Africa Market Update December 2016

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


Table of Contents

A financial Advisory Company

DECEMBER 2016 | MARKET UPDATE – AFRICA

Cover image: http://airlines-airports.com/lufthansa-city-office-in-luanda-angola/

www.stratlinkglobal.com

NIGERIA 5

KENYA 6

TANZANIA 7

UGANDA 9

RWANDA 10

ETHIOPIA 8

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


Capital Invested by Country (USD)

AFRICA DEALS LANDSCAPEJANUARY 2016 - NOVEMBER 2016

1. South Africa2. Congo3. Nigeria4. Egypt5. Ethiopia6. Morocco7. Zambia8. Tanzania9. Kenya10. Guinea11. Sudan12. Eritrea13. Mauritius14. Ghana15. Sierra Leone16. Burkina Faso

4.6 Billion 3.0 Billion

959.3 Million 665.3 Million 550.8 Million 414.1 Million 291.7 Million 207.7 Million 155.8 Million 154.0 Million

95.2 Million 65.0 Million 33.1 Million 29.1 Million 27.5 Million25.4 Million

17. Rwanda18. Namibia19. Zimbabwe20. Cameroon21. Uganda22. Madagascar 23. Mozambique24. Tunisia25. Swaziland26. Botswana27. Niger28. Liberia29. Mali30. Central African Republic31. Ivory Coast32. Malawi

20.5 Million 20.0 Million 12.1 Million 11.2 Million

8.5 Million 5.0 Million 2.6 Million 1.9 Million 1.5 Million 1.2 Million 1.2 Million

320,000 140,000 130,000

50,00040,000

1

2

4

9

10

12

16

13

32

20

21

25

26

24

23

1431

11

19 22

3015

6

7

17

18

8

27

28

29

53

Source: PitchBook, StratLink Africa



Capital Invested by Sectors Capital Invested by Deal Type

Snapshot of Deals

• On November 9th, 2016, Seven Seas Technologies (Kenya) reported receiving USD 3.0 Million of financing from Toyota Tsusho

• On November 15th, 2016, Tenke Fungurume Mining (DRC) was acquired by China Molybdenum for USD 2.8 Billion

• On November 22nd, 2016, Delvv.io (South Africa) received USD 463,452.0 in venture funding led by HAVAIC

• On 23rd November, 2016, Leapfrog Investment bought out Good Life Pharmacy (Kenya) for USD 22.0 Million

Source: PitchBook, StratLink Africa

8.8%Communications & Networking

1.8%Commercial Banks

23.3%Others

5.3%Commercial Services

5.0%Commercial Products

9.0%Capital Markets

Metals, Minerals & Mining 33.3%

Consumer Non-Durables 9.8% 3.7%Insurance

32.1% 27.1%

9.4% 7.0%

3.8% 3.7%

2.4% 2.3%

32.1%

27.1%

9.4%

7.0%

3.8%

3.7%

2.4%2.3%

12.2%

12.2%

Merger & Acquisition............................ Corporate Divestiture...

Secondary Transaction - Open Market... PIPE.................................

Growth/Expansion................................... Buy Out/LBO...................

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

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



Medium Term Economic Development Plan

Investors’ focus shifts to the much anticipated Medium Term Economic Development Plan (2017 – 2019) set to be tabled by the Federal Government in December 2016. Unlike preceding plans, the document is set to be an economic recovery strategy plan in view of the turbulence faced in the monetary and fiscal environments over the last one years. Key aspects to look out for in the plan will be:

Monetary Stability: The monetary environment has been bedeviled by a set of challenges over the last one year. Issues in this regard will be:

• Proposed steps towards addressing the dollar (USD) crunch, which has been a big inconvenience for investors, will be a key area of focus for the investment community

• Proposed steps towards stemming the tide of high inflation to bring it back to low single digits. We foresee a bias for a broadly contractionary policy stance in the near term in this regard. We will be keen to observe any pointer on the future of fuel subsidies whose scrapping has been widely cited as one of the key drivers of the present bout of double digit inflation

Bold Plan to Overhaul Oil Industry

The planned overhaul of the oil sector makes for what could well be the most bold reform attempt since the Buhari administration took over. At its core, the plan entails overhauling the National Petroleum Corporation and list it on the stock exchange with the government retaining control. StratLink views this development is crucial for two reasons:

• If it sees the light of day, this is bound to be a major milestone in propping Nigeria’s political landscape profile as a country committed to much needed reforms. With the country’s macroeconomic environment strained by recession, the investor community is keen to observe indications of reform measures that aim at strengthening the policy environment

POLITICAL OUTLOOK

GDP: USD 545.7 Bln | Population: 177.5 Mln

BUSINESS NEWS ENVIRONMENT

NIGERIA

Monetary Policy Conundrum Tightens on Rising Inflation

Further upward nudge in inflation in October 2016 to 18.3% deepened the country’s monetary policy conundrum. The Central Bank is now likely to tighten the benchmark rate further in Q1 2017, in spite of efforts to stimulate private sector in view of an economy in recession. StratLink believes there are two important take home indicators in light of this development:

• Of note is that Nigeria’s inflation now stands higher than Ghana’s which was, for the better part of 2015 and 2016, deemed to be having West Africa most turbulent monetary environment with high inflation and weakening currency and this is bound to inflict an unfavourable psychological impact (towards Nigeria) on the investor community

ECONOMIC OUTLOOK

Investors Jittered over State of Economy

There was a general uptick in yields between October and November 2016 with investors still demanding higher yields for the short-term than the medium and long-term. Our expectations on the market in the near term are as follows:

• In November 2016, Africa Development Bank approved USD 600.0 Million, as part of a USD 1.0 Billion package, in budget assistance towards the Federal Government. This is likely to diminish the government’s appetite for domestic debt in the coming months and help nudge yields downwards in the coming months

DEBT MARKET UPDATE

Full report available for purchase via:

https://gumroad.com/l/ZEEmP



The Case of Daadab and Withdrawal of Troops from South Sudan

Kenya’s external relations (within the region of Eastern Africa) are bound to elicit considerable interest in the months ahead following two developments:

• The Kenyan government has extended the deadline for closing the Daadab Refugee Camp by six months to May 2017 ceding ground on a matter that had emerged as sticky issue for the country in view of relations with external partners. This came on the back of pressure from the United Nations High Commission for Refugees in light of an earlier decision to close the camp by end of November 2016. We view repatriation of the refugees and closure of the camp as a wild card for region and will wait to observe how this is executed if it materializes. An unstable Somalia has been a sore thumb for the region over the last five years, providing a hub of terrorist cells. It is important for Eastern Africa that the country’s transition into a more stable climate is facilitated without creation of pressures on the socio-political climate

POLITICAL OUTLOOK



KENYA

Shilling Slides

Investor focus is on the shilling as the year draws to a close with the local unit having ceded ground to the greenback between Q3 2016 and the first two months of Q4 2016. This has come under the weight of demand from importers. We expect the local unit to remain stable in the near term buoyed by two factors:

• Robust foreign exchange reserves (at USD 7.5 Billion as at November 10th, 2016, equivalent of 4.8 months of import cover) that give the Central Bank capacity to respond to any pressures.

• Recent monetary policy adjustments by the Central Bank are likely to have been a source of confidence for the investment community with a dovish stance widely interpreted to indicate minimal pressure lurking in the near term horizon

Government Sets Revenue Targets for 2017/18

The 2017/18 Medium Term Budget plan tabled by the National Treasury suggests the government targets raising USD 16.6 Billion (Kes 1,694 Billion) in revenue in 2017/18, representing about 20.4% of GDP¹. Whereas StratLink observes that tax reforms over the last three years have been instrumental in supporting revenue mobilization efforts, two factors warrant cautious optimism with regard to the revenues targets:

• Revenue mobilization performance stood at 92.4% in the first nine months of 2015/16 (July 2015 – March 2016), registering 11.7% growth (year-on-year) falling below the target set by Treasury². If this under-performance prevails, the revenue mobilization agency is bound to face challenges in realizing the target set

ECONOMIC OUTLOOK

Government Revises Local Debt target

The yield curve posted muted movement between October and November 2016, reversing a trend of decline witnessed in the preceding two months. This came against the backdrop of a 25.9% upward review of the domestic market borrowing target to USD 2.9 Billion. This revision is likely to suggest the government could be revising plans to tap into the international market to meet revenue gaps. The rise in demand for domestic debt is bound to send yields on the uptick in the coming months.

DEBT MARKET UPDATE

Market Posts Mild Rally

Recovery by banking stocks following the introduction of a ceiling and floor on lending and deposit rates, respectively, pushed the market to a mild rally between October and November 2016.

EQUITY MARKET UPDATE






President Magufuli Realigns Regional Ties

President Magufuli made his maiden visit to Kenya in October 2016, making it his third foreign trip since assuming Presidency alongside Rwanda (April 2016) and Uganda (May 2016). With his initial foreign trips focusing on the East Africa Community (EAC), President Magufuli could be keen to remedy the perception of Tanzania as a member state playing hard ball in the integration process. Over the years, EAC has grown to serve as an important export market for Tanzania and it is important the country warms up sour relations.

Mining Firms Ordered to List on Dar Bourse

Companies holding special mining licenses have been ordered to float 30.0% of their stake on the Dar Bourse over the next two years, through the current Minimum Shareholding and Public Offering Regulations. This comes as the country looks to increase transparency in the sector by sealing graft loopholes in mining firms; boost government revenue and promote economic growth besides allowing local citizens to have a stake in the mining firms. The move also comes a few months after the National Assembly passed the Finance Bill 2016 which requires all electronic communication companies registered in the country to list on the Dar es Salaam Stock Exchange in what we project was a move to increase transparency of telecommunication firms.

POLITICAL OUTLOOK


TANZANIA

Improving Macroeconomic Conditions

Economic conditions continue to improve on the back of rising commodity prices, which have seen export receipts rise as the import bill declines, and a stabilizing shilling. Q2 2016 GDP growth was mainly driven by an upturn in mining earnings, a rebound by traditional exports and strong growth (9.1% compared to 5.2%, in the same period in 2015) in the manufacturing sector.

ECONOMIC OUTLOOK

High Investor Appetite for Debt Instruments

Investors’ appetite for treasury bills has remained strong attracting over-subscription in bids across all tenures in November 2016 supported mainly by high liquidity in the market with the interbank rate declining to 13.6% in the period under review. The monetary environment has been stable with the shilling holding firm against the greenback, appreciating by 30.0 bps, month-on-month and depreciating marginally by 70.0 bps, year-on-year whilst inflation has been on the decline standing at 4.5% in October 2016.

DEBT MARKET UPDATE


Bourse Remains Bearish

The bourse maintained bearish trends in November 2016. Tanzania Breweries Ltd’s (TBL)share price trended on a plateau after poor financial year performance attributed to harsh operating environment as well as waning investor confidence coupled with stricter enforcement of alcoholic beverage trading hours. TBL Group reported a 7.0% decline in revenues during the six months ending September 30th, 2016 to USD 236.3 Million while the group’s gross profit dropped by 12.0% to USD 108.6 Million in the period under review.





Cabinet Reshuffle Signals Adjustment to New Norm

The November 2016 cabinet reshuffle is the strongest indicator since the May 2015 general election that the country is adjusting to a new norm. Ethiopia faces a new norm on two fronts:

• Months of protests, largely in the Oromia region, have awakened the state to growing disenfranchisement of sections of the public and began reshaping the country’s political landscape. Media reports indicate that nine of the new members of the cabinet are from the Oromia region indicative of an attempt by the government to mitigate rising political pressures by fostering a sense of inclusion

GDP: USD 61.5 Bln | Population: 94 Mln

POLITICAL OUTLOOK

ETHIOPIA

Automobile Market attracts Investment

Despite uncertainty in the political environment, Ethiopia has continued to attract investor interest with the latest development being in the automobile industry with South Korean manufacturer, KIA Motor Corp, announcing plans to establish an assembly plant in Ethiopia. This is important for two reasons:

• It speaks to the country’s position as a gateway to the Eastern African market with investors taking cognizance of the country’s pivotal position in a fast growing region

• This also comes one year since Ethiopia opened its first vehicle manufacturing and assembly plant targeting growing demand domestically. In the East African region, Ethiopia has the least number of registered vehicles despite its population and GDP size and this is a key factor prompting automobile investors to look at the market


Inflation Continues to Decline

Inflation seems to have corrected to lows last witnessed in Q4 2014 after a surge in 2015. At 5.6% in October 2016, it stands at the lowest level since October 2014 and is significant for three reasons:

• This bodes well for an economy which has, in the recent past, come under intense socio-political pressure threatening the investment climate

• In the face of adverse weather conditions characterized by a protracted dry spell, it suggests the government is managing likely food supply side challenges well to tame the potential high rise in prices that can be created by shortage

• Whereas there is little, if any, data to indicate the general direction of monetary policy, we expect the National Bank of Ethiopia has been broadly hawkish in the year-to-date with a keen eye on mitigating inflation and foreign exchange risks. Available data shows that year-on-year growth in money supply decelerated from a high of 39.2% in 2011 to 26.5% in 2014. Another reason for tight monetary policy would be the slide for the local unit against the greenback over the last one year. The Birr has been subdued by low commodity prices which have undermined export earnings.

ECONOMIC OUTLOOK






Fragile Environment in Kasese

The security situation comes under close watch following a fragile environment in Kasese District over the last one month characterized by clashes between security forces and a militia group. We will be keen to observe how this impacts the wider political environment over the coming months. This will be important given that Kasese is known to be one of the regions that report strong support for President Museveni’s main challenger – Kizza Besigye. As such, how the state responds to the security situation is bound to elicit political undertones that could shape the risk profile in 2017. Placement of Besigye under house arrest recurrently has been one of the key issues defining the country’s post-election political landscape over the past nine months.

Uganda Looks to Tap into the Chinese Market

The government has earmarked fourteen projects worth approximately USD 6.0 Billion to potential investors from China through an investment seminar held in China, which ranks second as Uganda’s major source of imports after India. This comes as the country looks to tap more into alternative markets owing to macroeconomic uncertainty in the European Union (EU) following the June 2016 Brexit vote. The vote by the UK to leave the EU has led to increased uncertainty over the potential spill overs of a fragmented market on trading partners such as Uganda. China has, for the last three years, topped the list of the top ten foreign direct investment sources in Uganda, consolidating its position as one of the country’s key bilateral partners. Total trade between the two countries is reported to have reached USD 932.8 Million in 2015, despite being considerably in favor of China by balance.

POLITICAL OUTLOOK


UGANDA

Shilling Tanks on Widening Trade Balance

The Uganda Shilling comes under sharp focus as the year wraps up following a slide in Q4 2016. This recent bout of depreciation comes on the back of a deteriorating trade balance that has heightened foreign exchange pressures. In the six months to September 2016, Uganda’s balance of trade deficit grew by 6.4% (monthly average) compared to 3.5% in the same period in 2015. The graph below illustrates that the balance of trade deficit has been widening for the better part of 2016, losing the gains made in the contraction registered in the first half of 2015.

ECONOMIC OUTLOOK

Yields Stable

The yield curve was, by and large, stable between October and November 2016 with marginal movement across all tenors. Market reports suggest investor appetite has been low, especially on the short-term end of the market, in the period under review in what could be an indication of a cautious stance over emerging pressure on the monetary environment notably from a foreign exchange perspective. Investors could also be assuming a cautious stance following the November 18th, 2016 downgrade of the country’s debt rating from B2 to B1 attributed to a weakened fiscal environment.

DEBT MARKET UPDATE


The bourse managed to endure the industry shocks occasioned by the placement of Crane Bank under statutory management in October 2016, maintaining bullish trends witnessed in the previous months to rise by 3.7%, month-on-month, reflecting investor confidence in the banking industry stability.






Greater Integration with Central Africa

President Paul Kagame’s visit to Gabon in November 2016 comes against the backdrop of Rwanda’s re-admission to the Economic Community of Central African States (ECCAS) in 2015. We expect Rwanda to continue solidifying its ties with the Central African regional bloc owing to the following reasons:

• Access to a wider market: ECCAS member states form an economic bloc of about USD 223.3 Billion in GDP size, 53.1% larger than the East African Community’s (EAC) economy. This gives Rwanda access to a much wider market and provides a potential buffer in the event of adverse macroeconomic conditions in the EAC market. Additionally, relatively low GDP growth in the ECCAS bloc over the last five years suggests the region could be performing below potential and harbors enormous potential in the years ahead

Energy Sector Primed for Investment

The energy sector seems primed for creating investment opportunities over the next five years in view of the government’s ambitious targets in deepening electrification. About 85.0% of Rwandans are reported to use biomass and government is looking to reduce this to 45.0% by 2020 through attracting investors to the energy sector to help meet its energy generation targets. Available data indicates that the Energy Development Corporation Ltd (EDCL) has since signed agreements with about thirteen enterprises to provide off-grid solutions. Rwanda’s installed capacity stands at 190.0 Megawatts (MW) with 27.0% connectivity rate, of which only 2.0% is off-grid. By 2017, the government targets to reach 70.0% population total access to electricity, out of which 22.0% will be supplied by off-grid solutions.

POLITICAL OUTLOOK


RWANDA

Recovery in Coffee Prices to Prop Trade Balance

We reported in our previous month’s (November 2016) market report that the economy faces headwinds from protracted effects of depressed commodity prices that have seen the country’s trade deficit deteriorate by 5.0% to USD 341.2 Million in Q2 2016 from the previous quarter. Nonetheless, the upturn in traditional exports, the second largest export earner after minerals, is expected to be a key driver of the country’s growth in 2017. The tumble in commodity prices has been a key factor in determining economic growth trajectory for most sub-Saharan Africa economies as export earnings plunged, consequently, negatively impacting trade balances.

ECONOMIC OUTLOOK

Government Paper Attracts Investor Interest

The USD 18.5 Million three-year Treasury bond issued from November 2016, to improve the fiscal environment, recorded a subscription rate of 139.1%. Previous bond issuances in 2016 have also been oversubscribed, reflecting growing appetite for fixed income instruments among investors. The USD 18.6 Million five-year Treasury bond issued on August 24th, 2016 was oversubscribed by 139.0% while the USD 18.5 Million issued in February 2016, reported a subscription rate of about 226.0%. This trend is likely to be driven by cautious optimism over the economy’s near-term outlook especially with regard to potential shocks from the external environment as a key risk factor whilst the 2017 general election stands as a remote risk factor. Liquidity in the money market remains relatively high with the interbank rate declining marginally by 10.0bps to 6.6% in October 2016.

DEBT MARKET UPDATE

Exchange Remains Bearish with Low Activity

The Rwanda Stock Exchange All Share Index remained bearish in November 2016, declining marginally by 70.0 bps to close the month at 127.4 units, attributable to higher interest in fixed income securities which seem to be faring better. The bourse has witnessed subdued investor activity in the period under review as investors cash out their end of year gains.






StratLink in the News

StratLink Africa continues to make commentary on thematic issues in frontier and emerging markets. Below please find links to the latest pieces.

Please click the buttons to view the full articles:

International Growth Center: Commodity price shocks in times of crisis - Securing growth in sub-Saharan African economies - In this piece, Senior Research Analyst, Julians Amboko, discusses the commodity price rout and risks that could be created by insufficient counter-cyclical response in sub-Saharan Africa

Business Daily: Consumer sentiment in sharp rise - In this piece, StratLink’s research assessing consumption trends in Kenya was cited by Business Daily

http://www.theigc.org/blog/commodity-price-shocks-in-times-of-crisis-securing-growth-in-sub-saharan-african-economies/

http://www.businessdailyafrica.com/Consumer-sentiment-in-sharp-rise--says-survey/539552-3466788-a3i0ye/index.html



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]


Contact Details

STRATLINK AFRICA

StratLink - Africa, Limited.

Delta Riverside, Block 4,

4th Floor, Riverside Drive,

Nairobi, Kenya

[email protected]

www.stratlinkglobal.com

+254202572792

Africa Market Update December 2016

Business

Transcript of Africa Market Update December 2016