Standard - African Markets Revealed Sep 2010

African Markets Revealed — September 2010

Fixed Income Research

Index

African markets Coming in from the cold 3

Angola Out of the woods? 12

Botswana Fiscal pressures set to persist 16

Côte d’ Ivoire A step closer to general elections? 20

Egypt Getting back into its stride 28

Gabon Economic diversification on the agenda 32

Ghana Sovereign downgrade is behind the curve 36

Kenya Economic growth could gather momentum 40

Malawi Growth driven by agricultural production 44

Mauritius Stepping up the response to economic headwinds 48

Mozambique Strong GDP growth continues 52

Namibia Mining sector on the mend 56

Nigeria Loose fiscal policy drives up bond yields 60

South Africa Feeling the effects of a fragile global recovery 72

Tanzania Gearing up for elections 76

Uganda Focus turns to elections 80

Zambia Rising yield rates could rekindle carry attraction 84

Republic of the Congo Oil prices support macro outlook 64

Senegal Signs of recovery despite structural imbalances 68

Democratic Republic of the Congo Easing interest rates 24


2 Fixed Income Research

Stephen Bailey-Smith* +44-20-3145-6964 [email protected]

Henry Flint* +27-11-378-7202 [email protected]

Samir Gadio* +44-20-3145-6774 [email protected]

Michael Keenan* +27-11-378-7246 [email protected]

Phumelele Mbiyo* +27-11-378-7236 [email protected]

Atusaye Mughogho* +27-11-378-8152 [email protected]

Dmitry Shishkin* +44-20-3145-6963 [email protected]

Seamus Vasey* +27-11-378-8151 [email protected]



cant negative influence on global growth. In many ways, the fiscal austerity has been imposed by the market as the yield required to lend to EU governments rose. The ensuing increase in debt servicing costs also undermines the government’s ability to spend on other things that arguably have a more direct impact on economic growth.

The bearishness on global growth was additionally fu-elled by signs that the US consumer was turning less

Global growth: double-dip mist is lifting

Our default position on global growth since mid-2009 has been that it will outperform expectations. The position was motivated by the overly bearish view that has hung over the market, especially in Europe and America, since the financial crisis in 2008. The view served us well in the period through to end-Apr 10, at which point we felt the usefulness of the stance declined substantially following an extended period of broad based upward revisions in growth expectations. During May and Jun 10, we once again found our bullish growth stance questioned by the market as it grappled with the prospect of a double dip in G4 economic growth. Our bullish default position came back into its own in Jul 10 as the double dip growth ex-pectations lifted in line with improving risk appetite. After being again questioned in Aug 10, the soft-landing global growth scenario appears to be winning through in Sep 10 and we are happy to subscribe to it in coming months.

The roots of the double dip concerns come from several issues linked to expected de-leveraging. Perhaps the most critical during May and Jun 10 were concerns over European government de-leveraging via fiscal tightening. Such tightening was seen as too early and likely to un-dermine the region’s economic growth and have a signifi-

African markets: coming in from the cold

• The global environment is becoming increasingly supportive of flows back into African markets, as the search for yield thaws the illiquidity premium.

• We are not advocates of a double dip global recession and deflation. We rather see a soft landing in global eco-nomic growth from a very restrained removal of monetary and fiscal expansion.

• EM growth out-performance will probably attract increased investment inflows, especially as global interest rates are likely to remain lower for longer.

• EM currencies are expected to continue outperforming G4 currencies, even given an eventual return of EUR/USD downside as the soft data releases switch back to the EU from the US.

• We are constructive on oil prices, seeing a high of around USD95 pb in 2010 and above USD100 pb in 2011.

• We continue to favour African FX carry trades against G4 in GHS, EGP, AOA and even NGN given the higher rate on offer further down the curve.

• We are reasonably happy being moderately long duration in KES, GHS, ZMK, UGX, EGP, ZAR and possibly even NGN after the recent back up in yields.

• We remain constructive on the African macro equity story and still expect some strong multi-month returns fol-lowing a fairly frosty performance over the last four months.

• We would lighten up on Gabon and possibly Ghana Eurobond positions after their recent solid out-performance. We still like Senegal, the lesser-spotted Republic of Congo and we are starting to see value in Côte d’Ivoire.

Source: IMF

Figure 1: IMF economic growth forecasts

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confident and employment creation was proving elusive. Another piece of the bearish growth picture came from concerns over the measures taken in China to slow eco-nomic and particularly credit growth there.

Interestingly, in the middle of the double-dip growth con-cerns in Jul the IMF published their revised World Eco-nomic Outlook in which they revised up their expectations for global GDP growth in 2010 to 4.6% from 4.2% in Apr 10. Their expectations for 2011 remained unchanged at 4.3%. The IMF revised down EU growth forecasts 0.2pps to 1.6% in 2011, revised up US growth forecast 0.2pps to 3.3% in 2010 and 0.3pps to 2.9% in 2011. Meanwhile, they revised down Chinese growth 0.5pps to 10.5% in 2010 and down 0.3pps to 9.6% in 2011. However, EM growth was revised up 0.5pps to 6.8% in 2010 and down 0.1pps to 6.4% in 2011.

Although it is possible that the IMF are now behind the curve in being too bullish on global growth, we see the chance of a double dip in global economic growth as ex-tremely low. Indeed, we are reasonably happy to run with the IMF’s recent estimates, albeit with the risks to some downward revision.

Orderly de-leveraging

We continue to adhere to the argument that the inevitable developed economy de-leveraging will be extremely closely managed in an attempt to make it occur as orderly as possible. Basically this means that fiscal and especially monetary stimulus will only be removed into an environ-ment of reasonable investor and consumer confidence. The consensus view, that we broadly share, that G4 inter-est rates will probably stay low for longer, sits in line with the orderly de-leveraging argument.

EM decoupling

We have never advocated de-coupling as an argument for EM asset out-performance. If anything, EM econo-mies are increasingly integrated into the global economic system. The financial crisis in the developed world clearly had huge knock on influences for EM, mainly through financial channels. But this is not the same as arguing that emerging economies cannot continue to flourish if growth in the developed world is subdued. We believe it most certainly can. Indeed, the major issue the markets are grabbling with is how far the healthy growth in emerging economies can assist the developed econo-mies during what is likely to be an extended period of de-leveraging and subsequent low growth. We continue to advocate that the self-reinforcing dynamism being dem-onstrated by emerging economies will be sufficient to prevent a double dip in global growth and inflation.

Our view is broadly in line with that of the IMF. They are looking for developed economies to grow on average by around 2.4% y/y over the next 5-y, they expect emerging economies to grow an average of 6.2% y/y over the same period, producing global growth of average 4.4% y/y. Accordingly, while emerging economies account for 32.7% of current global GDP (in USD terms) in 2009 (up from 20% in 2000), this proportion will increase to 38.7% in 2015. Basically, while a little less than a third of global GDP, emerging economies are expected to produce around half of global GDP growth. If these expectations are extrapolated forward, emerging economies will pro-duce more than developed economies by around 2028.

Emerging market bubble

Source: Bloomberg, Standard Bank Research Source: Bloomberg, Standard Bank Research

Figure 2: EU high yield versus Emerging market spreads

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We also continue to argue that the poor growth outlook in developed economies and the increased levels of household savings will foster larger investment flows to outperforming emerging markets. The caveat to these flows will be the extent of the increase in fiscal dis-saving.

Inflows into developed countries (particularly the US) from emerging countries will continue to slow and possi-bly reverse on a net basis.

The larger investment inflows into emerging markets will push up asset prices adding to the virtuous growth and asset price out-performance spiral. We are reasonably confident that these flows will play a key role in creating EM asset bubbles in due course, but this is likely to un-fold on a multi-year basis.

The out-performance of EM equities over the last year, relative to developed markets is part of a self-reinforcing cycle of increasing investment flows into EM which is likely to persist as a multi-year trend. The EM out-performance is clearly demonstrated by the MSCI EM equity performance since the crisis, versus the MSCI DM equity market performance over the same period. That said, most of the EM equity out-performance was during 2009. Actually year-to-date in 2010, while MSCI DM is down 3.2%, MSCI EM is up a modest 1.4%.

Frontier market bias: search for yield

Over the same period, the MSCI Frontier equity index was up 4.2% and MSCI Africa was up 12.2%. The ex-pectation that there would be significant catch-up from frontier markets (especially those in Africa) during 2010 has played out moderately well as indicated by the per-formance of the respective equity markets. That said, the

frontier markets performance is still lagging relative to wider EM since the lows reached in early 2009. Africa, being at the far end of the frontier curve, has lagged the re-bound even further.

Part of the issue is related to liquidity. The problems of not being able to get out of illiquid assets during the fi-nancial crisis continues to result in a substantive pre-mium being applied to illiquid assets by global investors. Second, frontier markets are still viewed as something of a complimentary trade (offering yield pick up) during peri-ods of solid risk appetite. The relatively shaky risk senti-ment so far in 2010 has meant frontier market trades have remained relatively marginal.

Skittish risk sentiment to continue

A great deal of the shaky risk sentiment seen in 2010 comes from an underlying concern that 2009’s asset price rebound was built on an unsustainable increase in fiscal and monetary policy. Clearly much of the double dip economic growth outlook comes from similar con-cerns.

Have we seen the end of these concern? Absolutely not. But we suspect that we may take a respite from them for a while as it seems that the market is presently overly pricing the tail risk from another serious period of market dislocation and ensuing double dip deflation. In some ways the sharp upside correction we saw in risk appetite during July has used up some of our positive expectation for H2:10, although Aug’s negative sentiment made the northern summer months somewhat more of a sideways move.

Part of the positive sentiment was fostered by the seem-ing disconnect between strong US company earnings

Source: Bloomberg, Standard Bank Research

Figure 4: Emerging versus developed equity performance Figure 5: EM FX volatility versus VIX index


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once any perceived deflationary concerns have re-scinded. With fixed income instruments having rallied hard in recent months, we are looking for something of a rebound switch-trade back into equities, probably in a post-northern hemisphere summer holiday rally in Sep 10. We have a target of 1,200 on S&P500, but the index needs to break resistance at 1,130 first.

International currency outlook

The other key part of our global outlook depends on USD developments. Although EUR/USD has been the key global FX cross arguably for some time, its importance for risk sentiment took on new impetus since late 2009 as potential questions around debt sustainability in Europe took hold. As Figure 6 shows, average Western Europe CDS spread changes have been a key driver of EUR/USD for much of 2010, although the importance appears to have waned somewhat in recent weeks.

Our house view is that EUR/USD is heading back to par-ity at some point in the next 6-12 months. But that this multi-month trade has been interrupted at present by a combination of initially overly short EUR positioning and the relative strength of growth indicators moving back in favour of the EU versus the US. As these are expected to reverse towards the end 2010, we could see Eurozone concerns resurface and EUR/USD to resume its down-side momentum. Importantly, such a move is likely to be associated with more negative risk sentiment.

EM currencies: strong and consistent

The second key currency theme regards the expected out-performance of EM currencies versus DM currencies Against the developed countries the USD is up 2.4%

and the pessimism on the economy. Indeed, some 75% of the S&P500 companies reported earnings above mar-ket expectations. There is also strong evidence that these companies are sitting on substantial cash re-serves, which has to be a fairly positive indicator for valuations. Cash-rich companies can either buy back stock, invest in future growth or pay large dividends. Moreover, at some point these companies will have to start re-investing, which is a vital part of rebuilding em-ployment and consumer confidence.

Debt bubble forming

Global risk sentiment certainly seems to still favour fixed income. While high beta equity markets in EM and DM have struggled in 2010, fixed income has rallied hard. Moreover, this is not just US treasuries, which are the natural safe haven focus. Indeed, fixed income and credit, even sub-investment grade credit, have generally outperformed equities during 2010. Indeed, as part of the search for yield we suspect that going forward dividend yields rather price earnings ratio will become an increas-ingly important factor driving investment decisions. That said, the sharp decline in global yields should also have a positive impact on equity valuation in so far as the risk free rates used in the discount factors have declined.

It certainly seems that at present the asset class of choice, for the clearly ample global liquidity to find a home, is fixed income. Indeed, the creation of excess liquidity to prevent a deflationary spiral taking hold has been a key feature of our bullish post-crisis stance. It is a solid theme supporting our soft landing for global growth expectation. Moreover, we continue to expect the inter-national authorities to push and pull the liquidity lever appropriately, only removing monetary accommodation

Source: Bloomberg, Standard CIB Global Research

Figure 6: USD/EUR versus average W Europe CDS spread Figure 7: Major versus EM currencies in USD terms


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YTD in 2010, while against the emerging countries it is down a modest 0.4% YTD. Moreover, not only has EM currencies outperformed DM currencies against the USD, they have also been less volatile. The 25-d vol on EM currencies was 3.6% on 8 Sep, while the 25-d vol on DM currencies was 8.0%. The average YTD was 5.1% for EM currencies and 8.8% for DM currencies.

The recent reduction in EM FX volatility is also noticeable when one compares the volatility of key high beta EM currencies against the USD (see Figure 5) with the VIX index (S&P500 volatility index). The argument here is that EM currencies are starting to detach from more traditional indicators of global risk sentiment.

Interest rate outlook

Our global interest rate outlook has also altered a little in recent months. When it comes to monetary policy in the US we have been in the “low for longer” camp for some time. But we have pushed out the expectations of the re-moval of monetary accommodation even further and the expectation of interest rate hikes to at least the back end of 2011. The decision by the US Fed at its Aug FOMC meeting to re-invest maturing agency debt and agency mortgage backed securities in longer-term Treasuries, left monetary policy neutral rather than allowing a moderation in the quantitative easing strategy.

Not surprisingly, this FOMC change proved extremely constructive for US Treasuries and we saw an extension of the bull flattening that has been seen in recent month. The US 10-y Treasury yield rallied to 2.41% (on 25 Aug 10) and is probably likely to test the Dec 08 lows of around 2.0% and possibly even make new lows before the present multi-year declining trend channel is finally

breached. With US Treasuries still seen as the ultimate risk-free rate, these historically low yields have proved extremely constructive for fixed income assets since Apr 10. That said, as already argued, lower risk free rates are also supportive of improved equity valuations.

EM monetary policy

Just as economic growth between EM and DM is diverg-ing, so is monetary policy, with a number of EM central banks already started upon monetary tightening. Inter-estingly, we still believe that the focus on deflation in the developed economies will likely lead a number of EM central banks to leave monetary policy too loose for too long, with the potential for rates to back up quite aggres-sively at some stage in the future. We suspect this will prove more of an issue next year rather than in 2010. In the meantime, the long duration trade across high beta EM has been given an extra lease of life, that we sus-pect will last for most of the remainder of 2010.

Constructive on commodity prices

Commodity prices on average are still some way from their highs in early Jan 10, but they are up from May 10 lows and are still significantly above Feb 09 multi-year lows. Undoubtedly commodity prices have been under-mined in 2010 by USD strength and concerns about weaker economic growth. Although we can see both of these issues undermining commodity prices on a multi-month basis, we remain pretty constructive.

First, we are buyers of the soft landing in global growth argument, with key emerging economies continuing to produce significant upside demand for commodities. Second, with interest rates extremely low and high beta


Figure 9: Commodity price development Figure 8: US Treasury yield (10 year)


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commodities like oil, gold or copper trading more like cur-rencies, we believe the appeal of commodities as invest-ment assets will continue to be a key driver.

Our core view on oil is for it to trade to a high of USD95 pb in coming months from a previous high of USD87.0 pb and a present price of USD76.0 pb. Importantly, this would provide an average price on front-month WTI of around USD85 pb in the rest of 2010, which would be extremely supportive for most oil exporters, but without placing massive additional inflation pressure into the sys-tem. We are looking for oil prices to trade above USD100 pb in 2011 and average around USD92 pb, with the possi-bility that the volatility of the prices could be less marked than in previous years.

Outlook for African currencies

Our relatively neutral view on African currencies against the USD in our May publication proved reasonably accu-rate. Our AF10 currency index was flat versus the USD, but was down a modest 1.6% against the EUR. On a YTD basis, the AF10 was down 9.4% against the USD and up 1.7% against the EUR.

When the returns against the forward curve are consid-ered (Figure 11), the African currencies faired better but were still among the worst performers among a group of EM currencies in the 4-m since early May. To some ex-tent the starting point distorts the story, as it captures the aggressive weakness against the USD seen by African currencies in May. Indeed, on a 3-m basis African cur-rencies have generally delivered positive returns against the USD.

Interestingly, while the AF10 has been relatively weak against the USD YTD, this is not because of an overt deterioration in BOP. Indeed, FX reserves have gener-ally been increasing suggesting that there has been con-certed policy towards allowing some weakness. Cer-tainly, this sits comfortably with the broader policy stance of accommodative monetary and fiscal policy. Clearly adopting relatively loose external monetary conditions assists the growth drive presently in place. Certainly few of the African currencies we look at appear expensive at this point.

Broadly speaking we are constructive on African curren-cies on a multi-month basis. First, with the exception of SA they generally look cheap relative to their historical values, on a real effective basis, against their BOP fun-damentals or compared to the performance of non-African EM currencies. Second, we believe that the pol-

Figure 10: US Treasury yield (10 year)


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Figure 11: FX carry trade return since last publication in May


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icy bias for cheaper currencies is running out of steam as we move out of a dis-inflationary phase. Third, we are relatively benign on EUR/USD in coming months, al-though we suspect the bias is towards a weaker EUR on a 6 to 12-m trajectory as EU wide risk concerns resurface. Fourth, we are reasonably happy that global growth will soften relatively modestly undermining trade flows. Fifth, we see a large investor bid for EM currency carry trades in coming months as equity caution lifts only moderately and duration concerns start to bite. Sixth, our global out-look remains supportive for commodities, which will broadly benefit Africa, but will particularly benefit its oil producers.

In terms of attractive carry trades, we continue to favour heavily managed currencies with strong BOP positions and high yields. These are broadly found among Africa’s hydro-carbon producers.

We remain confident that USD/NGN will continue to trade in a reasonably tight range around 150 on a multi-month basis. The extremely low rate on offer at the short-end make the carry trade potential limited at present, but the back up in longer bond yields means there may be some interesting opportunities presenting themselves in coming months.

The solid fundamental C/A story and the significant inter-est rates on offer continues to make USD/AOA an attrac-tive proposition. Moreover, there appears to be a shift in strategy to allow some AOA appreciation in line with the positive C/A fundamentals. Market access continues to be extremely limiting.

We still believe the EGP carry trade offers value, funded against a EUR/USD basket. Indeed, we suspect that the authorities have drawn a bit of a line around 5.70 and that there is some catch-up relative to the historic relationship with EUR/USD moves.

Of the non-hydrocarbon economies, we continue to favour short USD/GHS positions despite the sharp reduction in interest rates.

Milking the bond duration dregs

As with the broader local EM fixed income market, a clear trend in African local rates is difficult to discern. In many ways local currency duration trades have been the asset class of choice by investors over the last four months. Certainly, the continued downside in yields across G4 has fostered a very positive environment to push local rates across the globe even lower.

Nowhere is this better seen than in South Africa, where foreign inflows into the bond market have been a major source of recent ZAR strength. The 9 Sep 10 MPC deci-

sion to cut the repo rate by another 50 bps to 6.0% and leaving the policy stance relatively neutral means that there are probably some last vestiges of yield compres-sion to come. Yet the multi-month risk/rewards are proba-bly towards lightening up on duration.

Despite much of the positive price action in Ghana’s curve having occurred in Q1:10, we were reasonably construc-tive over the last four months and after some global risk related jitters, we have seen some further moderate yield compression along the curve. On the back of our con-structive GHS and inflation view we believe that there is still some further gradual yield compression to come in coming months.

Kenya’s bond curve has been the star performer over the last four months. We were relatively neutral on the curve having seen some impressive yield compression already. However, the market seemed happy to take the curve down to extra-ordinarily low levels given the combination of extremely benign inflation and excess liquidity. While we do not see the curve selling off aggressively in coming months, we see further yield compression as modest and limited to longer dated paper. As such, we continue to favour a roll-down trade funded in the short-end.

Indeed, we see potential for roll-down trades in Uganda, Tanzania and Zambia, with the possibility of further bull bear rotation as in Kenya.

Nigerian yields have backed up significantly in the last four months and the yield curve has become much steeper. The 20-y bonds is now at 11.6% and the 5-y at 9.0%. These are now approaching more normal levels for an economy with inflation in low double digits. These yields are also approaching levels that once again start to look attractive.

We are also reasonably constructive on duration in Egypt, after the short-end rallied with global investor appetite and has started to drag down the longer-end, which is being supported by a neutral to possibly easing monetary policy bias.

From equity underperformance to out-performance We have been very constructive on African equities during 2010. Key to our view was the expectation that a number of them would rebound strongly in order to catch up with the strong performance in other EM equities during 2009. We saw the rebound as part of the shift to more illiquid frontier markets as the search for yield progressed and risk appetite recovered from the nervousness installed during the 2008 financial crisis.

Our expectations materialised nicely in the months to



early May, but have waned in the interim months. Nigeria was down 12.5%, Ghana down 5.9%, Egypt down 3.6% and Kenya up 3.5%. MSCI Africa was down 7.6%, while MSCI EM was up 4.6%.

In many ways, we are fans of the lagged correlation with the higher beta EM markets, with the rebound seen in MSCI EM in Jul and early Sep not really filtering through to the African markets yet. We still believe it will and ex-pect to see the still positive YTD appreciation in these markets (excluding Egypt) to be added to in coming months.

We are perhaps most constructive on Nigeria which de-spite being one of the best performing equity markets YTD, still show plenty of upside potential. We target 1,200 for the benchmark NGSE-30 by year-end and 1,500 by the end of 2011, implying upside of almost 20% and 50.0% respectively from its current level of 1,002 in early Sep 10.

First, Nigeria’s strong economic growth backdrop and easy monetary conditions provide solid backdrop for equi-ties. Second, Nigeria is still some 64% from its highs and has lagged broader EM and other African market perform-ance (especially Kenya). Third, Nigeria, like the rest of SSA ex-South Africa remains relatively undiscovered with an underweight holding by Global Emerging Market (GEM) funds. Fourth, valuations, earnings growth and profitability are attractive. According to our estimates the market is trading at a Dec 11 P/E of 8.3x and a dividend yield of 6.1%. In Table 1 we have identified the 10 Nigeria equities we expect to outperform in coming months.

African Eurobond outlook

In line with the relatively favourable global risk environ-

ment for EM credit and the increasing search for yield most of Africa’s Eurobonds have performed well in recent months, especially Gabon’17 and Ghana’17.

Gabon’s Eurobond (USD1bn; 8.2%; rated BB-) yield fell to 5.6% on 8 Sep, a record low, and the spread with equiva-lent US treasuries declined to 295 bps. The new low spread places it in the middle of the EMBI Global universe which has a spread of around 291 bps presently. At such levels, and despite the technical support from the informal amortisation structure, we see limited price upside from here.

Ghana’17 (US$750m; 8.5%; rated B by S&P and B+ by Fitch) have also rallied, with the yield retreating to 5.9% on 8 Sep, from 8.6% on 25 May, and its spread ebbing to 329 bps, from 549 bps, in the same timeframe.

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Figure 12: US Treasury yield (10 year)


Table 1: High conviction Nigeria equity picks

Stock Sector Rating Market Cap ($m)

Price (Cents, $)

Target Price (Cents,$) Price (N) Target Price (N) Upside/

Downside

Oando plc Oil & Gas BUY 746 41.37 82.49 62.05 123.73 99%

Flour Mills Consumer BUY 794 47.93 91.00 71.90 136.50 90%

Fidelity Bank plc Banking BUY 435 1.56 2.85 2.34 4.28 83%

Diamond Bank plc Banking BUY 608 4.27 7.81 6.41 11.72 83%

Skye Bank plc Banking BUY 529 4.73 7.72 7.10 11.58 63%

Dangote Sugar Refinery Consumer BUY 1,309 10.90 17.67 16.35 26.50 62%

Dangote Flour Mills Consumer BUY 579 11.40 18.00 17.10 27.00 58%

UACN Prop. Dev. Co. plc Infrastructure & Building BUY 436 12.47 18.00 18.70 27.00 44%

Guaranty Trust Bank plc Banking BUY 2,391 10.27 14.66 15.40 21.99 43%

First Bank of Nigeria plc Banking BUY 2,744 8.47 11.47 12.70 17.20 35%




Interestingly, Ghana’s downgrade by S&P in late Aug has had no negative effect on the Eurobond, suggesting to some extent that global liquidity, macro and risk condi-tions rather than domestic metrics remain the key drivers. That said, it may also be taken as the dwindling influence of ratings in many situations. Although it is difficult to see substantial further yield compression from here we do expect the release of the upward GDP revisions, that are long overdue, to make the market more comfortable with the present pricing.

Senegal’s 5-y Eurobond (US$200m; 8.75%; rated B+) has also advanced in Q3:10. After trading up to a yield of 10.1% in Mar, the bond fluctuated in the 7.8%-9.6% range between Apr and May, and currently yields 7.8%. The spread over US treasuries tightened some 114 bps be-tween 2 Jul and 6 Sep to around 627 bps. As such, Sene-gal still offers some 351 bps of yield pick up over the EMBI Global spread even as Senegal has outperformed the index. It also continues to give up some 179-256 bps of yield to comparable issuers such as Ghana, Gabon and Sri Lanka. Despite the bond’s relative illiquidity we are looking for some additional spread compression from Senegal’14 in coming months. Moreover, the potential for the government to offer a switch auction of the bond, roll-ing it into a larger USD500m issue in 2011 should add to the bond’s attraction.

Côte d’Ivoire’s international bond (US$2.3bn; 2.5%; not rated) due 2032 has underperformed its African and EM peers. The bond was issued as a result of the restructur-ing of six defaulted bonds and is currently the largest Eurobond in the African debt universe (ex SA). It has per-formed poorly as foreign accounts that held the defaulted bonds have utilised rallies to take profit, preventing a size-able rally in the instrument.

A sustained turnaround in Côte d’Ivoire’32 is probably conditional on a sharp reduction in political risk. It seems

that the presidential election scheduled for late Oct, will actually take place after five or six previously announced elections were cancelled. If the election is to proceed with-out major political dislocation, then the bond looks ex-tremely attractive in relative terms. The bond offers an attractive yield pick up at 11.5% and a spread of 783 bps over US treasuries. Moreover, the step-up nature of the coupon payment means they are relatively small (USD58m a year) versus total revenue projected at USD4bn for 2010. Apart from the political environment, Côte d’Ivoire’s current macro economic risk metric is actu-ally reasonably supportive

RepCongo’29 (USD477.8m; 3%; not rated) has also re-mained relatively flat at around 9.3% between early Jun and Sep, while the spread with US treasuries actually widened to 671 bps, from 641 bps over the same period. The poor performance probably reflects the substantial illiquidity of the bond. Certainly its risk metric looks solid: we are looking for a sizeable fiscal surplus of around 26.0% of GDP in 2010 and for GDP growth to outperform in the region of 8.7%. We would be buyers of the lesser-spotted RepCon’29 on any sightings of a 9.0% plus yield handle.

Looking forward we expect the Nigerian government to sell a USD500m Eurobond by end-Nov. The bond is likely to be well received given the current international search for benchmarked sovereign high yield and price extremely tightly, probably between Gabon and Ghana.

It is also possible that Angola, after getting its rating and finally auditing its arrears, will bring its Eurobonds to mar-ket in coming months.

Figure 13: African Eurobond spread continue to narrow

150

850

1,550

2,250

2,950

Nov-06 Oct-07 Sep-08 Sep-09 Aug-10

%

Senegal Cote d'Ivoire Gabon Ghana GTB FBN Congo Rep




Angola: out of the woods?

Notes: pe — period end; pa — period average; na — not available Source: Banco Nacional de Angola, Angola Ministry of Finance. Standard Bank Research

With Angola’s de facto one party system, the key political issue has been succession to 68-year-old MPLA party leader and President, José Eduardo dos Santos. Such risk has been removed somewhat by the new con-stitution, passed by parliament on 21 Jan 10. The consti-tution allows for a system similar to South Africa, where the president is the leader of the majority party rather than elected by independent vote. The president is lim-ited to two five-year terms, but dos Santos’ 31 years al-ready in power do not count. The next parliamentary election is in 2012 and we expect the MPLA to maintain its majority and for dos Santos to remain its leader. Inter-estingly, dos Santos appears relatively serious about reining in malpractice by public officials and parliament has passed a bill allowing for those caught to be more easily prosecuted.

The latest government estimates agreed with the IMF suggest that GDP growth was a modest 0.7% y/y in 2009 as a 5.2% decline in the oil sector undermined strong growth of 8.2% in the non-oil sector. The official budget estimates for 2010 have also been revised down to 6.7% y/y, with 5.0% oil sector growth and 7.8% non-oil sector growth. Growth nearer to 8.3% y/y is envisaged in 2011 on the back of another solid performance from the oil sector, but more importantly, the increasing contribution from the non-oil sector, which will continue to be lifted by considerable infrastructure investment. Improving road, rail, ports, airports, water and telecoms infrastructure will clearly benefit all sectors of the non-oil economy, but will perhaps be most important in revitalising Angola’s once-prosperous agricultural sector.

Quarterly indicators

Political risk: limited ahead of 2012 elections Election results

GDP growth: building a non-oil growth path Composition of GDP

Source: Banco Nacional de Angola, Standard Bank Research

Presidential election (1992) Party % of votes

José Eduardo do Santos MPLA 49.57

Jonas Malheiro Savimbi UNITA 40.07

António Alberto Neto PDA 2.16

Holden Roberto FNLA 2.11

Legislative election (2008) % of votes Seats

Movimento Popular de Libertação de Angola (MPLA)

81.73 191

União Nacional para a Independência Total de Angola (UNITA)

10.38 16

Frente Nacional de Libertação de Angola (FNLA) 1.13 3

Partido de Renovação Social de Angola (PRS) 3.10 8

Source: Comissao Nacional Eleitoral

Q1:09 Q2:09 Q3:09 Q4:09 Q1:10 Q2:10 Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f Q4:11f

GDP (% y/y) pa 1.3 1.3 1.3 1.3 6.7 6.7 6.7 6.7 8.3 8.3 8.3 8.3

CPI (% y/y) pa 13.5 13.7 13.7 13.7 13.1 13.7 14.0 13.5 13.2 13.0 12.5 12.0

M3 (% y/y) pe 73.6 56.6 32.0 23.0 20.0 22.0 24.0 26.0 28.0 30.0 32.0 34.0

CA/GDP (%) pe -5.2 -5.2 -5.2 -5.2 11.3 11.3 11.3 11.3 9.5 9.5 9.5 9.5

FX reserves (USD bn) pe 13.2 12.1 12.8 12.6 13.8 15.5 15.5 16.0 16.5 17.0 17.5 18.0

Import cover (months) pe 7.1 6.5 6.9 6.7 7.9 8.8 8.8 9.1 8.8 9.0 9.3 9.6

3-m rate (%) pe 15.0 15.5 15.8 23.7 20.0 19.0 18.0 17.0 16.0 15.0 14.0 14.0

1-y rate (%) pe 15.0 10.3 10.0 20.4 25.0 25.0 21.0 20.0 19.0 18.0 17.0 16.0

USD/AOA pe 75.0 78.0 85.0 89.5 92.3 92.3 90.0 90.0 90.0 90.0 90.0 90.0

REER pe 626.1 635.5 645.0 612.8 582.1 590.9 599.7 608.7 617.9 627.1 636.5 646.1

NEER pe 29.6 30.8 33.5 35.3 36.4 36.4 35.5 35.5 35.5 35.5 35.5 35.5

USD/AOA vol (20 day) 2.8% 0.9% 0.0% 3.8% 3.1% 0.2% 4.2% 0.5% 0.5% 0.5% 0.5% 0.5%

-10.0%

-1.3%

7.5%

16.3%

25.0%

2005 2006 2007 2008 2009 2010

y/y

GDE Netex Real GDP



BNA official FX reserves increased to around USD15.3bn in Jul 10 from a low of USD12.0bn in Jan 10. However, FX reserves accumulation has been flat since Apr and was down from a high of USD15.65bn in May. The lack-lustre accumulation is surprising, given the BNA’s desire to rebuild reserves and to clear the C/A surplus. We ex-pect a C/A surplus of around USD8.7bn or 11.3% of GDP in 2010 and a similar figure for 2011. The key drain on FX reserves has been the government’s decision to start paying down the USD6.8bn of contractor arrears, with an estimated USD1.28bn being disbursed to smaller compa-nies in Jul 10. Although these arrears will remain a drain, we still anticipate a rise in official FX reserves, given the solid C/A picture, likely strong FDI inflows and foreign investor interest in Eurobond issuance, and possibly even the opening up of the local debt market.

We do not yet have the breakdown of the early Aug 10 revised budget, but it does appear that the government has made progress in better understanding its balance sheet. The identified arrears of USD6.8bn were almost twice those assumed by the government in its IMF re-view. The new budget is expected to deliver a surplus of 1.2% of GDP (presumably prior to arrear payments). It is based on an oil price assumption of USD65.32/bbl, which is still well below the YTD average of USD76.7/bbl and thus should offer some room for fiscal out-performance. Moreover, in early Sep 10, the government raised petrol and diesel prices at the pumps by 50% and 38%, respec-tively, in an attempt to reduce transfers (subsidies) which accounted for 8.5% of GDP in 2009. The reforms are also key to progress in reforming Angola’s downstream oil sector. Source: Angola Ministry of Finance, Standard Bank Research

The easing bias in rates we had expected to develop in H2:10 has started to materialise, with the reference 91-d bill rate falling to 17/18% from 24/25% during H1:10. We anticipate a further reduction in rates, albeit at a fairly moderate pace. Perhaps most important is our expecta-tion of AOA stability and/or strength. It was the authori-ties’ desire to support confidence in the AOA that fos-tered the need for higher rates in the first instance. M3 money growth also remains extremely modest by histori-cal standards at just 14.3% y/y in Jun 10, while M1 was down to 9.1% y/y. Inflation, meanwhile, has remained in its unusually stable 13-14% range, which has now per-sisted since Oct 08. While we are tempted to say the risks are to the downside from a stronger AOA, the sharp hike in fuel prices in Sep 10 is likely to have a knock-on higher price effect through many parts of the economy.

Balance of payments: back into surplus BOP developments


Monetary policy: modest easing bias Inflation and interest rates


Angola

Fiscal policy: dealing with arrears and subsidies Central government budget

-50,000

-25,000

0

25,000

50,000

2004 2006 2008 2010f

USD m

Trade balance Services

Income account Transfers

Current account

% of GDP 2009e 2010f

Total revenue (+ grants) 35.2 43.5

- oil 22.2 33.5

Total expenditure 45.0 38.0

- current 30.8 24.6

- interest 1.5 2.0

- transfers 8.5 4.1

- development 14.1 13.4

Overall balance (- arrears) -9.8 5.6

2011f

41.7

31.7

34.8

22.6

1.1

3.8

12.2

6.9

%

0

8

16

24

32

Nov-06 Oct-07 Sep-08 Jul-09 Jun-10

CPI y/y 91-d T-bill Rediscount



Our expectation in the May AMR edition that cash rates would drop proved appropriate, with the curve falling by 400-500 bps along its length. Although rates have backed up a bit since Jul’s lows, we are still reasonably confident that there is more yield compression likely in coming months, with some modest bull flattening. First, the AOA is expected to be stable or stronger. Second, the need to issue bills for deficit financing purposes is declining and the government is set to register a fiscal surplus ex-arrears. Third, inflation is likely to remain be-nign and monetary policy easing should continue. Cer-tainly, if the planned issuance of AOA bonds material-ises, this will place downward pressure on cash yields. Similarly, we anticipate a Eurobond issuance in coming months now that a BB- rating has been achieved and the government has made progress in auditing its liabilities.

Our expectation back in May that the USD/AOA would stabilise around 95 proved overly conservative. In fact, USD/AOA stabilised around 92.5 and since 19 Aug has shifted lower to around 90 at the time of writing. We are looking for the unit to stabilise around this level, although we acknowledge the risks are now towards a move even further south. Certainly, the C/A fundamentals support a stronger AOA, but to be fair, they have done so for some time. The turning point is one of confidence in the AOA and some regulatory changes which make it harder for banks to sit long USD. Net open position limits are being reduced and FX deposits can no longer be extended to meet reserve requirements. There is also the issue of policy, with the IMF sponsoring reforms to enable the FX rate to be more market responsive. In an environment of a C/A surplus and solid financial inflows, such a policy should foster AOA appreciation.

Bond curve outlook: modest bull flattening Changes in yield curve

Source: BNA, Standard Bank Research

FX outlook: USD/AOA risk to the downside USD/AOA: forwards versus forecast

Source: Reuters, Standard Bank Research

Money supply growth: historically low Oil earnings and FX reserves

Source: Reuters, Standard Bank Research Source: Banco Nacional de Angola, Standard Bank Research

Angola

10.0

15.0

20.0

25.0

30.0

28-d 63-d 91-d 182-d 364-d

YTM %

3m forecast May-10 Aug-10

10.0

50.0

90.0

130.0

170.0

Aug-01 Oct-03 Dec-05 Feb-08 Apr-10

M3 y/y

0.0

2.5

5.0

7.5

10.0

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-100.0

5.5

11.0

16.5

22.0

Oil earnings per month (USD bn) LHS

FX reserves (USD bn) RHS

70

81

93

104

115

Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11

USD/AOA

History Forw ards Forecast



Angola: annual indicators

Notes: pe — period end; pa — period average; na — not available; nr — not rated

Source: Banco Nacional de Angola, Angola Ministry of Finance, Standard Bank Research, Bloomberg

Angola

2005 2006 2007 2008 2009 2010f

Output

Population (million) 14.5 14.6 14.8 14.9 15.0 15.2

Nominal GDP (AOAbn) 2,475 3,627 4,627 6,374 5,786 7,059

Nominal GDP (USDbn) 30.6 45.2 59.5 85.0 70.7 77.4

GDP / capita (USD) 2,113 3,094 4,024 5,704 4,711 5,095

Real GDP growth (%) 20.6 18.6 20.3 13.4 1.3 6.7

Oil production capacity ('000 bpd) 1,247 1,427 1.698 1.906 1.837 1.900

Central Government Operations

Budget balance / GDP (%) 9.1 14.4 10.9 8.8 -9.8 5.6

Domestic debt / GDP (%) 21.2 16.7 16.0 17.8 27.3 21.8

External debt / GDP (%) 5.0 5.0 9.9 15.2 14.9 12.2

Balance Of Payments Exports of goods (USDbn) 24.1 35.6 44.7 63.1 38.6 57.3

Imports of goods (USDbn) 8.4 8.8 13.7 21.0 22.4 21.0

Trade balance (USDbn) 15.8 26.8 31.1 42.1 16.2 36.3

Current account (USDbn) 5.1 12.4 9.7 5.6 -3.7 8.7

- % of GDP 16.8 27.4 16.3 6.6 -5.2 11.3

Capital & Financial account (USDbn) -3.3 -3.7 -6.3 -0.7 -1.6 -5.3

- FDI (USDbn) -1.5 -0.2 -1.8 -0.9 -1.6 1.4

Basic balance / GDP (%) 11.8 26.9 13.2 5.5 -7.5 13.0

FX reserves (USDbn) pe 3.2 9.3 11.2 17.5 12.6 16.0

- Import cover (months) pe 4.6 12.7 9.8 10.0 6.7 9.1

Sovereign Credit Rating

S&P NR NR NR NR NR BB-

Moody’s NR NR NR NR NR NR

Fitch NR NR NR NR NR BB-

Monetary & Financial Indicators

Consumer inflation (%) pa 23.2 13.4 12.3 12.3 13.4 13.6

Consumer inflation (%) pe 18.5 12.2 11.8 13.0 13.7 13.5

M3 money supply (% y/y) pa 52.7 69.2 42.9 74.4 58.1 24.5

M3 money supply (% y/y) pe 59.2 27.8 45 93.1 23.0 26.0

BNA discount rate (%) pa 95 16.8 18 19.6 24.8 25.0

BNA discount rate (%) pe 95 14 18 19.6 30.0 20.0

3-m rate (%) pe 11.2 6.3 14.1 14.6 15.0 17.0

1-y rate (%) pe na 9.53 14.0 14.5 20.4 20.0

USD/AOA pa 87.2 80.4 77.7 75.0 81.9 91.2

USD/AOA pe 80.8 80.3 75.0 75.0 89.5 90.0

REER pa 422 503 563 603 630 595

NEER pa 25.8 27.7 28.5 29.4 32.3 36.0

2011f

15.3

8,471

94.1

6,152

8.3

2.016

6.9

19.7

9.2

60.5

22.6

37.9

9.0

9.5

-9.0

1.7

11.3

18.0

8.5

BB

NR

BB

12.8

12.0

30.0

34.0

18.0

16.0

14.0

16.0

90.0

90.0

632

35.5



Botswana: fiscal pressures set to persist

Investor interest lies in whether a seemingly stronger opposition, coupled with instability in the ruling party, will sway the government’s attention away from the country’s economic challenges. At this stage, it seems that growth remains the government’s top priority and we believe that prospects of an early election are slim. Following the formation of the Botswana Movement for Democracy (BMD) party, the opposition now has 16 seats in parlia-ment, the highest in Botswana’s post-independence his-tory, after 4 members of the BDP defected to the BMD. We thus expect pressure on the BDP to mount as the opposition tries to capitalise on the current infighting within the BDP, which President Khama believes is ’destroying’ the party.

Following the rebound in GDP growth to 36.4% y/y in Q1:10 (10.7% y/y in Q4:09), we have revised our GDP growth outlook for 2010 from 5.5% y/y to 15.7% y/y. The rebound in growth this year is likely to continue being led by a revival in mining production, following mine closures in 2009 due to the global financial crisis. Increased min-ing activity will in turn likely boost investment expenditure in the mining sector. Investment spending will also be buoyed by infrastructure development in the energy sec-tor. Faltering US growth poses downside risks to the min-ing sector’s revival. We expect Netex to remain at the mercy of US growth prospects and non-mining GDP to continue being robust. The authorities’ accommodative policy bias is likely to stay in place for at least the me-dium term which should continue to support PCE.


Political risk: BDP hamstrung by infighting Election results (2009)

GDP growth: growth to rebound Composition of GDP

Notes: pe — period end; pa — period average; na — not available Source: Bank of Botswana, CSO, Standard Bank Research

Source: Bank of Botswana, IMF, Standard Bank Research

Source: Independent Electoral Commission

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 14.2 1.8 2.5 3.3 4.5

CPI (% y/y) pa 7.3 8.2 8.9 9.4 9.1

M3 (% y/y) pa 9.9 12.2 17.8 20.5 22.8

FX reserves (USD bn) pe 7.8 7.6 7.6 7.8 7.9

Import cover (months) pe 22.7 22.1 20.9 21.5 21.8

3-m rate (%) pe 7.2 7.2 7.3 7.3 7.3

5-y rate (%) pe 7.9 8.1 8.5 8.7 8.8

USD/BWP pe 7.10 7.15 7.45 7.30 7.32

REER pe 102.6 103.3 103.7 104.6 104.9

USD/BWP vol (20 day) 13.0% 10.0% 10.0% 10.0% 10.0%

NEER pe 159.3 163.4 165.6 166.1 166.8

CA/GDP (%) pe -3.1 -3.3 -2.5 -1.7 -1.3

Q2:10

10.5

7.5

7.8

-2.9

7.9

23.0

7.2

7.6

7.06

101.5

158.2

9.5%

Q1:10

36.4

6.1

3.6

-2.5

8.3

24.2

7.2

7.5

6.77

100.7

157.8

8.0%

Q4:09

10.7

5.9

-4.1

-3.5

8.7

28.9

8.2

na

6.61

100.8

159.7

15.4%

Q3:09

-10.9

6.4

0.9

-3.9

9.2

30.6

8.2

na

6.58

100.9

159.0

9.4%

Q4:11f

5.5

8.5

24.4

0.6

8.0

22.1

7.3

8.8

7.35

105.6

167.2

10.0%

Q2:09

-0.2

8.5

5.4

-5.4

8.2

27.3

10.3

na

6.78

101.2

160.8

11.7%

Q1:09

-13.8

12.1

12.5

-8.9

8.1

27.0

11.4

na

7.73

102.3

174.5

19.0%

Legislative election Seats % of votes

Botswana Democratic Party (BDP) 45 52.9

Botswana National Front (BNF) 6 22.8

Botswana Congress Party (BCP) 4 19.9

Botswana Alliance Movement (BAM) 1 2.2

Botswana People’s Party (BPP) 0 1.1

New Democratic Front (NDF) 0 0.1

MELS Movement of Botswana 0 0.1

Independents 1 0.9

Total 57 100

-15.0

-6.3

2.5

11.3

20.0

2000 2002 2004 2006 2008 2010f

PCE GCE GFCF

Stocks Netex GDP

y/y



In light of a faltering developed-world growth recovery, we have downwardly revised our C/A outlook. We expect the C/A to remain under pressure in 2010, registering a deficit of 3.3% of GDP (-3.5% in 2009). In our view, the trade account will weigh heavily on the C/A. Diamond exports will probably remain muted for the remainder of 2010 due to weak global demand. Furthermore, we ex-pect strong outward service and income-related pay-ments also to weigh on the C/A. We believe the capital account will receive a boost from FDI into the mining sec-tor and external loans to finance part of the budget defi-cit. However, these flows are likely to fall short of financ-ing the C/A deficit. As a result, we expect FX reserves to remain under pressure for the rest of the year and to de-cline to USD7.6bn (22.5 months of import cover) by end-2010.

Fiscal pressures are set to persist as diamond revenues remain below pre-recession levels due to the faltering US economy. The World Bank in Aug 10 recommended that Botswana cut its public sector by 25% to ensure fiscal sustainability. The authorities are reluctant to dip further into their accumulated savings even as fiscal pressures persist. Government deposits with the BOB declined to BWP19.8bn in May 10 from BWP25.2bn at the start of the year. Given this reluctance, we expect the govern-ment will rely mainly on a combination of domestic and external borrowing to finance the budget deficit. In addi-tion to this month’s bond auction proceeds, the govern-ment still has to receive the remaining USD500m tranche of the USD1.5bn AfDB loan to bolster its coffers. If fiscal pressures deteriorate further, another sovereign credit rating downgrade could be on the cards.

Our inflation forecast foresees a rising trajectory over the coming 9-m. We expect inflation, which declined to 7.0% y/y in Jul 10 from 7.7% y/y in Jun 10, to climb higher to end the year at 8.5% y/y. Thereafter, we see inflation pushing even higher to peak at 9.6% y/y in Jun 11 before subsiding somewhat by year-end to 8.3% y/y. Food and transport are likely to remain the key drivers of inflation. BWP weakness in coming months should also fuel infla-tionary pressures. Our view continues to be more bearish than that of the BOB, which sees inflation returning to within the 3%-6% objective range as early as Q2:11. De-spite inflation still being well above the objective range for a prolonged period, we do not anticipate a tightening bias from the central bank at least until H2:11. With growth remaining below-trend, boosting economic growth contin-ues to be the top-most priority for the authorities.

Balance of payments: C/A under pressure Current account developments

Fiscal policy: fiscal pressures to persist Central government budget

Monetary policy: accommodative policy stance Inflation and interest rates

Source: Bank of Botswana, IMF, Standard Bank Research

Source: Ministry of Finance

Source: Bank of Botswana, CSO, Standard Bank Research

Botswana

-1,200

-150

900

1,950

3,000

2004 2006 2008 2010f

Trade Services Income

Transfers C/A

USD m

% of GDP 2009/2010 2010/2011

Total revenue 31.2 27.2


- wages 12.2 12.0

- interest 0.3 0.5


Overall balance (- grants) -15.5 -12.5

Overall balance (+ grants) -15.1 -12.2

Net external borrowing 0.5 0.3

Net domestic borrowing 14.6 11.8

Donor support (grants and loans) 0.4 0.3

0.0

5.0

10.0

15.0

20.0

Jan-05 May-06 Oct-07 Feb-09 Jul-10 Dec-11

Inflation Low er bound

Upper bound Bank rate

%, y/y



We expect yields to rise by at least 50 bps over a 12-m horizon; we thus recommend investors to remain short duration in bonds. The rise in yields is likely to be driven by continued upward inflationary and fiscal pressures. With global growth muted, diamond exports are likely to falter, giving rise to fiscal pressures. These could be re-solved by either cutting back on expenditure or increas-ing domestic and external borrowing. We expect a new note issuance programme, the details of which are yet to be finalised by the Ministry of Finance and BOB, to be bigger than the previous BWP5.0bn programme. The authorities plan to present the new programme to Parlia-ment in Nov 10. We would expect yields to rise further were it not for the robust market demand for long-dated paper by pension funds, which are mandated to invest 30% of funds under management in local securities.

We expect USD/BWP at 7.15 by year-end. The USD is likely to return to broad-based strength over a 6-m hori-zon, which should lead to BWP weakness through its policy link with the ZAR. In any case, the authorities are likely to welcome a weaker BWP, given the prevailing fiscal and trade deficits. The dichotomy between mining and non-mining GDP, together with upside inflationary pressures, present the authorities with a policy dilemma. Monetary policy tightening could dampen inflationary pressures but would also depress non-mining GDP growth, while leaving trade and fiscal deficits largely un-affected. Hence, we suspect exchange rate policy rather than monetary policy will be used to deal with the current situation. The possibility of another credit rating down-grade due to muted diamond exports strengthens the case for the authorities to rely on this policy alternative.

For the remainder of 2010, we expect faltering devel-oped-world growth prospects to limit the upside potential for both the Domestic Company Index (DCI) and Foreign Company Index (FCI). However, robust domestic de-mand should support both indices somewhat. Accommo-dative fiscal and monetary policy stances by the authori-ties will continue to gain traction and should keep local business confidence buoyant. We expect the recently introduced NewGold ETF to attract much investor atten-tion in the current economic environment. Investors will be keen to gain gold exposure to hedge against global financial turmoil, inflation and currency weakness. We further expect a flurry of new government bond listings in 2011 upon the introduction of a new bond issuance pro-gramme.

Bond curve outlook: bear steepening Changes in yield curve

FX outlook: weak exchange rate policy bias USD/BWP: forwards versus forecast

Equity market: diminished upside potential Botswana Stock Exchange

Source: Bank of Botswana, Standard Bank Research



Botswana

6.00

7.00

8.00

9.00

10.00

91-d 182-d 2-y 5-y 8-y 15-y

6-m forcast 23-Aug-10 13-Jul-10

YTM

600

3,050

5,500

7,950

10,400

Jul-05 Jul-06 Jul-07 Aug-08 Aug-09 Aug-100

750

1500

2250

3000

DCI FCI

Index Index

5.0

6.0

7.0

8.0

9.0


USD/BWP




Botswana: annual indicators

Notes: pe — period end; pa — period average; nr — not rated; na — not available

Source: Bank of Botswana, CSO, Standard Bank Research

Botswana

2005 2006 2007 2008 2009 2010f

Output


Nominal GDP (BWPbn) 52.4 65.7 73.5 85.0 86.9 106.9


GDP / capita (USD) 5,510 6,034 6,429 6,581 6,410 7,721

Real GDP growth (%) 1.6 5.1 4.8 3.1 -3.6 15.7

Diamond production (’000 carats) 31.8 34.3 33.6 32.6 17.7 24.0

Copper-nickel production (tons) 50,400 56,223 49,121 52,086 48,225 53,175

Beef sales (tons) 17,750 18,250 18,725 19,150

Central Government Operations Budget balance / GDP (%) 8.0 10.8 4.8 -6.6 -15.1 -12.2



Balance Of Payments

Exports (USDbn) 4.49 4.54 5.06 4.74 3.20 3.60

Imports (USDbn) 2.71 2.63 3.45 4.52 3.61 4.06

Trade balance (USDbn) 1.78 1.91 1.61 0.22 -0.41 -0.46

Current account (USDbn) 1.58 1.95 1.80 0.69 -0.43 -0.50

- % of GDP 15.4 17.2 14.6 5.2 -3.5 -3.3

Financial account (USDbn) -0.09 -0.15 -0.15 0.07 0.97 0.75

- FDI (USDbn) 0.22 0.51 0.52 0.08 0.08 0.15

Basic balance / GDP (%) 17.79 21.94 19.32 6.19 -2.87 -2.32




S&P A A A A A A-

Moody’s A2 A2 A2 A2 A2 A2

Fitch nr nr nr nr nr nr




Policy interest rate (%) pa 14.23 14.96 14.70 15.08 12.20 10.00

Policy interest rate (%) pe 14.50 15.00 14.50 15.00 10.00 10.00

3-m rate (%) pe 12.32 12.72 11.97 13.13 8.20 7.20

1-y rate (%) pe na 11.89 11.42 na na na

2-y rate (%) pe na na na na 7.42 7.30

5-y rate (%) pe na na na na na 8.10

USD/BWP pa 5.18 5.86 6.12 6.83 7.12 7.10

USD/BWP pe 5.53 6.04 6.03 7.56 6.61 7.15

REER pa 102.3 100.7 99.1 101.2 101.3 102.3

NEER pa 117.6 132.7 143.8 161.2 164.6 165.3

M3 money supply (% y/y) pe 14.3 8.9 29.0 22.7 -0.8 12.5


17,000 17,500

2011f

1.996

120.8

16.8

8,406

4.0

25.2

58,631

21,065

-7.0

5.3

14.2

4.00

4.35

-0.35

0.10

0.6

0.50

0.23

1.97

8.00

22.07

A-

A2

nr

9.0

8.3

12.3

18.7

10.50

11.00

7.25

na

7.70

8.80

7.20

7.35

104.6

167.5



Côte d’ Ivoire: a step closer to general elections?

On 2 Sep, the Ivorian electoral commission announced that it had finalised the voter list, which we see as a posi-tive surprise and potentially a breakthrough in the political impasse that has marked Côte d'Ivoire's recent history. We believe rising domestic and international pressure to end the transition period in the country could not be con-tinuously ignored by parts of the Ivorian elite. Neverthe-less, we remain somewhat cautious about the prospects of an election on 31 Oct, especially given that the contest has been postponed six times since 2005. Also, it re-mains to be seen whether the ruling party, the leadership of the New Forces, and opposition ministers, have a real incentive to organise an election which might jeopardise their grip on power. The next hot topic, in our view, is whether the New Forces need to be fully disarmed prior to the election as claimed by the ruling party.

We have downwardly revised our growth outlook for 2010 to 2.8% y/y, from 3.8% y/y in 2009. The current political environment, coupled with the ongoing electricity short-ages and social tensions, are likely to weigh on growth prospects in 2010. Government expenditure is expected to rise to cover the disarmament of rebel forces and the electoral process. Production will probably be hampered by electricity shortages which affected the economy in H1:10. GFCF spending is likely to be adversely impacted as investors mostly adopt a wait-and-see strategy regard-ing the political situation. Low-income growth will proba-bly curtail PCE. Exports, in the cocoa sector in particular, should provide support for growth. However, the cocoa industry is likely to be curtailed by a lack of investment and declining productivity in recent years.


Political risk: voter list finalised Election results (2000)

GDP growth: relative slowdown expected Composition of GDP

Notes: pe — period end; pa — period average Source: IMF, Ministere de l’economie et des finances, Institut National de la Statistiques, Standard Bank Research, Bloomberg

Presidential election Party % of votes

Laurent Gbagbo FPI 59.4

Robert Guï CNSP 32.7

Francis Wodié PIT 5.7

Parliamentary election Seats % of votes

Ivorian Popular Front (FPI) 96 42.7

Democratic Party of Côte d’Ivoire (PDCI) 94 41.2

Rally of the Republicans (RDR) 5 2.2

Union of Democrats of Côte d’Ivoire (UDCI) 1 0.004

Theodore Mei UDCI 1.5

Ivorian Workers Party (PIT) 4 1.7

Source: IMF, Standard Bank Research

Source: Cote d’Ivoire Independent Electoral Commission


GDP (% y/y) pa 4.00 3.80 3.80 3.40 3.10 2.80 2.70 2.50 2.80 3.60 3.90 4.70

CPI (% y/y) pa 5.50 2.21 -1.60 -1.70 -0.10 1.00 2.40 4.40 3.25 2.40 1.70 1.60

M2 (% y/y) pe 4.2 3.3 2.0 17.2 20.9 25.5 19.9 15.4 13.2 11.5 14.5 15.1

CA/GDP (%) pe 6.10 6.50 7.50 8.00 5.30 3.20 1.80 -0.50 -0.60 0.40 0.90 1.40


Import cover (mths) pe 4.1 4.6 4.8 6.1 5.1 5.4 5.6 5.6 5.8 5.9 5.9 6.1

BCEAO Lending Rate (%) pe 4.75 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25

USD/XOF pe 494.3 466.6 448.1 457.3 482.3 523.4 510.6 524.7 655.1 605.3 596.3 589.4

REER pe 106 106 105 106 102 98 99 98 97 96 96 98

NEER pe 103 103 104 104 102 99 98 97 95 94 95 97

USD/XOF vol (20 day) 18.1% 14.3% 6.7% 8.5% 10.3% 11.3% 12.2% 10.0% 10.0% 10.0% 10.0% 10.0%

-8.0

-4.0

0.0

4.0

8.0

2004 2005 2006 2007 2008 2009e 2010f 2011f

%

PCE GCE GFCF Inv

Netex GDP



In our view, the C/A could post a surplus of around 2.5% of GDP in 2010, which would be more modest than the 5.7% projected by the IMF. Indeed, the expected trade surplus (13.9% of GDP) reflecting above-trend cocoa prices between Jan and Aug, coupled with increasing rubber production and elevated oil prices, will be offset by outward service and income payments. Also, declining cocoa prices in H2:10, and elevated imports of capital goods, will negatively affect trade metrics. The country’s importance to the region should continue to attract some FDI inflows, but a turnaround is unlikely until an elected administration assumes office. Portfolio inflows have re-mained marginal due to low interest rates in WAEMU and the lack of liquid investable assets on the BRVM. We expect FX reserves to climb to USD3.4bn in 2010, 5.6 months of import cover, from USD3.2bn in 2009.

Strong cocoa tax and VAT collections helped mitigate a decline in custom receipts. On the expenditure side, higher spending to cover shortfalls of the electricity sector and pension funds were offset by lower interest payment on the reduced Paris Club debt. In this regard, the main concern is that international creditors and donors could ultimately suspend their support should the political im-passe persist. The government has continued to clear domestic arrears, but structural reforms in public finance appear to have stalled. Extra-costs associated with the electoral process and electricity subsidies could push the fiscal deficit closer to 1.6%/GDP in 2010, a modest gap by WAEMU standards, even as declining cocoa prices since Aug represent an incremental risk factor. Finally, the TPCI 7% 2010-17 (XOF62bn) bond could be sub-scribed by a less sizeable margin than in previous years.

Inflation in Côte d’Ivoire was flat in Jul-Jun, at 1.8% y/y, from 0.9% y/y in May, 0.3% y/y in Apr and negative fig-ures in Q1. The upward trend reflects a less favourable base effect in H1:10, which is likely to deteriorate further in H2 as inflation was in negative territory a year earlier. Accordingly, while y/y inflation has averaged 0.6% be-tween Jan and Jul, we expect it to rise further in the com-ing months, and average 1.9% in 2010. The relatively modest monthly inflation rates recorded since last Jan make a substantial spike in consumer prices in excess of 5% in Sep-Dec 2010 unlikely. Although inflation is also tilted to the upside in most other WAEMU countries, there is scope to believe that the Central Bank of West African States will be somewhat reluctant to raise rates as the priority since last year has been to support the modest economic recovery in the region.

Balance of payments: C/A surplus Current account developments

Fiscal policy: deficit set to rise Central government budget

Monetary policy: inflation tilted to the upside Inflation and interest rates


Source: Ministere de l’economie et des finances, Standard Bank Research

Source: Institut National de la Statistiques, Standard Bank Research

Côte d I’voire

-5.0

-1.3

2.5

6.3

10.0

Jan-00 Sep-01 May-03 Jan-05 Aug-06 Apr-08 Dec-09

CPI (y/y) ECB refi BCEAO rate

%

-4.0

-2.0

0.0

2.0

4.0

2003 2004 2005 2006 2007 2008 2009e2010f 2011f

USDbn


Transfers CA

% of GDP 2008 2009



- wages 6.8 6.8

- development + transfers 2.9 2.9



Net external borrowing -1.2 -14.0


- interest 1.8 1.9

2010

20.1

22.1

7.2

1.9

3.1

-2.3

-2.0

-3.4

0.6

Donor support (grants) 1.7 0.6 0.3



The performance of the Ivorian eurobond has been rela-tively poor in recent months, with the price falling to a low of 55.0 (11.4%) on 3 Sep, from 61.25 (9.9%) on 4 Apr. Some international accounts, which held the defaulted bonds prior to the restructuring, sold the instrument and took profit. We believe a sustainable rally in the eurobond will be conditional on tangible signs that the presidential contest will actually go ahead on 31 Oct and that all politi-cal forces will accept the results. Still, the low coupon (2.5%) implies a marginal risk of default in light of Côte d'Ivoire's fiscal and macroeconomic metrics. Indeed, the Ivorian authorities need to repay $58m a year to service the eurobond, while total government revenue is pro-jected at $4.6bn for 2010. Besides, the external debt ratio is now close to 49.5%/GDP and tilted to the downside in the framework of the HIPC and MDRI schemes.

As a member of WAEMU, Côte d’Ivoire is affected by the CFA peg that sets the EUR/XOF rate at 655.957. We believe EUR/USD will continue to decline in the medium term, possibly reaching 1.25 and parity in three and six months, respectively. Consequently, the USD/XOF rate is likely to depreciate towards 655 or so during the next 6-m, tracking EUR weakness via the CFA peg. The fore-cast move in USD/XOF will probably lead to some depre-ciation of the REER and improve external competitive-ness. Still, the Ivorian C/A has been less affected than those of other WAEMU countries by euro strength in the past. Besides, we do not expect any change in the EUR/XOF peg, which has only been adjusted once (in 1994). While FX reserves have gradually increased in recent years and could reach $3.4bn in 2010, 65% of this amount is held by the Banque de France.

The recovery in the BRVM has been modest YTD, with the bourse gaining 10.6% YTD (as of 3 Sep) in local cur-rency terms; still, the composite index is flat in USD terms. The performance of the index was almost in line with that of SONATEL, which is by far the largest stock by market capitalisation. Although we believe the BRVM could still edge up in the short to medium term and catch up with the rally in equities in more developed emerging markets, downside risks stem for global risk appetite in the coming months and the likely weakness of the CFA franc next year. Interestingly, the political situation in Côte d’Ivoire could continue having a limited impact on the BRVM, probably because the most actively traded stock (SONATEL) was listed by a Senegalese company and given the lack of liquidity of most Ivorian stocks.

Eurobond performance: tied to political outlook Côte d’Ivoire 2032

FX outlook: XOF weakness via EUR peg USD/XOF: forwards versus forecast

Equity market: BRVM tracks SONATEL Bourse Regionale Valuers Mobiliers




Côte d I’voire

50

55

60

65

Apr-10 May-10 Jun-10 Jul-10 Aug-10

Price

60

110

160

210

260

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

Index

BRVM composite index

400

453

505

558

610


USD/XOF




Côte d I’voire: annual indicators

Source: Institut National de la Statistique, Ministere de l’economie et des finances, IMF, Standard Bank Research, Bloomberg


Côte d I’voire

2005 2006 2007 2008 2009 2010f

Output


Nominal GDP (XOFbn) 8621 9081 9487 10,485 10,999 11,516


GDP / capita (USD) 824 871 966 1,125 1,128 1,093

Real GDP growth (%) 1.80 0.93 1.59 2.30 3.80 2.80

Oil Production ('000 bbl) 39,936 63,132 53,132 60,297. 58,849, 62,584


Budget balance (excl. Grants) / GDP (%) -2.8 -2.4 -1.9 -2.3 -2.2 -2.3

Budget balance (incl. Grants) / GDP (%) -1.7 -1.8 -1.3 -0.6 -1.6 -2.0



Balance of Payments

Exports of goods and services (USDbn) 7.7 8.5 8.7 10.4 10.5 10.6

Imports of goods and services (USDbn) -5.3 -5.4 -6.1 -7.1 -6.3 -7.4


Current account (USDbn) 0.0 0.5 -0.1 0.5 1.7 0.6

- % of GDP 0.2 2.7 -0.7 1.9 7.0 2.5

Capital & Financial account (USDbn) -0.4 0.0 0.9 -0.7 -1.4 0.1

- FDI (USDbn) 0.3 0.3 0.4 0.4 0.8 0.9

Basic balance / GDP (%) 2.1 4.5 1.1 3.6 10.4 6.4




S&P nr nr nr nr nr nr

Moody’s nr nr nr nr nr nr




Consumer inflation (%) pe 2.56 2.04 1.48 8.90 -1.60 4.70


M2 money supply (% y/y) pe 7.69 10.3 19.6 18.2 17.2 16.5

BCEAO lending rate (%) pa 4.00 4.25 4.75 4.75 4.25 4.25

USD/XOF pa 527 522 479 448 462 491

USD/XOF pe 556 497 447 467 457 525

REER pa 100.0 99.9 101.4 106.9 105.8 99.3

NEER pa 100.0 99.9 103.3 104.8 103.5 99.0

2011f

22.1

12,138

21.8

986

3.2

66,495

-2.8

-2.6

8.5

48.8

10.1

-7.3

2.8

0.2

0.7

0.4

0.8

0.7

3.6

6.1

nr

nr

nr

2.20

1.80

13.6

15.9

4.25

557

589

96.8

95.8



Democratic Republic of the Congo: easing interest rates

While the next presidential contest will only take place in Nov 2011, it is widely assumed that President Joseph Kabila will seek re-election. We foresee some frictions within the ruling coalition, especially between Kabila’s PPRD and Prime Minister Adolphe Muzito’s PALU. Al-though the MLC may suffer from the absence of Jean-Paul Bemba (now facing war crime charges in the Hague), veteran opposition leader Etienne Tshisekedi has announced he would run. Tshisekedi‘s UDPS was the main opposition party in the 1990s, but boycotted the 2005 elections. We expect some discontent at the re-gional level after the missed 15 May deadline for provin-cial decentralisation. Finally, we note a sizeable shift in regional geopolitics, as DRC-Rwandese relations have recently significantly warmed up, which is positive for the security situation in the volatile east Congo.

We maintain our forecast for a rebound in GDP growth, to 6.5% y/y in 2010; this will be supported by a structural breakthrough in public debt management and an im-proved macro framework. Indeed, as the DRC reached the HIPC competition point and is starting to benefit from significant debt forgiveness, the fiscal space for pro-poor and investment spending will improve. Accordingly, we expect government capital expenditure and infrastructural development to get a boost. Investment in the mining sector, rebounding from the slump suffered during the global crisis, is likely to pick up. Accommodative mone-tary policy will probably positively impact consumption going forward. Risks to our view are the possible re-course to central bank financing in case of a fiscal slip-page ahead of the 2011 election as well as a poor busi-ness climate potentially discouraging foreign investors.


Political risk: pre-electoral manoeuvring Election results (2005)

GDP growth: positive outlook Composition of GDP

Notes: pe — period end; pa — period average; na — not available Source: Banque Centrale du Congo, IMF, Standard Bank Research


Source: Cote d’Ivoire Independent Electoral Commission

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 6.6 7.3 7.4 7.5 7.1

CPI (% y/y) pa 21.6 14.3 12.5 14.1 15.7

M3 (% y/y) pa 29.9 32.0 33.5 36.2 37.5

FX reserves (USD m) pe 1075 1105 1140 1210 1150


1 m rate (%) pa 18.1 12.9 12.5 14.7 19.4

2 y rate (%) pa 902 905 908 909 925

USD/CDF pa 150 148 149 150 152

REER (Q1:02=100) pa 51 50 51 51 50

USD/CDF vol (20 day) 7.5% 9.0% 9.0% 9.0% 9.0%

NEER (Q1:02=100) pa 7.1% 6.5% 7.8% 8.9% 9.5%

Current account/GDP (%) pe -24.7 -26.9 -26.1 -22.1 -22.5

Q2:10

6.2

26.9

26.6

-21.3

1056

2.0

38.1

898

137

50

7.4%

14.6%

Q1:10

5.7

42.1

25.5

-19.7

1092

2.0

60.9

913

150

55

6.3%

5.8%

Q4:09

3.8

58.8

30.7

-15.7

1001

2.3

70

891

128

48

7.5%

5.9%

Q3:09

3.5

38.4

35.1

-13.5

876

2.0

65

802

125

52

8.9%

9.9%

Q4:11f

7.8

20.6

38.3

-24.1

1195

1.8

27.5

926

155

48

10.5%

9.0%

Q2:09

2.3

49.3

36.4

-14.2

268

0.6

65

796

130

59

19.2%

7.2%

Q1:09

2.5

38.0

38.3

-14.8

237

0.5

64.8

729

131

61

31.5%

30.7%

Presidential election % of votes 1st round

% of votes 2nd round

Joseph Kabila Kabange 44.81 58.05

Jean-Pierre Bemba Gombo 20.03 41.95

Francois Joseph Mobutu Ngangawe 13.06 -

Other 22.10 -

Legislative election Seats

People's Party for Reconstruction & De-mocracy

111

Movement for the Liberation of Congo 64

Unified Lumumbist Party 34

Social Movement for Renewal 27

Forces for Renewal 26

Other 238

Total 500

-15.0

-5.0

5.0

15.0

25.0

2002 2004 2006 2008 2010f

PE GE GFCF Netex GDP

% y/y



We estimate the C/A deficit will widen to 23.2% of GDP in 2010 (-14.6% in 2009). Contributing to this is rising out-ward service and income payments as growth rebounds. Commodity exports should also pick up, as will imports (driven by the need for infrastructure development). This will probably leave the trade balance increasingly nega-tive. The BOP is expected to benefit from robust financial flows, including aid inflows for pro-poor and security re-lated purposes, and FDI. We also expect a pick-up in aid flows in 2011 to support the forthcoming electoral proc-ess. Still, the jury is out over the prospects of a sustain-able increase in FDI after First Quantum Minerals’ Kolwezi project was taken over and sold by the govern-ment and an agreement with Tullow Oil for two explora-tions blocks was cancelled. FX reserves will rise slightly to USD1.1bn by end-2010, from USD1.0bn at end-2009.

We think fiscal and monetary discipline and coordination will be maintained in the medium term in the framework of the PRGF. This was also stressed by Budget Minister Jean-Baptiste Ntahwa in early Aug. The USD12.3bn debt-relief deal recently secured by the DRC should re-sult in incremental revenues being channelled into infra-structure development and social expenditure. Neverthe-less, we cannot rule out the possibility of increased mili-tary spending should the withdrawal of UN peacekeepers become effective next year, given the threat of conflict in the volatile eastern provinces. The potential risk of fiscal slippage, and ultimately higher inflation, also stem from the general elections scheduled for 2011, in which Presi-dent Joseph Kabila is likely to stand. Political manoeu-vres within the ruling coalition ahead of the contest may translate into increased patronage expenditure.

The BCC has continued to ease interest rates as inflation decelerated, cutting the benchmark rate to 22% (Aug 11), from 29.5% (July 8), 42.0% (May 10), 52% (April 8) and 60% (March 25). This has been associated with rapidly declining treasury yields. Indeed, the yield on the 28-day T-Bill fell to 28.09% in late July from highs of 70% in Q4:09. The yield on the 7-day T-bill dropped even further to 17.0% (7 Sep). The BCC still targets inflation of 15.0% y/y at year-end, but some BCC officials now estimate that consumer prices could fall below the 10% threshold if the current CPI trend is sustained. Accordingly, the BCC may well lower its benchmark rate again in the coming months, but we think rates will probably stabilise in the low-to-mid teens going forward, and potentially rebound in H2:11 ahead of the presidential election.

Balance of payments: financing the CA deficit Current account developments

Fiscal policy: fiscal prudence on the agenda Central government budget

Monetary policy: BCC eases rates further Interest rates


Source: Banque Centrale du Congo, IMF, Standard Bank Research


Democratic Republic of the Congo

-6

-4

-2

0

2

2004 2005 2006 2007 2008 2009e 2010f 2011f

Trade balance Services

Income Transfers

Current account

USD m

% of GDP 2008 2010



- Wages 6.9 6.7

- Interest 3.1 3.0

- Transfers and subsidies 3.5 3.1

Cash basis balance before int. res. -3.1 -12.7

Domestic fiscal balance -0.3 -1.4

Net domestic financing 0.9 0.0

Net foreign borrowing 1.8 5.6


2009

17.8

28.7

6.3

3.2

3.0

-3.0

-3.3

-0.8

3.2

9.3

10.0

27.5

45.0

62.5

80.0

Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10

Policy rate Treasury bills 28-d

% y/y



We remain constructive for CDF, and expect the ex-change rate to trade in a tight range around 900 in the medium-term. Given that the authorities are keen on pro-gressively de-dollarising the economy, exchange rate stability will probably be maintained, assuming no unex-pected exogenous macro shocks which would worsen the overall BOP balance (-3.2% of GDP in 2010). This is also supported by our core view that the government will somewhat retain its prudent policies. Also, we think the currency will be positively affected by the debt relief package and the associated budget implications as well as the normalisation of monetary conditions. Still, a pos-sible shift in global risk aversion and lower interest rates could outweigh this favourable environment. Besides, downside risks to the FX outlook stem from a possible loosening in fiscal policy ahead of the 2011 elections.

Inflation has decelerated sharply Changes in yield curve

FX outlook: currency stability USD/CDF: forwards versus forecast

FX reserves marginally tilted to the upside The REER has appreciated


Source: BCC, IMF, Standard Bank Research




Source: BCC, IMF, Standard Bank Research

5.0

18.8

32.5

46.3

60.0


% y/y

10.0

20.0

30.0

40.0

7-day 28-day

YTM

Sep 10 Oct 10 Feb-11 Sep-11

0

400

800

1,200

2003 2005 2007 2009 2011f

FX reserves

USD m

80

100

120

140

160

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

400

600

800

1,000

1,200


USD/CDF




Democratic Republic of Congo: annual indicators


Notes: pe — period end; pa — period average, nr — not rated


2005 2006 2007 2008 2009 2010f 2011f

Output

Population (million) 57.6 59.3 61.1 62.9 64.8 66.7 68.7

Nominal GDP (CDFbn) 3,366 4,005 5,148 6,526 9,734 12,912 15,920

Nominal GDP (USDbn) 7.2 8.0 9.6 13.0 12.1 14.3 17.4

GDP / capita (USD) 125.1 134.6 157.4 206.1 186.6 213.7 252.6

Real GDP growth (%) 6.6 5.2 6.1 6.0 3.0 6.5 7.5


Budget balance / GDP (%) -3.1 -0.1 -0.3 -3.3 -3.3 -1.4 -0.8

Domestic debt / GDP (%) na na na na na na na

External debt / GDP (%) 138.8 131.8 139.7 101.5 105.7 30.4 31.0

Balance Of Payments

Goods exports (USDm) 2.1 2.3 6.1 6.6 3.8 4.5 5.7

Goods imports (USDm) 2.5 2.7 5.3 6.7 5.3 6.4 8.1

Trade balance (USDm) -0.4 -0.4 0.9 -0.1 -1.5 -1.9 -2.3

Current account (USDm) -0.8 -0.6 -0.2 -1.8 -1.8 -3.3 -4.1

- % of GDP -10.5 -8.1 -1.6 -14.2 -14.6 -23.2 -23.7

Financial account (USDm) 0.3 0.1 0.2 1.1 1.0 2.4 3.0

Basic balance -0.4 -0.4 -0.3 -0.6 -0.4 -0.5 -0.6

- % of GDP -5.1 -5.4 -3.6 -4.4 -3.4 -3.2 -3.6

FX reserves (USDm) pe 154 220 184 290 1,001 1,105 1,195

- Import cover (months) pe 0.7 1.0 0.4 0.5 2.3 2.1 1.8


S&P nr nr nr nr nr nr nr

Moody’s nr nr nr nr nr nr nr

Fitch nr nr nr nr nr nr nr


Headline inflation pa 21.5 13.3 20.8 25.5 46.1 26.2 15.8

M3 money supply (% y/y) pa 24.2 49.5 55.7 32.8 35.1 28.5 36.3

Policy interest rate (%) pa 41.5 29.7 30.8 28.5 67.9 38.0 16.5

Policy interest rate (%) pe 28.8 35.0 22.5 40.0 70.0 13.0 26.0

1-m rate (%) pa 48.8 29.7 29.0 27.6 64.6 37.2 16.0

2-y rate (%) pa na na na na na na na

USD/CDF pa 475 468 557 564 805 905 917

USD/CDF pe 435 530 550 630 907 905 925

REER (02M1=100) pa 115 129 125 123 129 144 150

NEER (02M1=100) pa 103 104 88 98 57 51 49



Egypt: getting back into its stride

As expected, Egypt’s de facto one-party National Democ-ratic Party (NDP) dominated the upper house (the Shura Council) election in Jun 10, securing a third of the 264 seats. The NDP won 80 of the 88 seats contested. We share the dominant view that the poll provides something of a precursor for the larger parliamentary elections planned for Oct 10 and presidential polls in 2011. We would be surprised to see a deviation from the 85-90% NDP seat share in the parliamentary poll. Indeed, with the opposition coalition (CEOP) still divided and the Mus-lim Brotherhood constrained by anti-religious party legis-lation, the NDP may even increase its hold on power. Yet the key political risk remains the succession of President Mubarak, who at 82 is expected to stand aside prior to a scheduled presidential poll in 2011. We still expect his son, Gamal, to become the next president.

Although we do not have the breakdown of GDP for Q2:10, the authorities suggest growth was around 5.9% y/y and expect it to increase to 6.5% y/y on average in the coming fiscal year to mid-11. We broadly agree with their outlook. The non-deflated data for Q2:10 shows a solid improvement in the key sectors of tourism, Suez transport and oil and gas. The manufacturing sector has also continued to consolidate. However, construction growth has decelerated and the retail sector has contin-ued to register negative growth, suggesting that the Egyptian consumer’s confidence remains fairly fragile. We are still relatively comfortable that consumer confi-dence will improve in H2:10 in line with asset price up-side and still-accommodative fiscal and monetary policy. As such, we expect solid import demand to place down-ward pressure on GDP from the demand side.


Political risk: Oct 10 parliamentary elections Election results (2005)

GDP growth: firming up Composition of GDP

Notes: pe — period end; pa — period average Source: Central Bank of Egypt, Central Authority for Public Mobilization and Statistics, Standard Bank Research, Bloomberg

Source: Central Bank of Egypt, Standard Bank Research

Source: Egypt Election Commission


Mohamed Hosni Mubarak NDP 88.6

Ayman Abdel Aziz Nour Al Ghad 7.6

Noman Khalil Gomaa Al Wafd 2.9

Parliamentary election Seats % of

votes

National Democratic Party (NDP) 311 68.5

Independents (Muslim Brotherhood) 88 19.4

New Wafd Party 6 1.3

Total 454 100

Osama Abdel Shafi Shaltout Al Takaful 0.4

Independents 24 4.6

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 6.1 6.5 6.0 6.5 6.5

CPI (% y/y) pa 8.5 8.0 7.5 7.0 6.5

M2 (% y/y) pe 12.0 13.0 14.0 15.0 16.0


Import cover (months) pe -7.8 -9.2 -8.4 -8.0 -7.4

3-m rate (%) pe 9.0 8.0 7.5 7.0 7.5

5-y rate (%) pe 12.0 11.0 10.5 10.0 9.5

USD/EGP pe 5.60 5.70 5.75 5.80 5.70

REER pe 93.0 95.0 96.0 97.0 98.0

USD/EGP vol (20 day) 0.6% 1.0% 1.0% 1.0% 1.0%

NEER pe 54.0 54.5 54.0 54.0 54.5

CA/GDP (%) pe -2.96 -0.16 -2.26 -3.34 -3.68

Q2:10

5.9

10.3

10.4

-2.45

35.2

-8.3

10.2

12.5

5.69

93.1

54.9

0.7%

Q1:10

4.6

12.1

9.8

-2.61

34.7

-8.6

10.0

12.2

5.45

91.5

53.7

1.2%

Q4:09

5.0

12.6

9.5

0.39

34.2

-9.5

9.8

10.5

5.48

90.0

52.0

2.1%

Q3:09

4.6

9.5

7.0

-2.73

33.5

-8.0

9.6

10.2

5.48

88.0

51.5

3.5%

Q4:11f

6.7

7.5

17.0

0.49

38.2

-9.4

8.0

9.0

5.80

100.0

55.0

1.0%

Q2:09

4.5

10.8

8.0

-2.20

31.3

-8.1

10.3

10.2

5.59

86.0

52.5

0.9%

Q1:09

4.2

13.5

6.9

-2.16

32.2

-9.2

10.5

10.5

5.63

85.0

53.0

5.7%

-5.0

-1.3

2.5

6.3

10.0

2003 2004 2005 2006 2007 2008 2009f 2010f

%

PCE GE GFCF

Stocks Netex GDP



The CBE’s FX reserves rose to USD35.28bn in Jul 10 from USD34.16bn in Dec 09. The increase points to the improving BOP position. The improvement in FX re-serves is also masked by CBE FX deposits at commer-cial banks which increased to USD5.68bn in Jun 10 from USD4.50bn in May and USD1.86bn in Dec 09. The im-provement in the C/A deficit we had been looking for in 2010 failed to materialise in Q1:10. The C/A registered a USD1.3bn deficit compared to a USD0.99bn deficit in Q1:09. Part of the issue was reduced oil exports, which was corrected in Q2:10. However, trade data for Q2:10 also deteriorated, with the 12-m deficit registering USD23.1bn from USD22.3bn in Q1:10. We have revised our C/A deficit forecast up to USD4.5bn in 2010 (2.1% of GDP) and USD5.4bn (2.2% of GDP) in 2011, but con-tinue to see these easily financed by financial inflows.

The cash deficit for FY09/10 was around 8.2% of GDP (including grants)—slightly lower than the 8.4% budg-eted. Expenditure moderated to 30.2% of GDP compared to 33.8% in FY08/09, but revenue fell to 22.1% from 27.1%, which has provided some private sector stimulus. The MT plans to get the deficit down to 3-4% of GDP by FY12/13, once the 2011 presidential elections are out of the way. We suspect this will prove difficult without the government dealing with the issue of subsidies which ate up 8.6% of GDP in FY09/10 and are likely to be greater than the 8.4% of GDP budgeted for FY10/11. The gov-ernment also postponed the introduction of a new prop-erty tax and VAT. Moreover, the servicing of the growing public sector debt is set to take an estimated 6.6% of GDP in FY10/11 from 6.1% in FY09/10, despite an exten-sion of government debt’s average maturity structure.

Although the CBE’s monetary policy stance has been neutral as expected since May’s publication, we suspect the risk from a tightening bias has decreased and may now have shifted towards further easing. We see little evidence of inflationary pressures in coming months. Headline inflation was 10.7% y/y in Jul 10, the same as Jun 10, but we expect inflation to continue its downward trajectory, bringing it back towards the core (non-food) level (7.1% y/y in Jul). Our dovish inflation outlook ap-pears to be shared by the CBE, who in its 29 Jul MPC comment saw the risks from growth and inflation being well balanced, with the main uncertainty coming from less robust global economic growth. Private sector credit—at 9.5% y/y on a 3-m moving average basis in Jul 10—remains subdued by historical levels and we see this picking up only gradually going forward.

Balance of payments: widening surplus Current account developments

Fiscal policy: election budgeting persists Central government budget

Monetary policy: risks to the downside Inflation and interest rates


Source: Egypt Ministry of Finance, Standard Bank Research


Egypt

-32,000

-16,000

0

16,000

32,000

Q1 08 Q4 08 Q3 09 Q2 10 Q1 11 Q4 11

USD m

Goods Services Transfers

Income C/A

% of GDP 09/10 10/11



wages 7.1 6.9

interest 6.1 6.6

subsidies 8.6 8.4

grants 0.3 0.4


Net asset position 0.4 -0.6



0.0

7.5

15.0

22.5

30.0

Feb-05 Mar-06 Apr-07 Apr-08 May-09 May-10

%

CBE lending rate CPI y/y CPI y/y (ex-food)



The yield curve has delivered some bull steepening over the past few months. We feel that this is likely to sponsor some bull flattening in coming months. Naturally, the rally in the short end will pull down the longer-dated yields. A large part of the bull steepening has been the re-emergence of foreign investor interest in the Egyptian carry trade as the USD/EGP stabilised. But there has also been considerable interest in EM duration trade in recent months, which is likely to extend to the Egyptian curve, once investors get comfortable with a likely disin-flation process in coming months. The risk is that the growing liquidity through the curve proves insufficient to attract foreign investors. The other risk comes from in-creased government debt issuance (EGP120bn in Q3 from EGP117bn in Q2 and EGP115 in Q3:09) and the bias to extend the average debt maturity structure.

Our outlook back in May that USD/EGP would head up towards 5.70 proved appropriate, albeit the move oc-curred somewhat swifter than we had anticipated. The key driver, as usual, was changes in EUR/USD with an overlay of trade-weighted policy bias. Interestingly, the relationship broke down since EUR/USD turned south in early-Jun, delivering some notable trade-weighted weak-ness. It may well be that this was part of a deliberate policy which has been under discussion with the IMF to allow more flexibility to prevent excess fixed income in-flows. Nevertheless, we suspect there is room for some trade-weighted gains on a multi-week basis, which should see USD/EGP trade back nearer to 5.60. How-ever, in line with our view that there is likely to be another period of significant EUR/USD downside, we see 5.70 revisited by end-10 and a move to 5.80 during H1:11.

Egyptian equities (as measured by the Hermes index) were up a relatively modest 3.6% in the year to 3 Sep 10. However, this compared favourably with the relatively flat YTD performance of the wider MSCI EM index. But Egyptian equities have underperformed since May’s pub-lication, falling 3.6%, while the MSCI is up 3.7%. How-ever, we remain relatively constructive looking for a de-gree of catch-up in coming months. At around 13.38x, the P/E ratio compares reasonably with the S&P500 at 14.6x, while the dividend yield of 3.8% compares well with 2.0% on the S&P500. We are also constructive on the potential growth in the economy, with 6.4% forecast for 2011. In addition, we are reasonably constructive on equities glob-ally in coming months as market valuations shift risk-free model rates lower and the prospects of a double-dip global recession are diluted even further.

Bond curve outlook: further yield compression Changes in yield curve

FX outlook: USD/EGP of 5.60 USD/EGP: forwards versus forecast

Equity market: constructive short-term Cairo Stock Exchange




Egypt

8.0

9.5

11.0

12.5

14.0

1-m 3-m 6-m 1-yr 2-yr 3-yr 5-yr 7-yr 10-yr

3-m forecast 10/05/2010 03/09/10

100 = Jan 09

60

115

170

225

280

Sep-04 Mar-06 Aug-07 Feb-09 Jul-10

Hermes MSCI EM MSCI Africa

5.3

5.5

5.7

5.9

6.1


USD/EGP




Egypt: annual indicators

Notes: pe — period end; pa — period average; na — not available

Source: Central Bank of Egypt, Central Authority for Public Mobilization and Statistics, Standard Bank Research, Bloomberg

Egypt

2005 2006 2007 2008 2009 2010f

Output Population (million) 70.0 71.3 72.8 74.2 75.7 77.2

Nominal GDP (EGPbn) 539 618 744 931 1069 1231


GDP / capita (USD) 1,343 1,518 1,813 2,275 2,578 2,797

Real GDP growth (%) 6.9 7.0 7.1 6.0 4.6 5.8

Oil Production ('000 b/d) 655.0 632.0 619.0 639.0 645.0 650.0

Gas Production (bcm) 34.6 34.6 44.7 46.5 50.0 54.0


Budget balance (excl. Grants) / GDP (%) -8.50 8.00 -7.10 -8.00 -7.40 -8.50




Balance of Payments


Imports of goods and services (USDbn) -39.10 -33.27 -45.26 -56.62 -45.56 -50.60

Trade balance (USDbn) -23.03 -12.72 -20.81 -26.77 -22.48 -26.07

Current account (USDbn) 2.05 2.51 0.24 -1.33 -3.19 -4.47

- % of GDP 2.18 2.32 0.18 -0.79 -1.64 -2.07

Capital & Financial account (USDbn) 6.70 -0.02 4.90 6.00 2.70 5.50

- FDI (USDbn) 5.38 10.04 11.60 7.60 6.10 7.00



- Import cover (months) pe -6.72 -9.39 -8.40 6.00 -9.01 -8.66


S&P B+ B+ BB+ BB+ BB+ BB+

Moody’s Baa2 Baa2 Baa2 Baa2 Baa1 Baa1

Fitch BB+ BB+ BB+ BB+ BB+ BB+






CBE Lending rate (%) pa 10.93 10.23 10.75 12.13 11.75 10.50

CBE Lending rate (%) pe 10.75 10.75 10.75 13.50 10.00 11.00

3-m rate (%) pe 8.50 9.65 7.10 11.84 9.80 8.00

1-y rate (%) pe 8.70 10.05 7.65 12.20 11.30 11.80

2-y rate (%) pe 9.10 10.41 7.45 10.35 11.50 12.00

5-y rate (%) pe 9.20 10.72 8.84 11.75 10.50 11.00

USD/EGP pa 5.77 5.73 5.67 5.58 5.55 5.61

USD/EGP pe 5.73 5.70 5.64 5.51 5.48 5.70

REER pa 73.4 74.1 76.5 87.0 87.3 93.2

NEER pa 55.9 53.6 51.3 51.4 52.3 54.3

2011f

78.8

1416

244.1

3,099

6.4

650.0

55.0

-8.90

-8.50

64.42

14.54

26.36

-54.71

-28.36

-5.39

-2.21

4.50

8.00

1.07

38.20

-8.38

BB+

Baa2

BB+

7.75

7.50

15.00

17.00

11.00

11.00

8.00

11.00

12.00

9.00

5.75

5.80

97.8

54.4



Gabon: economic diversification on the agenda

Despite failing to obtain an absolute majority in the 2009 elections, President Ali Bongo Ondimba has asserted himself and consolidated his power. Ali Bongo suc-ceeded his father, Omar Bongo, who ruled between 1967 and 2009, but he has promised to modernise the country and initiate key socio-political reforms. We believe the 2011 parliamentary elections will be a critical test for the current administration. While Prime Minister Paul Bi-yoghe Mba has incrementally come under pressure from Bongo’s top associates for the government’s weak imple-mentation capacity, it may be tricky for Bongo to replace him due to geopolitical reasons. Meanwhile, key opposi-tion leaders, including Andre Mba Obame, have launched a new party (Union Nationale). As such, this group could become one of the two largest oppositions parties, and, with the UPG, challenge the ruling PDG’s grip on power.

We forecast GDP growth of 4.6% y/y in 2010 and 5.5% y/y in 2011, assuming no negative oil price shocks. Pre-dictably, much of our forecast acceleration in GDP growth can be ascribed to higher oil prices relative to 2009 which are likely to support exports. The main down-side risk is, however, the decreasing trend in oil output in recent years as Gabon’s production has peaked. Ongo-ing exploration works could still help contain the expected downturn, but the government has vowed to diversify the economy going forward. We believe the expansionary fiscal stance, coupled with relatively robust oil revenues, should reinforce growth in real disposable income and private consumption as well as government consumption. Investment spending will pick up as infrastructure pro-jects materialise ahead of the 2012 African Cup of Na-tions.


Political risk: reforms and recomposition Election results (2009)

GDP growth: watch the oil price, production Composition of GDP

Notes: pe — period end; pa — period average Source: IMF, Ministere de l’economie et des finances, BEAC, Standard Bank Research, Bloomberg

Presidential election 2009 Party % of votes

Ali-Ben Bongo Ondimba PDG 41.7

Pierre Mamboundou UPG 25.8

Pierre Mamboundou UPG 25.2

Parliamentary election 2006 Seats % of votes

Gabonese Democratic Party (& allies) (PDG)

99 82.5

Union of the Gabonese People (UPG) 8 6.7

Gabonese Union for Democracy & Devel-opment (UGDD) 4 3.3

Congress for Democracy and Justice 1 0.8

Zacharie Myboto Independent 3.9

Gabonese Progress Party (PGP) 2 1.7


Source: Gabon Electoral Commission


GDP (% y/y) pa -0.23 -0.75 -0.18 0.24 4.80 4.10 4.75 5.50 5.50 4.90 5.70 5.85

CPI (% y/y) pa 5.50 4.00 3,4 2.00 2.30 -2.30 1.50 4.80 5.50 6.00 4.80 3.90

Reserve money (% y/y) pe 9.7 4.7 -1.5 -2.9 2.1 0.7 4.5 8.5 9.9 11.5 10.9 13.5

CA/GDP (%) pe 4.8 4.8 5.0 4.8 8.9 8.3 9.4 13.5 11.9 7.9 6.9 6.5



BEAC financing rate (%) pa 4.50 4.50 4.25 4.25 4.25 4.25 4.00 4.00 4.00 4.00 4.00 4.00

USD/XAF pe 494.3 466.6 448.1 457.3 482.3 523.4 510.6 524.7 655.1 605.3 596.3 589.4

-5.0

-2.0

1.0

4.0

7.0

2005 2006 2007 2008 2009e 2010f 2011f

%

PCE GCE GFCF Net ex GDP



We expect an improvement in the C/A surplus, to about 10% of GDP in 2010. As oil exports account for 75-80% of total exports, we believe the trade balance will be sup-ported by current and expected commodity prices. Down-side risks stem from the outlook for import demand, es-pecially in the case of infrastructure goods, and sluggish oil production. The forecast income deficit will be deter-mined by the usual expatriate remittance outflows, to-gether with dividend outflows. We note that the govern-ment has moved to diversify the economy in recent months and has announced contracts with Asian compa-nies worth $4.5bn. We do not expect a turnaround in portfolio inflows, given the lack of tradable assets on the BVMAC and low interest rates by EM standards. FX re-serves could rise to USD2.25bn in Dec 2010, accounting for 6.7 months of imports, from USD2.0bn in Dec 2009.

The government increased overall spending by 35.9% to XAF2,096bn in FY2010, leaving a deficit of about 5% of GDP. Of this, oil revenue would amount to XAF940.2bn. The oil price benchmark (US$66.7/bbl) has been outper-formed, while the exchange rate assumption (USD/XAF 465.5) implies that the marginal utility of every dollar of oil revenue has actually improved. However, implementation difficulties could force the government to cut back on capital spending. The IMF has also advised reviewing the pace of investment acceleration and improving the effi-ciency of public spending. Despite the government’s in-tention to trim a bloated civil service, risks of fiscal slip-pages are still significant ahead of the 2011 parliamen-tary elections. For example, the authorities agreed in late-July to reduce utility prices (gas, water and electric-ity) and the VAT on utilities in the 2011 budget.

While the Bank of Central African States (BEAC)’s mone-tary stance is influenced by the ECB’s policy course, it has some flexibility in determining interest rates. In late- July, the BEAC cut the benchmark rate by 25 bps to 4% to support economic growth and boost credit to the real economy. Given the structural issues in the eurozone, further easing by the ECB cannot be ruled out, although it remains to be seen whether this would impact the BEAC rate in the short term. Inflation is likely to remain subdued across the CEMAC region, which was highlighted by the BEAC as it lowered the prime rate. In this regard, inflation in Gabon was in negative territory in Q2:10 and is mar-ginally north of 0% YTD, although we expect some re-bound later this year given still-elevated m/m rates. Also, the country’s monetary aggregates have been flat or even contracted in y/y terms in recent months.

Balance of payments: benefiting from oil price Current account developments

Fiscal policy: still expansionary Central government budget

Monetary policy: BEAC cuts rates Inflation and interest rates


Source: IMF, BEAC, Standard Bank Research

Source: IMF, BEAC, Standard Bank Research

Gabon

-40

-15

10

35

60

2004 2006 2008 2010f

% GDP

Goods Services IncomeTransfers CA

% of GDP 2009 2010


Oil revenue 7.1 12.6

Non-oil revenue 10.9 10.4


- interest 2.2 1.6

Overall balance -4.4 -5.0

Net external borrowing (saving) -0.7 -0.7

Net domestic borrowing (saving) 5.1 5.7

-4.0

-1.0

2.0

5.0

8.0

Jan-00 Aug-02 Mar-05 Sep-07 Apr-10

%

ECB refi BEAC rate CPI y/y



Gabon’s eurobond has rallied significantly in recent weeks, with the yield retreating to a record low of 5.6% in late-Aug. Gabon’s 2017 yield performance has tracked the average EMBI+ spread in recent months, although this has not always been the case, especially during the global credit crunch. While further modest yield compres-sion cannot be discounted—given the current yields to maturity on some comparable bonds (Philippines)—downside risks stem from the world economic outlook, global liquidity conditions and oil prices. Interestingly, Gabon2017 is to some extent a benchmark for the re-maining SSA (excluding South Africa) eurobonds given its BB- rating. The eurobond collapsed by a less signifi-cant extent than other SSA bonds in late-2008 and was the first to trade at a premium in 2009 — we believe this may have been driven by technical factors.

We expect USD/XAF to be pushed higher by a decline in EUR/USD. As a member of the CEMAC region, Gabon is affected by the CFA peg that sets the EUR/XAF rate at 655.957. We believe EUR/USD will continue to decline in the medium term, possibly reaching 1.25 and parity in three and six months. Consequently, the USD/XAF rate is likely to depreciate towards 655 or so during the next 6-m, tracking EUR weakness via the CFA peg. The fore-cast move in USD/XAF will probably lead to some depre-ciation of the REER, giving rise to gains in external com-petitiveness. Furthermore, we do not expect any change in the EUR/XAF peg, which has only been adjusted once (in 1994), at a time when CFA countries displayed sub-stantial structural imbalances. While FX reserves remain robust, in excess of USD2bn, it is worth noting that 65% of reserves are held by the Banque de France.

Eurobond: record low yields Eurobond spread over UST vs. EMBI+ spread

FX outlook: XAF to track EUR/USD weakness USD/XAF: forwards versus forecast

Net FX reserves: robust, but unutilized Reserve money growth: subdued



Source: IFS, Standard Bank Research Source: IFS, Standard Bank Research

Gabon

spread over UST

0

300

600

900

1,200

1,500

Jan-08 Aug-08 Mar-09 Oct-09 May-10

Gabon

EMBI

-100

500

1,100

1,700

2,300

May-00 May-02 May-04 May-06 May-08 May-10

USDm

Gabon FX reserves (USDm)

-5.0

5.0

15.0

25.0

35.0

Oct-05 Aug-06 Jul-07 Jun-08 Apr-09 Mar-10

% y/y

M2

400

453

505

558

610


USD/XAF




Gabon: annual indicators


Source: IMF, Bancaire de Afrique Centrale (BEAC), Standard Bank Research

Gabon

2005 2006 2007 2008 2009 2010f 2011f

Output


Nominal GDP (XAFbn) 4,570 4,990 5,483 6,622 6,861 7,298 8,067


GDP / capita (USD) 6,049 7,229 8,577 9,663 9,678 8,639 8,295

Real GDP growth (%) 5.49 1.18 5.00 3.18 -0.23 4.80 5.50

Oil Production (k bbls/day) 229 227 225 212 228 230 235


Budget balance (excl. Grants) / GDP (%) 8.36 9.09 8.58 11.43 -4.41 -5.13 -2.1

Budget balance (incl. Grants) / GDP (%) 8.40 9.20 8.58 11.43 -4.41 -5.13 -2.1

Domestic debt / GDP (%) 7.80 5.60 7.40 7.00 6.30 7.91 8.40


Balance of Payments

Exports of goods and services (USDbn) 5.61 6.20 7.27 9.60 6.30 8.50 8.49

Imports of goods and services (USDbn) 2.40 2.81 3.30 4.56 4.07 4.20 4.90

Trade balance (USDbn) 3.21 3.39 3.97 5.04 2.23 3.70 3.59

Current account (USDbn) 2.05 1.76 2.17 2.45 0.72 1.39 1.13

- % of GDP 24.97 17.50 17.65 17.26 4.78 10.0 8.30

Capital & Financial account (USDbn) -1.82 -1.31 -2.00 -1.82 -0.64 -1.07 -1.05

- FDI (USDbn) -0.28 -0.31 -0.23 0.80 0.82 1.10 1.30

Basic balance / GDP (%) 21.6 14.5 15.8 22.9 10.2 17.4 18.4

FX reserves (USDbn) pe 0.68 1.13 1.29 1.92 2.00 2.25 2.43



S&P nr nr BB- BB- BB- BB- BB-


Fitch nr nr BB- BB- BB- BB- BB-


Consumer inflation (%) pa 1.20 -1.41 4.88 5.25 3.83 1.58 5.05

Consumer inflation (%) pe -0.40 6.50 5.90 5.60 1.80 5.50 4.00

Reserve money supply (% y/y) pa 28.8 25.2 12.2 7.8 3.5 4.0 11.5

Reserve money supply (% y/y) pe 27.6 16.4 6.9 9.1 -2.9 8.5 13.5

BEAC discount rate (%) pa 5.8 5.5 5.5 5.1 4.4 4.1 4.0

BEAC discount rate (%) pe 5.50 5.50 5.50 4.75 4.25 4.00 4.00

USD/XAF pa 527 522 479 448 462 491 557

USD/XAF pe 556 497 447 467 457 525 589



Ghana: sovereign downgrade is behind the curve

S&P’s recent sovereign downgrade of Ghana was partly due to concern over the lack of transparency and a regu-latory framework surrounding the country’s nascent oil industry. Interestingly, the World Bank’s MIGA has post-poned giving insurance for the new production facility pending further due diligence into the contract. There are also concerns that the government played a major role in derailing plans by Kosmos to sell its share of the Jubilee field to ExxonMobil. In addition, the Ghana Petroleum Revenue Management Bill has still not been passed into law, although a draft was released in mid-Mar 10. This has raised concerns that the regulatory framework will not be in place in time. Under the terms of its most recent IMF agreement, the government has committed to pass-ing the bill by end-2010, while also submitting a Petro-leum Regulatory Authority Bill to parliament in Sep 10.

GDP growth was 4.1% y/y in 2009, down from 7.2% in 2008. The key growth areas were finance (8.7%), crops and livestock (8.2%), and mining (8.2%). However, the strong performance in these sectors was offset by nega-tive growth in fishing (-2.3%), construction (-1.7%) and manufacturing (-1.3%). Using the 1993 weights, we ex-pect growth to improve to 5.5% in 2010 and then jump a significant 22.0% in 2011 as the impact of oil production comes into the data. Yet the key elephant in the room is the potential sharp (30-40%) upgrade in GDP derived from the rebasing of the data from 1993 to 2006. Al-though postponed several times, the release of these figures is likely to be by end-Q3:10. Such a change sig-nificantly alters Ghana’s risk measures—such as fiscal, C/A and debt ratios, which use GDP as the denomina-tor—and thus the country’s risk rating.


Political risk: oil sector transparency worries Election results (2008)

GDP growth: upward revisions Composition of GDP

Notes: pe — period end; pa — period average; na — not available.

Source: Bank of Ghana, Ghana Central Statistical Service, Standard Bank Research, Bloomberg

Source: Bank of Ghana, Standard Bank Research

Source: Ghana Electoral Commission


Second-round run-off

Prof. John Atta-MIlls NDC 50.23

Nana Akuffo Addo NPP 49.77


New Patriotic Party (NPP) 108

National Democratic Congress (NDC) 115

People’s National Convention (PNC) 2

Convention People’s Party (CPP) 1

Independent 4

Total 230

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 5.5 5.5 22.0 22.0 22.0

CPI (% y/y) pa 10.0 11.0 12.0 11.0 10.0

M2 (% y/y) pe 35.0 33.0 33.0 33.0 33.0



3-m rate (%) pe 12.0 11.0 10.0 10.0 10.0

5-y rate (%) pe 14.5 14.0 13.0 12.0 12.0

USD/GHS pe 1.43 1.43 1.43 1.43 1.43

NEER pe 114.0 116.0 118.0 120.0 115.0

USD/GHS vol (20 day) 3.1% 2.5% 2.5% 2.5% 2.5%

REER pe 229.0 235.0 240.0 245.0 235.0

CA/GDP (%) pe -15.5 -3.8 -1.2 -0.6 -11.5

Q2:10

5.5

9.0

32.0

-5.3

3.5

3.8

14.0

16.0

1.44

115.0

234.0

2.3%

Q1:10

5.5

14.1

24.5

-5.1

3.3

4.3

20.0

20.0

1.42

115.0

232.0

6.3%

Q4:09

4.1

17.0

21.2

-4.3

3.2

4.6

24.0

28.0

1.43

112.0

231.0

3.1%

Q3:09

4.1

19.5

22.1

-13.9

2.2

3.3

25.0

28.0

1.45

109.0

225.0

3.1%

Q4:11f

22.0

9.0

33.0

1.3

4.1

3.6

10.0

12.0

1.43

112.0

230.0

2.5%

Q2:09

4.1

20.5

29.2

1.9

1.7

2.6

25.8

28.0

1.50

106.0

220.0

3.0%

Q1:09

4.1

20.2

26.9

-9.7

1.7

2.4

25.4

28.0

1.41

104.0

205.0

3.5%

-20.0

-10.0

0.0

10.0

20.0

2006 2007 2008 2009 2010

%

PCE GCEGFCF NetexReal GDP grow th



BOG FX reserves rose to USD3.5bn at end-Jun 10 from USD3.3bn at end-Mar 10 and USD3.2bn at end-2009. The figures indicate a modest surplus in the BOP and we see a gradual accumulation of further FX reserves going forward. The C/A deficit fell to USD1.0bn (6.5% of GDP) in 2009—a marked improvement from USD3.5bn (26.2% of GDP in 2008). We expect a fairly modest deterioration to USD1.3bn (7.2% of GDP) in 2010, before improving to a deficit of USD0.7bn (2.8% in GDP) in 2011. The key to the improvement will be oil production which will likely come on line in Nov 10 and add around USD3.0bn to exports in 2011. We remain constructive on the financing of the deficit in coming months, via a combination of FDI and portfolio inflows.

S&P’s downgrade of Ghana’s sovereign rating can be attributed largely to concern over government debt sus-tainability. We are slightly more sanguine and suspect any downgrade should have taken place in 2007 ahead of the fiscal excesses of 2008. We are reasonably com-fortable with the government’s fiscal consolidation plans, which of course phase in oil-sponsored revenues. En-couragingly, the fiscal position for 2010 looks broadly on target in H1:10. The deficit on a commitment basis was 1.9% of GDP in H1:10 compared to a planned 2.5% of GDP. The government paid down GHS337.36m in ar-rears, which was GHS159m more than targeted, taking the cash deficit to its target of 3.2% of GDP. We expect arrears to decline to GHS1.2bn in 2010 from GHS1.43bn in 2009. We believe the deficit correction to 3.5% of GDP in 2012 is still achievable.

As expected, the monetary policy easing cycle that started in Nov 09 continued over recent months, with another 150 bps cut in Jul 10. The cut takes the prime rate down to 13.5%—a cumulative decline of 500 bps since Nov 09. Although we are nearing more neutral terri-tory, we are still pencilling in a move down to 12.0% by end-10. Our view is based on a relatively neutral view on inflation, which we see in a 9.0-11.0% range for the re-mainder of 2010 and most of 2011. A key factor under-pinning our benign inflation view is our expectation of further GHS strength/stability. Another is that we believe domestic demand will remain sluggish for a while. Private sector credit extension was a rather modest 4.3% y/y in May 10, compared to 43.0% in May 09 and 58.7% in May 08. M3 money growth was c.27.6% y/y in May—around the same level as in Dec 09.

Balance of payments: improving Current account developments

Fiscal policy: dealing with arrears Central government budget

Monetary policy: end of easing bias in sight Inflation and interest rates


Source: Ghana Ministry of Finance, Standard Bank Research


Ghana

-6,000

-3,500

-1,000

1,500

4,000

Q1 06 Q3 07 Q1 09 Q3 10

USD m

Trade Services

Income Transfers

Current Account

% of GDP 2008 2009



- recurrent 22.4 28.1

- debt service 3.2 4.9

- development/transfers 21.6 11.2




Sale of Assets 4.1 0.0


2010

37.1

41.6

29.4

5.2

10.9

-12.8

-8.0

2.1

0.0

5.9

Donor support (grants and HIPC) 5.3 6.0 4.8

5.0

11.3

17.5

23.8

30.0

Oct-04 Mar-06 Aug-07 Dec-08 May-10

%

91d T-bill CPI y/y BOG Prime rate



Our expectation of further compression in the local yield curve since our May publication proved appropriate; the curve has even delivered some moderate bull flattening. We are reasonably comfortable that there is some further moderate yield compression still to come. That said, dur-ing Jun and Jul the picture was not so encouraging and the 3-yr bond yields increased in line with a deterioration in foreign investor sentiment. Foreign participation also probably explains the relative outperformance since late-Jul. Interestingly, we have seen limited impact on local bonds or the 2017 eurobond from S&P’s downgrading of Ghana’s sovereign rating in late-Aug. Indeed, Ghana has been a strong outperformer in the eurobond universe, with spreads compressing a significant 200 bps since late-May compared to 70 bps in EMBI+ spreads.

We have upwardly revised our USD/GHS forecast to 1.43 for 2010 and 2011 from 1.38 and 1.35. While the GHS has outperformed the USD on a forward basis since May, it underperformed until mid-Jul. Since mid-Aug USD/GHS has found a more stable level around 1.43 (1.41-1.45 range) and we see this range being maintained in 2010 and into 2011. The risk to this view comes from a break of the range to the downside should the authorities see risk to their monetary policy goal of maintaining inflation in single digits. Importantly, Ghana’s positive BOP situa-tion suggests the USD/GHS rate will continue to be pre-dominantly policy determined. The risk is perhaps the authorities’ move to a more trade-weighted measure, increasing USD/GHS volatility. The GHS also continues to be protected by a reasonable interest rate carry and an ongoing unwinding of FX deposits.

Ghana has not outperformed broader EM equities, con-trary to our expectations. While the Ghanaian stock mar-ket was down some 2.7%, the MSCI EM was up 8.3%. That said, Ghana is still up 19.6% YTD compared to the MSCI EM being up a more modest 1.4%. Nevertheless, we remain constructive on the Ghana All Share Index in coming months and expect it to trade to new highs above 7,130. First, Ghanaian equities have performed better since the BOG cut rates a further 150 bps in late-Jul. Second, the appreciating or more stable GHS has as-sisted foreign investor confidence in Ghana, which we also see as broadly constructive equities globally. Third, local T-bill and bonds look relatively less attractive rela-tive to equities, with lower risk-free rates improving valua-tions. Fourth, we expect the upward GDP revisions to support overall corporate sentiment.

Bond outlook: constructive Changes in yield curve

FX outlook: USD/GHS in 1.41-1.45 range USD/GHS: forwards versus forecasts

Equity market: still bullish Ghana Stock Exchange



Source: Bloomberg

Ghana

11.0

12.3

13.5

14.8

16.0

91d 182d 1y 2y 3y

3-m forecast 07-May-10 06-Sep-10

Jan 04 = 100

10

90

170

250

330

Jul-01 May-03 Feb-05 Dec-06 Sep-08 Jun-10

GSE All-share MSCI EM

0.85

1.06

1.28

1.49

1.70


USD/GHS




Ghana: annual indicators

Notes: pe — period end; pa — period average; nr — not rated; na — not available. The cedi was rebased in mid 2007 by 10,000. For easier reference historical data has also been rebased.

Source: Bank of Ghana, Ghana Central Statistical Service, Standard Bank Research, Bloomberg

Ghana

2005 2006 2007 2008 2009 2010f


Nominal GDP (GHSbn) 9.7 11.5 14.0 17.3 21.4 24.9


GDP / capita (USD) 483 553 630 578 627 717

Real GDP growth (%) 5.9 6.2 6.3 7.2 4.1 5.5

Gold production ('000 FO) 2,124 2,120 2,215 2,400 2,550 2,700

Cocoa bean production ('000 MT) 537 741 620 676 720 740

Timber production ('000 CM) 460 455 465 465

Central Government Operations Budget balance (excl. Grants) / GDP (%) -6.9 -13.9 -14.1 -20.2 -15.8 -12.8



Balance Of Payments Exports of goods (USDbn) 2.8 3.7 4.2 5.3 5.9 7.7

Imports of goods (USDbn) 5.3 6.8 8.1 10.3 8.1 10.4


Current account (USDbn) -0.8 -0.8 -1.9 -3.5 -1.0 -1.3

- % of GDP -7.2 -6.5 -13.0 -26.2 -6.5 -7.4

Capital & Financial account (USDbn) 0.8 0.0 2.3 2.6 2.4 2.5

- FDI (USDbn) 0.1 0.0 0.9 1.1 0.7 1.1

Basic balance / GDP (%) -0.8 -6.5 -2.7 -15.3 4.6 0.6




S&P B+ B+ B+ B+ B+ B

Moody’s NR NR NR NR NR NR

Fitch B+ B+ B+ B+ B+ BB-

Monetary & Financial Indicators Consumer inflation (%) pa 15.1 11.0 10.7 16.5 19.3 11.0


BOG discount rate (%) pa 16.8 14.3 12.7 15.4 18.1 15.3

BOG discount rate (%) pe 15.5 12.5 13.5 17.0 18.5 12.0

3-m rate (%) pe 11.4 10.7 10.6 24.7 24.0 11.0

1-y rate (%) pe 16.5 13.5 12.0 21.0 21.0 11.0

2-y rate (%) pe 17.0 15.2 12.5 20.0 30.0 12.0

5-y rate (%) pe n/a 14.5 15.0 28.0 28.0 14.0

USD/GHS pa 0.91 0.92 0.94 1.12 1.36 1.43

USD/GHS pe 0.91 0.92 0.97 1.28 1.43 1.43

NEER pa 88.2 85.5 86.5 97.0 107.8 115.0

REER pa 134.1 138.2 145.8 176.3 220.3 232.5



466 455


2011f

24.8

33.0

23.1

932

22.0

2,900

750

450

-7.8

-3.8

32.0

32.1

10.8

13.0

-2.2

-0.7

-3.1

2.0

1.0

1.3

4.1

3.8

B+

NR

BB

10.5

9.0

33.0

33.0

12.0

12.0

10.0

10.0

11.0

12.0

1.43

1.43

118.0

237.5



Kenya: economic growth could gather momentum

The campaigning and voting for the referendum on the constitution held on 4 Aug occurred relatively peacefully. Although there were some sporadic instances of vio-lence, they were not sufficient to mar the entire exercise. Opinion polls in the period leading to the referendum allayed investor fears of a recurrence of the weeks of violence that followed the 2007 general election, the dis-puted outcome of which was a spark. The resounding approval of the constitution also eliminated the risk of a recurrence of the tensions that were triggered by the re-jection of the 2005 referendum. The approval of the con-stitution does not mean the pre-existing political tensions in the unity government will necessarily abate; it has just eliminated the constitutional referendum as a catalyst for further problems. For now the government is likely to muddle through until the next general elections.

The peaceful referendum will likely ensure that the tour-ism sector continues to improve over the remainder of 2010. Likewise, remittances from the Diaspora are likely to support real income growth. With inflation low, this will help to underpin household consumption spending. Hence, the 3.8% y/y growth rate for 2010 that we are forecasting is probably on the low side. Upside risks to our forecast include the possibility of a stronger contribu-tion from the agricultural sector. Good rains are likely to result in the agricultural sector adding to the growth mo-mentum, countering the destruction of horticultural prod-ucts meant for exports that was occasioned by the can-cellation of flights to Europe as a result of the Icelandic volcanic eruptions. Moreover, investment spending re-mains robust, boosted by government spending.


Political risk: hurdle cleared Election results (2007)

GDP growth: upside risks Composition of GDP

Source: National Bureau of Statistics, Standard Bank Research

Source: Electoral Commission of Kenya

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 0.9 2.3 3.3 3.8 4.3

CPI (% y/y) pa 3.2 3.0 3.4 4.0 4.1

M3 (% y/y) pe 17.0 16.8 17.3 16.8 15.9



3-m rate (%) pe 2.4 2.8 3.1 3.7 4.3

5-y rate (%) pe 5.7 5.2 6.5 7.1 7.7

USD/KES pe 81.2 80.9 82.9 82.5 82.3

REER pe 139.8 137.8 135.6 137.3 138.9

USD/KES vol (20 day) 6.5% 7.0% 7.0% 7.0% 7.0%

NEER pe 78.6 79.4 77.6 81.4 82.4

CA/GDP (%) pe -6.7 -3.9 -3.7 -3.4 -3.2

Q2:10

7.0

3.7

16.5

-6.2

3.5

3.7

2.6

7.0

81.6

137.7

74.8

10.0%

Q1:10

4.4

4.6

15.8

-6.4

3.4

3.6

4.9

8.3

77.3

144.6

78.5

3.9%

Q4:09

3.3

5.7

15.2

-6.7

3.9

4.0

6.6

9.9

75.7

149.9

80.8

7.0%

Q3:09

0.5

7.5

14.8

-7.3

3.7

3.9

7.3

11.2

75.3

150.0

81.0

7.1%

Q4:11f

4.9

5.2

15.5

-3.3

5.1

4.8

4.8

8.1

82.1

140.4

83.4

7.0%

Q2:09

1.1

10.2

13.0

-7.2

3.2

3.3

7.0

10.7

76.3

148.0

80.0

7.0%

Q1:09

5.6

14.2

11.5

-7.1

2.7

2.8

8.5

10.2

80.1

147.0

81.0

7.5%

Notes: pe — period end; pa — period average Source: Central Bank of Kenya, Kenya National Bureau of Statistics, Standard Bank Research

Presidential election Party % of

Mwai Kibaki PNU 47.1

Raila Amolo Odinga ODM 46.5

Stephen Kalonzo Musyoka ODM-K 5.9

Parliamentary election Seats

Orange Democratic Movement (ODM) 99

Party of National Unity (PNU) 43

Orange Democratic Movement -Kenya (ODM-K) 16

Total 207

Others 0.5

Kenya African National Union (KANU) 14

-12.0

-6.0

0.0

6.0

12.0

2002 2004 2006 2008 2010f

y/y

PCE GE GFCF

Stocks Netex GDP



Available data through May 10 shows that, contrary to our earlier expectations, the goods trade deficit has not continued to widen but has actually shrunk. Much of that shrinkage was due to falling imports, mainly oil, while exports have stagnated. Over the remainder of the year, the C/A is likely to improve somewhat, recording a deficit of 3.9% of GDP for the year. The improvement in tourist arrival numbers is likely to continue over the course of 2010, receiving another boost from a largely incident-free constitutional referendum. Having recovered from 2009, worker remittances have been subdued during H1:10 — a pattern likely to be repeated in H2:10. However, the lower base of 2009 would still imply a net improvement y/y, despite a stable q/q trend. FX reserves, at USD3.75bn in May (3.9 months’ import cover), are likely to rise to USD4.17bn in Dec (4.5 months’ import cover).

Fiscal policy remains broadly expansionary, with a deficit of 6.8% of GDP budgeted for FY2010/11 — marginally higher than the 6.6% achieved in FY2009/10. The FY2010/11 budget is predicated on an increase in reve-nues to 24.9% of GDP from 22.4% previously. Clearly, as the economy continues to recover, fiscal revenues are likely to improve as well. But what is striking about the increase in the revenue-to-GDP ratio is an expectation on the part of the government that efficiencies in revenue collection will underpin this increase in revenues. Hence, revenue collection may turn out to be smaller than budg-eted for, implying that either expenditure will be reduced or the deficit will be larger than anticipated. While this could have prompted the government to accelerate the process of issuing a Eurobond, we suspect there will be greater domestic issuance instead.

Although inflation ticked up to 3.6% y/y in Jul from 3.5% y/y in Jun, it is likely to drop below 3.0% y/y in Q3:10. However, this will probably be the bottom in the current cycle, with a rising trend likely to be established into Q1:11. Our current forecast envisages inflation ending the year at 3.1% y/y and rising to 5.4% y/y by Dec 11. The wild card remains food inflation, which has been subdued recently, averaging 4.7% y/y since the begin-ning of the year. Perhaps the increase to 4.6% y/y in Jul from 3.8% y/y in Apr is a sign that food inflation has bot-tomed out. But barring a drought that would constrain food supply in the region, we do not expect strong food inflation pressures to arise. Needless to say, there is no imperative for the CBK to hike rates just yet. But some withdrawal of the excess liquidity the CBK has injected is likely; reserve money is about 16.5% above target.

Balance of payments: lower oil imports Current account developments

Fiscal policy: broadly expansionary Central government budget

Monetary policy: turning neutral Inflation and interest rates

Source: Central Bank of Kenya, Standard Bank Research

Source: Kenya Ministry of Finance

Source: National Bureau of Statistics, Reuters

Kenya

-7,000

-4,000

-1,000

2,000

5,000

2001 2003 2005 2007 2009 2011f

USD m

Trade Service Income

Tranfers C/A

% of GDP 2009/2010 2010/2011



wages 6.8 6.6

interest 2.5 2.7

development 10.3 10.9






0.0

5.5

11.0

16.5

22.0

Jan-07 Nov-07 Sep-08 Jun-09 Apr-10

%

CPI y/y 91-day T-bill rate Central bank rate



The bull flattening of the curve over the past 4-m was far stronger than we had expected. The rally at the long end of the curve could persist some more. Robust demand for long-term paper is likely to keep long-term rates relatively flat. But rates at the short end of the curve appear to have hit the floor, with some upside likely as we move into 2011. The CBK has allowed reserve money to rise by close to KES30.0bn above target (about 16.5%), a situation that is unlikely to continue. Hence, as the CBK withdraws some of that excess liquidity, it will simultane-ously put a floor under short-term rates. Furthermore, the government is likely to issue more domestic paper as it finances the budget deficit. But the CBK’s accommoda-tive policy bias coupled with still-subdued inflation devel-opments imply that there won’t be much upside pres-sures even on short-term rates just yet.

A factor that may have led to the injection of excess li-quidity in the banking system, manifesting itself in re-serve money staying above targeted levels, is the desire of the CBK to arrest the appreciation of the KES. Inter-vention by the CBK could only abate if USD/KES were to start heading higher. Even then, chances are that the CBK would switch to buying EUR rather than USD if EUR/KES were to continue declining. Thus far, the CBK has been successful at not only stabilising the trade-weighted KES but also engineering a depreciation of the REER. Our calculations show that the REER declined by 8.4% between Dec 09 and Jun 10. Although decreasing inflation helped in bringing this about, the CBK kept the NEER depreciating. Without CBK intervention, the USD/KES rate would decline towards 75, but we are now tar-geting 82.5 on a multi-month basis.

The NSE has made up most of the ground lost to broader EM and frontier markets, a trend likely to continue over the rest of this year. The positive momentum the market received from strong corporate earnings continued to drive the market higher over the past 4-m period. The market also probably received a boost from portfolio in-flows. Surprisingly, investor sentiment, both domestic and foreign, remained buoyant, seemingly unfazed by the possible dislocation that could have been caused by the referendum. Of course, opinion polls showing increasing support for the constitution as the poll date neared helped. Foreign investor interest in the market improved, even though global economic growth seemed to be sput-tering. It appears that Africa-focussed investors have differentiated the possible impact of slowing developed market economies, with a still-bullish outlook for EM.

Bond curve outlook: further bull flattening Changes in yield curve

FX outlook: depreciation bias USD/KES: forwards versus forecasts

Equity market: catching up to EM Nairobi Stock Exchange



Source: Reuters

Kenya

1.0

3.5

6.0

8.5

11.0

3-m 1-y 3-y 5-y 7-y 9-y 11-y 15-y

YTM

6-m forecast 28-Apr-10 30-Aug-10

Jan 06 = 100

50.0

85.0

120.0

155.0

190.0

Jan-06 Mar-07 Apr-08 Jun-09 Aug-10

NSE 20 MSCI EM

60.00

66.25

72.50

78.75

85.00


USD/KES




Kenya: annual indicators

Notes: pe — period end; pa — period average, nr — not rated; na — not available

Source: Central Bank of Kenya, Kenya National Bureau of Statistics, Standard Bank Research

Kenya

2005 2006 2007 2008 2009 2010f


Nominal GDP (KESbn) 1,416 1,622 1,826 2,100 2,352 2,524


GDP / capita (USD) 538 624 735 783 779 800

Real GDP growth (%) 5.8 6.4 7 1.6 2.6 3.7

Tea production ('000 tons) 328.0 310.0 369.0 346.0 305.0 340.0

Coffee production ('000 tons) 47.7 50.5 52.2 38.7 55.0 58.0

Central Government Operations Budget balance (excl. Grants) / GDP (%) 0.5 -2.6 -1.4 -7.6 -8.0 -8.2



Balance Of Payments

Exports (USDbn) 3.5 3.5 4.1 5.0 5.9 6.1

Imports (USDbn) 5.6 6.8 8.4 10.7 11.5 11.2



- % of GDP -1.34 -2.27 -3.80 -6.63 -6.67 -3.94

Financial account (USDbn) 0.77 0.89 2.23 1.17 2.44 1.58

- FDI (USDbn) 0.02 0.05 0.73 0.10 0.80 0.68

Basic balance / GDP (%) -1.23 -2.04 -1.12 -6.31 -4.04 -1.82


- Import cover (mths) pe 3.8 4.3 4.9 3.2 4.0 4.5


S&P B+ B+ B+ B B+ BB-


Fitch nr nr B+ B+ B+ BB-






Policy interest rate (%) pa na 9.8 8.5 9.2 7.8 6.7

Policy interest rate (%) pe na 10.0 8.8 8.5 7.7 6.3

3-m rate (%) pe 8.1 5.7 6.9 9.0 6.6 2.8

1-y rate (%) pe 10.0 8.7 8.5 8.8 8.0 3.1

2-y rate (%) pe 10.5 10.2 9.2 9.8 8.5 3.4

5-y rate (%) pe 12.7 11.2 9.9 10.5 9.9 5.2

USD/KES pa 75.0 72.0 67.0 70.4 77.2 78.7

USD/KES pe 75.0 69.6 63.8 79.5 75.7 80.9

REER pa 109 118.0 123.0 142 149.2 139.9

NEER pa 87.2 85.9 85.4 84.2 80.8 78.3

Budget balance (incl. Grants) / GDP (%) 2.8 1.0 1.4 -5.0 -6.6 -6.8

2011f

40.8

2,732

33.6

823

4.1

356.0

62.0

-8.4

-7.1

29.7

21.4

7.3

12.9

-5.6

-1.1

-3.26

2.05

0.72

-1.11

5.12

4.8

BB-

nr

BB-

4.2

5.4

16.0

15.2

6.1

6.0

4.8

5.4

6.0

8.1

81.4

82.1

143.2

80.7



Malawi: growth driven by agricultural production

President Bingu wa Mutharika reacted strongly to a re-port prepared by the Malawi Vulnerability Assessment Committee, an organ of SADC. The committee reported that up to 1m people in Malawi would require humanitar-ian assistance due to poor crop yields caused by a dry spell in the country’s southern region. This claim came as the government was praising the efficacy of its agricul-tural input subsidy programme, a programme that has boosted maize output sufficiently to lead to a surplus and the commencement of maize exports to Zimbabwe. The president threatened to expel donors and close down newspapers reporting stories about food shortages. If the food shortfall were to materialise as predicted in the re-port, the humanitarian response could be hindered, espe-cially as the country has been dogged by allegations of corruption for many years.

The onset of a purported La Niña event could lead to errant rainfall patterns, resulting in disruptions to agricul-tural output. Hence, we have adjusted our GDP forecast marginally lower, to 5.8% y/y in 2010 from 6.2% y/y previ-ously. The heavily agrarian economy, with agriculture comprising about 34.0% of total GDP, has undoubtedly benefited from favourable rainfall patterns in the past few years. The strength of agriculture’s contribution to GDP can also be partially attributed to increased productivity as a result of the government-financed agricultural input subsidy programme. Likewise, attempts to attract farmers from other SADC countries have supported agricultural production and will probably continue to boost private investment spending. Additionally, with inflation low, con-sumer spending is likely to remain buoyant.


Political risk: looming row with donors Election results (2009)

GDP growth: marginally lower forecast Composition of GDP

Notes: pe — period end; pa — period average; na — not available Source: Reserve Bank of Malawi, National Statistical Office, Standard Bank Research


Bingu wa Mutharika UDF 66.0

John Tembo MCP 30.7

Walter Chibambo PETRA 0.8

Parliamentary election Seats

Democratic Progressive Party (DPP) 114

Malawi Congress Party (MCP) 26

United Democratic Front (UDF) 17

Total 193

Stanley Masauli RP 0.8

Others - mainly independents (32) 37

Source: National Statistics Office, IMF, Standard Bank Research

Source: Malawi Electoral Commission

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 6.0 5.1 5.8 6.3 6.8

CPI (% y/y) pa 7.5 6.7 6.1 5.6 7.4

M2 (% y/y) pa 29.4 31.1 28.6 22.1 18.9



3-m rate (%) pe 7.6 7.2 7.0 7.5 7.6

3-y rate (%) pe 17.3 17.3 17.3 17.3 17.3

USD/MWK pe 151.3 155 158.0 160.0 162.1

REER pe 104.1 103.8 102.5 101.5 100.7

USD/MWK vol (20 day) 0.0% 0.0% 0.0% 0.0% 0.0%

NEER pe 93.1 92.3 91.2 90.4 89.7

CA/GDP (%) pe -17.2 -18.1 -17.7 -18.3 -18.0

Q2:10

5.3

7.8

25.8

-17.9

0.180

1.2

7.2

17.3

150.8

105.7

94.9

0.0%

Q1:10

6.8

8.1

23.7

-16.4

0.177

1.2

7.3

17.3

147.5

113.7

91.3

0.0%

Q4:09

6.5

7.4

18.9

-18.5

0.171

1.3

7.2

17.3

142.5

108.3

93.0

3.8%

Q3:09

7.4

7.8

15.5

-17.6

0.205

1.5

9.1

17.3

141.2

103.5

94.7

0.0%

Q4:11f

6.7

7.5

21.6

-18.4

0.212

1.1

7.8

17.3

167.3

98.2

87.5

0.0%

Q2:09

6.7

8.9

20.9

-18.3

0.133

1.0

11.0

17.3

140.6

107.0

98.3

0.0%

Q1:09

8.2

8.8

28.5

-16.8

0.077

0.6

13.5

17.3

141

138.1

114.4

0.0%

-20.0

-8.8

2.5

13.8

25.0

2001 2003 2005 2007 2009 2011f

%

PCE GCE GFCF NetEx GDP



Source: IMF, Ministry of Finance

The campaign to eliminate the blending of tobacco with other substances could have far-reaching consequences for the country’s BOP in the medium term. The campaign was initiated under the WHO’s Convention on Tobacco Control, with the Canadian government spearheading the implementation of the convention’s recommendations. The practice of blending tobacco with other substances is intended to make it taste better. The WHO’s ban would affect burley tobacco, Malawi’s predominant crop variety. The near-term outlook for the BOP remains precarious, given the likelihood of a surge in oil prices and the uncer-tain capacity of donors to live up to their pledges. Hence, despite a requirement to the contrary in the ECF pro-gramme, it appears inevitable that the BOM will continue rationing FX, but FX reserves are likely to fail to rise ma-terially above 2m of import cover.

The implementation of the FY2010/11 budget could be severely compromised if the austerity programmes in Europe are implemented. The Finance Minister has al-ready admitted that possibility, and indicated that budget cutbacks would be inevitable. The ECF programme the government agreed with the IMF was based on an ex-pectation of a higher level of external inflows than was reflected in the FY2010/11 budget. Hence, some of the performance criteria in the ECF programme, particularly regarding the amount of net domestic debt repayment, may need to be revised. Indeed, the extent of the exter-nal shock coming from the consequences of the Euro-pean debt crisis could even result in an augmentation of the current ECF programme.

The stable inflation outcomes in recent months finally prompted the RBM to cut the bank rate by 200 bps at the beginning of Aug, bringing the rate to 13.0%. Thanks to subdued inflation, which has averaged 7.9% y/y thus far this year, chances are that the RBM will have an easing bias in the months ahead. The RBM seems to believe that low inflation readings are likely to persist. Non-food inflation, registering 9.9% y/y in Jul, remains elevated. However, with oil prices having lingered in a USD80 - USD90/bbl range since the beginning of the year, the transport index has been growing at an average of 14.2% y/y since Feb. Barring a devaluation of the MWK or a sharp rise in oil prices, only a marked increase in food inflation brought on by a bad maize harvest could lead to upside pressures on headline inflation.

Balance of payments: medium-term challenges Current account developments

Fiscal policy: at risk from European austerity Central government budget

Monetary policy: easing bias Inflation and interest rates

Source: IMF, RBM, Standard Bank Research

Source: National Statistical Office, RBM

Malawi

-1,100

-750

-400

-50

300

2004 2005 2006 2007 2008f 2009 2010f 2011f

USDm


Transfers C/A

% of GDP 2009/2010 2010/2011



- wages 5.6 5.6

- interest 2.8 2.9





Net domestic borrowing -0.9 -0.4

Donor support (grants) 11.7 11.1

5.0

13.8

22.5

31.3

40.0

Jan-04 Aug-05 Apr-07 Nov-08 Jul-10

%

Bank rate 91-day Inflation



Source: RBM, Standard Bank Research

T-bill rates are likely to decline over the coming 6-m, un-derpinned by the combination of low and stable inflation as well as an easing bias by the RBM. We do not expect the 91-d rate to move much, though. The 91-d rate is currently about level with the inflation rate, leaving little scope for it to fall much further. In any event, the 91-d rate fell on its own in Q4:09, while the 182-d and 273-d rates remained sticky around current levels. The extent of the moderation in inflation is likely to lead to a 70 bps - 90 bps decline in the 273-d and 273-d rates. Interbank rates rose to an average of 14.8% in Jul from 12.9% in Jan. However, since the RBM reduced the bank rate, they have consistently declined, reaching 12.1% on 24 Aug.

The MWK still appears likely to be devalued over the coming 18 months, but the extent of the devaluation will probably be less than our earlier expectations. The RBM tightened FX regulations, a probable sign that FX is still in short supply. The importation of and payment for all goods with a value in excess of USD50k, as well as all services, shall with effect from 1 Sep 10 require the prior approval of the RBM, supported by documentary proof. Regardless of the current supply demand situation for FX, a condition of the granting of the ECF was the elimi-nation of the difference between the official rate and the rate charged by foreign exchange bureaux, and the elimi-nation of queues for foreign exchange. The latest regula-tory tightening of FX controls may achieve this adminis-tratively, by disqualifying some imports, rather than via a marked depreciation of the MWK.

The market’s low liquidity and capitalisation, and the country’s foreign exchange control regulations have en-sured that the Malawi Stock Exchange is largely decoup-led from global equity market developments. The All Share Index has stagnated since Feb 2009, trending broadly sideways in that period, despite the swings ex-perienced in more liquid emerging and frontier markets. A cursory look at the market suggests that equities are trading at relatively attractive valuations. As of 20 Aug 10, domestic companies were trading at a weighted P/E ratio of about 8.0x and a dividend yield of about 4.6%. With little to attract foreign investors, the market will continue to rely on domestic drivers. There does not appear to be sufficient local investor interest that would see the market trend markedly higher over the remainder of 2010.

Bond curve outlook: bullish parallel shift Changes in yield curve

FX outlook: marginal USD/MWK upside to 155 USD/MWK: forwards versus forecasts

Equity market: trending sideways Malawi Stock Exchange Source: Reuters, Standard Bank Research

Source: Malawi Stock Exchange, Standard Bank Research

Malawi

5.0

9.0

13.0

17.0

21.0

91-d 182-d 273-d 3-y

YTM

07-May-10 20-Aug-10 6-m forecast

2,000

3,200

4,400

5,600

6,800

Jan-07 Nov-07 Oct-08 Sep-09 Aug-10

Index

MSE

120

134

148

161

175


USD/MWK




Malawi: annual indicators

Notes: pe — period end; pa — period average, nr — not rated; na — not available

Source: IMF, National Statistical Office, RBM, Standard Bank Research

Malawi

2005 2006 2007 2008 2009 2010f

Output


Nominal GDP (MWKbn) 326 396 465 565 660 730


GDP / capita (USD) 228 228 252 296 335 336

Real GDP growth (%) 2.4 8.2 7.9 9.7 7.2 5.8

Tobacco production ('000 tons) 145.3 155.1 110.7 194.7 135.0 130.0

Tea production (million kgs) 38.0 38.9 39.2 40.5 40.2 41.3


Budget balance (excl. Grants) / GDP (%) -17.6 -14.3 -15.3 -19.7 -13.5 -13.5 Budget balance (incl. Grants) / GDP (%) -1.5 -1.8 -1.7 -4.6 -1.8 -1.8 Domestic debt / GDP (%) 21.9 14.9 10.4 8.2 8.4 8.6 External debt / GDP (%) 143.0 49.0 31.2 32.8 33.1 33.4

Balance Of Payments

Exports (USDbn) 0.514 0.543 0.709 0.859 1.079 1.265

Imports (USDbn) 1.024 1.039 1.254 1.338 1.613 1.816



- % of GDP -25.5 -24.1 -21.6 -16.4 -17.8 -17.4


- FDI (USDbn) 0.027 0.030 0.032 0.034 0.036 0.054







Fitch nr CCC+ B- B- B- B-








3-m rate (%) pe 24.44 17.14 10.16 13.38 7.15 7.20

USD/MWK pa 116.3 136.0 140.0 140.5 141.5 150.9

USD/MWK pe 123.8 138.7 138.7 140.6 142.5 155.0

REER pa 100.0 99.0 97.3 113.7 109.8 108.6

NEER pa 100.0 90.5 88.0 101.9 96.2 94.3

2011f

14.8

816

5.1

342

6.4

138.0

43.5

-12.2

-1.0

9.1

33.8

1.717

2.337

-0.619

-0.934

-18.4

0.962

0.062

-17.2

0.21

1.1

nr

nr

B-

5.3

6.0

22.8

24.5

12.5

12.0

7.80

161.2

167.3

108.4

89.6



Mauritius: stepping up the response to economic headwinds

The new administration has not wasted time in formulat-ing a response to the crisis facing the country due to weak external demand. It appears as if the government has realised that the euro area debt crisis, coupled with weak growth in the UK, could dampen Mauritius’ eco-nomic performance for years to come. Thanks to unity within the government and a lack of discord between the Finance Ministry and BOM, the new administration, within 100 days of being sworn into office, managed to craft a programme to restructure the economy. At present it does not appear to have a significant budget impact, but it is likely to inform budgetary allocations in coming years. Given the coalition nature of the country’s politics, and the closeness of the May 10 election results, addressing the country’s economic challenges was a political impera-tive for the government.

The euro area debt crisis that has led to the adoption of fiscal austerity measures in some countries, together with the slowdown in UK economic growth, has prompted the Mauritian government to adopt another stimulus pro-gramme. The new programme goes beyond merely bol-stering growth in the face of waning external demand; it also seeks to shift goods and services exports away from Europe and towards other emerging markets, particularly Asia. The impact of the programme on growth is likely to materialise only in the medium term. We have revised our 2010 GDP growth forecast to 4.7% y/y down from 5.1% y/y previously. Although domestic demand has been robust, boosted by strong government and invest-ment spending, weak external demand is likely to leave net exports still weighing on GDP growth.


Political risk: settling down Election results (2010)

GDP growth: restructuring the economy Composition of GDP

Notes: pe — period end; pa — period average Source: Bank of Mauritius, Mauritius Central Statistics Office, Standard Bank Research, Bloomberg

Source: Bank of Mauritius, Standard Bank Research


Alliance de L’avenir (PTR-PMSD-MSM) 45 49.7

Alliance du Coeur (MMM-UN-MMSD) 20 42.0

Rodrigues Movement (MR) 2 1.0

Others 3 -

Total 70 100

Source: Mauritius Electoral Commission

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 4.8 5.3 5.2 5.1 5.0

CPI (% y/y) pa 2.5 3.7 3.7 4.0 4.5

M2 (% y/y) pe 11.4 12.7 13.1 13.8 13.6



3-m rate (%) pe 2.4 2.6 2.5 3.6 4.2

5-y rate (%) pe 7.1 7.2 6.3 6.8 7.1

USD/MUR pe 31.20 32.40 30.10 29.10 31.85

REER pe 96.8 96.1 104.0 106.8 98.4

USD/MUR vol (20 day) 15.0% 15.0% 15.0% 15.0% 15.0%

NEER pe 65.7 65.6 72.0 74.6 69.0

CA/GDP (%) pe -6.9 -6.7 -7.2 -7.6 -7.3

Q2:10

4.7

2.5

9.4

-7.2

2.06

5.4

3.2

7.1

32.00

89.5

59.8

14.9%

Q1:10

4.1

2.4

7.9

-7.7

2.09

5.5

4.2

8.7

29.60

99.2

66.3

23.2%

Q4:09

3.8

0.7

8.1

-7.9

2.18

6.7

4.7

8.5

30.35

107.0

72.0

39.1%

Q3:09

3.1

1.3

8.3

-8.7

2.12

6.6

4.5

8.7

30.50

107.5

73.0

9.3%

Q4:11f

5.5

4.1

13.4

-7.2

2.33

5.7

4.7

7.6

33.05

95.5

67.4

15.0%

Q2:09

2.9

3.3

12.5

-12.9

1.94

6.0

4.6

8.8

32.00

108.5

74.0

12.9%

Q1:09

2.6

4.9

15.0

-2.7

1.75

5.4

6.3

10.0

33.00

108.0

74.0

28.9%

-10.0

-3.8

2.5

8.8

15.0

2005 2006 2007 2008 2009 2010f 2011f

y/y

PCE GE Stocks

Netex GFCF GDP



Developments in the trade balance during Q2:10 point to a deteriorating C/A balance. Imports have been robust, bolstered by strong investment and government spend-ing. Meanwhile, goods exports have been stagnant, re-sulting in an average trade deficit of MUR5,680m (USD177.5m) per month. This indicates that the C/A defi-cit could be in excess of USD630m (6.7% of GDP). With-out strong tourist arrivals, which showed an average 7.0% y/y growth in the first six months of 2010, the C/A deficit would have been even larger. Whereas FDI in-flows have been strong thus far, portfolio flows have dis-appointed. In Q1:10, there were net portfolio outflows of USD87m, mostly comprising equity outflows. These have probably persisted as the SEMDEX index has been range-bound since then. We expect FX reserves to rise to USD2.5bn (6.6 months of imports) by end-2010.

The measures introduced as part of the fiscal stimulus were due to expire at end-2010. By then the government had expected GDP growth to be self-sustaining. How-ever, although the stimulus has evidently gained traction, with robust growth in infrastructural spending, the govern-ment has been forced to formulate a different strategy to deal specifically with the prospect of prolonged external demand weakness from Europe. The new programme is budgeted to cost MUR12.0bn, but only MUR2.0bn will be financed directly by the government. The bulk of the bal-ance, MUR5.0bn, will come from the private sector, with the rest coming from an acceleration of projects under the public sector investment programme and public cor-porations. The new strategy will probably play a major role in the allocation of future government expenditure.

The governor of the BOM has cautioned that the easing cycle may end. However, we doubt that a tighter policy stance is imminent. To be certain, inflation is rising with more upside likely in the next 18 months. However, infla-tion is still at very low levels. Although the trend is rising, inflation has stagnated over the past five months, averag-ing 1.8% y/y, with only the clothing and footwear compo-nent of the index recording annual growth rates in excess of 5% in that period. Our forecast now envisages inflation reaching only 3.9% y/y by year-end, and nudging up to 4.1% y/y in Dec 11. Naturally, upside risks from a poten-tial rise in oil prices remain the dominant risk, which is likely to be exacerbated by an exchange rate policy that favours a bias towards a weaker MUR.

Balance of payments: under pressure Current account developments

Fiscal policy: financing economic restructuring Central government budget

Monetary policy: still accommodative Inflation and interest rates


Source: Mauritius Ministry of Finance, Standard Bank Research


Mauritius

-900

-600

-300

0

300

600

Q2:05 Q1:06 Q4:06 Q3:07 Q2:08 Q1:09 Q4:09

USDm

Services, income & transfersTrade balanceC/A

% of GDP 08/09 Jul-Dec 2009



- interest 4.0 3.3

- wages 5.9 6.0






2010

19.8

23.8

3.0

5.6

-5.3

-4.1

1.4

2.3

1.2

-1.0

3.0

7.0

11.0

15.0

Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Jul-10

%

CPI y/y Bank rate



Yields have continued to decline, with the 91-d yield reaching 2.4% on 20 Aug 10. With the BOM likely to re-tain an accommodative policy stance, and inflation likely to remain very low, we expect a bull flattening of the curve over the next 6-m. Most of the recent auctions for both T-bills and T-bonds have been oversubscribed, indi-cating that the market’s interest rate expectations have shifted markedly lower over the past 6-m. Furthermore, growth is still low, hence the BOM is unlikely to be suc-cessful at shifting the market’s interest rate expectations. Although the governor has indicated that the outlook for monetary policy is starting to look uncertain, with chances of monetary tightening equal to those of further monetary easing, the subdued inflation outlook is likely to curb that sort of talk. Moreover, fostering growth is a pol-icy priority right now, not curbing inflation.

The BOM is likely to continue attempting to engineer a weaker MUR, with USD/MUR probably reaching 33.0 over the next 6-m. The MPC’s policy focus remains firmly on growth, given that inflation pressures are still muted and external demand has not recovered sufficiently. The BOM’s resolve to weaken the MUR on a trade-weighted basis was tested between mid-Jun and mid-Aug when the USD depreciated against a broad set of currencies. In response, the BOM conducted highly publicised interven-tions in the FX markets on three occasions in the past two months, buying both USD and EUR. Already the MUR has trended above 30.5, after falling below 29.5 in mid-Aug from over 33.0 in mid-Jun. Naturally, the rally in MUR since mid-Jun was sufficiently widespread to result in a c.6.4% appreciation on a trade-weighted basis, bol-stering the need for BOM intervention.

The upsurge in the SEMDEX that we were expecting materialised over the past 4-m, with the index rising 6.8% since the end of May. However, the increase in the index was still disappointing, and the index remains mired in the same trading range that has been in place since Oct 09. In addition, even with this latest increase the index has still underperformed the 9.0% rise in the broader MSCI EM. Some bearish sentiment surfaced recently in the local market, fanned by disappointing earnings from tourism-exposed counters. Despite an improvement in tourist arrivals, listed hotel groups have recently reported disappointing earnings results. Of course, the market may view the recent increase in tourist arrivals as unsus-tainable, given the prospect of restrictive fiscal policies in Europe — the origin of most tourist arrivals.

Bond curve outlook: continued bull flattening Changes in yield curve

FX outlook: engineered MUR upside likely USD/MUR: forwards versus forecasts

Equity market: waiting for a breakout Mauritius Stock Exchange



Source: Bloomberg

Mauritius

2.0

3.8

5.5

7.3

9.0

3-m 6-m 1-y 2-y 3-y 4-y 5-y

YTM

6-m forecast 20-Aug-10 07-May-10

15 Mar 2009 = 100

50.0

105.0

160.0

215.0

270.0

Jan-06 Feb-07 Apr-08 Jun-09 Aug-10

SEMDEX MSCI EM

25.0

28.8

32.5

36.3

40.0


USD/MUR




Mauritius: annual indicators

Notes: pe — period end; pa — period average; nr— not rated 1) The Lombard rate was replaced by a new policy reference rate (repo rate) in Dec 06

Source: Bank of Mauritius, Mauritius Central Statistical Service, Standard Bank Research, Bloomberg

Mauritius

2005 2006 2007 2008 2009 2010f


Nominal GDP (MURbn) 185.3 206.3 235.5 264.9 274.8 295.4


GDP / capita (USD) 4,896 5,237 6,035 7,443 7,005 7,331

Real GDP growth (%) 2.3 5 5.4 5.4 3.1 4.7

Sugar production ('000 Tonnes) 574 512 471 500 515 520

Tourist arrivals ('000) 735 772 907 930 890 926






Balance Of Payments


Imports of goods and services (USDbn) 3.08 3.52 4.14 4.72 3.88 4.58



- % of GDP -5.32 -9.38 -5.88 -10.47 -7.87 -6.71


- FDI (USDbn) -0.01 0.10 0.30 0.40 0.30 0.25






Moody’s Baa2 Baa1 Baa1 Baa1- Baa1- Baa2







BOM policy rate (%) pa1 10.20 12.10 10.50 7.38 6.25 6.38

BOM policy rate (%) pe1 11.50 13.00 8.00 6.75 5.75 7.00

3-m rate (%) pe 6.84 11.68 9.11 8.90 4.70 2.60

1-y rate (%) pe 7.84 12.37 10.20 9.20 5.50 3.45

2-y rate (%) pe 7.50 12.38 10.30 9.80 6.20 4.50

5-y rate (%) pe 8.95 13.21 10.60 11.00 8.50 7.20

USD/MUR pa 29.40 31.45 30.96 28.06 31.13 31.48

USD/MUR pe 30.45 32.78 29.25 31.29 30.35 32.40

REER pa 89.0 88.4 93.5 110.2 107.0 96.1

NEER pa 78.4 73.2 72.1 78.9 72.0 65.6

2011f

1.29

322.8

9.9

7,661

5.2

522

962

-5.1

-3.9

50.5

14.7

1.73

4.87

-3.14

-0.71

-7.18

0.68

0.30

-4.15

2.33

5.74

nr

Baa2

nr

4.06

4.05

13.55

13.44

7.75

8.50

7.65

7.87

8.30

9.15

32.66

33.05

99.3

68.1



Mozambique: strong GDP growth continues

Disputes over the Oct 09 elections continue. Renamo believes that ruling Frelimo is systematically taking over the state apparatus by allocating public sector employ-ment and social and developmental expenditure, which favours Frelimo supporters. These claims have been denied by Frelimo, but the debate continues. No sooner has the dispute with donors been settled than the Bachir drug scandal emerged, threatening relations with the US and allies. Mr Bachir, who is a significant businessman in Mozambique and a member and financial backer of ruling Frelimo, has been listed by the US as an international drug trafficker. Consequently, businesses with US inter-ests are limiting dealings with Mr Bachir. Already, Bar-clays Bank and local BCI Bank have closed branches in buildings owned by Mr Bachir. The government has yet to respond formally to this issue.

We expect real GDP growth to register 6.5% y/y in 2010, following the 6.3% y/y recorded in 2009. The risk is for our target to be breached to the upside, given that the economy reportedly expanded by 9.5% in H1:10. Contrib-uting to solid growth have been countercyclical monetary and fiscal policies. Investment in mega-projects have also supported growth. However, the export-focussed nature of these projects hinges on a sustained recovery in global demand, the evidence of which is not yet clear. From the demand side, PCE will continue to benefit from rising domestic demand backed by accelerating domestic economic activity, while GE and GFCF should remain solid. An improvement is also expected in Netex as re-covering global demand (albeit gradual) boosts exports. A key risk is imports, which have remained strong, espe-cially oil imports.


Notes: pe — period end; pa — period average Source: Bank of Mozambique, Mozambique Ministry of Finance, Standard Bank Research, Bloomberg

Political risk: managing credibility Election results (2009)

GDP growth: solid performance in difficult times Composition of GDP

Source: Bank of Mozambique, Standard Bank Research

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 6.5 6.5 6.9 6.9 6.9

CPI (% y/y) pa 16.6 16.9 15.9 12.6 9.8

M3 (% y/y) pe 23.5 20.0 20.0 21.0 21.0



3-m rate (%) pe 13.4 14.5 13.8 13.0 12.3

1-y rate (%) pe 14.5 15.5 14.8 14.0 13.3

USD/MZN pe 37.0 40.0 42.5 44.2 43.8

REER pe 86.4 86.1 86.1 86.1 86.1

USD/MZN vol (20 day) 16.7% 6.5% 6.5% 6.5% 6.5% NEER pe 44.5 44.0 44.0 44.0 44.0

CA/GDP (%) pe -16.1 -16.1 -15.3 -15.3 -15.3

Q2:10

6.5

12.1

25.0

-16.1

1.76

6.2

13.0

14.1

34.3

86.9

44.9 4.7%

Q1:10

6.5

6.3

28.0

-16.1

1.70

6.0

9.5

11.0

34.6

87.3

45.3 32.7%

Q4:09

6.3

2.7

31.5

-12.5

1.85

6.9

9.5

11.0

30.2

88.8

45.5 28.4%

Q3:09

6.3

1.6

28.0

-12.5

1.87

7.0

9.6

11.0

29.0

84.0

44.5 24.9%

Q4:11f

6.9

7.9

22.0

-15.3

2.03

6.6

11.5

12.5

45.0

86.1

44.0 6.5%

Q2:09

6.3

3.4

26.0

-12.5

1.61

6.0

10.9

12.2

26.8

92.4

49.3 6.9%

Q1:09

6.3

5.3

24.0

-12.5

1.47

5.5

10.9

12.1

28.1

93.8

49.1 42.3%

Source: National Elections Commission


Armando Guebuza Frelimo 75.01

Afonso Dhlakama Renamo 16.41

Daviz Simango MDM 8.59

Legislative election % of votes Seats

Frente de Libertação de Moçambique (Frelimo) 74.66 191

Resistência Nacional Moçambicana (Renamo) 17.68 51

Movimento Democrático de Moçambique (MDM) 3.93 8

Others 3.73 0

-8.0

-3.0

2.0

7.0

12.0

2003 2005 2007 2009f 2011f

% y/y

PCE GE GFCF

Stocks Netex GDP



The aluminium price recovery has stalled since Apr 10 on account of an unconvincing global recovery. At end-Aug, prices were up by around 13% y/y compared to 50% y/y at end-Apr. Despite lacklustre aluminium price perform-ance, exports are expected to benefit from projects reaching completion. Imports (particularly oil) will remain strong due to investment in mega-projects and increased domestic demand. We expect the trade deficit to narrow marginally. However, an increase in outward dividend payments associated with mega-projects is expected to erode any CA gains. Thus we expect the CA deficit to widen to 12.92% of GDP in 2010 from 12.52% in 2009. Reserves have largely been flat around USD1.8bn and while the import bill continues to grow against the back-drop of subdued export growth, we believe it will be diffi-cult for the authorities to significantly build reserves.

Fiscal policy will likely remain relatively accommodative in 2010 and 2011 and thereafter is expected to be more constrained. We maintain that a measured approach will be followed in policy tightening in line with the domestic and global economic recovery. Revenue in 2010 is ex-pected to benefit from higher grants, stronger economic growth and improved tax collection. Grants are expected to rise to USD26.9bn (32% of revenue) in 2010, increas-ing further to USD32.8bn (34% of revenue) in 2011. De-velopment expenditure is forecast to amount to 13.2% of GDP in 2010. A narrower budget deficit (+ grants) of 4.5% of GDP is expected in 2010 (vs. a deficit of 5.4% of GDP in 2009). In line with its IMF PSI, the government intends to finance the deficit through an increase in do-mestic and non-concessional external borrowing.

Consumer price inflation continues to accelerate, driven by the removal of fuel subsidies, administrative price in-creases and a weaker MZN against the USD and the ZAR. The ZAR is highly significant as South Africa is a major source of imports. CPI jumped to 16.11% y/y in Jul 10 from 1.12% y/y in Aug 09. The 12-m moving average rate (a key focus for authorities) rose to 6.8% y/y in Jul and we expect this to jump to 13.0% y/y in Dec 10, breaching the government’s target to maintain this rate in single digits. Government reacted to accelerating inflation by hiking its Standing Lending Facility (SLF) rate by 300bps to 14.5% in stages since Apr 10, while it also increased its intervention in the money market to contain reserve money. Despite these efforts, we believe the BOM is underestimating inflationary pressures and once these manifest themselves interest rates will have to rise further.

Balance of payments: stabilising Current account developments

Fiscal policy: strong development focus Central government budget

Source: Mozambique Ministry of Finance, Standard Bank Research

Monetary policy: strong surge in CPI a concern Inflation and interest rates


Source: Bank of Mozambique

Mozambique

-3.0

-1.5

0.0

1.5

3.0

2005 2006 2007 2008 2009e 2010f 2011f

USD bn

Trade balance Services & incomeTransfers Currrent account

% of GDP 2009e 2010f



- wages 8.8 8.6

- interest 0.5 0.5




Grants 9.4 8.3



2011f

25.7

32.0

8.2

0.5

13.0

-15.0

-6.4

5.8

0.8

8.6

0

5

10

15

20

Jan-05 Apr-06 Jul-07 Oct-08 Jan-10

%

CPI Maputo BOM SLF 91-d T-bill



Market interest rates have adjusted higher in response to accelerating inflation. Yields across the curve have shifted higher, exceeding our forecast made in May. Treasury bill rates, which had been slow to respond, have jumped across the board by around 300bps (in line with BOM policy rate tightening). As mentioned in the Monetary Policy section, we believe that the BOM is un-derestimating the upward inflationary pressure. In line with this view, we see the BOM raising interest rates by at least another 100bps, with an associated increase in yields by end-2010. The first tranche of USD150m 5-yr floating rate T-bonds was issued at the start of Sep. USD45m was on offer at 50bps above the average T-bill rate. Early indications are that the 15.0% yield on offer did not prove sufficient to fill the offer.

Upward pressure on USD/MZN intensified in Aug, push-ing the currency pair sharply north to 38.50 from 26.5 a year earlier. Against the ZAR, MZN reached a high of close to 5.30 over the same period. This upward pres-sure is mainly related to increased import demand, par-ticularly for oil. To alleviate FX pressure, the BOM an-nounced that it will foot the total oil import bill until end-2010, which is likely to be an estimated USD250m. This measure should ease upside pressure on USD/MZN in the market somewhat, although it will clearly exert down-ward pressure on FX reserves. Already, MZN has come off its earlier highs against the USD and ZAR. At current levels, we believe MZN weakness has gone too far in correcting for previous MZN overvaluation and that the authorities will continue to provide support to stem ag-gressive MZN weakness from current levels.

The predominant securities listed on the Bolsa de Valores de Moçambique are still bonds rather than equi-ties. The exchange, which began operations in 1999, has not prospered, with most companies looking to raise fi-nance through the exchange by issuing bonds rather than shares. Government privatisation of state-owned entities remains the only viable avenue for increased equity issuance.

Bond curve outlook: 5-y FRN launched Changes in yield curve

FX outlook: renewed USD/MZN upside USD/MZN: forwards versus forecast


Equity market: remains underdeveloped FX reserves: moving sideways



Mozambique

8.00

9.50

11.00

12.50

14.00

15.50

17.00

91-d 182-d 364-d 5-y

%

Dec-10 Apr-10 Sep-10

0

500

1,000

1,500

2,000

Jan-05 Nov-06 Sep-08 Jul-10

USD m

Fx reserves

20.0

27.5

35.0

42.5

50.0


USD/MZN




Mozambique: annual indicators


Source: Bank of Mozambique, Mozambique Ministry of Finance, Standard Bank Research, Bloomberg

Mozambique

2005 2006 2007 2008 2009 2010f

Output

Population (million) 20.5 21 21.4 22 22.6 23.1

Nominal GDP (MZNbn) 150.0 181.9 209.9 245.9 269.4 322.0


GDP / capita (USD) 313.4 464.3 412.4 442.7 394.8 348.5

Real GDP growth (%) 8.4 8 7.2 6.8 6.3 6.5





Balance Of Payments




Current account (USDbn) -0.64 1.45 -0.79 -1.18 -1.12 -1.30

- % of GDP -9.99 14.82 -8.91 -12.11 -12.52 -16.15

Capital & Financial account (USDbn) 0.35 -1.42 0.86 1.19 1.44 1.10

- FDI (USDbn) 0.11 0.15 0.43 0.59 0.88 0.90

Basic balance / GDP (%) -8.36 16.40 -4.06 -6.08 -2.66 -4.97




S&P B B B+ B+ B+ B+


Fitch B B B B B B






BOM discount rate (%) pa 11.8 17.6 16.5 15.0 13.0 13.5

BOM discount rate (%) pe 13.8 17.5 15.5 14.5 11.5 15.5

3-m rate (%) pe 10.0 16.0 14.8 14.0 9.5 14.5

1-y rate (%) pe 11.5 16.5 15.0 14.2 11.0 15.5

USD/MZN pa 23.31 21.0 21.2 24.5 27.7 35.1

USD/MZN pe 23.35 18.66 23.78 25.3 30.2 40.0

REER pa 94.4 91.8 91.2 92.3 91.0 86.8

NEER pa 62.7 54.9 51.9 50.1 46.1 44.6


2011f

23.6

381.5

8.5

359.1

6.9

-15.0

-6.4

7.0

36.2

2.55

3.70

-1.15

-1.30

-15.33

1.25

0.85

-5.31

2.03

6.57

B+

nr

B

11.6

6.4

21.0

22.0

14.0

12.5

11.5

12.0

42.5

45.0

87.20

45.10



Namibia: mining sector on the mend

Despite attempts by opposition parties to challenge the legality of the Nov 09 national election results, the over-whelming victory by the incumbent SWAPO has ensured business as usual and policy continuity. Policy focus con-tinues to be land redistribution, black economic empow-erment and job creation. The next test for SWAPO politi-cal support will come during regional and local authority elections, taking place on 26 to 27 Nov 10. The elections will be particularly interesting if progress is made towards a much-talked about opposition coalition. We still expect SWAPO political dominance to continue for some time yet. A key challenge for the government in the next two years will be consolidating its finances. Applying counter-cyclical fiscal policies at a time when SACU revenue is falling sharply will be a test for government’s resolve to fiscal discipline.

We now expect economic growth to recover to 3.8% y/y in 2010 (previously 3.9% y/y), following the contraction of 0.8% y/y in 2009. A further recovery in the mining sector is an important factor in our improved growth outlook for 2010. Already, diamond production is 102% up in H1:10 compared to H1:09, while uranium production is up by 51% over the same period. From the demand side, the economy is expected to benefit from stronger PCE on account of accommodative monetary and fiscal policies. GFCF is expected to continue benefiting from infrastruc-ture investment, which bodes well for the construction sector. Netex, a main drag on growth in 2009, is showing a promising performance on the back of increased mining production. A continued global economic recovery will be a key determinant in the actual GDP outcome for Na-mibia as will be a solid performance in South Africa.

Political risk: opposition coalition? Election results (2009)

GDP growth: recovery is gaining traction Composition of GDP


Notes: pe — period end; pa — period average; na — not available Source: Central Bank of Nigeria, National Bureau of Statistics, Budget Office of the Federation, NNPC, IMF, Standard Bank Research

Source: Bank of Namibia, IMF, Standard Bank Research

Source: INEC

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 3.8 3.8 4.5 4.5 4.5 CPI (% y/y) pa 4.4 4.5 4.7 5.3 5.7 M2 (% y/y) pa 12.8 13.0 13.3 14.6 14.8

FX reserves (USD bn) pa 1.65 1.69 1.73 1.77 1.82 Import cover (months) pe 3.1 3.2 2.8 2.9 3.0 3-m rate (%) pe 6.60 6.6 6.7 6.7 6.7 5-y rate (%) pe 8.1 8.1 8.2 8.2 8.2 USD/NAD pa 7.5 7.7 7.9 7.9 7.8 REER pa 93.6 93.3 93.0 92.7 92.4

USD/NAD vol (20 day) 9.2% 9.2% 9.2% 9.2% 9.2%

NEER pa 95.9 95.3 94.7 94.1 93.5

CA/GDP (%) pa -1.1 -1.1 -0.4 -0.4 -0.4

Q2:10

3.8 4.7 4.3

-1.1 1.61 3.0

6.92 8.53 7.5

93.9

96.5

13.6%

Q1:10

3.8 6.1

10.1 -1.1 1.73 3.3 7.2

8.70 7.5

94.2

96.6

9.0%

Q4:09

-0.8 6.9 6.3 2.7

1.85 4.0 7.4 8.8 7.5

92.0

94.5

15.7%

Q3:09

-0.8 7.4 1.3 2.7

1.96 4.2 7.3 8.7 7.8

91.7

94.4

14.6%

Q4:11f

4.5 5.9

15.0 -0.4 1.86 3.0 7.2 8.7 7.8

92.1

92.9

9.2%

Q2:09

-0.8 9.6 8.0 2.7

1.64 3.6 7.6 8.9 8.5

90.2

92.7

17.9%

Q1:09

-0.8 11.5 11.2 2.7

1.44 3.1 9.7 8.8 9.9

87.5

90.1

26.0%


Hifikepunye Lucas Pohamba SWAPO 75.25 Hidipo Hamutenya RDP 10.91 Katuutire Kaura DTA 2.98 Kuaima Riruako NUDO 2.92 Justus Garoëb UDF 2.37


South West African People's Organization (SWAPO) 54 74.29 Rally for Democracy and Progress (RDP) 8 11.16 Democratic Turnhalle Alliance of Namibia (DTA) 2 3.13 National Unity Democratic Organization (NUDO) 2 3.01 United Democratic Front (UDF) 2 2.40

All People’s Party (APP) 1 1.33 Republican Party (RP) 1 0.81 Congress of Democrats (COD) 1 0.66 South West Africa National Union (SWANU) 1 0.62 Appointed members 6 Total 78

-20.0

-10.0

0.0

10.0

20.0

2005 2006 2007 2008 2009 2010

y/y %

PCE GE GFCFStocks Netex GDP



The recovery in exports (especially mining) should sup-port a narrowing trade deficit. However, the projected NAD2bn drop in SACU receipts in 2010 will have nega-tive consequences for the CA. We forecast a CA deficit of 1.1% of GDP in 2010 (a 2.7% surplus in 2009). Inward FDI will continue to compensate for outward portfolio flows, but there is no escaping the impact of falling SACU receipts. Already, FX reserves have come under pres-sure, falling to USD1.6bn in Jul 10 from USD2.1bn in Oct 09. A key factor for the BOP moving forward will be the USD/NAD exchange rate (see FX outlook section). A weaker NAD could benefit the BOP in that it could bolster exports and stimulate tourism receipts, with positive con-sequences for the CA balance and reserves. A weaker NAD could, however, make imports more expensive—which would be negative for consumption and inflation.

From the 2010/11 budget, it is clear that fiscal policy is to remain accommodative for longer than anticipated. De-spite the improved outlook for revenue on account of the recovery in the mining sector, it will fall short of the budg-eted expenditure. The result is a widening budget deficit (+ grants) to 6.6% of GDP in 2010/11 from a deficit of 1.5% in 2009/10. The widening deficit will mostly be fi-nanced by increasing domestic issuance of T-bills and T-bonds. According to the MTEF, government will gradually withdraw its countercyclical policy from 2010/12 as reve-nue recovers. Given the sharp decline in SACU revenue, the government might find it difficult to consolidate its finances. It might have to look to alternative sources of revenue or cut back on spending. It could also accelerate its privatisation programme to alleviate pressure on its finances.

Fiscal policy: fiscal consolidation required Government budget

Balance of payments: falling SACU revenues Current account developments

Despite Namibia's CMA membership, which calls for close alignment of monetary policy to South Africa, the BON has opted for a level of autonomy by applying policy differently from South Africa in recent years. For in-stance, the BON has not lowered interest rates to the same extent as the SARB as it believes that underlying consumer demand is stronger in Namibia than in South Africa. Namibia’s policy rate got stuck at 7.0%, while SA’s fell to 6.5% and the SARB is expected to cut by another 50bps at the Sep 10 MPC meeting. Recent thinking from the IMF suggests there is room for Namibian rates to fall to South African levels. Nevertheless, we suspect that given the subdued inflation environment in both countries the BON will allow Namibian rates to fall by 50bps (assuming South African rates are cut at the Sep MPC), leaving the 50bps gap for some time yet.

Monetary policy: easing not over yet Inflation and interest rates

Source: Bank of Namibia, Standard Bank Research

Source: Namibia Ministry of Finance, Standard Bank Research

Source: NBS, Reuters, Standard Bank Research

Namibia

-1,600

-800

0

800

1,600

2005 2006 2007 2008 2009f 2010f 2011f

USDm

Services, income & transfersTrade balanceCurrent account

% of GDP 2009/10 2010/11



- operational 22.3 23.3

- capital 5.1 5.5

- interest 1.5 1.3




Net domestic borrowing -1.3 5.3


0.0

3.8

7.5

11.3

15.0

Jan-04 Mar-06 May-08 Jul-10

%

NCPI BON bank rate SACPI SA repo rate



The high degree of financial market integration with South Africa and co-ordinated monetary policy means that Namibian yields generally follow SA trends. The driv-ers responsible for a solid bond market performance at the start of 2010 have intensified. Elevated foreign buying remains pivotal in driving SA’s bond curve. SA macro conditions have provided a favourable backdrop to flows, including lower inflation; a stronger and more stable ZAR; improved supply dynamics; low real MM rates; and pro-gressive uncertainty surrounding alternative asset class returns, especially equities. Despite these improvements, locals remain sceptical of both the outright level and flat-ness of the bond curve. A material adjustment in local perceptions around structural inflation in SA would be necessary to sustain current levels, especially if foreign demand were to normalise or even reverse.

The NAD is pegged to the ZAR on a 1:1 basis under the CMA agreement; this is unlikely to change soon. Recent ZAR strength has mainly been a function of strong for-eign appetite for SA bonds and broad broad-based USD weakness. The prospect of renewed SARB accommoda-tion and widespread industrial action in SA has been largely ignored by ZAR bulls. The sustainability of ZAR strength hinges on global sentiment and more specifically the search for yield (i.e. carry trade). If risk aversion re-emerges due to global growth concerns, the USD could regain favour due to its perceived safe-haven status and EM currencies, such as the ZAR, will come under selling pressure. The prospect of renewed risk aversion, com-bined with narrowing interest rate and GDP differentials, a widening CA deficit and increased FX accumulation lead us to believe that the ZAR will weaken in H2:10.

The Namibian Stock Exchange (NSX) comprises mostly dual-listed (FTSE or FTSE/JSE) shares, with Anglo American representing 50% of market cap. Its 7 listed local companies constitutes <1% of total market cap. The NSX All Share Index is closely correlated with the FTSE/JSE. The LCI, which is less exposed to global market influences, has benefited from regulation forcing local asset managers to hold 35% of their portfolios in domes-tic companies. However, the LCI will come under pres-sure if changes are made to the domestic investment requirement (DIR) as advocated by the IMF who is con-cerned about the resulting risk-taking by domestic institu-tions. It remains to be seen whether the Namibian mone-tary authorities, who have in the past played down the IMF’s concerns, will make any changes to the DIR.

FX outlook: NAD weakness expected in H2:10 USD/NAD forwards versus forecast

Bond curve: foreign vs. local valuations diverge Changes in yield curve

Equity market: DIR in the spotlight again Namibia Stock Exchange



Source: Ecowin, Standard Bank Research

Namibia

6.0

7.3

8.5

9.8

11.0

91-d 182-d 365-d 3-y 9-y 15-y

%

Jul-10 Dec-10 Jan-10

0

350

700

1,050

1,400

Jan-02 Nov-04 Sep-07 Jul-10

All share

0

40

80

120

160

200Local index

All share Local companies

5.0

6.8

8.5

10.3

12.0


USD/NAD




Namibia: annual indicators


Source: Central Bank of Nigeria, NBS, Budget Office of the Federation, NNPC, IMF, Standard Bank Research

Namibia

2005 2006 2007 2008 2009 2010f 2011f

Output


Nominal GDP (NADbn) 46.2 54.0 62.1 74.0 80.0 86.9 95.5


GDP / capita (USD) 3,700 3,879 4,432 3,612 5,077 5,269 5,606

Real GDP growth (%) 2.5 7.1 5.5 4.2 -0.8 3.8 4.5


Budget balance (excl. Grants) / GDP (%) -3.6 -0.3 4.2 5.2 1.6 -1.8 -6.9

Budget balance (incl. Grants) / GDP (%) -3.4 -0.2 4.3 5.3 1.7 -1.5 -6.7

Domestic debt / GDP (%) 27.0 24.0 20.0 14.2 10.9 10.2 13.9


Balance Of Payments

Exports (USDbn) 2.5 3.1 3.6 3.1 4.4 5.2 6.3

Imports (USDbn) 2.7 2.9 3.7 3.7 5.5 6.4 7.4

Trade balance (USDbn) -0.2 0.2 -0.1 -0.6 -1.2 -1.2 -1.0

Current account (USDbn) 0.4 1.1 0.9 0.2 0.3 -0.1 0.0

- % of GDP 5.4 14.0 10.1 2.2 2.7 -1.1 -0.4

Financial account (USDbn) -0.5 -1.0 -0.7 -0.1 -0.3 -0.2 -0.2

- FDI (USDbn) 0.4 0.4 0.7 0.6 0.6 0.8 0.8

Basic balance / GDP (%) 10.4 19.0 18.4 10.2 8.2 6.0 6.3

FX reserves (USDbn) pe 0.3 0.4 0.9 1.3 1.8 1.7 1.9





Fitch BBB- BBB- BBB- BBB- BBB- BBB- BBB-


Consumer inflation (%) pa 2.2 5.0 6.7 10.3 8.8 4.9 5.4

Consumer inflation (%) pe 3.5 6.0 7.1 10.9 7.0 4.5 5.9


M2 money supply (% y/y) pe 8.3 31.9 10.2 17.4 6.3 13.0 15.0

BON bank rate (%) pa 7.1 7.7 9.6 10.3 8.5 6.8 6.5

BON bank rate (%) pe 7.0 9.0 10.5 10.0 7.0 6.5 6.5

3-m rate (%) pe 7.0 8.0 9.8 11.3 7.4 6.6 7.2

5-y rate (%) pe 8.8 9.2 9.9 7.3 8.8 8.1 8.7

USD/NAD pa 6.4 6.8 7.1 8.3 8.4 7.6 7.8

USD/NAD pe 6.4 7 6.9 9.9 7.5 7.7 7.8

REER pa 94.9 92.6 89.8 86.1 90.4 93.8 92.5

NEER pa 97.8 95.2 92.7 89.6 92.9 96.1 93.8



Nigeria: loose fiscal policy drives up bond yields

With the death of President Yar Adua (5 Mar 10), VP Goodluck Jonathan was sworn in as President. His abil-ity to enact significant reforms prior to fresh elections is limited, but his key priorities are to sort out corruption, the energy sector, security in the delta and deliver a credible election. He allegedly announced to a conference of state governors his intention to stand in the next presidential contest, scheduled for 22 Jan 11. This may be problem-atic, however, because of the gentleman’s agreement on power rotation between the north and south in the ruling PDP. Meanwhile, former military ruler Ibrahim Ba-banginda and ex Vice President Atiku Abubakar have said they would seek the PDP’s nomination. The PDP is likely to remain the dominant political force, but internal frictions or splits cannot be ruled out in the period leading to the elections.

The NBS estimates that growth reached 7.5% in H1:10, and we project growth to average at least 7.0% y/y in 2010, from 6.9% y/y in 2009. While these figures appear somewhat inflated, we note that agriculture continues to perform well and oil-growth is likely to be positive for the first time in several years. Indeed, crude production in H1:10 averaged 1.98m bpd vs 1.78m bpd in H1:09, and that y/y differential could be sustained in H2:10. We also expect solid oil prices to support strong public sector re-current spending ahead of the next general elections, although the level of execution of capital spending may be somewhat weak as in recent years. The strong fiscal and monetary stimulus should filter through to private consumption and investment spending, but downside risks come from a prolonged downturn in lending and political uncertainty.

Political risk: election date set Election results (2007)

GDP growth: solid performance in sight Composition of GDP


Notes: pe — period end; pa — period average; na — not available

Source: Central Bank of Nigeria, National Bureau of Statistics, Budget Office of the Federation, NNPC, IMF, Standard Bank Research


Umaru Musa Yar’dua PDP 70.0

Muhammadu Buhari ANPP 18.6

Atiku Abubakar AC 7.2

Legislative election House of Reps. Senate

PDP 263 87

ANPP 63 14

AC 30 6

Total 360 109

Patrick Utomi CPP 1.2

Other 4 2


Source: INEC

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 6.60 6.50 6.90 7.00 7.20 CPI (% y/y) pa 12.8 12.4 12.5 13.2 11.9

M2 (% y/y) pa 22.2 22.9 23.1 24.9 25.3

FX reserves (USD bn) pe 36 36.2 37.5 38.3 40.2 Import cover (months) pe 12.3 12.4 12.2 12.4 13.0

3-m rate (%) pe 2.9 3.4 3.8 4.5 5.0 5-y rate (%) pe 9.6 10.2 10.4 10.6 10.8 USD/NGN pa 150 150 150 150 150 REER (Q1:04=100) pa 137 138 138 138 140

USD/NGN vol (20 day) 2.5% 3.0% 2.8% 2.7% 2.9%

NEER (Q1:04=100) pa 111 112 111 112 112

CA/GDP (%) pa 12.5 11.8 12.5 12.7 12.9

Q2:10

7.69 14.0

21.5 13.3 37.4 12.8

2.5 7

150 135

110

2.3%

Q1:10

7.36 14.9

17.7 12.8 40.3 13.8

1.2 4.3 150 133

110

3.8%

Q4:09

7.67 12.6

19.5 13.2 42.4 15.9

3.5 7.4 150 132

108

10.7%

Q3:09

7.3 10.8

9.8 9.9

40.9 15.3

3.6 8.5 150 130

110

8.0%

Q4:11f

7.50 12.4

29.2 12.4 41.2 13.4

5.8 11.0 150 140

111

3.0%

Q2:09

7.45 12.6

15 7.5

43.3 16.2

3.6 9

155 127

108

3.9%

Q1:09

5.01 14.3

28.1 -3.2

47 17.6

3.5 10.5 147 124

102

15.2%

-15.0

-5.0

5.0

15.0

25.0

2004 2005 2006 2007 2008 2009e 2010f 2011f

%

PCE GE GFCF Netex GDP



The decline in FX reserves to USD36.0bn (12.4 months of import cover), in early Sep 10 from USD42.4bn in early 2010, has occurred despite significant trade and C/A surpluses since mid 2009. This mirrors the depletion of the ECA and relatively weak NGN confidence. Based on production of 1.85m bpd, we estimate the C/A breakeven oil price was USD55/bbl in 2009. We expect oil prices to average USD80/bbl in 2010 and crude oil production to increase to 2.05m bpd, resulting in a C/A surplus of around USD25bn or 12.6% of GDP. Meanwhile, FDI flows declined to USD5.8bn in 2009, from USD6.8bn in 2008, and should rebound slightly this year. While this highlights the relative inelasticity of FDI vs equity and debt flows, we see portfolio inflows being somewhat tilted to the upside amid a correction in long-dated bond yields and a revival in foreign interest in the stock market.

The government will most likely maintain its expansionary fiscal stance ahead of the 2010 elections. On 22 Jul, a NGN445bn (USD3bn) supplementary budget for the fis-cal year was approved by parliament. The extra spending includes a sizeable increase in wages for civil servants, doctors and professors. However, on the revenue side, the 2010 budget assumptions were revised downward, notably the benchmark oil price (USD60/bbl, from USD67/bbl) and the oil production target (2.2m bpd, from 2.35m bpd). The 2010 budget stands at NGN4.43tr (USD29.3bn), of which recurrent expenditure and capital expenditure amount to NGN2.14tr and NGN1.56tr, re-spectively and is up 42.9% y/y. In this regard, credit ex-tension to the public sector could remain robust and has increased drastically in recent months, reaching 57.4% y/y and 48.3% y/y in Jul 10 and Jun 10.

Fiscal policy: significantly expansionary Government budget

Balance of payments: C/A provides support Current account developments

While we think the current loose monetary policy will ulti-mately be (gradually) reversed by the CBN as credit met-rics improve in line with a banking sector recovery, this shift may actually take relatively longer than initially ex-pected. Indeed, the growth rate in credit to the private sector fell to a record low of 9.8% y/y in Jul 10, from 18.1% y/y in Jun 10. Private sector credit extension also contracted 2.9% YTD. Accordingly, AMCON's role will also be critically important in order to clean up the finan-cial system and improve risk perception across the board. We estimate inflation should remain close to an average of 13% y/y during the remainder of 2010 in the framework of the reweighted CPI basket because of the neutral base effect this year. Although real interest rates are now substantially negative, inflation will probably not affect CBN policy decisions in the near future.

Monetary policy: private sector credit contracts Inflation and interest rates

Source: NBS, NNPC, IMF, Standard Bank Research

Source: Budget Office, IMF, Standard Bank Research

Source: NBS, Reuters, Standard Bank Research

Nigeria

-40

-10

20

50

80

2003 2005 2007 2009e 2011f

USD bn

Trade Services

Income Transfers

Current Account

% of GDP 2008 2009

Expenditure 10.9 10.6

Recurrent expenditure 5.9 6.6

Capital expenditure 2.8 2.3

Service debt 1.6 1.1

Supplementary budget 2.9 1.4


Oil price assumption (US$/bbl) 59 45

Oil production assumption (m bbl) 2.45 2.29

Statutory transfers 0.7 0.6

2010

14.7

7.2

5.2

0.6

1.7

1.5

16.2

60

2.20

Budgeted FG Revenue 13.2 13.6 20.2

Exchange rate assumption 117 125 150

Domestic debt 9.7 12.6 13.1

Fiscal deficit -2.3 -3.0 -5.5

-5

3

10

18

25

Jan-06 Dec-06 Nov-07 Oct-08 Sep-09

%

Headline inflation Food inflation MPR



We continue to see the risks as still biased towards some bear steepening in the curve in coming months. Indeed, the primary market yield on the 20-y bond jumped to 11.0% on 21 Aug, from 10.0% in Jul and a low of 7.0% in Apr (the secondary market yield reached 11.6% as of 6 Sep). Also, the primary market yields on the 5-y and 3-y bonds increased to 9.25% and 7.54% on 21 Aug, from a previous 8.85% and 7.48%, while short-term rates have increased marginally or even declined on 25 Aug. This distortion reflects systemic excess liquidity at the short end and the increased aggregate fixed income issuance needed to finance the 2010 fiscal gap at the longer end of the curve. Furthermore, the series of expected state and corporate bonds may further reinforce the aforemen-tioned trend, although this could be relatively mitigated by the launch of the USD500m Eurobond in Nov 10.

We see USD/NGN trading in a relatively flat range be-tween 148-152 in the medium term. Key to this USD/NGN stability remains the CBN’s willingness and ability to preserve such a policy since 2009. Still, the strong C/A surplus (12.6% of GDP in 10) has not fostered a sizeable build in FX reserves YTD. On the contrary, reserves de-clined to a low of USD36.0bn on 2 Sep, from USD42.4bn in early 2010. This is explained by the draw down on the ECA (now standing at less than USD500m), the moneti-sation of the huge fiscal expansion and a broader lack of local NGN confidence. Concern about the political envi-ronment is adding to the story, while low interest rates and a delayed rally in the NSE have continued to under-mine support for the NGN from portfolio inflows. Down-side risk stems from the fiscal policy outlook, as a weaker NGN would boost oil revenue.

FX outlook: USD/NGN to remain steady USD/NGN: forwards versus forecast

Bond curve outlook: long dated yields to rise Changes in yield curve

Equity market: delayed rally still likely Nigerian Stock Exchange



Source: CBN, Standard Bank Research

Nigeria

The Nigerian Stock Exchange has been one of the best performing stock exchanges in the world YTD. The benchmark NGSE-30 has risen 18.1% in USD terms YTD (1,013.81 on 30 Aug 2010). We expect this perform-ance to continue, targeting 1,200 for the benchmark NGSE-30 by year-end (18.4% upside) and 1,500 by the end of 2011(48.0% upside). Indeed, Nigeria is the emerg-ing market and African laggard in terms of the equity market returning to pre-crisis highs – still 64% off its pre-crisis peak. Also, Nigeria, like the rest of SSA ex-South Africa, remains relatively undiscovered with an under-weight holding by Global Emerging Market funds. Finally, valuations, earnings growth and profitability are attrac-tive. The market is trading at a Dec 2011 P/E of 8.3x and a dividend yield of 6.1%.

110.0

125.0

140.0

155.0

170.0


USD/NGN


YTM

0

3.75

7.5

11.25

15

91d 182d 1y 2y 3y 5y 10y 20y

10-Mar-10 3-Sep-10 6-m forecast

100 = Jan 05

30

108

185

263

340


NSE MSCI EM MSCI Africa



Nigeria: annual indicators


Source: Central Bank of Nigeria, NBS, Budget Office of the Federation, NNPC, IMF, Standard Bank Research

Nigeria

2005 2006 2007 2008 2009 2010f


Nominal GDP (NGNbn) 14,572 18,565 20,678 23,842 24,794 29,877


GDP / capita (USD) 785 997 1110 1328 1074 1261

Real GDP growth (%) 7.2 6.1 6.3 6.0 6.9 7.0

Real Non-oil GDP growth (%) 8.6 9.4 9.8 9.0 8.3 5.7

Oil production (mbpd) 2.51 2.36 2.15 2.35 1.83 2.05

Bonny Light reference price (USD pb) 55.29 65.27 74.6 89.0 65.1 80.0

Central Government Operations Budget balance / GDP (%) * -1.1 -2.4 -1.2 -2.3 -3.0 -5.5



Balance Of Payments Exports (USDbn) 53.1 57.4 66.6 84.1 51.0 68.6

Imports (USDbn) 25.4 22.6 30.4 36.9 32.0 35.0


Current account (USDbn) 9.1 38.6 31.2 42.3 11.5 25.0

- % of GDP 8.2 26.7 19.0 21.0 6.9 12.6

Financial account (USDbn) 2.2 -13.8 2.7 -13.3 1.9 4.1

- FDI (USDbn) 1.7 4.9 6.0 6.8 5.8 6.2


FX reserves (USDbn) pe 28.3 42.3 51.5 53 42.4 36.2



S&P nr nr BB- BB- BB- BB-


Fitch nr nr BB- BB- BB- BB-


Core inflation (%) pa 8.9 12.8 9.3 5.1 9.2 12.5

Food inflation (%) pa 23 6.9 2.3 16.0 14.9 14.5


M2 money supply ( %y/y) pe 16.0 39.9 30.6 58.2 17.5 23.3



3-m rate (%) pe 10.8 15 7.2 8.5 3.5 3.4

1-y rate (%) pe 13.6 10.2 9 9.4 5.6 4.5

2-y rate (%) pe 14 14 8.6 8.6 6.7 8.5

5-y rate (%) pe 9.6 11.5 8.3 10.2

USD/NGN pa 131.3 128.7 125.8 118.5 148.9 150.0

USD/NGN pe 129.0 128.3 118.0 132.6 149.6 150.0

2011f

161.2

35,733

238.2

1478

7.2

7.6

2.15

92.0

-4.3

12.6

2.5

73.5

37.0

36.5

30.0

12.6

9.2

7.5

15.7

41.2

13.4

BB

nr

BB

12.4

11.3

13.5

25.6

28.7

6.8

7.5

5.8

6.2

10.0

11.0

150.0

150.0

NEER pa 102.9 104.8 107.5 113.3 107.0 110.8 111.0

REER pa 118.4 126.9 127.5 131.5 128.3 135.8 139.0



Republic of the Congo: oil prices support macro outlook

The political environment has stabilised following Presi-dent Denis Sassou Nguesso’s re-election in 2009, but tensions may rise ahead of the 2012 parliamentary elec-tions. In his speech preceding Congo’s 50th year of inde-pendence, Sassou Nguesso announced that his key pri-orities would be to boost infrastructure development, es-pecially in the failing power sector, alleviate poverty and consolidate national unity. While the Congolese opposi-tion appears to have been somewhat marginalised in recent years, two factions of the former ruling party UPADS decided to merge in Sep. Also, ex-President and UPADS historical leader Pascal Lissouba did not exclude returning to Congo, although this would be conditional on amnesty being granted to all his top associates. Finally, we do not expect any significant spike in violence in the Pool region the near future.

A rebound in oil output, to over 350k bbls/day by end-2010, from just over 300k bbls/day in 2009, would con-tinue underpinning GDP growth over the next two years. We expect GDP growth to accelerate to 8.7% y/y in 2010, which would make the Congo the fastest expand-ing SSA economy, and 7.6% y/y in 2011, from an esti-mated 5.8% y/y in 2009. Ongoing oil field development should continue to support investment spending, with FDI into the sector remaining relatively robust. Higher oil revenues would support government spending, both cur-rent and investment. Private consumption spending is likely to accelerate as well, providing a further boost to aggregate demand. Meanwhile, it is worth noting that the non-oil economy is growing at a slower pace than the oil sector, which highlights the evident lack of structural di-versification and sensitivity to exogenous shocks.


Political risk: Sassou Nguesso firmly in charge Election results

GDP growth: driven by the oil sector Composition of GDP

Notes: pe — period end; pa — period average; na — not available Source: BEAC, IMF, Standard Bank Research


Presidential election (2009) % of votes

Denis Sassou-Nguesso (PCT) 78.6

Joseph Kignoumbi Kia Mboungou (Ind) 7.5

Mathias Dzon (ARD) 2.3

Joseph Hondjouila Miokono (Ind) 2.0

Legislative election (2007) Seats

Congolese Labour Party (PCT) + allies 88

Pan-African Union for Social Democracy 11

Union for Democracy and the Republic (UDR)

1

Independents 37

Total 137

Nicephore Fylla de Saint-Eudes (PRL) 7.0

Source: Republic of Congo Electoral Commission


GDP (% y/y) pa 7.6 4.8 5.1 5.8 7.8 9.2 9.1 8.70 8.10 7.80 7.20 7.40

CPI (% y/y) pa 13.1 4.0 1.7 2.1 2.9 8.2 7.1 5.2 4.8 3.4 2.7 3.5

M3 (% y/y) pa 34.4 31.6 23.2 20.8 18.5 18.9 20.0 31.8 34.9 32.2 31.0 28.9

Trade balance GDP (%) pa 61.9 57.3 43.5 31.3 55.6 53.5 51 48.8 59.7 65.1 65.8 62.2

FX reserves (USD m) pa 3832 3792 3752 3712 3846 3981 4115 4250 4300 4375 4450 4675


BEAC financing rate (%) pa 4.25 4.25 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00

USD/XAF pe 494.3 466.6 448.1 457.3 482.3 523.4 510.6 524.7 655.1 605.3 596.3 589.4

-10.0

-2.5

5.0

12.5

20.0

2006 2007 2008 2009f 2010f 2011f

% y/y

PE GE GFCF Netex GDP



The current level of oil prices guarantees a significant trade balance surplus as oil accounts for close to 90% of total export earnings; aggregate imports could rebound depending on the outlook for infrastructure good imports. As in most SSA oil-producing countries, services and income outflows will counter the impact of the increasing trade surplus, with payments elevated due to oil field development. While our forecast is that the C/A surplus will rise to 2.5% of GDP in 2010, from an estimated 0.8% in 2009, downside risks emanate primarily from the oil price. Ongoing oil field development implies that FDI in-flows are likely to remain elevated, even as they boost machinery imports. We expect FX reserves to rise to USD4.25bn (13.1-m of goods and services imports) by year-end. Overall, the trajectory of the BOP position re-mains heavily dependent on the oil price path.

The sizeable debt relief granted in early-2010 (USD3.7bn) under the HIPC initiative and MDRI should support macroeconomic stability. While there has been noticeable progress in terms of multilateral and Paris Club debt cancellation, debt forgiveness from countries of the former Soviet Bloc (USD1.5bn) may be more com-plex to secure. The IMF stressed in early Sep that the country had achieved fiscal consolidation in excess of programme targets and initiated reforms in public finan-cial management and the management of oil resources. This is despite a 25% hike in the public sector minimum wage next year. Broadening the tax base will remain a critical component of any structural reforms, given the magnitude of the non-oil primary deficit, in our view. Even so, the substantial fiscal surplus expected in the medium term significantly mitigates any risk of sovereign default.

Balance of payments: impressive trade metrics BOP developments

Fiscal policy: sizeable surpluses Central government budget

Monetary policy: accommodative stance Interest rates


Source: BEAC, IMF, Standard Bank Research

Source: Ministre des Finances , IMF, Standard Bank Research

The Bank of Central African States (BEAC)’s monetary stance is influenced by the ECB’s policy course, but it has some flexibility in determining interest rates. In late July, the BEAC cut the benchmark rate by 25 bps to 4% to support economic growth and boost credit to the real economy. Given the structural issues in the eurozone, further easing by the ECB cannot be ruled out, although it remains to be seen whether this would impact the BEAC rate in the short term. Inflation is likely to remain subdued across the CEMAC region, which was highlighted by the BEAC as it lowered the prime rate, but the Congo may be an outlier in this regard. Indeed, inflation stood at 5.8% y/y in March, and we believe it could peak at 9.0% y/y in May, and gradually recede to 4.9% y/y in Dec. Accordingly, real interest rates are likely to remain nega-tive this year.

Republic of Congo

-14.0

-5.0

4.0

13.0

22.0

2006 2007 2008 2009 2010f 2011f

% y/y

PE GE GFCFNetex GDP

% of GDP 2009 2010

Total central govt. revenue 46.0 50.4

Total central govt. expenditure 27.8 24.5

- Recurrent 13.6 11.2

- Interest 1.3 1.0

- Development/transfers 13.0 12.3

Central govt. balance (inc. grants) 18.2 26.0

Central govt. balance (exc. grants) 18.6 26.6

Net domestic borrowing (saving) -16.0 -19.0

Net external borrowing (saving) -0.9 0.4

Grants (inc. HIPC) 0.5 0.7

2008

52.2

24.5

13.6

1.6

9.3

27.7

28.1

-7.0

-2.2

0.4

Non-oil primary deficit (% non-oil GDP) -43.2 -40.9 -30.5

-10.0

-2.5

5.0

12.5

20.0

Jan-00 Aug-02 Mar-05 Sep-07 Apr-10

%

ECB refi BEAC rate CPI y/y



We expect USD/XAF to be pushed higher by a decline in EUR/USD. As a member of the CEMAC region, the Re-public of Congo is affected by the CFA peg that sets the EUR/XAF rate at 655.957. We believe EUR/USD will continue to weaken in the medium term, possibly reach-ing 1.25 and parity in three and six months. Accordingly, the USD/XAF rate may depreciate towards 655 during the next 6-m, tracking EUR weakness via the CFA peg. The forecast move in USD/XAF will probably lead to some depreciation of the REER, giving rise to gains in external competitiveness. Furthermore, we do not expect any change in the EUR/XAF peg, which has only been adjusted once (in 1994), at a time when CFA countries displayed substantial structural imbalances. While FX reserves have reached USD3.8bn, it is worth noting that 65% of those are held by the Banque de France.

Eurobond: delayed catch-up Eurobond yield

FX outlook: further XAF weakness in sight USD/XAF: forwards versus forecast

FX reserves: tilted to the upside Effective exchange rates: real appreciation Source: Reuters, Standard Bank Research


Source: BEAC, IFS, Standard Bank Research Source: BEAC, IFS, Standard Bank Research

While RepCongo2029 has continued to somewhat track the EMBI and global risk perception in recent months, trading was more erratic and the yield compression less linear. We note that RepCongo had lagged the rally in other SSA eurobonds in 2009; as such, the yield com-pression through 2010 may have been a delayed catch- up effect. This would make sense as the eurobond is significantly illiquid and generates few trades; in fact, the yield reached its low in Q1:09, at a time when other SSA and frontier market bonds had already started to gradu-ally recover. Secondary market trading and international appetite are also constrained by the size of RepCon-go2029 (US$477.8m), a marginal step-up coupon and the lack of a sovereign rating. The bond provides some yield pick-up at 9.4% (3 Sep), but it is unlikely to deliver sizeable price appreciation going forward.

Republic of Congo

spread over UST

200

588

975

1,363

1,750

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Rep Con EMBI

0

1,000

2,000

3,000

4,000

Dec-00 Apr-03 Aug-05 Dec-07 Apr-10

USDm

Rep Congo FX reserves (USDm)80

94

108

121

135

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

400

453

505

558

610


USD/XAF




Republic of Congo: annual indicators


Source: Ministre des Finances, BEAC, IMF, Standard Bank Research

Republic of Congo

2005 2006 2007 2008 2009 2010f 2011f

Output


Nominal GDP (XAFbn) 3,242 4,043 3,664 4,613 5,130 5,875 6,533


GDP / capita (USD) 1,808 2,213 2,127 2,785 2,922 3,068 2,875

Real GDP growth (%) 7.80 6.20 -1.60 9.20 5.80 8.70 7.6

Oil production (k bbls/day) 246 270 224 249 304 355 378


Budget balance / GDP (%) 17.9 17.3 11.5 28.1 18.6 25.2 26.7

Domestic debt / GDP (%) na na na na na na na


Balance of Payments

Goods exports (USDm) 4,868 6,078 5,833 8,452 7,870 10,125 11,785

Goods imports (USDm) 1,273 2,006 2,639 2,393 2,980 3,880 4,330

Trade balance (USDm) 3,596 4,071 3,193 6,059 4,890 6,245 7,455

Current account (USDm) 652 128 -1490 652 80 298 241

- % of GDP 10.6 1.7 -19.5 6.3 0.8 2.5 2.1

Financial account (USDm) -106 -115 428 1,790 1,451 630 700

Basic balance 546 13 -1,062 2,442 1,531 928 941

- % of GDP 8.9 0.2 -13.9 23.7 15.2 7.8 8.0

FX reserves (USDm) pe 732 1,842 2,175 3,872 3,712 4,250 4,450





Fitch nr nr nr nr nr nr nr


Headline inflation pa 3.1 6.5 2.7 7.4 5.4 5.8 3.6


Policy interest rate (%) pa 5.80 5.50 5.50 5.10 4.40 4.10 4.00

Policy interest rate (%) pe 5.50 5.50 5.50 4.75 4.25 4.00 4.00

1-m rate (%) pa na na na na na na na

2-y rate (%) pa na na na na na na na

USD/XAF pa 527 522 479 448 462 491 557

USD/XAF pe 556 497 447 467 457 525 589

- % of GDP 58.5 52.6 41.7 58.8 48.5 52.2 63.6



Senegal: signs of recovery despite structural imbalances

President Abdoulaye Wade (84) recently announced that he would seek a third term in 2012 and denied he had any intention of putting his son in place before he goes, as claimed by the opposition. Karim Wade’s political am-bitions suffered a setback last year when he stood in local elections for Dakar, a traditional ruling PDS strong-hold. The PDS’s resounding defeat by the opposition coalition reflects growing antagonism towards the party’s leadership. Meanwhile, persistent power cuts have re-sulted in street protests; besides its economic cost, SE-NELEC’s inability to meet consumption may ultimately have a negative impact on the government’s credentials. Still, we note that Senegal was one of the first SSA coun-tries to restore multi-party politics in 1976, which, along with a relatively mature institutional framework, should mitigate long-run political risks.

After averaging 2.5% y/y and 1.6% y/y during 2008 and 2009, respectively, we expect GDP growth to rebound to 3.4% y/y in 2010. Such levels are still rather low com-pared to SSA peers. Two key constraints recently identi-fied by the IMF include the vulnerable energy sector and the financing constraints that limit the fiscal room for ma-noeuvre. More generally, growth remains sensitive to global demand. For example, the important tourism sec-tor is vulnerable to negative developments in the EU. Yet there are encouraging signs in terms of industrial activity, especially in the key phosphate and cement industries. We also note some turnaround in credit to the private sector which accelerated to 13.4% y/y in Mar 10, from a low of 5.0% a year earlier. Investment spending, particu-larly in infrastructure and the mining sector, remains im-portant for the long-term growth outlook, in our view.


Political risk: Wade candidate in 2012? Election results (2007)

GDP growth: growth set to rebound Contribution to GDP (%)

Notes: pe — period end; pa — period average

Source: Senegalese authorities, Standard Bank Research

Source: Senegalese Electoral Commission


GDP (% y/y) pa 1.8 1.4 1.2 1.9 2.5 3.4 3.6 3.9 4.2 4.0 4.3 4.4

CPI (% y/y) pa 1.8 -0.4 -3.0 -2.4 -0.6 0.1 2.8 4.5 3.0 2.0 1.5 1.2

M2 (% y/y) pe 6.2 8.5 8.0 9.0 13.4 12.9 12.7 15.1 14.6 14 14.3 15.1

CA/GDP (%) pe -9.0 -9.3 -9.5 -9.7 -9.5 -9.1 -9.6 -9.5 -9.9 -10.2 -10.1 -9.3


Import cover (mths) pe 4.4 5.9 6.0 6.3 6.3 6.0 6.3 6.3 6.0 5.7 6.0 6.3

BCEAO Lending Rate (%) pe 4.75 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25

USD/XOF pe 494.3 466.6 448.1 457.3 482.3 523.4 510.6 524.7 655.1 605.3 596.3 589.4

REER pe 104 104 105 105 104 101 100 99 97 95 96 98

NEER pe 103 103 104 104 102 99 98 97 95 94 95 97

USD/XOF vol (20 day) 18.1% 14.3% 10.5% 10.5% 9.0% 12.8% 11.7% 10.4% 15.5% 13.2% 9.5% 11.9%

Presidential election (25 Feb 07) Party % of votes

Abdoulaye Wade PDS 55.9

Idrissa Seck RP 14.9

Ousemane Tanor Dieng PS 13.5

Parliamentary election (3 Jun 07) Seats % of votes

Parti Democratique Senegalais (PDS) 131 69.2

Parti Socialiste (PS) 0 0

Rewmi Party (RP) 0 0

Total 150 100

Moustapha Niasse AFP 5.9

Alliance des forces de progress (AFP) 0 0

2008 2009e 2010f 2011f Agriculture 1.3 0.6 0.7 0.8 Livestock and hunting 0.1 -0.2 0.2 0.2 Forestry 0 0 0 0.1 Fishing 0 -0.1 0 0 Mining 0 0 0 0.1 Fat and oil products -0.1 0 0 0 Utilities 0.2 -0.1 -0.2 0 Construction 0 -0.2 0.3 0.5 Manufacturing -0.7 -0.5 0.6 0.6 Commerce 0.6 -0.8 0.2 0.2 Transport & comm 0.9 0.2 0.4 0.4 Education 0.2 0.2 0.1 0.2 Health 0.2 0.3 0.2 0.1 Other services -0.1 1.7 0.5 0.7 Public Administration -0.1 0.5 0.4 0.3 GDP 2.5 1.6 3.4 4.2



Senegal’s C/A deficit is now well above the WAEMU and SSA averages, and could reach around 9.4% of GDP in 2010 (and exceed 10%, excl. grants). This is compared to a WAEMU convergence criteria of 5.8% (excl. grants). Such a trend continues to reflect the lack of a diversified export base, and a sizeable trade deficit, despite a some-what balanced services position and positive current transfers. Furthermore, we think tourism will struggle and the import intensity associated with some large infrastruc-ture projects also represents a downside risk to the C/A outlook. Despite a downward trend, we expect a robust financial account, with FDI accelerating to around USD115m in 2010. The other large funding source is aid either via project grants (USD205m) or official project finance, but portfolio flows will most probably remain mar-ginal as in most WAEMU countries.

Senegal’s fiscal metrics have consistently been at odds with WAEMU convergence criteria in recent years. The fiscal deficit was slightly higher than expected at around 5.1% of GDP in 2009 and above the regional median. Revenues fell short mostly due to tax arrears from public enterprises (mainly SENELEC). Current expenditure was higher than expected at 16.5% of GDP, but capital invest-ment was lower at 10.5% of GDP. The settlement of ad-ditional arrears could push funding to 7.3% of GDP in 2010. Meanwhile, the government will target a 4% me-dium-term deficit target in the framework of the IMF-sponsored programme. The authorities intend to reduce current expenditure, but also tap the WAEMU debt mar-ket on a more regular basis going forward. Still, it re-mains to be seen to what extent fiscal consolidation may be successful ahead of the 2012 presidential election.

Inflation has continued to accelerate, reaching 2.3% y/y in Jul 10, from 1.3% y/y in Jun 10 (inflation had been negative until May 10). This suggests the deflationary trend between H2:09 and Jan-May 10 has come to an end. Inflation for the remainder of the year will probably rise faster in Senegal than WAEMU, but average CPI is unlikely to exceed 1.7% in 2010. Still, the BCEAO will probably be reluctant to hike the benchmark rate (4.25%), given the modest regional economic recovery. Besides, the real interest rate differential between the euro and CFA zones remains favourable and the BCEAO has raised the discount rate only twice in the 2000s: by 25 bps to 4.25% in Aug 06 because the ECB had drasti-cally tightened monetary conditions, and 50 bps to 4.75% in Aug 08 as WAEMU inflation converged to 10%.

Fiscal policy: violating convergence criteria Central government budget

Balance of payments: sizeable C/A deficit Current account developments

Monetary policy: interest rates on hold Inflation and interest rates


Source: Senegalese authorities, Standard Bank Research

Source: Institut National de la Statistiques, Standard Bank Research

Senegal

-2,850

-1,725

-600

525

1,650

2005 2006 2007 2008 2009e 2010f 2011f

USDmn

Trade IncomeServices TransfersCurrent account

% of GDP 2008 2009



- wages 5.9 6.1

- subsidies + transfers 5.6 4.8





- interest 0.6 0.7

2010

21.9

26.9

6.3

0.8

3.9

-7.3

-4.9

3.0

2.9

Donor support (grants) 2.4 3.0 2.3

Delays settlement -1.4 -1.6 -0.5

-5.00

-1.25

2.50

6.25

10.00

Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10

%

CPI y/y Money Market rate Discount rate



Senegal’s debut 5-y eurobond (USD200m; 8.75% cou-pon; rated B+) performed well in Q3:10. After trading up to a yield of 10.1% in Mar 10, the bond fluctuated in the 7.8%-9.6% range between Apr 10 and May 10, and cur-rently yields 7.8%. The spread over US treasuries tight-ened some 114 bps between 2 Jul and 6 Sep to around 627 bps, while EMBI Global has tightened around 61 bps to 276 bps. As such, Senegal still offers some 351 bps of yield pick-up over the EMBI Global spread. Senegal’s spread compression has relatively outperformed that seen in EMBI Global. Despite the liquidity differential, we are still looking for some rally in Senegal 2014, assuming positive global risk sentiment, as it continues to give up 179-256 bps of yield to comparable issuers, such as Ghana, Gabon and Sri Lanka. Senegal plans to issue a second USD300m bond in 2011.

USD/XOF continues to track EUR/USD via the CFA peg which is backed by the French Treasury. We believe EUR/USD will continue to decline in the medium term, possibly reaching 1.25 and parity over a 3-m to 6-m hori-zon. This would reflect poor growth dynamics in the euro zone and a subsequent interest rate differential and negative market sentiment. Consequently, the USD/XOF rate is likely to rise to 655 over the next 6-m. The ex-pected EUR weakness in the short to medium term will probably further reduce the level of XOF overvaluation on a REER basis. As such, it is highly unlikely the peg will be changed, especially as it has been adjusted only once (in 1994) at a time when CFA countries faced significant structural imbalances. We see FX reserves stabilising at around USD2.1bn in 2010, of which 65% would still be held by the Banque de France.

In line with most other African equity markets, we had been expecting the regional BRVM (based in Abidjan) to outperform in 2010, having lagged the global rebound in equities seen during 2009. Both main indices (ICX 10 and ICX Composite) were still up 17.4% and 10.6%, re-spectively, as of 6 Sep 10. Meanwhile, Sonatel (Senegal’s major telecom provider), which accounts for USD2.6bn of the total market cap of USD6.2bn, was up 10.8% YTD (in XOF terms). This compares to MSCI EM which was up just 3.2%, the MSCI Global which was down 2.8% and MSCI frontier which was up 3.6%. It was somewhat more in line with MSCI Africa which rose 11.9% (with Nigeria up 12.6%). However, the likelihood of XOF weakness could mitigate foreign participation in the BRVM, especially in the context of intrinsically limited liquidity.

Eurobond outlook: yield pick-up still attractive USD Senegal 8.75% 22 Dec 2014 bond

FX outlook: CFA peg provides anchor USD/XOF: forwards versus forecast

Equity market: BRVM outperforms MSCI Bourse Regionale Valuers Mobiliers




Senegal

400

453

505

558

610


USD/XOF


bps

220

368

515

663

810

Dec-09 Jan-10 Mar-10 May-10 Jul-10

Senegal Dec 14 Spread EMBI spread

Jan 02= 100

0

275

550

825

1,100

Aug-01 May-03 Mar-05 Dec-06 Sep-08 Jul-10

ICX 10 ICX Comp Sonatel



Senegal: annual indicators

Senegal

2005 2006 2007 2008 2009 2010f

Output


Nominal GDP (XOFbn) 4582.3 4846.4 5344.3 5,935 5,970 6,278


GDP / capita (USD) 770 801 938 1,086 1,032 995

Real GDP growth (%) 5.6 2.3 4.6 2.5 1.6 3.4

Phospheric acid (‘000 tons) 504 180.2 234.1 180 260 300






Balance of Payments





- % of GDP -7.8 -9.6 -12.1 -10.4 -9.4 -9.4


- FDI (USDbn) 0.05 0.11 0.13 0.12 0.98 0.12





S&P B+ B+ B+ B+ B+ B+




Consumer inflation (%) pa 1.7 2.1 5.8 5.8 -1.0 1.7

Consumer inflation (%) pe 1.3 4.0 6.1 4.3 -2.2 4.5



BCEAO lending rate (%) pa 4.00 4.25 4.75 4.75 4.25 4.25

USD/XOF pa 527 522 479 448 462 491

USD/XOF pe 556 497 447 467 457 525

REER pa 100.0 99.9 102.7 106.0 104.8 99.6

NEER pa 100.0 99.9 103.3 104.8 103.5 99.0

2011f

13.2

6,666

11.97

908

4.2

350

-6.5

-4.3

11.0

27.8

1.8

4.2

-2.4

-1.18

-9.9

0.63

0.14

-8.7

2.2

6.3

B+

B1

B+

1.9

2.1

14.5

16.5

4.25

557

589

96.5

95.8

Source: Institut National de la Statistique, Ministere de l’economie et des finances, IMF, Standard Bank Research, Bloomberg




South Africa: feeling the effects of a fragile global recovery

In April 2009, the ANC won its fourth-consecutive general election, but failed to obtain a two-thirds majority which would have allowed it to unilaterally alter the constitution. The recent public workers’ strike, which was character-ised by increasingly bitter exchanges between unions and government, highlights growing tensions between the ANC and its tripartite alliance partners Cosatu and the SACP. The ANC is due to hold its National General Council from 21 to 24 September. Among the issues to be discussed will be the contentious mine nationalisation proposal as well as the possible introduction of a tax on capital inflows to stem rand appreciation. We expect these discussions to provide an up-to-date guide to the ANC’s most likely future policy direction.

GDP growth undershot market expectations in Q2:10, moderating to 3.2% q/q (saar), after climbing 4.6% q/q in Q4:10. The slowdown came despite hopes that increased spending during the World Cup would boost growth. Min-ing production contracted, while manufacturing produc-tion slowed and consumer demand remained muted dur-ing the quarter. The prognosis for the SA economy re-mains fragile, given heightened risks of further global slowdown and the impact of the strong ZAR on the sup-ply-side of the economy. PCE could regain traction on the back of low interest rates and benign inflation envi-ronment, but persistently high unemployment levels also pose a downside risk to our 2010 GDP forecast of 2.9% y/y.


Political risk: increased tensions Election results (2009)

GDP growth: lingering headwinds Composition of GDP

Notes: pe — period end; pa — period average Source: South African Reserve Bank, StatsSA, Standard Bank Research, Bloomberg

Source: SARB, South Africa National Treasury, Standard Bank Research

Source: Electoral Commission of South Africa


Jacob Zuma ANC 65.9

Helen Zille DA 16.7

Mvume Dandala Cope 7.4

Mangosuthu Buthelezi IFP 4.5

National election Parliamentary

seats % of votes

African National Congress (ANC) 264 65.9

Democratic Alliance (DA) 67 16.7

Congress of the People (Cope) 30 7.4

Inkatha Freedom Party (IFP) 18 4.5

Other 21 5.5

Total 400 100

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 2.8 3.3 3.5 3.7 3.8

CPI (% y/y) pa 3.9 4.2 4.4 5.0 5.4

M3 (% y/y) pe 2.5 3.0 3.3 4.5 5.0



3-m rate (%) pe 6.1 6.1 6.2 6.2 6.2

5-y rate (%) pe 6.8 6.7 6.6 6.8 6.9

USD/ZAR pe 7.5 7.7 7.9 7.9 7.8

REER pe 114.5 113.0 110.0 109.0 111.0

USD/ZAR vol (20 day) 9.2% 14.6% 15.7% 9.0% 13.6%

NEER pe 74.0 72.0 70.0 69.0 71.0

CA/GDP (%) pe -4.9 -5.0 -5.3 -5.6 -5.4

Q2:10

3.0

4.5

1.8

-4.4

34.6

5.3

6.6

7.7

7.5

115.6

75.0

13.6%

Q1:10

1.6

5.7

0.9

-4.6

34.8

5.0

6.7

7.9

7.5

111.3

72.4

9.0%

Q4:09

-1.4

6.0

1.7

-2.9

32.4

5.8

7.2

8.5

7.5

108.1

70.3

15.7%

Q3:09

-2.2

6.4

5.1

-3.1

35.1

6.3

7.0

8.7

7.8

109.2

69.1

14.6%

Q4:11f

4.0

5.6

5.6

-5.3

35.6

5.5

6.7

7.5

7.8

110.0

70.0

13.6%

Q2:09

-2.7

7.8

7.5

-3.5

31.9

6.5

7.6

8.6

8.5

104.2

66.0

17.9%

Q1:09

-0.7

8.4

12.6

-6.7

30.4

5.8

8.8

8.3

9.9

90.6

57.5

26.0%

-15

0

15

30

2000 2002 2004 2006 2008 2010

% y/y

Netex GFCF GCE PCE GDP



SA’s current account widened to 4.6% of GDP in Q1:10 from 4.0% in Q4:09. However, this shortfall was once again adequately financed by the capital account due to a strong influx of portfolio inflows. Traditionally, these have been predominantly directed towards the JSE, but in 2010 their course has been guided by the relatively high yields offered by the SA bond market. We expect continued widening of the current account during H2:10. Exports are vulnerable to the uncompetitive effects of the strong ZAR and fragile global recovery. Imports are ex-pected to continue recovering gradually and increased dividend payments to non-residents could also contribute to a wider current account deficit. Although there are some potential FDI transactions, portfolio inflows will have to remain robust in order to compensate for an ex-pected widening of the current account deficit so as to avoid a deterioration in SA’s BOP.

With a strong bounce in the first few months of 2010 and a helpful boost from the Soccer World Cup, revenue col-lection in FY 2010/11 has been running steadily ahead of original government projections. Standard Bank esti-mates currently see a ZAR30-40bn gross tax revenue overrun for the full year; this would be 4.6%-6.2% more than budgeted. However, with renewed growth uncertain-ties (domestically & globally), National Treasury is unlikely to announce any changes to the prevailing bor-rowing requirement until the Medium-Term Budget Policy Statement on 27 October. On the expenditure front, the only real threat lies with a bloated civil service wage bill. The danger is that the revenue surplus is dipped into; if so, without material future budget adjustments, this could prove fiscally problematic from next year onwards.

After cutting unexpectedly in March, the SARB main-tained the repo rate at 6.50% at the May and July mone-tary policy meetings. Despite the vulnerability of the do-mestic recovery, inflation risks were seen as evenly bal-anced and a stable monetary stance was deemed appro-priate. Since the July MPC meeting, domestic data flow has shown a weakening recovery, disinflation has proven to be much stronger than anticipated and external fragili-ties have escalated. In light of this, the MPC chose to lower the repo rate by 50 bps on 9 September. This was in line with market expectations. The SARB did suggest, however, that “the scope for further downward movement is seen to be limited…”. However, further weak data flow and continued disinflation due to the rand’s strength may yet prompt another cut.

Fiscal policy: bloated wage bill a future problem Central government budget

Balance of payments: strong portfolio inflows BOP developments

Monetary policy: 6.0% repo delivered Inflation and interest rates

Source: South African Reserve Bank, Standard Bank Research

Source: South Africa National Treasury, Standard Bank Research

Source: South African Reserve Bank, StatsSA

South Africa

Note: ‘Development’ spending includes health, education & housing and

community amenities.

-30,000

-20,000

-10,000

0

10,000

2003 2005 2007 2009 2011

USD m

Transfers Income

Services Trade balance

C/A

(5)

0

5

10

15

20

Jan-00 Aug-02 Mar-05 Oct-07 May-10

% y/y, %

CPI Repo PPI

% of GDP 2008/09 2009/10 2010/11f

Total revenue 29.8 27.3 28.4

Total expenditure 30.8 35.0 34.6

-wages 10.1 11.3 11.2

-interest 2.5 2.6 2.9

-development 11.6 12.6 14.1

Overall balance -1.0 -7.6 -6.2

Net external borrowing -0.2 0.5 0.5

Net domestic borrowing 1.5 6.9 5.7



The same drivers responsible for a solid performance of the bond market in the first few months of the year have intensified. Indeed, the familiar theme of elevated foreign buying of local debt remains pivotal in driving SA’s bond curve. Local conditions have provided a favourable macro backdrop to such flows, including: lower inflation; a stronger and more stable currency; probable improved supply dynamics; low real money market rates; and pro-gressive uncertainty surrounding alternative asset class returns, especially equities. But despite these improve-ments, locals remain sceptical of both the outright level and flatness of the bond curve. A material adjustment in local perceptions around structural inflation in SA would likely be necessary to sustain current levels, if foreign demand were to normalise or even reverse.

Rand strength in recent months has mainly been a func-tion of a strong foreign appetite for SA bonds, although broad-based dollar weakness has contributed towards ZAR appreciation. Renewed SARB accommodation and widespread domestic industrial action has been largely ignored by ZAR bulls. The sustainability of ZAR strength hinges largely on global sentiment and more specifically the search for yield (i.e. carry trade). If risk aversion re-emerges due to global growth concerns, the dollar could quickly regain favour, given its perceived safe-haven status, and emerging markets such as SA could sell-off. The prospect of renewed risk aversion, combined with narrowing interest rate and GDP differentials, a widening current account deficit and increased reserve accumula-tion lead us to believe that the ZAR will weaken during H2:10.

The JSE has continued to exhibit a high correlation with US equity markets in recent months and as a conse-quence local equities have oscillated within a relatively narrow range. Even though foreigners have shown a distinct preference for SA bonds, non-residents have still managed to buy R24.6bn worth of SA equities this year and have thus once again become significant sharehold-ers (almost half) of the overall JSE. The prospect of an-other SARB rate cut and some attractive valuation met-rics, combined with the fact that SA bonds have already rallied dramatically in recent months could ensure that SA equities regain some favour into year-end. However, the risk to such an improvement remains with the rela-tively dismal global and domestic economic outlook, which could prevent equities from becoming the asset class of choice over the medium term.

Bond curve: foreign vs. local valuations diverge Changes in yield curve

FX outlook: ZAR unlikely to strengthen further USD/ZAR: forwards versus forecasts

Equity market: JSE still stuck in a range Johannesburg Stock Exchange vs. Dow Jones




South Africa

6.0%

7.4%

8.8%

10.2%

1-yr 5-yr 9-yr 13-yr 17-yr

nacq

Aug-09 Aug-10 Aug-11

Index

15,000

19,000

23,000

27,000

31,000

Jan 09 Jul 09 Jan 10 Jul 10

Index

6,000

8,000

10,000

12,000

14,000

JSE All Share DJ Industrial Ave. (rhs)

5.0

6.0

7.0

8.0

9.0


USD/ZAR




South Africa: annual indicators


Source: South African Reserve Bank, South Africa National Treasury, Standard Bank Research, Bloomberg

South Africa

2005 2006 2007 2008 2009 2010f 2011f

Output

Population 47.3 47.9 48.5 48.8 49.1 49.1 49.0

Nominal GDP (ZAR bn) 1,571 1,767 2,017 2,284 2,408 2,500 2,520

Nominal GDP (USD bn) 246.8 261.1 286.0 276.6 285.9 331.1 321.4

GDP/capita (USD bn) 5,212 5,444 5,891 5,632 5,760 6,744 6,560

Real GDP growth (%) 5.3 5.6 5.5 3.7 -1.8 2.9 3.2


Budget balance/GDP (%) -0.5 -0.3 0.7 -0.4 -4.9 -6.5 -5.0

Domestic debt/GDP (%) 30.2 28.1 24.4 22.6 27.2 30.0 31.7

External debt/GDP (%) 4.4 4.5 3.8 4.3 3.7 3.8 3.9

Balance of Payments

Exports of goods and services (USD bn) 67.58 78.36 89.47 98.05 78.02 72.85 76.53

Imports of goods and services (USD bn) 68.74 84.75 97.85 106.40 80.47 92.72 82.91

Trade balance (USD bn) -1.16 -6.39 -8.39 -8.34 -2.45 -19.87 -6.38

Current account (USD bn) -8.56 -13.86 -20.50 -19.58 -11.47 -15.56 -16.39

C/A % of GDP -3.5 -5.3 -7.2 -7.1 -4.0 -4.7 -5.1

Financial account (USD bn) 11.98 15.77 21.77 11.64 12.55 19.96 16.03

Net FDI (USD bn) 5.71 -6.59 2.73 12.15 4.14 6.63 5.11

Basic balance/GDP (%) -1.15 -7.83 -6.21 -2.69 -2.56 -2.70 -3.51

FX reserves (USD bn) pe 18.60 23.08 29.63 30.62 32.48 35.00 35.60

Import cover (months) pe 4.6 4.5 4.6 6.1 5.8 5.7 5.5


S & P BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+

Moody's Baa1 Baa1 Baa1 Baa1 A3 A3 A3

Fitch BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+

Monetary & financial indicators

Consumer inflation (%) pa 3.4 4.7 7.1 11.5 7.1 4.6 5.1

Consumer inflation (%) pe 3.6 5.9 8.9 9.5 6.3 4.2 5.6


M3 money supply (% y/y) pe 19.9 22.5 23.6 14.8 1.8 3.0 5.6

SARB policy rate (%) pa 7.1 7.6 9.6 11.6 8.4 6.5 6.1

SARB policy rate (%) pe 7.0 9.0 11.0 11.5 7.0 6.0 6.5

3-m rate (%) pe 7.5 7.1 9.2 11.3 7.2 6.1 6.7

1-year rate (%) pe 7.1 7.0 9.2 11.2 7.1 6.2 7.3

USD/ZAR pa 6.4 6.8 7.1 8.3 8.4 7.6 7.8

USD/ZAR pe 6.4 7.0 6.9 9.9 7.5 7.7 7.8

REER pa 112.5 108.9 105.1 92.4 103.0 113.6 110.0

NEER pa 91.8 87.3 78.3 65.4 65.7 73.3 70.0

5-year rate (%) pe 7.9 7.4 8.6 9.6 8.5 6.7 7.5

2-year rate (%) pe 7.2 7.1 8.9 10.8 7.6 6.2 7.4



Tanzania: gearing up for elections

Investors are likely to focus on the elections set for 31 Oct 10. Early polls indicate that the incumbent govern-ment will mostly likely retain power, which would not be a surprise, given the CCM’s electoral dominance. The CCM retaining power should ensure policy continuity which is vital, given the economy’s challenges. Following the approval of power-sharing provisions in Zanzibar in Aug 10, chances of post-election violence on the island appear slim. Despite the signing of the Mining Act 2010 into law, investor confidence in the mining sector has not faltered as initially feared. In the Survey of Mining Com-panies 2010, conducted by the Fraser Institute and cov-ering 51 countries globally, Tanzania was voted third in Africa as the country with the most attractive mining re-gime. Participants cited political stability among other reasons.

Following better-than-expected growth in 2009, we have increased our growth forecast for 2010 to 6.8% y/y from 6.5% y/y. Our constructive view is based on the authori-ties’ continued pursuit of expansionary policies to stimu-late growth. We expect this policy bias to remain in place in the medium term. The rebound in GDP growth is likely to be led by government’s capital expenditure focus on infrastructure development. Government revenues are expected to be bolstered by the increase in mining royal-ties, following the signing of the Mining Act 2010 into law. Consumption should benefit from the low interest rate and inflation environment. Improved farm incomes due to increased agricultural productivity should further support PCE. Netex should benefit from a weak TZS, but faltering global growth poses a risk for Netex.


Political risk: all eyes on the election Election results (2005)

GDP growth: recovery on track Composition of GDP

Notes: pe — period end; pa — period average Source: Bank of Tanzania, Tanzania National Bureau of Statistics, Bloomberg, Standard Bank Research

Source: Bank of Tanzania, Standard Bank Research


Jakaya Kikwete CCM 80.28

Ibrahim Lipumba CUF 11.68

Freeman Mbowe CHADEMA 5.88


Chama Cha Mapinduzi (CCM) 206 70.0

Civic United Front (CUF) 19.0 14.3

Chama cha Demokrasia na Maendeleo (CHADEMA) 5.0 8.2

Total 232 100

Source: National Electoral Commission of Tanzania

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 6.5 6.6 7.0 6.7 7.3

CPI (% y/y) pa 6.1 5.4 5.1 4.8 4.5

M3 (% y/y) pe 26.4 27.6 28.3 29.5 31.2



3-m rate (%) pe 2.9 2.4 2.6 2.9 3.2

5-y rate (%) pe 9.7 8.6 8.3 8.0 7.8

USD/TZS pe 1,540 1,590 1650 1645 1630

REER pe 158.6 171.3 180.3 179.6 178.9

USD/TZS vol (20 day) 5.6% 5.4% 5.4% 5.4% 5.4%

NEER pe 193.6 197.9 203.5 203.0 202.4

CA/GDP (%) pe -7.6 -7.7 -8.0 -7.6 -7.7

Q2:10

6.9

8.2

24.6

-7.4

3.5

5.2

3.0

9.5

1,470

152.5

189.9

8.6%

Q1:10

7.1

9.8

19.1

-7.2

3.5

5.2

2.4

13.8

1,358

149.6

187.5

2.8%

Q4:09

6.7

12.5

18.4

-7.5

3.6

5.7

6.1

13.5

1,340

145.7

169.0

5.4%

Q3:09

7.1

11.7

19.5

-11.1

3.4

5.5

3.0

13.5

1,311

150.3

169.4

5.9%

Q4:11f

7.8

4.4

33.9

-7.8

4.2

5.7

3.5

7.5

1,625

178.1

202.0

5.4%

Q2:09

5.2

11.4

19.0

-11.9

2.9

4.7

5.6

16.6

1,313

172.2

189.0

9.2%

Q1:09

5.6

13.1

14.4

-12.6

2.7

4.4

12.4

15.0

1,328

179.4

201.5

16.6%

-10.0

-3.8

2.5

8.8

15.0

2000 2002 2004 2006 2008 2010f

PCE GCE GFCF

Stocks NetEx GDP

y/y



Following a better-than-expected C/A deficit (7.5% of GDP) in 2009 on the back of an improved trade balance, we now expect the C/A deficit to widen to 7.7% of GDP in 2010. The C/A deterioration is likely to be driven by the trade account. We expect imports to outweigh exports as Tanzania imports capital goods for its infrastructure de-velopment programme. Infrastructure will probably boost service and income payments as well, also weighing on the C/A. Inward transfers should be subdued as donors are likely to hold back on disbursements until after the elections. Furthermore, the government expects a 37.2% decline in donor budgetary support to TZS821.6bn in FY2010/11. Some donors disbursed funds earmarked for FY2010/10 in FY2009/10 in a bid to assist the authorities to cope with the 2009 recession. We expect FX reserves to climb to USD3.8bn (5.6m of import cover) by year-end.

Following the 2009 recession, the FY2010/11 budget was highly expansionary with the budget deficit (excluding grants) increasing to 16.4% of GDP (14.7% of GDP in FY2009/10). This served to confirm the government’s resolve to revive growth. Infrastructure and agriculture were central to the budget. Infrastructure spending, to remove bottlenecks in the economy, increased 37.3% to TZS1.51tr. This has seen the development budget, which the government plans to finance through a combination of domestic and external borrowing, rise to TZS1.33tr, or 11.2% of GDP in FY2010/11 (9.4% of GDP in FY2009/10). Agriculture expenditure increased by 35.5% to TZS904bn in support of the government’s agricultural initiative, Kilimo Kwanza.

With the economy still recovering from the 2009 reces-sion and the elections a month away, we expect the BOT to maintain its expansionary monetary policy bias. Disin-flation thus far this year, which we expect will continue through year-end, gives the BOT further scope to main-tain an expansionary policy bias. Indeed, the magnitude of disinflation has led us to revise our inflation forecast from 7.0% y/y to 5.1% y/y at year-end. We expect food inflation to continue being the key driver of disinflation in coming months as food supply remains favourable. Food supply will probably get a further boost from favourable rains and the government’s investment in its Kilimo Kwanza initiative. Inflation declined to 6.3% y/y in Jul 10 from 7.2% y/y in Jun 10. Disinflation was spearheaded by food inflation that decreased to 5.6% y/y in Jul 10 from 7.1% y/y in Jun 10.

Balance of payments: C/A deficit to persis Current account developments

Fiscal policy: expansionary fiscal policy bias Central government budget

Monetary policy: continued disinflation Inflation and interest rates


Source: Tanzania Ministry of Finance

Source: Bank of Tanzania, Tanzania National Bureau of Statistics

Tanzania

-3,600

-2,375

-1,150

75

1,300

2004 2005 2006 2007 2008 2009 2010f 2011f

Trade balance Services Income

Transfers C/A

USD m

% of GDP 2009/2010 2010/2011



- Wages 5.9 6.2

- Interest 1.4 1.1

- Development 9.4 11.2




0.0

5.0

10.0

15.0

20.0

Jan-04 Aug-05 Apr-07 Nov-08 Jul-10

91-day Headline inflation (y/y)

%



Over a 6-m horizon we expect rates to continue pushing lower. With rates already very depressed at the short end of the curve, we expect much of the downward drift to come from the long end of the curve. The predominant driving force behind lower rates is likely to be the authori-ties’ expansionary monetary policy bias in their bid to resuscitate GDP growth. In our view, this policy bias will likely remain in place for at least the rest of the year. Muted credit extension to the private sector by commer-cial banks (15.1% y/y in Jun 10 compared to 32.8% y/y in Jun 09) coupled with the steepness of the curve should lead to continued robust commercial bank demand for government securities. This in turn is likely to also help pull rates lower. Furthermore, the benign inflation outlook is also conducive for lower rates in the months ahead.

We are less constructive on TZS strength than before and now expect USD/TZS to remain above 1,500 for the rest of the year. We are targeting 1,590 by year-end, with risks lying firmly to the upside. We expect USD/TZS up-side to be predominantly driven by broad-based USD strength. Further upward pressure on USD/TZS is likely to emanate from donors withholding disbursements until after the elections. The reluctance of the BOT to use FX reserves to meet USD demand in the market further supports USD/TZS upside. The BOT prefers trade-weighted TZS weakness, having earlier adopted a weak exchange rate policy designed to revive economic growth.

In line with EM equity markets, the DSE remained rela-tively flat over the last 3-m. We expect this trend to con-tinue for the remainder of the year. Subdued market ac-tivity is likely to be a function of global growth concerns which will only be exacerbated by the domestic market’s illiquidity and the upcoming elections. However, Tanza-nia’s growth prospects should support the DSE as com-pany earnings improve. We expect a flurry of treasury bond listings, given the government’s expansionary pol-icy bias and the probable withholding of disbursements by donors. In Q2:10, treasury bond listings increased by 183% to TZS241bn from Q1:10 levels. Following the elections, we expect parliament to continue with its re-view of the Capital Markets and Securities Act. The re-view in part aims to develop an Enterprise Growth Market segment on the DSE for smaller businesses.

Bond curve outlook: bull flattening Changes in yield curve

FX outlook: set to remain above 1,500 USD/TZS: forwards versus forecasts

Equity market: increase in government bonds Dar es Salaam Stock Exchange



Source: Reuters

Tanzania

0.0

3.8

7.5

11.3

15.0

35-d 91-d 182-d 364-d 2-y 5-y 7-y 10-y

6-m forecast 11-Aug-10 06-Jul-10

YTM

1,000

1,065

1,130

1,195

1,260

Jan-07 Oct-07 Jun-08 Feb-09 Oct-09 Jul-10

DSE

Index

1,050

1,213

1,375

1,538

1,700


USD/TZS




Tanzania: annual indicators

Notes: pe — period end; pa — period average, nr — not rated

Source: Bank of Tanzania, Tanzania National Bureau of Statistics, Bloomberg, Standard Bank Research

Tanzania

2005 2006 2007 2008 2009 2010f


Nominal GDP (TZSbn) 15,965 17,941 20,948 25,337 29,961 34,200


GDP / capita (USD) 393 382 441 538 556 557

Real GDP growth (%) 7.4 6.7 7.1 7.4 6.2 6.8

Gold production ('000 Kg) 47.3 39.7 40.2 46.5 48.2 53.6

Tobacco production ('000 MT) 47.0 52.0 44.0 50.8 58.7 60.0

Coffee production ('000 MT) 54.8 43.1 68.3 50.0




Balance Of Payments Exports of goods and services (USDbn) 3.0 3.4 4.1 4.7 5.2 5.7




- % of GDP -6.1 -8.0 -9.4 -13.7 -7.5 -7.7


- FDI (USDbn) 0.5 0.6 0.7 0.7 0.6 0.8




Sovereign Credit Rating S&P nr nr nr nr nr nr





BOT discount rate (%) pa 15.6 16.0 19.9 14.2 10.1 7.6

BOT discount rate (%) pe 19.3 20.1 16.4 16.0 3.7 7.6

3-m rate (%) pe 14.7 14.4 10.2 11.3 6.1 2.4

1-y rate (%) pe 15.7 15.6 14.3 13.0 8.8 5.4

2-y rate (%) pe 16.9 18.5 15.0 14.4 10.9 8.1

5-y rate (%) pe 17.0 15.2 17.8 16.4 13.5 8.6

USD/TZS pa 1,123 1,251 1,241 1,199 1,325 1,466

USD/TZS pe 1,150 1,265 1,154 1,318 1,340 1,590

REER pa 157.6 167.5 170.0 172.4 166.8 169.5

NEER pa 157.7 171.0 176.0 186.3 179.9 189.9



54.0 34.3


2011f

43.1

38,305

24.4

565

7.2

57.1

62.7

65.2

-16.2

-10.8

9.6

37.2

6.3

8.9

-2.6

-1.9

-7.8

3.6

1.1

-3.3

4.2

5.7

nr

nr

B-

4.8

4.5

30.8

33.9

8.0

8.5

3.5

5.0

7.0

7.5

1,573

1,555

167.6

186.2



Uganda: focus turns to elections

The Feb 11 elections are likely to dominate investor fo-cus over the next 6-m. As we were expecting, in Aug 10 President Museveni announced his intention to seek a fourth term in office, following the 2005 removal of presi-dential term limits. His ruling National Resistance Move-ment (NRM) will probably endorse him as its presidential candidate at the party’s conference this month. The 2011 election could be highly competitive, given the discovery of oil in 2006. The NRM should face stiff competition fol-lowing the consolidation of the opposition. Some opposi-tion parties have joined forces to form the Inter-Party Co-operation (IPC) coalition. Kizza Besigye, who has failed to beat Museveni at the previous two elections, is ex-pected to be picked as the opposition’s presidential can-didate.

We have revised our growth forecast for 2010 from 7.7% y/y to 7.0% y/y. This follows the deeper-than-expected fall in growth in 2009, coupled with faltering global growth prospects. Nonetheless, we remain constructive on growth and the benign inflation environment underpins our view. The authorities’ expansionary policy bias, which should remain in place until the elections, will continue to gain more traction. Government’s expansionary fiscal policy bias will see increased government investment expenditure in infrastructure-related projects in the en-ergy and hydrocarbon sectors, in line with the National Development Plan. Expansionary monetary policy will continue to buoy credit extension to the private sector which should boost PCE and GFCF. A weak UGX and improving regional growth prospects will likely boost Netex.


Political risk: focus shifts to the elections Election results (2006)

GDP growth: robust growth still on the cards Composition of GDP

Notes: pe — period end; pa — period average Source: Bank of Uganda, Uganda Central Statistics Office, Standard Bank Research, Bloomberg

Source: Bank of Uganda, Standard Bank Research


Yoweri Kaguta Museveni NRM 59.3

Kizza Kifeefe Besigye FDC 37.4

John Ssebaana Kizito DP 1.6


National Resistance Movement (NRM) 205

Forum for Democratic Change (FDC) 37

Democratic Party (DP) 8

Total 319

Abed Bwanika Independent 1.0

Other 60

Miria Kalule Obote UPC -

Uganda People’s Congress (UPC) 9

Source: The Electoral Commission of Uganda

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 7.0 7.0 8.8 8.8 8.8 CPI (% y/y) pa 3.4 4.1 5.3 5.1 3.9

M3 (% y/y) pe 33.6 35.8 36.3 37.7 38.4



3-m rate (%) pe 4.6 4.6 4.6 4.8 5.1

5-y rate (%) pe 9.4 9.2 8.7 8.9 9.5

USD/UGX pe 2,275 2,290 2,415 2,395 2,390

REER pa 111.2 111.8 120.3 119.6 119.2

USD/UGX vol (20 day) 8.3% 7.9% 7.9% 7.9% 7.9% NEER pa 125.2 126.0 135.3 134.4 134.0

CA/GDP (%) pe -0.8 -1.1 -1.3 -1.5 -1.7

Q2:10

7.0 4.9

30.2

-0.4

2.9

7.8

4.4

8.9

2,280

111.5

125.4 11.0%

Q1:10

7.0 8.2

21.4

0.1

2.8

7.5

4.0

8.8

2,080

100.6

118.1 10.3%

Q4:09

5.2 12.1

17.5

0.4

2.8

5.7

5.5

14.1

1,900

99.9

114.3 7.9%

Q3:09

5.2 12.9

26.1

-4.9

2.8

5.6

6.8

14.1

1,923

106.8

121.5 9.3%

Q4:11f

8.8 3.3

39.3

-1.6

3.8

8.2

5.5

9.9

2,385

118.6

133.8 7.9%

Q2:09

5.2 12.7

25.0

-5.2

2.4

5.1

6.3

14.1

2,055

113.4

126.2 17.1%

Q1:09

5.2 14.5

24.9

-5.6

2.4

5.1

12.8

14.0

2,105

103.2

112.7 16.2%

-10.0

-3.8

2.5

8.8

15.0

2001 2003 2005 2007 2009 2011f

PCE GCE GFCF

Stocks Netex GDP

y/y



With the C/A deficit widening by 46.2% to USD582m in Q2:10 from Q1:10, we maintain our expectation of a de-terioration in the C/A in 2010. We forecast a C/A deficit of 1.1% of GDP in 2010, from a surplus of 0.4% of GDP in 2009. The C/A is likely to be weighed down by the trade balance. Imports will probably remain robust, supported by the government’s infrastructure development pro-gramme. Exports, however, should be buoyed by a weak UGX and improving regional growth prospects, but will fail to match imports. Income and service payments are also expected to add to the widening of the C/A deficit, FDI into the hydrocarbon sector should remain robust as commercial oil production draws closer. We maintain our FX reserves forecast for 2010 at USD3.2bn (8.6 months of import cover).

The FY2010/11 budget was underpinned by the National Development Plan (NDP). The NDP, launched in Apr 10, aims to hoist Uganda to middle-income status by 2015. A key goal of the NDP is infrastructure development. Ac-cordingly, the FY2010/11 development budget increased to 7.6% of GDP. Much of this budget is expected to be financed through external borrowing. With the com-mencement of commercial oil production drawing closer, investors will likely focus their attention on the develop-ment of the National Oil and Gas Policy by the MoF. The government wants to ensure that a robust policy frame-work is in place to prudently manage oil revenues in or-der to achieve Uganda’s developmental ambitions. As part of this process, the government has amended tax legislation in preparation for oil revenues.

Our inflation forecast produced in May 10 proved to be too bearish. We are now more bullish on future inflation, following the significant disinflation thus far this year. Inflation dipped further to 3.2% y/y in Jul 10 from 4.4% y/y in Jun 10. We expect inflation to continue pushing lower in Q3:10, bottoming out below 3.2% y/y, on ac-count of sanguine food inflation. However, in Q4:10, we expect inflation to reverse and subsequently accelerate to 4.6% y/y by year-end. An anticipated increase in elec-tion spending should contribute to upward pressure on inflation. Brent crude oil prices are expected to rise above USD90/bbl in Q4:10 which should add additional upward pressure on inflation. However, a benign inflation envi-ronment in the near term will allow the authorities to maintain an expansionary monetary policy bias at least until after the elections.

Balance of payments: C/A deficit to persist Current account developments

Fiscal policy: managing the oil windfall Central government budget

Monetary policy: favourable inflation outlook Inflation and interest rates


Source: Bank of Uganda, Uganda Bureau of Statistics

Source: Ministry of Finance, Standard Bank Research

Uganda

-3,000

-1,725

-450

825

2,100

2000 2002 2004 2006 2008 2010f


Transfers C/A

USD m

% of GDP 2009/2010 2010/2011



- wages 3.8 3.4

- interest 1.0 0.9







-5.0

6.3

17.5

28.8

40.0

Jan-07 Nov-07 Oct-08 Aug-09 Jul-10

Headline Food 91-day

%



In line with the BOU’s expansionary monetary policy, we expect rates to push lower over a 6-m horizon. In our view, much of the downward drift will be at the long-end of the curve, given where long-dated yields are currently. We expect positive real returns being offered across the curve to maintain robust investor demand for government paper. The bid:cover ratio for T-bills has averaged 3.0 YTD, compared to 2.9 in the last 6-m of 2009. In addition to robust demand for government securities, a benign inflation outlook will also help pull yields lower. We ex-pect the BOU’s expansionary monetary policy bias to remain in place at least until after the election next year.

We forecast USD/UGX to end the year higher at 2,290. The return of broad-based USD strength over a 6-m hori-zon will probably be the main driver of UGX weakness in coming months. Corporate USD demand and the likeli-hood of donors withholding disbursements prior to next year’s election should provide further impetus for UGX weakness. A weak UGX should help boost aggregate demand through exports. We expect investors to con-tinue closely watching events surrounding the standoff between the government and Heritage Oil, regarding the latter’s tax liability. Any indications that the dispute is unlikely to be resolved amicably are likely to weigh on investor sentiment. Investor sentiment will also hinge on Al Shabaab terrorist threats. If terror attack threats mate-rialise and are directed at the oil and/or tourism sectors, we are likely to see further USD/UGX upside.

The USE has appreciated by 47.2% (21.4% USD terms) since Q3:09. Much of this rise we suspect has been on the back of investor attraction to Uganda’s growth poten-tial as oil production draws closer. However, for the re-mainder of the year we expect the USE to plateau around current levels, with risks lying to the downside. Investor appetite is likely to be muted due to pending elections and faltering global growth prospects. Tullow Oil expects to cross-list on the USE in October, following the submis-sion of its application to the Capital Markets Authority in Sep 10. Thus far there are no indications that the tax dispute between the government and Heritage Oil will derail these plans. If Tullow Oil successfully cross-lists on the USE, its market capitalisation will top that of the Nai-robi Stock Exchange. To avoid market distortions, the USE is likely to create a foreign index.

Bond curve outlook: bull flattening Changes in yield curve

FX outlook: USD/UGX set to push higher USD/UGX: forwards versus forecasts

Equity market: Tullow Oil to cross-list Uganda Stock Exchange

Source: BOU, Standard Bank Research


Source: Reuters

Uganda

3.0

5.5

8.0

10.5

13.0

91-d 182-d 364-d 2-y 3-y 5-y 10-y

21-Jul-10 25-Aug-10 6-m forecast

YTM %

580

718

855

993

1,130

Jan-06 Dec-06 Nov-07 Oct-08 Sep-09 Aug-10

USE

Index

1,500

1,775

2,050

2,325

2,600


USD/UGX




Uganda: annual indicators

Notes: pe — period end; pa — period average; nr — not rated

Source: Bank of Uganda, Uganda Central Statistical Service, Standard Bank Research, Bloomberg

Uganda

2005 2006 2007 2008 2009 2010f


Nominal GDP (UGXbn) 17,878 20,166 23,351 28,176 34,166 38,300


GDP / capita (USD) 370 430 425 471 550 544

Real GDP growth (%) 10.0 7.0 8.1 10.4 5.2 7.0

Coffee production ('000 Tonnes) 158.1 133.1 175.3 211.8 200.3 227.3

Gold production (Kgs) 5,861 6,921 7,200 7,600 8,100 8,500

Tea production ('000 Tonnes) 44.9 42.8 30.4 33.1




Balance Of Payments Exports of goods and services (USDbn) 1.52 1.67 2.54 3.43 3.82 4.29



Current account (USDbn) -0.01 -0.38 -0.47 -0.80 0.06 -0.21

- % of GDP -0.1 -3.4 -3.5 -5.7 0.4 -1.1


- FDI (USDbn) 0.38 0.64 0.73 0.80 0.60 0.80





S&P nr nr nr nr B+ B+


Fitch nr nr nr nr B B



BOU policy rate (%) pa 15.2 14.8 15.8 16.5 12.4 8.0

BOU policy rate (%) pe 14.5 16.3 14.7 19.4 10.1 8.3

3-m rate (%) pe 7.70 9.46 8.45 12.50 5.47 4.60

1-y rate (%) pe 9.94 10.94 13.14 18.45 9.05 6.00

2-y rate (%) pe 13.27 14.20 12.50 14.78 12.26 8.05

5-y rate (%) pe 15.12 14.40 13.85 14.07 12.67 9.20

USD/UGX pa 1,781 1,823 1,716 1,945 2,023 2,210

USD/UGX pe 1,817 1,740 1,690 1,733 1,900 2,290

REER pa 100.0 101.8 100.1 100.0 105.6 108.8

NEER pa 101.4 104.8 103.5 104.7 118.7 123.7



37.7 34.3


2011f

33.05

43,356

19.1

577

8.8

249.5

8,750

35.7

-5.3

-2.8

17.7

15.4

4.98

5.51

-0.89

-0.36

-1.6

1.84

1.30

4.9

3.75

8.2

B+

nr

B

4.40

3.20

36.80

39.30

8.4

8.5

5.50

6.80

8.80

9.90

2,275

2,385

119.3

134.1



Zambia: rising yield rates could rekindle carry attraction

The perceived close association between President Banda and former President Chiluba continues to embroil the government in controversy and accusations of abet-ting corruption. In 2007, a British court ordered Chiluba to repay some USD58.0m he was accused of stealing while in office. However, a Lusaka High Court recently ruled that it could not enforce an order issued by a court in another country, seemingly absolving him of wrong-doing. In 2009, a decision by the chief prosecutor not to appeal Chiluba’s acquittal in another case sparked riots and widespread condemnation of the government by the donor community. These events have created the im-pression that President Banda is interfering with the judi-ciary to protect Chiluba. In addition to verbal condemna-tion, some donors have withheld aid disbursements in protest.

We have raised our GDP growth forecast to 7.0% y/y in 2010. In addition to ensuring that mine expansion pro-jects would continue, thereby underpinning production growth, higher copper prices have encouraged further copper exploration. Similarly, the global demand for com-modities remains buoyant, encouraging exploration for other commodities in the country. Hence, investment spending will likely underpin GDP growth as well. Net exports, supported by a rise in copper exports, will proba-bly subtract less from GDP this year, possibly becoming a net addition to GDP growth in 2011. Even the 6.7% y/y growth forecast for 2011 may turn out to be conservative, given the amount of new production capacity coming on stream that year. The agricultural sector has grown strongly recently, the resultant maize surplus prompting the government to start exporting maize.

Political risk: perceptions of abetting corruption Election results

GDP growth: strong upside Composition of GDP


Notes: pe — period end; pa — period average Source: Bank of Zambia, CSO, IMF, Standard Bank Research

Source: Ministry of Finance, Standard Bank Research

Presidential election 2008 Party % of votes

Rupiah Banda MMD 40.1

Michael Sata Patriotic Front 38.1

Hakainde Hichilema UPND 19.7

Parliamentary election 2006 Seats % of votes

Movement For Multiparty Democracy 74 46.5

Patriotic Front 44 27.7

United Democratic Alliance 27 17.0

Total 159 100

Godfrey Miyanda Heritage Front 0.8

United Liberal Party 2 1.3

Source: Electoral Commission of Zambia

Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f

GDP (% y/y) pa 6.8 7.2 7.1 6.8 6.5 CPI (% y/y) pa 8.1 7.6 8.4 9.5 10.0

M3 (% y/y) pa 25.2 27.4 26.1 22.4 18.4



3-m rate (%) pe 6.9 7.1 7.4 7.9 8.7

5-y rate (%) pe 16.3 12.8 13.0 13.3 13.1

USD/ZMK pe 5,003 5,057 5,011 5,149 5,418

REER pe 118.8 118.7 119.0 118.8 118.2

USD/ZMK vol (20 day) 13.3% 10.4% 10.4% 10.4% 10.4%

NEER pe 89.2 88.1 87.9 87.4 85.1

CA/GDP (%) pe -6.2 -5.9 -7.2 -8.4 -8.0

Q2:10

6.9 8.7

22.8

-6.4

2.19

4.1

6.1

16.5

5,123

117.3

88.7

17.9%

Q1:10

7.1 9.8

8.9

-7.1

2.07

3.9

5.5

16.9

4,682

124.5

94.0

10.4%

Q4:09

6.8 11.2

8.1

-7.3

1.91

4.5

5.0

17.1

4,662

122.5

94.2

9.7%

Q3:09

7.6 13.7

19.2

-7.5

1.78

4.2

15.2

20.0

4,720

121.0

95.0

10.2%

Q4:11f

6.4 10.4

21.1

-8.2

2.50

4.2

9.8

13.3

5,504

118.3

84.8

10.4%

Q2:09

6.4 14.4

21.1

-6.5

1.14

2.7

13.7

19.0

5,150

115.6

91.3

18.0%

Q1:09

4.3 14.4

25.7

-7.9

0.94

2.2

13.9

19.5

5,580

119.8

96.0

11.3%

-1.5

0.8

3.0

5.3

7.5

2003 2005 2007 2009e 2011f

%

GCE PCE GFCF Netex GDP



The strength of the trade balance, benefiting from the high copper price, is likely to limit the C/A deficit to 5.9% of GDP this year. Cumulatively, the 12-m trade balance recorded a surplus of USD1.56bn in Jun, having swung from a deficit of USD87m in Aug 09. The swing in the trade balance, amounting to about 10% of GDP, had no impact on FX reserves, which remained in a USD1.7bn - USD1.9bn range between Aug 09 and Jun 10. A surge in net service payments, due to the ongoing mineral explo-ration, mine expansion and development projects proba-bly partly accounts for the leakage in the BOP. Net in-come outflows are probably elevated as well, as mine companies repatriate dividends to off-shore parent com-panies. Hence FX reserves are likely to rise to USD2.1bn (4.8 months of imports) by Dec 10 from USD1.96bn in Jul, a smaller increase than we were originally expecting.

Even if revenues were to perform in line with the budget, chances are that the government would struggle to fi-nance the budget deficit. The surge in the copper price has probably indirectly boosted revenue collection some-what through personal income and company income taxes. However, it is probably customs and excise duty together with VAT on imports, boosted by the recovery in imports, that has supported revenues. Meanwhile, net domestic borrowing through T-bill and T-bond auctions is likely to be much lower than the budgeted ZMK1,487bn. As of Aug, net issuance was about ZMK400bn. Net issu-ance of paper has declined markedly since Apr, with still-erratic demand for paper coupled with attempts by the BOZ to keep yields low by rejecting some bids depress-ing issuance. Additionally, donors have been frequently delaying disbursements in protest against corruption.

We expect the BOZ to continue withdrawing liquidity from the banking system. Granted, inflation, which declined to 8.2% y/y in Aug from 8.4% y/y in Jul, appears on track to fall below 8.0% y/y during Q4:10. The downtrend from the 16.6% y/y peak in Dec 08 has not been uniform. Up-ward food inflation pressures appeared several times, intimating the end of the disinflationary trend, only to dis-sipate soon thereafter. But at 2.9% y/y in Aug, food infla-tion is about to reach the bottom in this cycle. Even the more than doubling of the oil price from the bottom in early 2009 has not jump-started broader inflationary pres-sures. Evidently, food disinflation has been a dominant factor driving headline inflation. But the disinflationary forces are likely to abate, with upside pressure becoming dominant as evidenced by the 25.0% increase in some electricity tariffs.

Balance of payments: strong trade balance Current account developments

Fiscal policy: funding shortfall likely Central government budget

Monetary policy: tightening bias Inflation and interest rates


Source: IMF, Zambia Ministry of Finance

Source: CSO, Bank of Zambia, Standard Bank Research

Zambia

-2,600

-1,500

-400

700

1,800

2005 2006 2007 2008 2009 2010f 2011f

USD m


Transfers C/A

% of GDP FY09 FY10



- Interest 1.5 2.1






0.0

12.0

24.0

36.0

48.0

Jan-04 Mar-05 Jun-06 Sep-07 Dec-08 Mar-10

%

91-d Broad money (y/y) Inflation (y/y)



Yield rates have risen at the short end of the yield curve, while falling at the very long end over the past 4-m. We believe this trend is likely to continue over the remainder of this year, possibly pushing 91-d yields up by some 200 bps, while 15-y yields could fall by 185 bps. The possibil-ity that inflation will be bottoming out calls for some re-moval of the excess liquidity the BOZ has injected into the banking system. The loose policy stance the BOZ adopted in 2009 seems to have worked. Money supply growth, boosted by a surge in demand deposits rather than foreign currency deposits, jumped to 26.6% y/y in Jun from a low of 5.4% y/y in Jan. As the BOZ withdraws liquidity, short-term rates are likely to push higher. But with inflation likely to remain subdued over the coming 6-m, we expect long-dated T-bond rates to decline further.

Directionally, 5,200 is the USD/ZMK target in 6-m. Cop-per prices at current levels are still decidedly bullish for the ZMK. Yet flux in global sentiment still plays a large role in swaying USD/ZMK. Even intervention by the BOZ has had some influence in recent months, causing move-ments in USD/ZMK to be divorced from copper price movements. The BOZ would probably prefer to see a weaker ZMK on a trade-weighted basis. Yet by our calcu-lations the NEER is at about the same level as mid-09. Hence, with tighter monetary policy bias likely to emerge, we would expect less BOZ intervention in the months ahead. As yields rise again, portfolio investors are likely to be attracted back to the local rates market, causing a stronger correlation between USD/ZMK and copper prices to be re-established. The upshot is that USD/ZMK volatility is likely to remain high in the months ahead.

The uptrend in the Lusaka Stock Exchange All Share Index has been far too modest thus far, amounting to a 4.1% increase since the end of 2009. The case for a stronger uptrend has been bolstered by negative real short-term interest rates. Even though rates have risen at the short end of the curve, in terms of prospective re-turns, it still seems highly probable that equities will out-perform fixed income over the coming year. This should encourage a portfolio reallocation process by local inves-tors, leading to a bid for equities. While other EM and frontier markets have risen strongly, the subdued per-formance of the local market suggests that there are un-dervalued counters in the market. Of course, foreign port-folio investors would face limits like low market capitalisa-tion when considering the market.

Bond curve outlook: more rotation Changes in yield curve

FX outlook: volatility to remain high USD/ZMK: forwards versus forecasts

Equity market: trending higher Lusaka Stock Exchange

Source: Bank of Zambia, Standard Bank Research



Zambia

0.5

5.5

10.5

15.5

20.5

91-d 3-Y 5-Y 8-Y 11-Y 14-Y

YTM (%)

23-Apr-10 20-Aug-10 6-m forecast

600

1,675

2,750

3,825

4,900

Jan-06 Feb-07 Apr-08 Jun-09 Aug-10

Index

LSE

2,950

3,675

4,400

5,125

5,850


USD/ZMK




Zambia: annual indicators

Notes: pe — period end; pa — period average; nr — not rated; na — not available

Source: Bank of Zambia, CSO, IMF, Ministry of Finance, Standard Bank Research

Zambia

2005 2006 2007 2008 2009 2010f

Output


Nominal GDP (ZMKbn) 31,945 38,464 46,195 55,079 64,326 74,338


GDP / capita (USD) 640 921 958 1178 991 1,149

Real GDP growth (%) 5.2 6.2 6.2 5.7 6.3 7.0

Copper production (‘000 tons) 446 497 522 612 698 776

Cobalt production (tons) 5,537 4,659 4,885 4,616 5,878 7,421


Budget balance / GDP (%) -2.6 18.5 -1.2 -2.5 -3.7 -2.9 Domestic debt / GDP (%) 19 20.2 19.2 17.2 16.4 15.8 External debt / GDP (%) 68.7 5.7 5.9 5.2 10 9.8

Balance Of Payments

Exports (USDbn) 2.25 3.93 4.51 4.96 4.34 6.29

Imports (USDbn) 2.16 2.64 3.61 4.56 4.21 5.16



- % of GDP -10.0 -0.7 -8.3 -9.0 -7.3 -5.9


- FDI (USDbn) -1.57 -1.59 0.84 0.79 0.83 0.85









Consumer inflation (%) pa 18.3 9.1 10.7 12.4 13.5 8.6 Consumer inflation (%) pe 15.9 8.2 8.9 16.6 9.9 7.8 M3 money supply (% y/y) pa 12.9 15.9 33.5 27.7 18.5 21.1 M3 money supply (% y/y) pe 0.2 45.0 26.6 21.8 20.6 30.1 Policy interest rate (%) pa 17.18 11.36 13.11 15.20 15.10 8.62 Policy interest rate (%) pe 17.31 11.12 13.41 15.58 7.05 9.08 3-m rate (%) pe 15.31 9.12 11.41 13.58 5.05 7.08 1-y rate (%) pe 17.08 11.14 13.89 18.53 11.83 8.59 2-y rate (%) pe 19.00 10.55 14.40 16.58 14.40 11.30 5-y rate (%) pe 24.93 13.58 15.70 18.99 17.07 12.80 USD/ZMK pa 4,364 3,541 3,966 3,731 5,032 4,900 USD/ZMK pe 3,340 4,390 3,830 4,785 4,662 5,057 REER pa 100.0 133.8 126.3 147.3 119.8 121.1 NEER pa 100.0 126.6 112.9 126.8 94.6 91.4

2011f

13.60

86,441

16.43

1,208

6.7

892

7,792

-3.3

16.5

10.3

6.60

5.94

0.67

-1.35

-8.2

1.74

0.95

-2.4

2.50

4.2

nr

nr

B-

9.6

10.1

22.0

22.8

10.32

11.80 9.80

10.49

12.40

13.30

5,262

5,504

118.6 86.8



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The analyst(s) who prepared this research report (denoted by an asterisk*) hereby certifies(y) that: (i) all of the views and opinions expressed in this research report accurately reflect the research analyst's(s') personal views about the subject investment(s) and is-suer(s) and (ii) no part of the analyst’s(s’) compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research report.

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General

This research report is based on information from sources that Standard Bank Group believes to be reliable. Whilst every care has been taken in preparing this document, no research analyst or member of the Standard Bank Group gives any representation, war-ranty or undertaking and accepts no responsibility or liability as to the accuracy or completeness of the information set out in this docu-ment (except with respect to any disclosures relative to members of the Standard Bank Group and the research analyst’s involvement with any issuer referred to above). All views, opinions and estimates contained in this document may be changed after publication at any time without notice. Past performance is not indicative of future results. The investments and strategies discussed here may not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of in-vestments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Members of Standard Bank Group may act as placement agent, advisor or lender, make a market in, or may have been a manager or a co-manager of, the most recent public offering in respect of any investments or issuers referenced in this report. Members of the Standard Bank Group and/or their respective directors and employees may own the investments of any of the issuers discussed herein and may sell them to or buy them from customers on a principal basis. This report is intended solely for clients and prospective clients of mem-bers of the Standard Bank Group and is not intended for, and may not be relied on by, retail customers or persons to whom this report may not be provided by law. This report is for information purposes only and may not be reproduced or distributed to any other person without the prior consent of a member of the Standard Bank Group. Unauthorised use or disclosure of this document is strictly prohib-ited. By accepting this document, you agree to be bound by the foregoing limitations. Copyright 2010 Standard Bank Group. All rights reserved.

Standard - African Markets Revealed Sep 2010

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Transcript of Standard - African Markets Revealed Sep 2010