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Africa Monitor
Vol 7 Issue 3 March 2013
Business Monitor Internationals monthly regional report on political risk and macroeconomic prospects
KENYA
Oil Outlook
135 130
UGANDA
May-12
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Dec-11
Jan-12
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BMI View: In line with our expectations, the Bank of Uganda has held Source: BMI its benchmark policy rate at 12.00%, amid concerns about climbing inflation and ongoing weakness in the currency. Despite rising eco- We have raised our 2013 average price forecast for Brent to US$107/ nomic headwinds, we expect these factors to remain on policymakers' bbl from US$102/bbl. The short-term picture is positive, confirmed by a push through technical resistance levels by both Brent and WTI. minds, likely resulting in continued caution.
At their meeting on January 3, Bank of Uganda (BoU) policymakers elected to hold the benchmark Central Bank Rate at 12.00%, the first time they have left the rate unchanged since May 2012. The move is in line with our expectations; given the rising risks in terms of inflation and more pressingly the shilling, we expect that policymakers had to
...continued on page 7
Recent gains have been in line with greater optimism towards both the US and the Chinese economies. We have recently revised up our GDP growth forecasts for both respectively to 2.3% from 2.1% and 7.5% from 7.1%. However, we do not foresee a sustained rally in the coming months. Oil supply will continue to improve, with the market moving into surplus for the first time since 2007.
ISSN: 1754-226X
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Feb-13
KENYA
...continued from top of front page
RISK SUMMARY
POLITICAL RISK
to 2012. Inflation had fallen to a 26-month low of 3.2% in December, while an annual contraction in a newly constructed producer price index in December shows price pressures remain relatively muted. With households and traders being the largest borrowers, together accounting for around 30% of outstanding credit, consumption will also benefit from the falling borrowing costs
Growth Accelerating
Real Economic Growth, % y-o-y
6 4.8 4.2 3.8 3.5 3.2 3 4
4.6
4.6
are following the policy rate lower, leading to a rise in credit growth in November 2012 for the first time since it peaked at 36.3% in September 2011. With inflation remaining low and the central bank likely to lower the policy rate further, we expect conditions will improve for investment growth. Sentiment should also be boosted after the elections. Net Export Outlook: The outlook for the external sector is mixed. On the one hand, the continued economic malaise in Europe will weigh on demand for Kenyan horticultural exports and to a lesser extent, tourism. However, Kenya also sends about half of its exports to African countries, where growth outlooks are significantly more robust and this will go some way to offsetting weak demand from elsewhere.
Little Sign Of Inflationary Pressure
Producer Price Inflation
8 y-o-y q-o-q 6
4
0 Q111 Q211 Q311 Q411 Q112 Q212 Q312
2 0 -2 -4 -6
Q311 Q411 Q112 Q212 Q312 Q412
ECONOMIC RISK
as banks lower rates in line with reductions to policy rates. Public Consumption Outlook: The approval of a US$680mn supplementary budget in January will increase government spending in the 2012/13 fiscal year, although given that the
Low Inflation And Price Pressures Muted
Headline Consumer Price Inflation, % y-o-y
25
20
As for imports, given our upbeat assessment on investment and consumption, growth will remain strong and this will place a drag on the headline growth. Risks To Outlook The main risk in 2013 comes from the possibility that elections descend into violence and chaos. Not only would this disrupt output, but could also lead to a loss of confidence, which would result in shilling depreciation and rises in price growth that would undermine economic growth over the long term. The weather also
Credit Growth Rising On Falling Rates
Private Sector Credit Growth, % y-o-y
40 35 30 25 20 15 10 5 0
Jun-11 Oct-11 Jun-12 Mar-11 Aug-11 Dec-11 Mar-12 May-11 May-12 Aug-12 Jan-12 Feb-12 Sep-11 Nov-11 Sep-12 Oct-12 Jul-11 Apr-11 Apr-12 Jul-12 Nov-12
15
10
Jan-10
Mar-10
Jul-10
Jan-11
Mar-11
Jul-11
Jan-12
Mar-12
May-10
May-11
May-12
Sep-10
Nov-10
Sep-11
Nov-11
Jul-12
Sep-12
majority of it will go to wage rises for teachers and public sector medical professionals, some of the increase will be reflected in increased private consumption. The extra spending means the budget deficit will be wider in FY12/13 than we had previously expected. This could force the government to tighten fiscal expenditure in the FY13/14 budget. Gross Fixed Capital Formation: The poor performance of the construction sector in the Q312 GDP data shows investment was weak in 2012. This is not surprising, given high inflation, elevated borrowing costs and uncertainty over the election. However, price growth has tumbled and commercial bank interest rates
Nov-12
poses risks to agricultural production and to macro stability via the currency and inflation.
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KENYA
ECONOMIC OUTLOOK
during 2013 to 8.00% by the year end. We believe credit growth will gather momentum and are forecasting an annual figure of 20.0% y-o-y in 2013. The incentive for banks to extend credit to the private sector will be increased by the fact that yields on government treasuries declined to below 10.0%, while the attraction of the repo market (which the central bank has been using to absorb excess liquidity from the system) has been diminished by falling repo rates. Mobile Money To Boost Banking Sector Another supportive factor for the banking industry will be developments in mobile money. In November, leading Kenyan telco Safaricom teamed up with Commercial Bank of Africa to launch its latest mobile money offering MShwari. The service allows users of Safaricoms M-Pesa mobile money product to use mobile phones to open bank accounts and apply for loans without having to go to a bank branch. A low opening balance requirement of KES1.00 also removes another obstacle which prevented Kenyans from entering the banking system. According to data from Safaricom, customers had deposited KES1.0bn (US$11.6mn) and borrowed a similar amount using the service in the first two months of its existence. We believe other banks will be forced to develop similar products, boosting banking sector growth.
banking sector assets at KES2,3trn (US$27.2bn) or about 71.8% of GDP in October 2012. Client loans made up the lions share at 57.9% of the total, while government treasuries accounted for slightly less than 20.0% of total assets . Credit growth slowed sharply during 2012, following aggressive interest rate hikes by the CBKs monetary policy committee as a surge in borrowing costs priced many would-be borrowers out of the market. However, following equally aggressive monetary easing, which has seen the CBK reduce the policy central bank rate (CBR) by 850 basis points (bps) to 9.50% in January, credit growth appears to have bottomed out, and actually increased for the first time in 14 months in November. With interest rates likely to fall further in line with additional rate cuts, we are expecting the authorities to cut rates by another 150bps
be keen to nurture a nascent economic recovery and muted inflationary pressures will allow them to do so.
2012e 42.7 38.84 909 4.5 16.8 3.3 18.0 14.7 87.00 6.3 10.0 16.5 11.8 -10.2 -11.2 4.5 10,123.0 26.1 87.8 9.0 2013f 43.9 43.29 986 5.8 12.7 6.4 7.8 1.3 92.00 7.3 15.0 17.9 8.1 -10.6 -9.9 4.7 10,932.8 25.3 84.4 9.7 2014f 45.1 48.01 1,064 6.3 14.1 7.0 7.8 0.8 95.00 8.4 15.0 19.5 9.0 -11.1 -9.1 4.9 11,807.4 24.6 81.5 -
e/f = BMI estimate/forecast. 1 Basket Reweighted In 2009; 2 Real rate strips out the effects of inflation; 3 Cover for goods and services. Source: 4 World Bank/UN/BMI; 5 Central Bank of Kenya/BMI calculation; 6 Central Bank of Kenya; 7 Kenya National Bureau of Statistics; 8 Central Bank of Kenya/BMI; 9 BMI; 10 IMF IFS; 11 IMF IFS and Central Bank of Kenya/BMI calculation; 12 World Bank GDF; 13 World Bank GDF/BMI calculation.
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UGANDA
RISK SUMMARY
POLITICAL RISK UN Approves Drone Flights
The UN plans to deploy unmanned surveillance drones over the eastern DRC to provide information regarding rebel movements in the volatile region and police the country's porous border with Rwanda. There is already a UN peacekeeping force deployed in the DRC, but the force has failed to prevent rebels from establishing a fiefdom in North Kivu province. The DRC government and several UN reports have alleged that Rwanda is supporting cross-border rebel attacks, a charge that Kigali denies. Aerial surveillance could settle the issue and prevent the internationalisation of the conflict.
Our short-term political risk rating is 25.8 .
POLITICAL OUTLOOK
Since the talks started, little progress has been made. This is partially due to the rebels wide-ranging complaints, which include everything from the poor treatment of soldiers in the DRCs armed forces, vote tampering in the countrys 2011 presidential election and the lack of a modern shopping centre in the eastern DRC. State Refuses to Sign Ceasefire Talks have almost broken down several times over the governments refusal to sign a formal ceasefire (which it says would legitimise the rebels) and M23's continued levying of taxes in the areas it controls. Based on previous rebellions in the DRC (some involving today's M23 leadership), BMI believes a negotiated solution is likely eventually. Neither the government nor the rebels are likely to win a conclusive battle, and the conflict should be seen as a bloody negotiation seeking to divide the state's resources.
ECONOMIC RISK
BUSINESS ENVIRONMENT
e/f = BMI estimate/forecast. 1 Goods imports only. Source: 2 World Bank/UN/BMI; 3 AfDB/IMF/BMI; 4 BCC/IMF/BMI; 5 Banque Centrale du Congo/BMI; 6 BMI; 7 BMI/AfDB; 8 BCC/BMI; 9 IMF, BMI
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SUDAN
POLITICAL OUTLOOK
RISK SUMMARY
POLITICAL RISK
of a plot to 'incite chaos' and undermine the country's leaders. A key hardliner, Gosh served as head of the NISS until he was dismissed in 2009, but worked as Al-Bashir's presidential adviser on security affairs until 2011. While Al-Bashir may have moved preemptively against Gosh and his alleged co-conspirators, it is clear his room for manoeuvre as president is increasingly constrained. Moreover, the threat from within appears to be greater than that posed either by popular protests or the armed opposition. With regard to the former, the last occurred in June, when people demonstrated against austerity measures, but these protests were quickly quelled. Demonstrations took place again in December, but with no more than a few hundred protestors on each occasion. Given all these considerations, Al-Bashir may well calculate that his continuation in power is best served by playing to the hardliners in his own regime to soften the threat posed to him . Such an outcome, which is our core scenario, has significant implications for the security and military situation in Sudan.
ECONOMIC RISK
Population, mn 1,2 43.6 35.7 36.5 37.4 38.2 Nominal GDP, US$bn 1,3 68.62 55.96 51.42 51.11 52.87 GDP per capita, US$ 1,3 1,576 1,569 1,408 1,368 1,383 Real GDP growth, % change y-o-y 1,4 6.6 -19.0 -6.7 2.1 3.6 GDP SDG nominal growth, % change y-o-y 1,3 15.3 -7.0 23.6 31.5 17.0 Budget balance, % of GDP 1,6 -2.0 -8.4 -11.4 -7.5 -7.4 Consumer prices, % y-o-y, eop 1,6 19.7 18.9 44.4 20.0 8.0 Exchange rate SDG/US$, eop 7 2.50 2.68 5.50 5.67 5.85 Goods exports, US$bn 5 12.7 11.1 3.0 4.3 4.3 Goods exports, % change y-o-y 6 57.0 -12.9 -73.0 42.5 1.4 Goods imports, US$bn 5 9.0 8.3 9.0 9.4 9.9 Goods imports, % change y-o-y 6 3.1 -7.5 8.0 5.0 5.0 Balance of trade in goods, US$bn 5 3.7 2.8 -6.0 -5.2 -5.6 Current account, % of GDP 6 0.2 1.4 -16.0 -14.8 -15.3 Foreign reserves ex gold, US$bn 5 1.2 1.1 1.1 1.2 1.3 Import cover, months g&s 6 1.3 1.2 1.2 1.2 1.2 Total external debt stock, US$mn 8 35,700.0 36,000.0 24,127.5 23,886.3 23,647.4 Total external debt stock, % of GDP 9 52.0 64.3 46.9 46.7 44.7 Total external debt stock % of XGS 9 275.6 318.0 735.1 520.5 504.3 e/f = BMI estimate/forecast. 1 Forecasts from 2011 onwards incorporate secession of South Sudan and hence, exclude the South Sudanese portion of the economy. Source: 2 World Bank/UN/BMI; 3 UN/BMI calculation; 4 UN; 5 IMF; 6 IMF/BMI calculation; 7 BMI; 8 World Bank GDF; 9 World Bank GDF/BMI calculation.
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TANZANIA
ECONOMIC OUTLOOK
RISK SUMMARY
POLITICAL RISK PM Opposes End Of Union
Prime Minister Mizengo Pinda and the ambassador to Italy, Ali Karume, said the new constitution, which is in the process of being written, should maintain the union between Tanganyika and Zanzibar as it is. Karume, who is the younger brother of Zanzibar's former president, also dismissed a proposal that the Zanzibari president should automatically be the vice-president of the union. Pinda meanwhile, called for the establishment of a special commission to deal with union problems. Secessionist sentiment remains prevalent in Zanzibar and some see the implementation of the new constitution as an opportunity to redefine the relationship between the entities.
Our short-term political risk rating is 65.4.
ECONOMIC RISK
perspective, the Vuli rains (which fall between September and December) were good and this should lead to good harvests from January to March. Given that this harvest accounts for 30% of total national food requirements, it should also help to take the pressure off food prices. The authorities also lifted a ban on rice imports and plan to bring in a large consignment of sugar to ease food price pressures. The combination of these factors should prevent economic growth from losing more momentum and should ease the pressure on food prices. However, recent developments show how fragile the economy is. Food output and prices remain an important determinant of the countrys economic fortunes and bad weather could play havoc. Furthermore, with the current and fiscal account gapingly wide and foreign exchange reserves only sufficient to cover around four months of imports, the economy possesses little to buffer it from potential shocks.
Population, mn 4 44.8 46.2 47.7 49.2 50.7 Nominal GDP, US$bn 5 22.40 23.11 28.74 32.56 35.74 GDP per capita, US$ 6 499 500 603 662 705 Real GDP growth, % change y-o-y 5 6.8 6.4 7.0 7.1 7.3 Unemployment, % of labour force, eop 1,7 5.5 5.3 5.1 5.0 4.9 Consumer prices, % y-o-y, eop 7 5.6 19.8 11.6 7.0 6.0 Real lending rate, %, eop 3,12 9.0 -5.1 2.9 6.0 5.0 Exchange rate TZS/US$, eop 13 1,484.35 1,582.00 1,600.00 1,664.00 1,730.56 Goods exports, US$bn 5 4.3 5.1 6.0 7.2 8.1 Goods imports, US$bn 5 7.2 9.8 11.0 12.3 13.6 Goods imports, % change y-o-y 6 22.8 37.2 12.0 12.0 10.0 Balance of trade in goods, US$bn 5 -2.8 -4.7 -5.0 -5.1 -5.5 Current account, % of GDP 6 -8.3 -17.1 -13.8 -12.5 -12.3 Foreign reserves ex gold, US$bn 14 3.4 3.8 4.1 4.6 5.0 Import cover, months g&s 15 4.5 3.8 3.7 3.6 3.6 Total external debt stock, % of GDP 17 38.3 42.9 27.3 27.1 29.1 e/f = BMI estimate/forecast. 1 Surveys conducted in 1990/91, 2000/01 and 2006; 2 Fiscal year (x-1)/(x), so 2008 figure is for FY 07/08. Includes grants.; 3 Real rate strips out the effects of inflation. Source: 4 World Bank/UN/BMI; 5 Bank of Tanzania; 6 Bank of Tanzania/BMI; 7 Tanzania Bureau of Statistics; 8 Bank of Tanzania, Tanzania Ministry of Finance; 9 Bank of Tanzania, Tanzania Ministry of Finance, BMI; 10 Tanzania Bureau of Statistics/BMI; 11 IMF; 12 IMF/BMI; 13 BMI; 14 IMF IFS; 15 IMF IFS/BMI; 16 World Bank; 17 World Bank/BMI.
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UGANDA
...continued from bottom of front page
temper their desires to stimulate economic growth (see December 5 'BoU Loosening To Slow Amid Currency Woes' on our online service). We expect these difficulties to persist over the next few weeks, likely leading to another hold in February. Base effects should ease headline inflationary pressures thereafter, but risks to the currency stemming from a decline in the availability of foreign exchange will remain elevated. Given these factors, there is a rising risk that the loosening cycle has concluded. If either (or both) the inflationary or currency outlook deteriorates, authorities could raise rates, despite the gloomy economic picture. Growth concerns loom large for Ugandan policymakers, as real GDP expansion fell by more than half from FY2010/11 to FY2011/12, declining from 6.7% to 3.2%. One of the main factors is the high cost of borrowing, which despite the BoU's aggressive cutting cycle remains elevated, as commercial banks did not lower their lending rates for most of 2012, much to the chagrin of policymakers. Under BoU pressure, commercial rates have finally begun to come down, with Stanbic and Barclays announcing significant
DATA & FORECASTS
reductions in December. Meanwhile, headline inflation reached 5.5% year-on-year in December, up from 4.9% in November. More significantly in terms of monetary policy, core inflation also increased for the first time since October 2011, from 3.8% y-o-y in November to 4.6% in December. Core inflation, which increased 1.4% month-on-month (the largest monthly increase of 2012 and far higher than the 0.3% m-o-m rise in November), is likely to breach the BoU's 5.0% target in January, and should remain at about 5.0% for the next several months. The BoU attributed the recent increase in price growth to seasonal factors, including higher purchases during the holiday season and expects pressures to ease over the coming months. The shilling, which was UGX2,700/US$ at the time of writing, continues on a downward trend, hit on multiple fronts including a wide current account deficit, a reduction in portfolio investment, and the suspension of donor funds due to an embezzlement scandal. We expect all three of these depreciatory pressures will persist, suggesting further downside for the currency and further reason for caution on the part of the BoU.
RISK SUMMARY
POLITICAL RISK
ECONOMIC RISK
BMI View: Thanks to ongoing robust growth in imports, we expect Uganda's gaping current account deficit will remain wide over the coming years. We are forecasting a shortfall of 10.6% of GDP in 2013.
Population, mn 4 Nominal GDP, US$bn 5 GDP per capita, US$ 6 Real GDP growth, % change y-o-y 5 GDP UGX nominal growth, % change y-o-y 6 Budget balance, UGXbn 1,7 Budget balance, % of GDP 1,6 Consumer prices, % y-o-y, ave 6 Consumer prices, % y-o-y, eop 8 Lending rate, %, eop 5 Real lending rate, %, eop 2,9 Exchange rate UGX/US$, ave 6 Exchange rate UGX/US$, eop 6 Exchange rate UGX/EUR, eop 6 Goods exports, US$bn 5 Goods exports, % change y-o-y 6 Goods imports, US$bn 5 Goods imports, % change y-o-y 6 Balance of trade in goods, US$bn 3,5 Current account, US$bn 5 Current account, % of GDP 6 Foreign reserves ex gold, US$bn 5 Import cover, months g&s 5 Total external debt stock, US$mn 10 Total external debt stock, % of GDP 10 Total external debt stock % of XGS 10 Short term debt as a % of International reserves 10 Short term foreign debt, % of total 10 2010 33.4 17.75 585 6.2 14.8 -1,668.2 -4.3 4.1 3.1 19.7 16.6 2,173.16 2,337.00 3,126.20 2.2 -7.0 4.4 14.1 -2.2 -1.6 -8.8 2.7 5.3 2,993.7 16.9 84.6 11.6 10.5 2011 34.5 18.08 577 5.9 18.2 -1,616.1 -3.5 18.6 27.0 26.7 -0.3 2,522.68 2,480.00 3,210.36 2.5 16.4 5.0 14.2 -2.5 -1.9 -10.4 2.6 4.2 3,352.9 18.5 79.1 15.5 12.1 2012e 35.6 21.64 668 4.8 18.8 -1,932.9 -3.6 14.6 5.5 21.8 16.3 2,504.50 2,720.00 3,345.60 2.7 7.0 5.5 10.0 -2.8 -2.3 -10.7 2.9 4.3 3,721.8 17.2 79.9 15.2 12.0 2013f 36.8 23.12 692 6.1 12.4 -2,021.1 -3.3 6.7 7.9 19.0 11.1 2,635.00 2,550.00 3,111.00 3.1 15.0 6.0 10.0 -2.9 -2.5 -10.6 3.5 4.6 4,056.7 17.5 75.7 13.6 11.8 2014f 37.9 28.21 817 7.1 14.6 -2,135.0 -3.1 7.7 7.5 19.0 11.5 2,475.00 2,400.00 2,880.00 3.6 17.0 6.6 10.0 -3.0 -2.6 -9.2 4.6 5.4 4,381.3 15.5 71.2 11.1 11.6
BUSINESS ENVIRONMENT
e/f = BMI estimate/forecast. 1 Fiscal year, July-June, ending on the year indicated; 2 Real rate strips out the effects of inflation; 3 fiscal year, July-June. Source: 4 World Bank/UN/BMI; 5 BOU, BMI; 6 BMI; 7 Ministry of Finance, BoU, BMI; 8 UBOS, BMI; 9 IMF/BMI; 10 World Bank/BMI.
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Regional REGIONAL
ECONOMIC OUTLOOK
Significantly, this move has also opened the door for a number of Indian IT companies, drawn by Airtel's outsourcing needs, while the general rise in demand for business software has also seen Indian firms rapidly expand their presence, especially in the financial services sector. This not only creates an opportunity for India's vibrant services industry, but also gives African economies the opportunity to move further up the value chain, by adding expertise and technical assistance to local labour markets. Elsewhere, India's reputation for making low-cost consumer goods is also providing it with an advantage in Africa over Western counterparts, with the autos and pharmaceuticals markets being cases in point. Cheap imported commercial vehicles from India is one example, driven by booming demand for infrastructure and construction-related goods. Investment Is Commercially-Driven Indian investment into Africa is relatively difficult to measure and reflects the more nuanced nature of its relationship with the region compared to that of China's for instance. Part of this difficulty stems from the broad sources of financing, which range from state-provided credit lines for particular projects, to investment from private Indian firms. The latter is a key distinguishing factor between the India-Africa model and the China-Africa model. The generally deeper integration of Indian firms within a number of African economies reflects, in part, the continued importance of historical as well as geographical links in shaping economic relations. East Africa is a case in point, given its history of trade with India and the considerable Indian Diaspora in the region and we expect the sub-region to remain at the heart of Indian investment into Africa over the coming years. For all the power of India Inc, BMI believes the government will continue to play a vital role in oiling the wheels of India's commercial success in Africa. The Export-Import Bank of India will continue to be a key player in this regard, with its provision of credit lines to Indian companies across a range of sectors a crucial cog in the wheel, given the limited access to credit in much of the region and the prohibitive costs of doing business.
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Copy Deadline: 25 January 2013 Analysts: Geraint Tudor Jones, Gregan Anderson, John Ashbourne Editor: Matthew Searle Sub-Editor: Clynton Wratten Subscriptions Manager: Yen Ly Marketing Manager: Julia Consuegra +44 (0)20 7246 5162 Production: Neil Murphy, Reema Patel, Jolene Choo Publishers: Richard Londesborough/Jonathan Feroze
growing African demand for low-cost Indian goods across a broad range of sectors will be a key driver of India's engagement with Africa over the coming years. Attracted by SSA's rapidly-expanding consumer base and aided by well-established trade and historical links, the commercial opportunitiesfor many of India's consumer-focused companies are sizeable. An example of this is Africa's booming telecoms sector which has been, and will in our view continue to be, one of the outperforming sectors over the coming years. In 2010, India took a massive step into the market, with Bharti Airtels US$10.7bn acquisition of Zains Sub-Saharan African operations, giving it access to 15 African markets (in Q312 Airtel had over 50mn subscribers in Africa).