yields Rise

The short-term end of the yield curve posted a mild uptrend between July and August 2016 with the medium to long-term ends remaining largely stable. With liquidity being relatively high in the money market (the interbank rate averaged 5.1% in August 2016 compared to 5.8% in July 2016), the uptick is a likely reflection of inflation expectations following the rise from 5.0% in May 2016 to 6.4% in July 2016.

DEBT MARKET UPDATE

Banking Stocks Tumble Following New Law

Banking stocks tumbled after the President’s ascent of the Banking Amendment Bill (2015) which provides for setting of a ceiling on lending rates at 400.0 bps above the Central Bank’s benchmark rate. We constructed a banking stocks index which plunged 18.9% between the day of the bill’s ascent and August 30th, 2016, 30.4% year-to-date.







POLITICAL OUTLOOK


TANZANIA

Government Accused of Stifling Democracy

Despite mounting concern over constraints on democratic space in the country, we maintain a favourable outlook of Tanzania’s political risk environment with the new government’s reform agenda providing a strong platform for rallying national unity. We view the widening rift between the government and factions of the opposition as manifestation of hangover from the stalemated constitutional review process.

Opposition Plans Rallies

Leading opposition faction, CHADEMA, has planned rallies across the country to demonstrate against what it terms as suppression of democracy by the government. The government is reported to have banned a local newspaper which allegedly published an article which implicated President Magufuli in election fraud. As stated in our July 2016 Market Update, government is increasingly being accused of abusing the Cyber Crime Act to propagate intolerance towards free speech and media freedoms, after it banned live coverage of parliamentary proceedings and all opposition political rallies.

Electrification Deals Boosts Industrialization Prospects

The National Energy Policy received a major boost following a USD 200.0 Million deal between the government and World Bank towards implementation of a six year rural electrification program. For the investment climate, this marks a major step towards decentralization of industry away from urban centres and potentially creating new investment opportunities. Key sectors of interest for investors should be agro-processing and mineral processing with investment in Export Processing Zones suggesting these are areas of priority interest for growing industry.

POLITICAL OUTLOOK


Promising start of 2016/17 Financial Year for Tanzania Revenue Authority

We retain focus on the country’s fiscal position anticipating further recovery owing to the rebound in commodity prices coupled with aggressive fiscal consolidation efforts by the new administration. Available data indicates revenue mobilization performance stood at 99.3% in the first three quarters of 2015/16, compared to 85.6% in the same period a year earlier.

The rebounding performance in mobilization of non-tax revenue and import taxes is an indicator of ongoing fiscal consolidation that has sought to seal leakages. Performance in non-tax revenue and import tax is likely to have been buoyed by improved relations with bilateral partners and addressing inefficiencies within the import-export system.

ECONOMIC OUTLOOK

Low Appetite for T-Bills on Tight Liquidity

Yields in the T-Bill market exhibited signs of rising in August 2016 as liquidity remained tight with the interbank rate rising marginally 50.0 bps month-on-month, to average 16.9% in August 2016. As a result, investors maintained low appetite for government short-term instruments reflecting in under-subscription of auctions with the exception of the 182-Day tenure. We expect yields to remain elevated in the medium-term as the liquidity squeeze persists with Bank of Tanzania remaining on a tight monetary policy stance.

Whereas the 364 Day paper yield remained unchanged at 15.9%, the 91 Day and 182 Day papers’ yields rose although marginally, by 70.0 bps and 10.0 bps to 7.5% and 15.7%, respectively, in the period under review.

DEBT MARKET UPDATE





Angola Defies Regional Trends in FDI Inflows

Angola defied regional trends to post a strong surge in Foreign Direct Investment (FDI) inflows in 2015 to stand at USD 8.7 Billion. Coming from an oil rich country in the midst of challenges occasioned by subdued prices, the surge in inflows is of particular interest and can be attributed to new projects earmarked for the period 2016 – 2017 including the Kaombo Project which has seen Total plan to invest as much as USD 16.0 Billion towards its development.

POLITICAL OUTLOOK


Control of Cabinda: Hot Potato ahead of 2017 Election

We maintain a dimmed outlook of Angola’s political risk outlook ahead of the 2017 general election in view of the following considerations:

• Continued strife between rebels and the government over control of the oil rich Cabinda enclave. In the latest incident, August 08th, 2016, ten soldiers are reported to have lost their lives in renewed conflict between the state and rebel forces in the region

• A harsh macroeconomic environment renders Angola susceptible to socio-political pressures as citizens seek to vent frustration over deteriorated living conditions. The surge in inflation is likely to present a key challenge as households face eroded purchasing power at a time when earnings have, by and large, been subdued by the slump in oil prices

• President Jose Eduardo dos Santos’ appointment of his daughter as head of the state oil company, Sonangol, has elicited widespread criticism over patronage by the President who has been in power since 1979

ANGOLA


Source: Bloomberg, StratLink Africa

Ten Year Eurobond Yields

ECONOMIC OUTLOOK

Diminished Prospects in the Near to Medium-Term

We downgrade the country’s near-term economic outlook based on discontinuation of talks with the International Monetary Fund, in July 2016, for potential funding to address fiscal pressures stemming from subdued oil prices. Angola’s ten year Eurobond yield has since been on the uptick averaging 10.2% in July 2016 compared to Nigeria’s 6.7%3 indicating deteriorated risk perception.

5.5%

6.5%

7.5%

8.5%

9.5%

10.5%

11.5%

12.5%

13.5%

14.5%

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Apr-

16

May

-16

Jun-

16

Jul-1

6

Aug-

16

Nigeria Angola

Kwanza Stabilizes

The Kwanza stabilized in Q2 2016 with the country’s foreign exchange reserves exhibiting slowed deceleration over the last three months. The Kwanza had come under pressure in Q1 2016 following US dollar aridity in the market following decision by Bank of America and Standard Chartered to stop supplying banks with the greenback towards the end of 2015.





Government Issues Oil Licenses

The government has issued oil production licenses to joint venture partners, Total Exploration and Production Company, and Tullow Oil Uganda, in addition to the one it had earlier issued to the China National Offshore Oil Company (CNOOC), raising investment prospects of realizing the targeted commercial production in 2017. We anticipate the following to be key issues for investors:• Production is projected to peak at 225,000

barrels per day around 2025 implying the next ten years are to be characterized by accelerated growth of the economy from the new engine (oil) as well as growth in per capita income, subject to trends in oil prices. In the case of Gabon, economic growth accelerated from 2.4% in 1993 to 5.7% in 1997 at the peak of oil production beyond which growth has fluctuated depending on domestic and external conditions

Age Limit on the Presidency: Sticky Issue

Ruling party, National Resistance Movement (NRM), is reported to have petitioned President Museveni with a proposal seeking to amend article 102 (b) of the constitution to remove the presidential age limit of 75 years. As indicated in our March 2016 (Post-Election Issue), the question of succession within the party in view of the age limit imposed by the constitution was bound to be one of the key issues shaping the country’s political climate in 2016. The parliament has previously (2005) amended the constitution to expunge term limits on the presidency and it is unlikely the new proposal would experience formidable resistance in view of NRM’s dominance.

POLITICAL OUTLOOK



UGANDA

Bank of Uganda Slashes Benchmark to Restore Growth Momentum

Bank of Uganda slashed the benchmark rate by 100.0 bps to 14.0%, for the third consecutive time since April 2016, in an apparent monetary expansion onslaught on the ongoing economic slowdown. The economy expanded by 3.5% in Q1, 2016 compared to 5.4% in the same period a year earlier as the country took a hit from monetary contraction and low commodity prices.

ECONOMIC OUTLOOK

Rise in Short-term Borrowing

T-Bill yields are likely to continue exhibiting an upturn over the coming months on the back of increase in the government’s appetite for short-term debt over the last three months. The stock of T-Bills posted the strongest growth, month-on-month, in June 2016 at 8.0% compared to an average of 3.2% in the first half of 2016.

DEBT MARKET UPDATE


The bourse, although recovering, remained bearish in August 2016, declining marginally by 80.0 bps to close the month at 1,633.7 units. We expect further gains at the bourse in the coming months as economic conditions in the country improve.





POLITICAL OUTLOOK

Rating Reveals Event Risk Still Looms over Business Climate

On August 12th, 2016, Moody’s assigned Rwanda B2 (Stable Outlook) on first time local and foreign currency issuer ratings casting a broadly favourable outlook for the business environment. The rating is in line with StratLink’s assessment of vulnerability of the country’s business environment to exogenous shocks, especially in view of strained relations with Burundi, which could slow down economic activity.

Endogenous Risk Moderated

From an endogenous perspective, risks to the business environment have been mitigated by the constitutional referendum that paved the way for President Kagame to seek an additional term in office in the 2017 general election.



RWANDA

Trade Relations with Burundi

We assume a negative outlook on Rwanda’s risk environment following the decision by neighboring Burundi to ban cross-border trade informed by the following consideration:

• Rwanda’s exports to Burundi have grown from 10.5% of its exports to the East African region in 2010 to 13.8% in 2015. As such, Burundi has grown in significance to Rwanda and the latest development threatens to undermine this position.

• On the whole, this development derails efforts to foster regional integration especially for the two smallest economies (Rwanda and Burundi) which stand to benefit from access to larger markets

• This development comes on the backdrop of already strained relations between the two countries with the government of Burundi alleging involvement by its Rwandan counterpart in supporting rebels seeking to oust President Pierre Nkurunziza

Fiscal Balance gets a Boost from Improved Tea Export Earnings

An unfavourable trade balance presents risks to the country’s economic outlook in the near term. Rwanda’s fiscal balance has been deteriorating on the back of declining export earnings. The deficit on traded goods widened by 10.2% in Q1 2016 from the same period in 2015 with imports accounting for 77.5% of total trade (USD 456.9 Million) whilst exports constituted 15.6% (USD 97.8 Million) as re-exports accounted for 7.0% (USD 41.0 Million).

ECONOMIC OUTLOOK

Exchange Remains Bearish as Bralirwa Profit Declines

The Stock Exchange All Share Index remained flat throughout August 2016, declining marginally by 60.0 bps to close the month at 129.3 units. The market has been undermined by Bralirwa’s performance in the first half of 2016 posting 83.8% decline in profits for the first half of 2016 owing to high interest expenses on loans and losses stemming from foreign exchange risks.

Franc Slides on Foreign Exchange Shortage

Liquidity is likely to tighten in the coming months in view of the deceleration by the Franc witnessed over the last month. The depreciation came against the backdrop of reports of shortage of foreign exchange in the market.

DEBT MARKET UPDATE






StratLink in the news

In the month under review, Konstantin Makarov’s focus of analysis was on emerging markets in view of trends witnessed over the last two quarters:

• In this piece, he provides analysis on the effects of emerging markets on economies through 2016

• In this piece, he assesses investors’ approach to emerging markets, identifying weaknesses and opportunities

Senior Research Analyst, Julians Amboko, shed insight on the ongoing electoral cycle in sub-Saharan Africa in view of change of regime in Nigeria, South Africa and Burkina Faso

http://ventureburn.com/2016/08/effects-emerging-markets-economies-2016/

https://www.entrepreneur.com/article/280969

http://blogs.lse.ac.uk/businessreview/2016/08/30/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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