Africa Market Update August 2015

A financial Advisory Company

AUGUST 2015 MARKET UPDATE – AFRICAKENYA | ANGOLA | TANZANIA | UGANDA | RWANDA | ETHIOPIA


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

KENYA MARKET UPDATE

OBAMA’S VISIT AND GES: SPOTLIGHT ON GROWTH TAILWINDS AND HEADWINDS



Solar EnergyKenya’s Ministry of Energy signed a KES 221.9 Bln ($2.2 Bln) deal with American �rm, Skypower, for the development of solar energy

USAID to provide KES 2.5 Bln ($25.0 Mln) Loan Portfolio Guarantee Support towards Essential Capital Consortium (ECC) which focuses on lending to social enterprise

� Equity Bank Ltd, is set to receive KES 20.2 Bln ($200.0 Mln) from the Overseas Private Investment Corporation (OPIC) to lend to youth and women led SMEs

� Chase Bank Kenya will lend over KES 58.5 Bln ($580 Mln) to SME entrepreneurs with a focus on youth and women

-Ongoing talks to extend visa validity for temporary visitors, business people and tourists in the USA

� President Obama announced a KES10.1 Bln ($100.0 Mln) fund in support of women and youth entrepreneurs

� President Obama announced the establishment of three Women Enterprise Hubs in Sub-Saharan Africa in Kenya, Zambia and Malawi

1 5yr yrsfrom to

Women & YouthEntreprise

Small & MediumEntreprise

Social Enterprise

Source: The East African Weekly, Business Daily Kenya, techmoran.comCurrency conversion: 1$ = KES 100.9

Kenya hosted the sixth Global Entrepreneurship Summit (GES) in July 2015 - the first to be held in Sub-Saharan Africa. The summit saw a number of deals signed inluding, but not limited to, those highlighted below:



POLITICAL OUTLOOK

1 The East African July 25 – 31, 2015 2 Reuters April 01st, 20153Institute of Certified Public Accountants Kenya, October 2014 4British Broadcasting Corporation December 16th, 2014

Es�mated amount that Kenya loses annually to corrup�on3

USD 681.1M

Corruption and Constrained Civil Society Space Blight Kenya’s Profile

President Obama highlighted the cost of corruption and constrained space for civil society as challenges to Kenya’s economic growth and democracy, respectively. Obama’s sentiment came on the back of the naming of 175.0 government officials, including at least three Cabinet Secretaries2, in alleged corruption scams by the country’s anti-graft body.

The Kenyan government’s approach to civil activism also came under the spotlight despite President Obama lauding progress made in broadening democratic space through the constitution promulgated in 2010. His comments came against the backdrop of deregistration of 510.0 Non-Governmental Organizations in December 2014 in anti-terror efforts4.

Can Kenya Build on Gathered Momentum?

The visit by President Obama galvanized Kenyans from all walks of life with a collective sense of national pride. The onus now lies on the country to consolidate and further gains made. A great deal remains to be done to bridge socio-economic gaps between urbanized centers such as Nairobi and Mombasa and those historically marginalized such as Garissa. Equitable resource allocation and implementation of development projects could be a game changer in addressing the growing challenge of radicalization of youth in such marginalized areas.

Snapshot of Regional Disparities

Nairobi

Garissa

Nairobi

Garissa

11.6

0.1

44.1

72.4

Electricity penetra�on as % of Households

Paved Roads as % of Total County Roads

Anti-terror Efforts Tops Agenda

The visit by the President of the United States, Barrack Obama, to Kenya and Ethiopia served as major boost for the two countries on the frontline of anti-terror efforts in the Eastern African region. Whereas the amount of additional funding from US Government to Kenya agreed upon following Obama’s visit remains undisclosed, we note that Kenya is set to receive USD 100.0 Million in counter terror aid funding in 2015 up from USD 38.0 Million in 20141.

On the whole, Obama’s visit was significant in the following ways:• It was the first visit by a sitting USA President to Kenya

and augments StratLink Africa’s view that the two countries are ending an era of Lukewarm relations.

See our June 2015 Market Update - http://www.stratlinkglobal.com/ForceDownload.php?down-load_file=http%3A%2F%2Fwww.stratlinkglobal.com%2Fdownload%2FJune%25202015%2520Af-rica%2520Market%2520Update.pdf&download_name=June%202015%20Africa%20Market%20Update

• The visit serves as an endorsement of Kenya’s anti-terrorism efforts and increased support could play a major role in boosting investor confidence

• Kenya is the first Sub-Saharan African host of the Global Entrepreneurship Summit. This cements its position as a leading hub in the region and could further catalyse investor interest. Please see the Business Environment for analysis on Kenya’s Foreign Direct Investment vis-à-vis regional peers in 2014

MOU with USA Expected to Boost SecurityKenya and USA signed a memorandum of understanding on a Security Governance Initiative which Kenya’s Ministry of Foreign Affairs says will help bolster border security. Ken-ya’s porous borders with volatile Somalia have been widely cited as one of the country’s weak spots in counter-terror efforts. This could serve as a prop on Kenya’s risk profile which has been affected by attacks by the Somalia based Al Shabaab militia.

In the national budget for financial year 2015/16, Kenya’s government scaled up allocation to security organs by 13.8%, year-on-year, to USD 2.3 Billion.

Source: Commission for Revenue Allocation, StratLink Africa

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In the last five years (2009 – 2014), domestic consumption has experienced strong growth in Kenya posting 11.5% (CAGR) to USD 48.7 Billion compared to Ethiopia’s 10.3% to USD 37 Billion and Uganda’s 8.1% to USD 19.2 Billion6. We expect this to remain an attraction point for consumer facing investors targeting the East Africa region.

Central Bank Moves to Anchor Inflation Expectations

The Central Bank hiked its benchmark rate by another 150.0 bps on July 07th, 2015 to 11.5% and the Kenya Banks’ Reference Rate (KBRR) by 133.0 bps to 9.87%. StratLink Africa assesses that the monetary environment is fraught with inflation risk from four fronts – food prices, money supply, the weak shilling and oil prices and we are likely to see additional hiking in the near future.

The move comes as an attempt by the market regulator to anchor inflation expectations in view of what looks to be an environment fraught with risk of further uptick in the near term. Despite the July 2015 decline, inflation could nudge further towards the 7.5% CBK upper limit given three underlying factors ─ the food index, money supply and the recent trend in global oil prices.

5 UNCTAD World Investment Report 20156 Business Monitor International

Year-on-Year Growth in FDIOur July 2015 Market Update – Could There be Another Hike in the Offing? - anticipat-ed further monetary tightening: http://www.stratlinkglobal.com/ForceDownload.php?down-load_file=http%3A%2F%2Fwww.stratlinkglobal.com%2Fdownload%2FJuly%25202015%2520Af-rica%2520Market%2520Update.pdf&download_name=July%202015%20Africa%20Market%20Update

Source: Business Monitor International, StratLink Africa

Source: Central Bank of Kenya, National Bureau of Statistics, StratLink Africa

Source: UNCTAD 2015 Data, StratLink Africa

Private Final Consumption (USD Bln)

Inflation vs Food Index

BUSINESS ENVIRONMENT

Kenya Trumps Regional Peers in FDI AccelerationDespite a challenging year in 2014 characterized by terror risk, Kenya registered the strongest year-on-year growth in foreign direct investment in East Africa. This underlies our assessment that the country enjoys favourable macroeconomic environment that is bound to be a key allure for investors.

Notably, our January 2015 issue – Can East Africa’s Colossus Equal its Daunting Challenges? indicated that consumer facing industries were bound to witness high investment owing to strong growth in consumption

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ECONOMIC OUTLOOK

We note that a major FDI attraction in 2014 was Danone Food Company’s purcahse of a 40.0% stake in East Africa’s largest milk processor – Brookside Dairy5

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The food index consists the lion’s share of the Consumer Price Index at 36.1%. As such depressed rainfall heightens inflation risk.

Food Index Growth

Broad Money Supply Average Growth

Consumer Price Index Composition

Note: Parts of Western Kenya, Central Rift Valley and the South-Eastern Lowlands experienced enhanced rainfall (over 100.0% of the Long-Term Mean) in May 2015 (end of the long rains)7. This could have the net effect of toning down food inflation pressure.

Note: We assess that the 133.0 bps hike of KBRR to 9.87% in July 2015 could be an effort by CBK to clamp the bulge in money supply that is feeding into mounting inflation risk to the economy.

Source: Bloomberg, StratLink Africa


Source: National Bureau of Statistics, StratLink Africa

Food Index: Steepest Rise Since 2012

The food index registered the strongest average year-on-year growth in Q2, 2015 since Q2, 2012. According to the Famine Early Warning System January 2015 report, the country was bound to experience food stress owing to below average short rains between October and November 2014. We note that it is the first since Q4, 2013, that the food index has breached the 11.8% ceiling in year-on-year growth.

Shilling: Bartered by Domestic and External Forces

The shilling continues to exhibit weakness against the USD having touched a low of 103.7 units of exchange in July 2015. The rather rapid depreciation above the 100.0 Ksh/USD level could be an indication of investor reaction following the slide below what was widely viewed as a psychological mark (100.0 units to the USD) on July 06th, 2015.

7 Kenya Meteorological Department June 20158 National Treasury Budget Statement 2015/16

Money Supply: Bulge between June 2014 and April 2015

In the ten months between June 2014 and April 2015, broad money supply has registered the strongest growth since 2012 (in bands of ten months). We believe this can be attributed to the introduction of the Kenya Banks’ Reference Rate, in June 2014, that sought to provide commercial banks with a transparent mechanism of pricing credit. The average commercial bank lending rate is reported to have stood at 15.5% in February 2015 from a high of 16.9% in June 20148 compared to a marginal ten bps decline between the preceding seven months.



The shilling will continue experiencing headwinds given the deterioration of the country’s trade balance ─ value of exports declined by 6.6%, year-on-year, in the first four months of 2015 to USD 1.7 Billion whilst imports grew by 0.2% to USD 4.8 Billion9. The relative strengthening by the greenback also continues to be a major contributor to the trend witnessed by the shilling.

Yields remained on an uptick between June and July 2015 driven by tightening liquidity. The money market registered net liquidity withdrawal of USD 234.2 million in the first half of July 2015 (latest available data) compared to a net injection of USD 143.3 million during the same period in June 2015. Whereas the latest tightening has been driven by acitivity of the Central Bank of Kenya (CBK) and remittance of taxes by commercial banks, interest rates could also be reflecting the hawkish stance by CBK in view of underlying monetary pressures.

Yields Reflect Risk PerceptionInflation has been trending upward and edging closer to CBK’s target upper limit. The variance in the rise in yields between the short-term and long-term instruments could be indicative of investors being cautious of the short-term monetary environment. As indicated in page four (Economic Outlook), factors such as the food index, money supply and the weakening shilling are bound to keep inflation on the uptick in the near term. Intervention by CBK in the recent past could, however, be propping confidence on the long-term with yields reflecting a marginal rise. The interbank rate has been volatile with a general rise between June 2015 and July 2015 reflecting contractionary monetary policy.

Oil Prices Nudge Upward

Oil prices seem to be on a gradual upswing with the Organization of Petroleum Exporting Countries (OPEC) basket monthly average closing the first half of 2015 at USD 59.9 up from the USD 44.4 trough of January 2015.This trend is further feeding in to the country’s inflation as oil marketers pass cost to the end consumer.

Kenya Shilling vs USD

BVAL Yields’ Index

OPEC Basket Monthly Average (USD/Barrel)




Kenya Shilling change year-on-year

Kenya Shilling change month-on-month

-18.2% -6.7%

10 International Energy Agency July 20159 Kenya National Bureau of Statistics

Note: Upward pressure from oil prices could, however, be temporary given surging production (from OPEC member states) that reached a three years’ high of 31.7 Million barrels per day in June 2015. Global demand is also expected to moderate for the rest of 2015 after peaking at 1.8 Million bpd in Q1, 201510.

DEBT MARKET UPDATE



Bond turnover has also been on a general decline between May and July 2015 registering 75.7% drop between May 07th, 2015 and July 16th, 2015 to USD 7.2 Million.

Tightened liquidity in the money market has constrained investor appetite for short-term debt instruments with the monthly average of bid-to-cover ratios reflecting a decline in the last four months. This trend is likely to persist in the near term as CBK mops liquidity with a view to propping the shilling.

Further reflecting tight liquidity conditions, the reopened five year paper (July 2015) registered a performance rate of 85.9% attracting bids worth USD 128.6 Million.

Description AmountAmount Offered (USD Mln) 149.6Amount Received (USD Mln) 128.6Number of Bids Received 708.0Number of Bids Accepted 688.0Yield 14.3%

Bond Turnover (USD)

Overall Interbank Rate

Average Bid-to-Cover RatioNSE 20 Share Year-on-Year

Note: Ratings agency, Fitch, downgraded Kenya’s long-term foreign and local currency issuer default rating to negative from stable affirming them at B+ and BB-, respectively, on July 17th, 2015. This reflects a deteriorated macroeconomic climate characterized by the weakening shilling (raising the cost of dollar denominated debt) and rising domestic debt levels.

EQUITY MARKET UPDATE

Source: Central Bank of Kenya, StratLink Africa




FXD1/2015/5




NSE 20 Share Index change year-on-year

NSE 20 Share Index change month-on-month

-5.5%

-3.2%This bearish trend is likely to persist in the near term given the likelihood of further rise in fixed income yields and the weakening of the shilling. Market Remains Bearish

The market remained bearish through July 2015 with the 20 Share Index falling below the 4,700.0 mark on July 14th, 2015. Our assessment on this trend is premised on two considerations:

Domestic Investors: Domestic investors could be opting for the fixed income market owing to the steady rise in yields that is making it increasingly lucrative. Investors could be anticipating further rise in yields owing to the prevailing monetary environment which could see CBK tighten its benchmark rate further.

Foreign Investors: Foreign investors have been more skewed towards selling, a trend that is likely to be the key factor depressing the market. Foreign investors’ buy-sale ratio (in USD) deteriorated from 0.9 in June 2015 to 0.8 in July 2015. The weakening shilling could also be stoking concern amongst investors since depreciation heightens the risk of loss in dollar value terms by portfolios held at the domestically.

NSE 20 Share Index Month-on-Month

Buy vs Sale (Foreign Investors, USD)


Source: Broker Data, StratLink Africa

Safaricom Ltd, Kenya Commercial Bank, Equity Bank Ltd and East African Breweries Ltd stood out as counters reporting high activity by foreign investors in July 2015. Between July 3rd, 2015 and July 20th, 2015, Safaricom reported a net purchase of USD 293,916.2.



ANGOLA MARKET UPDATE

HAWKISH MONETARY STANCE AND CURRENCY DEVALUATION AS DEPRESSED OIL PRICES BATTER THE LOCAL CURRENCY



POLITICAL OUTLOOKRe-engineering MPLA Ahead of 2017

The ruling MPLA Party seems headed for re-engineering amidst signals that long-time President Jose Eduardo dos Santos could step down in 2017. Eduardo dos Santos has been at the country’s helm since 1979 and is reported to have called upon the party to prepare for transition in the forthcoming ballot1. In its seventh congress slated for August 2016, MPLA plans to execute major changes to its structure and composition in what could be aimed at bracing for a democratic contest. Reports indicate that 30.0% of the party’s composition will be reserved for delegates under 35.0 years while female representation will be expected to constitute at least 40.0%2.

Transition: Sailing Uncharted Waters?

Angola has had one President for 36.0 years and the prospect of transition is likely to present sentiments of uncharted waters amongst investors. By and large, there is a pervasive feeling that despite adopting multi-party democracy in 1992, there is growing concern over the country’s democratic space. In November 2013, Human Rights Watch called for investigation into what it termed as arbitrary arrest and use of excessive force in dispersing protesters perceived to be under opposition party, UNITA’s, umbrella3.

The 2010 Constitution Factor

It is also worthy of note that in 2010, the country adopted a new constitution that did away with direct election of the President. In its stead, it provides that the leader of the party with majority seats in Parliament becomes President. This, alongside the absence of Eduardo dos Santos from the next polls, could be one of the key factors necessitating a revamp of MPLA.

Recent History Could Embolden Opposition

Whereas MPLA won the 2012 election with a decisive margin, it will be noted that its share of the total vote at 71.8% was considerably lower than the 81.6% registered in the 2008 ballot4. At the same time, UNITA’s share of votes scaled up from 10.4% in 2008 to 18.7% in 20125 suggesting growing traction within the electorate. The opposition is likely to be strengthened further by the prevailing economic climate which is stoking general dissatisfaction with the government. A high cost of living manifesting in an uptick in inflation has been a key point of concern.

Inflation Trend


On June 20th, 2015, police arrested thirteen youth for an alleged plot to overthrow Eduardo dos Santo’s government.

1 Bloomberg July 3rd, 20152 Agencia Angola Press July 4th 20153 Human Rights Watch 2013

4Freedom House 20135Chatham House

Available data indicates that inflation has since crept upwards by 39.0 bps to 7.9% as at March 2015 and is likely to fan cost of living concerns among consumers.

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Our January 2015 Market Update – Tumbling Oil Prices: When the Music Stops – anticipated mounting inflationary pressure following the government’s slash of fuel subsidies from 4.0% of Gross Domestic Product (GDP) to 1.0%. We assessed that this was bound to inflict upward pressure on inflation

Whereas MPLA won the 2012 election with a decisive margin, it will be noted that its share of the total vote at 71.8% was considerably lower than the 81.6% registered in the 2008 ballot.

“

“

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3,736,000,000.0

116,900,000.0

44,100,000.0

10,400,000.0

5,800,000.0

Zimbabwe

Mauri�us

Nairobi

Nigeria Johannesburg

05555555050000000

Average Weekly Traded Volume

STOCK EXCHANGE

Es�mated amount raised by listed companies at the Nairobi Securi�es Exchange through rights issues in 2014.

USD 243.5M

For listed companies, this sort of expansion is often financed by capital raised through avenues such as rights issues; a provision that could inject new vibrancy in Angola’s private sector.

Most Active Stock Markets in Africa 2014


Securities Exchange in 2015?

Stock exchange trading could commence before the end of 2015 following interest by “some banks and telecommunications companies” in listing6. Roll out of a stock exchange had been deferred to 2017 (from 2015) citing need for companies to ‘’improve accounting records” before listing7.

New Channel for Capital Raising

An exchange will provide companies with a new channel through which to raise capital to fund growth. In the recent past, we have witnessed regional growth by domestic companies in Africa such as Equity Bank’s expansion away from Kenya and the entry of Nigeria’s beauty brand, House of Tara, into the Kenyan market.

ECONOMIC OUTLOOK

Bold Monetary Adjustments

The Central Bank has been at pains to assert its position and inject confidence as far as the monetary environment is concerned with a hawkish stance and devaluation of the local unit. The Kwanza was devalued by 6.5% on June 05th, 2015 to 117.7 units to the greenback in what could be an attempt by the government to mitigate deterioration of the balance of payments (stemming from depressed oil prices) by boosting export competitiveness.

6 Bloomberg May 07th, 20157 Bloomberg June 25th, 2014 Source: Bloomberg, StratLink Africa

Trade Balance in Goods (as % of GDP)

In June 2015, the Central Bank tightened its benchmark monetary policy rate for the second time in the year, hiking it by 50.0 bps to 9.75%. We assess this as an attempt to rein in on inflation which, as indicated in the Political Outlook, has been nudging upward. The latest hike is likely to be principally informed by the currency devaluation which is bound to feed further into elevated inflation pressure in the economy.

Earlier hike: On March 30th 2015, the Central Bank hiked the benchmark rate by 25.0 bps to 9.25%.

Source: International Monetary Fund, StratLink Africa

Monetary Policy Rate





World Bank Assistance Could Offer Respite

The economy could, however, be cushioned from elevated monetary pressures following World Bank’s support of USD 650.0 Million . This move is likely to be critical in boosting investors’ perception of the economy in the near term following a credit rating downgrade that have impacted negatively on its outlook.

February 2015: Standard&Poor’s downgraded Angola from BB- to B+ (Stable Outlook)

World Bank’s assistance could be especially critical in propping the country’s depressed foreign exchange reserves, thereby aiding in injecting some measure of resilience in the Kwanza.

8 Bloomberg June 02nd, 2015

Kwanza vs USD ExchangeOPEC Basket Price vs Foreign Exchange Reserves

Source: Bloomberg, StratLink Africa Source: Bloomberg, StratLink Africa

Kwanza change year-on-year Kwanza change month-on-month

-27.2% -5.3%

Decline in OPEC Benchmark price between June 2014 and June 2015 (Price at at June 2015 = USD 62.7/Barrel)

-41.8%



TANZANIA MARKET UPDATE

INFLATION BREACHES 6.0% MARK ON THE BACK OF OIL AND FOOD PRICES



POLITICAL OUTLOOK

New Bills Widen Rift between Government and

Opposition

Whereas passage of the new Petroleum Bill on July 05th, 2015 may have served to boost investor certainty on the market outlook, it has widened the rift between the government and opposition. Factions of the opposition have decried mischief in tabling of the bills shortly before the dissolution of parliament (which took place on July 09th, 2015) as a scheme by the government to rush the legislation through parliament.

Kicking the Can Farther Down the Road

This development comes on the back of soured relations between the government and the opposition notably in view of the drafting of a new constitution. In April 2014, factions of the opposition, under the Ukawa Group, abandoned constitution review talks alleging failure by the process to meet the peoples’ expectations. The fate of the constitutional review process remains uncertain following indefinite postponement of the referendum earlier slated for April 2015.

Shift from the Norm

The ongoing electoral cycle (referendum and October 2015 election) presents a shift from Tanzania’s traditionally toned down political temperatures. The country heads to the forthcoming election divided by the draft constitution (widely rejected by the opposition) and concern over the recent corruption scandal in the energy sector that blighted ruling Chama Cha Mapinduzi’s (CCM) profile.

CCM’s Magufuli: Kikwete’s Heir-in-Waiting?

In what stood out as a surprise development, CCM nominated Minister of Works, John Magufuli, as the Presidential candidate in view of the forthcoming polls. Magufuli is widely viewed as President Kikwete’s heir-in-waiting given that CCM has won every election since adoption of multiparty politics in 1995. We, however, retain our January 2015 assessment ─ Between Elections and Constitutional Referendum: A Nation at Crossroads


Country Remains East Africa’s Loci of FDIDespite strong growth in FDI by Kenya, Tanzania still attracts the lion’s share in the East Africa region, accounting for 37.3% of inflows. We note that in the World Bank Ease of Doing Business Index (2015), Tanzania (ranked 131 out of 189 countries) outpacing regional peers Kenya (136) and Uganda (150).

http://www.stratlinkglobal.com/ForceDown-load.php?download_file=http%3A%2F%2Fwww.stratlinkglobal.com%2Fdownload%2FJanu-ary%25202015%2520Africa%2520Market%2520Up-date.pdf&download_name=January%202015%20Afri-ca%20Market%20Update

- that hiccups encountered in view of the draft constitution could serve to disadvantage CCM in the polls.

Note: Tanzania invested in port infrastructure with new cranes, a conveyor belt and anchorage tankers helping to reduce berth and offloading time as well as congestionWorld Bank, Ease of Doing Business ReporT

Foreign Direct Investment (USD Mln)

Source: UNCTAD 2015, StratLink Africa

The country’s budding natural gas sector (with reserves estimated at 55.0 trillion cubic feet1) could also be a key driver of FDI inflows into the country placing it amongst Africa’s giants in natural gas reserves.









Natural Gas Reserves (Trln Cubic Feet)

Inflation vs OPEC Benchmark Price

2014 FDI Inflow by Country Share

Source: explorationworld.com, StratLink Africa

Source: Bloomberg, Bureau of Statistics, StratLink Africa

Source: UNCTAD 2015, StratLink Africa

Note: International Energy Agency (IEA) forecasts global demand for natural gas rising by 2.0% per annum in the next five years. StratLink Africa expects global price to be depressed in the short-term given what IEA describes as “flood of new supplies”

Note: As indicated in the Kenya Market Update, upward pressure from oil prices could, however, be temporary given surging production (from OPEC member states) that reached a three years’ high of 31.7 Million barrels per day in June 2015. Global demand is also expected to moderate for the rest of 2015 after peaking at 1.8 Million bpd in Q1, 20152.

1 Reuters, June 2015 2 International Energy Agency July 2015

ECONOMIC OUTLOOK

Inflation Nudges above 6.0% MarkInflation crossed the 6.0% mark for the first time in three quarters driven by uptick in the food index; rebounding oil prices and the weakening shilling that has led to rising costs in imported commodities. This threatens to deteriorate the country’s monetary risk environment further with the shilling having come under immense pressure against the USA dollar in the recent past. The emerging rebound in global oil prices has been a key driver of rising inflation with trends in both variables (inflation and global oil price) showing stark similarity as indicated the graph below.



As suggested by the graph below, the exchange rate plays a role in determining the trajectory of the food index especially given the country’s growing food imports. As such, inflation is bound to remain on the uptick given the weakening of the local unit.

The average interbank rate rose from 20.0% in June 2014 to 31.6% in July 2015.

Food Imports as Proportion of Total Imports (May)

T-Bill Yields

Food Index vs Shilling Exchange (Monthly Average)

Interbank Rate

Source: Bank of Tanzania, StratLink Africa



DEBT MARKET UPDATE

Liquidity continued to tighten through July 2015 sending yields further upwards with the interbank rate soaring to a high of 35.6% on July 13th, 2015. The tightening is likely to be in response to the 200.0 bps hike of the cash reserve ratio by Bank of Tanzania to 10.0% on May 21st, 2015.

Food Index: Key Challenge in the Short-termWe expect the mounting food index to present a major challenge in the country’s inflation risk environment in the near term. Over and above supply-demand factors driven by erratic weather patterns, food imports as a proportion of total imports have been rising in the recent past. This suggests that Tanzania faces greater exposure to foreign exchange driven inflation in 2015 than it has in the last two years. In May 2014, food imports grew by 19.3%, year-on-year, to USD 64.3 Million.

Source: Bureau of Statistics, Bloomberg, StratLink Africa



Shilling Exhibits Mild ResilienceThe local unit has shown mild resilience against the greenback in view of the ongoing liquidity tightening. In July 2015, the shilling clawed back some of the ground lost in the recent past but continues to exhibit volatility.

Uptake of T-Bill instruments has been constrained by liquidity with the 182.0 Day paper registering 0.01 in bid-to-cover ratio on the auction of July 15th, 2015.

Tanzania Shilling vs USD

All Share Index Year-on-Year

All Share Index Month-on-month

T-Bill Bid-to-Cover Ratios




Shilling depreciation year-on-year change

All Share Index year-on-year change-22.4% +9.9%



All Share Index month-on-month change

-9.9%



Local Investors Show Risk Averse ApproachThe market was bearish in July 2015 in what we assess could be driven by a shift by investors towards the fixed income market owing to attractive yields - Between July 01st, 2015 and July 21st, 2015, local investors accounted for 81.0% of sold volumes, compared to 72.0% and 62.0% in June and May 2015, respectively. The trend suggests that local investors could be becoming increasingly risk averse and opting for the less risk prone fixed income market.

Selling Ratio at the Exchange

The weakening of the shilling could subject the market to further bearish pressures in the months ahead as foreign investors would be prompted to opt out owing to rising risk of diminished portfolio value in dollar terms.

Source: Dar es Salaam Stock Exchange, StratLink Africa



UGANDA MARKET UPDATE

ARREST OF OPPOSITION LUMINARIES STOKES PRE-ELECTION JITTERS



POLITICAL OUTLOOK

Heightened Political Risk Following Opposition Luminaries’ Arrest

The arrest of presidential hopefuls, Kizza Besigye and Amama Mbabazi on July 9th, 20151 has poured cold water on Uganda’s political risk profile. The arrest has been ascribed to ‘illegal meetings’ further stoking concern over perceived intimidation by the ruling party ahead of the 2016 polls. The arrest comes in quick succession to Mbabazi’s launch of his presidential bid and paints a grim picture of the state of democratic space in the country.

Fractured Opposition Flaunts Coalition Card

The Human Rights Watch Report (2015) decries repression of freedoms of expression and assembly in Uganda2; a fact that is likely to loom large amongst development partners’ concerns going forward. It is worth noting that the arrest of the two opposition luminaries comes on the back of declaration (June 10th, 20153) that opposition parties would coalesce ahead of the forthcoming election.

We note that the 2011 presidential poll marked a strong reversal in the trend of Museveni’s apparent decline in share of presidential votes cast. Whereas concern abounds over the independence of the electoral commission, we expect the opposition to face an arduous task in its bid to defeat Museveni.

1 Bloomberg News, 9th July, 20152 https://www.hrw.org/world-report/2015/country-chapters/uganda3Reuters News Agency

4Bloomberg News, 1st July, 20155UNCTAD FDI Data 2015

Source: Electoral Commission, StratLink Africa

Source: UNCTAD, StratLink Africa


Uganda Shortlists 17 Oil Exploration Firms as Oil Mining Enters the Homestretch

Uganda has finally shortlisted seventeen oil exploration firms for licensing after a more than three years’ delay4. The extractive sector in Uganda has been restrained due to delays occasioned by taxation wrangles between the government and the mining companies, slowing down investments in the sector. As such, the move serves to send a signal to oil investors of the government’s commitment to tap into an estimated 6.5 billion barrels of oil resources. The government is banking on these licenses to unlock investments into the oil sector and increase Foreign Direct Investment (FDI) inflows.

FDI Net Inflows in USD Millions

In 2014, Uganda reported 4.6% growth, year-on-year, in FDI to USD 1,146.6 Million reflecting a rebound from the 9.0% decline between 2012 and 20135. Uganda has stepped up efforts to woo oil investors including doing away with with-holding and Value Added Tax in exploration phase as indicated in our June 2015 issue –

http://www.stratlinkglobal.com/ForceDownload.php?download_file=http%3A%2F%2Fwww.stratlink-global.com%2Fdownload%2FJune%25202015%2520A-frica%2520Market%2520Update.pdf&download_name=June%202015%20Africa%20Market%20Update

Presidential Votes

https://www.hrw.org/world-report/2015/country-chapters/uganda








6 Bloomberg 2015 Data

ECONOMIC OUTLOOK

Monetary Pressures Mount

Bank of Uganda hiked its benchmark rate for the third time in four months, indicating a bold attempt at anchoring inflation expectations. The economy is facing mounting monetary pressures driven by currency depreciation and inflation drivers such as money supply and the food index. June 2015 inflation stood at 4.9%, a marginal 10.0 bps short of the bank’s target of 5.0% in the medium term.

Monetary Policy Rate vs Inflation

Money Supply Growth (Year-on-Year)

Shilling vs USD Exchange

Source: Electoral Commission, StratLink Africa



Inflation Uptick Could be Benign Going Forward

Monetary tightening could decelerate growth in money supply and translate to a more benign, if any, rise in inflation through Q4, 2015. We note that inflation between May and June 2015 stagnated at 4.9% suggesting the hawkish policy approach could be yielding results. On the whole, growth in money supply has decelerated and bodes well for inflation expectations going forward ─ Growth averaged 10.4% in Q1, 2015 compared to 12.1% in the same period a year earlier6.

Shilling Claws Back Lost Ground

The shilling clawed back lost ground in July 2015 in what we assess was driven by mop up of liquidity in the money market as indicated by the interbank rate. Latest available data indicates the interbank rate closed June 2015 at 14.2%, compared to 7.0% at the end of May 2015.

The shilling found a resistance point at 3,575.0 units of exchange to the greenback afterwhich it exhibited resilience.



DEBT MARKET UPDATE

Yields Show Signs of Uptick

Yields in the T-Bill market are showing signs of correcting upwards after declining between March and May 2015. As indicated in the foregoing foreign exchange analysis, Bank of Uganda is likely to have tightened liquidity thereby arresting the decline in yields. Given the volatility exhibited by the shilling, we expect liquidity to remain tight in the near term in a bid to prop the weak local shilling and mitigate inflation risk.

Uganda Stock Exchange All Share Index

Uganda Stock Exchange All Share Index

Overall Interbank Rate

T-Bill Yields

Source: Bank of Uganda, StratLink Africa


Source: Bank of Uganda, StratLink Africa


All Share Index year-on-year change

All Share Index month-on-month change

The mild bullish run witnessed in June 2015 abated in what we assess was investors’ adjusting position following hype over hiked electricity tariffs that are expected to boost Umeme Ltd’s revenue. Umeme Ltd accounted for 81.7% of market capitalization in July 2015 making sentiment around the share a key market driver.

The 91 Day yield declined by 10.0 bps, month-on-month, to 12.8% while the 182 Day declined by 30.0 bps to 13.6%. Similarly, the 364 Day yield declined by 24.0 bps to 14.0%. Tightening liquidity in the money market is bound to keep yields on the rise in the near term.


+8.5%

-5.2%



RWANDA MARKET UPDATE

COUNTRY HEADED FOR REVISION OF PRESIDENTIAL TERM LIMITS



POLITICAL OUTLOOK

Parliament Issues Kagame Green Light for Third Term

Parliament voted overwhelmingly in favour of abolition of term presidential limits in July 2015 with the Senate reporting 100.0% endorsement while the Lower Chamber reported 99.0%1. The push for constitutional amendment is now expected to be subjected to a referendum which is likely to see it sail through with little, if any, opposition given the initial receipt of 3.7 million signatures from citizens vouching for an additional term for Kagame.

Note: 3.7 million signatures represents 73.3% of the total votes cast in the last Presidential election in 20102 and serves as a strong indicator of the likely direction the referendum could take. The votes suggest Kagame enjoys widespread popularity and is likely to face little, if any, opposition if subjected to an election.

Please refer to our June 2015 Market Update for analysis on the short-term and long-term implications of a possible third term by Kagame:

http://www.stratlinkglobal.com/ForceDownload.php?download_file=http%3A%2F%2Fwww.stratlink-global.com%2Fdownload%2FJune%25202015%2520A-frica%2520Market%2520Update.pdf&download_name=June%202015%20Africa%20Market%20Update

Sovereign Backed Push for Third Term Mitigates Near Term Risk

Chances of Rwanda descending into civil unrest like neighbouring Burundi (following Pierre Nkurunziza’s third term bid and subsequent election) are unlikely given public support for a third term by Kagame. Unlike Burundi’s Pierre Nkurunziza, discussion on a possible third term for Kagame was ignited by receipt of signatures from a section of citizens. In the long-term, we expect focus to shift to the state of the country’s opposition.

The State of Opposition in Rwanda

Out of ten registered opposition parties, only one ─ Democratic Green Party ─ is reported to have staged protest against pursued abolition of presidential term limits3. This speaks volumes to the frail state of opposition in the country and threatens a long-term challenge in transition politics. In March 2014, Rwanda suffered a diplomatic spat with South Africa in what was perceived to be intimidation by Rwanda’s government of critics in South Africa.

Key Stress Points for Rwanda’s Political Outlook

• Constrained democratic space could create a challenge in the long-term as far as political transition is concerned. The push for a third term for Kagame is, in part, driven by a widely held view of a potential leadership vacuum that could reverse socio-economic gains made in the last two decades

• An environment of stifled dissent and state critique could render the country fertile ground for political volatility in the long-term. The Burkinabe Uprising of October 2014 that forced President Blaise Compaore out of power after twenty seven years saw upheaval spread to multiple cities in the country (Burkina Faso). This is a possibility that will likely be at the top of investors eyeing long-term presence in Rwanda

• The last two presidential polls reveal not only overwhelming support Kagame but also a decline in popularity which could present a challenge given the widely held perception of a high-handed approach to governance. In the 2010 poll, Kagame clinched 93.1% of votes cast, 200.0 bps lower than he did in 2003.

In December 2013, the Supreme Court extended the prison term for opposition party FDU-Inkingi’s President, Victoire Ingabire, from eight to fifteen years. Ingabire has been accused of conspiring to undermine the government4.

1 www.afrikareporter.com2 Institute of Democratic and Election Assistance

3 www.afrikareporter.com4 Human Rights Watch Report 2015






www.afrikareporter.com

www.afrikareporter.com



5 UNCTAD 2015 Data 6 OEC Data 20157 International Monetary Fund 20158 Human Rights Watch Report 2015


Second Slowest FDI Growth in Eight Years

Foreign Direct Investment growth, year-on-year, reported the second slowest acceleration in eight years suggesting investors could still be gauging the investment climate following adverse effects from the 2012/13 economic growth slump. Slow growth could also have been driven by investors’ anticipation of change in the investment code from the one that has been in place since 2005. Lethargic growth in FDI could be an indicator of priced in uncertainty over the new code.

ECONOMIC OUTLOOK

Rising Pressures Could Weigh Down 2015 Growth

Despite robust growth in Q1, 2015 (7.6%), mounting structural challenges threaten to drag aggregate growth in 2015. The rallying greenback and depressed coffee and tea prices (about 30.0% of export earnings on average6) expose the economy to balance of payment pressures. The ratio of imports to GDP deteriorated by 540.0 bps to 34.4% between 2009 and 2014 compared to a 440.0 bps surge in the ratio of exports to GDP, in the same period, to 15.3%7.

The government targets crossing the USD 1.0 Billion mark in FDI inflow in 2015 backed by the new investment code which it says offers tax breaks and incentives to would be investors. The target is within reach given historical year-on-year growth in FDI. Between 2005 and 2006, FDI inflow accelerated by 285.0% to USD 30.6 Million5 on the back of high economic growth that stood at 7.9% in 2006.

Slow Growth in Domestic Consumption

Additionally, domestic consumption growth in Rwanda is slow and could disappoint as an anticipated catalyst for economic growth. Between 2009 and 2014, Rwanda posted an 8.1% growth (CAGR) in domestic consumption to USD 6.2 Billion, compared to Tanzania’s 12.1%, Kenya’s 11.5% and Ethiopia’s 10.2%8.

In December 2013, the Supreme Court extended the prison term for opposition party FDU-Inkingi’s President, Victoire Ingabire, from eight to fifteen years. Ingabire has been accused of conspiring to undermine the government .

Note: Compared to regional peers, Rwanda posts the lowest domestic consumption and this could be a disincentive in attracting consumer facing industries which are increasingly targeting the Eastern African market.

Note: Between January and June 2015, global coffee prices plunged by 15.7% to 124.9 US Cents/lb.

FDI Inflow vs GDP Growth

Trade Balance as % of GDP

Source: UNCTAD, Business Monitor International, StratLink Africa

Source: IMF 2015, StraLink Africa



9 World Bank, International Monetary Fund10 The East African Weekly May 16th, 201411 Rwanda Express June 11th, 2015

DEBT MARKET UPDATE

T-Bill yields witnessed a general downtrend between the months of May and July 2015, in what we can attribute to a decline in government borrowing in the period under review. The amount borrowed by government through the short-term papers fell by 22.6%, month-on-month, to USD 64.1 million in June 2014.

Amount Borrowed through T-Bills (USD Mln

Revenue Mobilization Hurdles

Revenue mobilization remains a pressing challenge for Rwanda’s fiscal position. Whereas we have observed in previous issues that the country is scaling down the proportion of external support that funds the national budget, we note that, by regional standards, the country’s tax to GDP ratio, at about 13.0% - 14.0%9 is comparatively low. Available data indicates that between July 2013 and March 2014, Rwanda Revenue Authority reported 95.4% performance rate 10 on the back of decline in imports.

Whereas the 91.0 and 364.0 Day papers posted a decline in yields (thirteen bps and twenty five bps, respectively, to 3.4% and 5.5%), the 182.0 Day registered a marginal rise of ten bps to 4.4%. Two factors could be informing the mixed movement:

• The interbank rate suggests liquidity is tightening and we could be witnessing the infancy stages of a general uptick in yields in the near future. This could be based on the weakness exhibited by the rallying greenback that has occasioned a general weakening of currencies in the East African region

• Inflation pressures are rising in the economy and investors could be beginning to price in expectations in this regard. June 2015 inflation stood at 2.8%, sixty bps higher than it did in the preceding month

In 2015/16, Rwanda targets mobilizing revenue to the tune of 17.5% of GDP11

Private Final Consumption (USD Bln)

Tax Revenue to GDP Ratio

Source: Business Monitor International, StraLink Africa

Source: National Bank of Rwanda, StratLink Africa

Source: World Bank, StratLink Africa



Rwanda Franc Slide against Greenback

The local unit came under immense pressure from the USD depreciating by 5.1% month-on-month and 7.3% year-on-year to close July 2015 at 740.8 units to the greenback.

July 2015 was a bullish month at the exchange with the All Share Index gaining 5.9% month-on-month to close July at 143.7. The uptick was occasioned by the newly listed Crystal Ventures shares which started trading on Thursday 16th, July 2015 and surged by 38.0% in share price on the first day of trade12. The share price, however, moderated in the latter half of the month and the exchange is likely to return to its February – May 2015 terrain.

As indicated, liquidity is tightening with the interbank rate rising by 120.0 bps between May 2015 and June 2015 to 4.0%.

T-Bill Yields Interbank Rate

Rwanda Stock Exchange All Share Index

Crystal Ventures Share Price

Rwanda Franc vs USD

Source: Bank of Rwanda, StratLink Africa

Source: National Bank of Rwanda, StratLink Africa





12 Rwanda Stock Exchange



ETHIOPIA MARKET UPDATE

IS THE GOVERNMENT UNCLENCHING THE ANTI-TERROR FIST?



POLITICAL OUTLOOK

Surprise Release of Journalists and Bloggers

Charges levelled against five journalists and bloggers held since April 2014 were dropped, in a surprise development, on July 08th, 2015. The five were arrested in view of alleged links to terror groups; a move that sparked widespread criticism of the country’s anti-terror legislation both at home and abroad. What does the move by the government indicate?

One ─ Endearing the Citizenry Post-Election

The government could be out to woo public support following the May 2015 vote in which Ethiopian People’s Revolutionary Democratic Front (EPRDF) clinched landslide victory. The controversial anti-terror legislation stood out as a sore thumb for EPRDF in the race to the ballot. The clamour for review of the widely controversial anti-terror law could present a coalition point for the country’s opposition bodies going, threatening a potential tipping point in subsequent election cycles (as happened with Nigeria in the March 2015 poll). EPRDF could be viewing its re-election as an opportunity for a change of course on the controversial legislation.

Two ─ Visit by President Barrack Obama

The charges could have been dropped in view the visit by USA President Barrack Obama. Ethiopia’s human rights record has come under sharp criticism in the recent past. In a report dated July 23rd, 2015, Amnesty International expressed concern over “failure of the African Union Elections Observer Mission and the National Elections Board of Ethiopia to properly monitor and report allegations of widespread abuse before, during and after the election”1. Available data indicates that USA is one of Ethiopia’s main sources of Official Development Assistance (ODA) accounting for 60.1% of ODA disbursed by Ethiopia’s top ten sources between 2003 and 2012.

1 Amnesty International Report - http://www.amnestyusa.org/news/press-releases/amnesty-international-asks-ethiopia-to-investi-gate-suspicious-murders-and-human-rights-violations

Note: Between 2003 and 2012 Ethiopia’s top ten sources of ODA disbursed USD 5,109.2 Million of which USA accounted for USD 3,070.0 Million.

Official Development Assistnace (2003 - 2012)

EPRDF could have dropped the charges in a bid to stave off any likelihood of retributive action from USA in light of growing concern over the country’s human rights record.

Ethiopia: Key Ally in a Volatile Region

Also worthy of note is the fact that Ethiopia joined the African Union Mission to Somalia (Amisom) in January 2014 and could be looking to tap into USA assistance in the face of growing threat from the Somalia based Al Shabaab militia. President Obama’s visit to Ethiopia and Kenya also indicate that USA is targeting consolidation of partnership with key allies in the volatile Horn of Africa region that has been characterized by political turmoil in South Sudan and unrest in Somalia.

Source: Global Humanitarian Assistance, StratLink Africa

http://www.amnestyusa.org/news/press-releases/amnesty-international-asks-ethiopia-to-investigate-suspicious-murders-and-human-rights-violations






European Investment Bank Pitches Camp in Ethiopia

On July 16th, 2015 European Investment Bank opened an office in Addis Ababa. The non-profit lending institution has been crucial in helping finance infrastructure projects across Africa. Ethiopia could have stood out as a choice destination for the bank owing to its strong budgetary allocation to capital spending compared to regional peers in Eastern Africa which suggests greater policy focus towards infrastructure expansion.

Steady growth in capital expenditure has been anchored on the Growth and Transformation Plan (2010 – 2015). The plan, for instance, targeted expanding Ethiopia’s road density (km/1,000.0 population) from 0.64 in 2010 to 1.537.0% 4 in 20153. In February 2015, Ethiopia rolled out the region’s maiden light railway system covering 34.0 km of electrified rail transport. Plans are underway to initiate Growth and Transformation Plan II (GTP II) and we anticipate continued

2 European Investment Bank - http://www.eib.org/projects/loans/regions/south-africa/index.htm?start=2000&end=2014

3 Growth and Transformation Plan 2010 - 2015

4 UNCTAD Investment Report 2015

Note: Between 2000 and 2014, financing contracts signed between the bank and South Africa amounted to USD 2.5 Billion2.

Note: In 2014, private equity group KKR (USA) made its maiden direct investment in Africa by injecting USD 200.0 Million into Ethiopia rose producer Afriflora. Further, in 2014, Ethiopia was one of two Least Developed Countries (LDC’s) that registered the strongest growth in foreign direct investment (26.0% year-on-year to USD 1.2 Billion) after Zambia’s 37.0% to USD 2.5 billion 4

Capital Expenditure as % of Total Expenditure

Capital Expenditure as % of GDP



focus on capital spending to fast-track growth. World Bank estimates that infrastructure contributed 0.6% to Ethiopia’s annual per capita GDP growth between 2001 and 2011.

On the whole, we are bullish about Ethiopia’s business climate. Energy, transport and Information, Communication and Technology are likely to be areas of focus in upgrading infrastructure to middle-income status.

http://www.eib.org/projects/loans/regions/south-africa/index.htm?start=2000&end=2014 3 Growth and Transformation Plan 2010 - 2015





ECONOMIC OUTLOOK

Fundamentals Drive Inflation Concern

We retain our July 2015 assessment of mounting inflation risk in the economy notably from a food index and currency depreciation perspective. The Birr remains weak against the greenback on the back of a strong rally by the latter and deteriorating balance of payments that have seen imports surge faster than exports.

Birr Edges Closer to 21.0 Units of Exchange to USD

The Birr has continued to depreciate against the greenback through July 2015.

The Birr is likely to remain weak in the near term driven by depressed coffee prices in the global market that threaten to subdue export earnings.

Inflation vs Food Index Trend

Ethiopia Birr vs USD Exchange Month-on-Month

Coffee Price (US Cnts/lb)Ethiopia Birr vs USD Exchange

Source: Central Statistical Agency, StratLink Africa



Source: International Coffee Organization, StratLink Africa

Ethiopian Birr change year-on-year

Ethiopian Birr change month-on-month

-5.6%

-1.0%



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