Thursday, 30 January 2014

Bright prospects for EA economy in 2014

 THE ECONOMY of east Africa  grew by about 5.9 per cent in 2013.And this year, it is projected to grow by 6.2 per cent, say experts.  The region has largely enjoyed a robust growth in the upwards of 5 per cent over the last decade. All countries in the region have been growing robustly except Kenya, the giant economy in the region. However, since Kenya is also joining in the club, growth in the block this year could even be higher than projected. Tanzania is still the high flyer with a projected growth of 7.2 this year.

Economists have always said that the average growth rate would be higher if Kenya was growing at its potential.  Perhaps the time has finally arrived for Kenya to drive growth in the region.  Kenya’s economy is well diversified and resilient. What it lacked was the robustness of Tanzania and Rwanda.  However, her sluggish growth is a temporary matter arising from economic shocks since 2008. Before then, the economy had shrugged off the lethargy of Moi’s era, growing robustly   over a four year period to a 7.1 per cent in 2007.

 The post- election Violence of 2008, coupled with the oil crisis then and the financial meltdown in the west, pushed growth to a miniscule 1.5 per cent in 2008.  Since then growth has been on an upward trajectory reaching 5.0 per cent last year. Following new confidence generated by a peaceful election and transition of power, Kenya is expected to hit 6.0 per cent or higher in 2014.

 Uganda the other drag to east African prosperity is also said to have turned north. For nearly a decade, Uganda posted robust growth averaging 9.8 per cent between 2001 and 2008. The spike came in 2009 when growth eased to 7.2 per cent and continued the retreat to a paltry 3.4 per cent in 2012.

However, say experts , the bottom has been reached and now the only way is up.  In 2013, the economy is said to have posted a 5.5 per cent growth which will surge to 6.5 per cent in 2014.

The drivers of growth in east Africa are more or less similar, Agriculture, Tourism, services, manufacturing, hotels and retail trade and transport and communications. The communications sector is, to varying degrees, the fastest growing sector in the region of nearly 120 million people.

Inflation in the region is down is in single digit region compared to 2012 when it was in double digits. At the end of December inflation in Kenya stood at 7.15 while in Tanzania it stood at 5.6 per cent while it stood at 6.5 per cent in Uganda. The rates show a declining trend in the region which is a pointer that the economies of the region have responded positively to stabilization measures.

 There is one major headache though, there seems to be a looming grain shortage in the region due to poor rains.  Grains, especially maize form a stable food in the region. Grain shortages could mean higher imports of grain and the consequent higher prices in the region. However, there is a shift from rain fed agriculture to irrigation.  This could ameliorate grain shortages mid this year. But for now food security is a potential risk to economic growth. Even then, growth prospects are positive throughout this year.

Monday, 20 January 2014

Kenya enters middle income class

THE KENYAN ECONOMY has entered the middle income range we can report. According to various sources, the economy last year grew by 5.0 per cent. Consequently Per capita income has risen to US$1040.55 from US$991 last year.

The entry level into the group according to World Bank is $1025 and Kenya’s GDP per capita has reached $1041, above the cut-off level, catapulting the country to lower middle income country.

Kenya’s entry into middle income level has been long in coming. The country has enjoyed relative robust growth for much of the 2003-2013 decade. According to the World Bank’s data, Kenya ‘s GDP per capita grew 248 per cent between  2000 and 2012 rising from US$399 in 2000 to $991 in 2012.

   The growth of Kenya's  GDP per capita was also ahead of her neighbours in east Africa in the eight years for which  data was available. Her posted a  207 per cent  growth between 2004 and 2012. This was way higher than Tanzania and Uganda where GDP capita has grown by 160 and 165 per cent respectively.  

In 2014 experts say, Kenya joined the middle income countries.  Both Tanzania and Uganda have crossed the US$600  mark. Tanzania’s per capita is expected to have reached $625 last year while Uganda is following closely at $615.

According to World Bank Atlas, countries are stratified into: low income, $1,035 or less; lower middle income, $1,036 - $4,085; upper middle income, $4,086 - $12,615; and high income,$12,616 or more.

For Kenya, the entry into middle income level means a bigger market for local manufacturers and even regional manufacturers. In a recent unrelated survey by the Central Bank of Kenya, the manufacturing sector was upbeat about the prospects for 2014 and beyond.

But  for some, the party  has already began. According to analysts, some companies listed at the Nairobi Securities exchange will report a double digit growth in profits this year. That is why, activity in the exchange, which is generally a barometer for an economy’s well-being, is bullish. The bourse was rated the best performer in Africa in 2013 by MSCI index with a 43.7 rate of return on US$ dollar terms. 
On a regional outlook, the good news on the Kenyan economy is also good news for the region.  Kenya is the largest market for regional manufacturers. This means that high demand for local manufactures spread to the region. The recent expansion of local super market chains into the regional markets will be an added advantaged for Tanzanian and Ugandan Manufactures to compete
in the Kenyan Market.

 Since January 2013, NSE 20 share index has risen 23 per cent to 5027 points at the close of business last week.  In effect, save for a major economic shock, the large consumer base will feed further economic growth. In fact, a survey by Ernst and Young projects that by 2018, Kenya’s GDP per capita will surpass  US$1200  mark at a projected real growth rate of 5.8 per cent.

The Kenyan economy is relatively diversified and resilient. It has weathered a lot of storms. These include the Post- election violence that hit the country in 2007/08 that left the economy on its knees.  The violence was by followed a string of external shocks that slowed Kenya’s economic performance. These include the Oil shock of 2008 which at one point rose to $150 per barrel followed by the financial crisis in the West and a severe drought in 2010/11. 

Despite this unholy alliance, the economy has trudged along posting a 2.7 per cent growth in 2009, which peaked at 5.8 at 2010 before retreating to 4.4 per cent in 2011.  It edged up to 4.6 per cent in 2012 as fears of the political violence due to elections in 2012 held back economic activity.

However, since the peaceful election and the transition  of power in March-April 2013, confidence is back and world bank economists  say the economy grew  by 5.6 per cent in 2013  and will cross the 6 per cent mark in 2014. Given renewed confidence after the elections, the country’s growth momentum is expected to pick up and could catapult the country to well past 7 per cent in 2015 and beyond.

Another factor that could influence economic activity in Kenya is the discovery of oil. So far an estimated 1 billion barrels of commercially viable crude have been discovered in the Turkana County.  Already, the government is said to be discussing the infrastructure to transport crude oil with Tullow Oil, the company that has made the discoveries.  Tullow has also made similar discoveries in Uganda and could be looking at exporting the crude through Kenya.

The discovery of oil in Kenya is a game changer and is expected to significantly contribute to economic growth in the next decade.  Discovery of fossil fuels has catapulted economic growth in Angola, Mozambique and other African countries.

For the time being the drivers of economic growth are transport and communications, tourism, agriculture, manufacturing , retail trade and hotels. 

Wednesday, 15 January 2014

How Poor infrastructure stymies development in EA

Port of Dar-Es-Salaam: A bottleneck on Central Corridor 
POOR TRANSPORT infrastructure in East Africa  stymies growth in East Africa. The region is aware of that bottleneck and  has drawn plans to develop the necessary infrastructure. However, funding is  a major hurdle. This article looks at the potential  benefits that could be unleashed by developing  transport infrastructure.

We call on East Africa governments to  borrow a leaf from Ethiopia's book. The country issued an infrastructure bond targeting Ethiopians in the diaspora to build the 6.000MW renaissance dam. We begin our analysis with the central corridor 

The Central Corridor connects the port of Dar es Salaam to the inland regions of Tanzania and to Burundi, Rwanda and the Democratic Republic of the Congo's Kivu province. This corridor comprises a network of roads and railways passing Lake Victoria to the south. Along this route, it also taps into East Africa's most established mining region: the greenstone belts of Tanzania. Its farthest extension into the Democratic Republic of the Congo also taps into the limited mining activity in the Great Lakes region. 

The minerals extracted here are exported through Port of Dar-Es salaam in Tanzania. The Central Corridor, mainly serves the Tanzania's economy due to the limited amount of goods going in and out of Rwanda, Burundi and the Democratic Republic of the Congo.

 Along the Central Corridor, roads still carry the bulk of traded goods; railways transport only about 10 percent of total goods, because Tanzania's railroads need to be upgraded. The backbone of the Central Corridor is the Central Rail Line that runs between Dar es Salaam and Kigoma in western Tanzania. While this railway was designed to handle 5 million metric tons of cargo per year, it currently only carries less than 10 percent of its capacity.

Countries such as China and Japan have offered support and funding to refurbish the railroads and purchase new locomotives and carriages, although much of the money required to completely renovate the existing railway network -- an estimated $1 billion -- has not been secured yet.

In the short term, transport along the Central Corridor could benefit from upgrades to the railroad, while in the medium term it could benefit most from the use of more trains. In the long term, however, Tanzania may be required to convert its current meter gauge (1,000 millimeters) railways to the standard gauge (1,435 millimeters), which could handle a larger capacity. Such a conversion, which would require the construction of a completely new railroad, cannot be completed in the short term because Tanzania cannot suspend railway operations and because the country's existing railroad bridges cannot accommodate the wider gauge.

Although Tanzania's railroads currently operate well below their capacity, transport along this route could quickly increase if refurbished to improve its efficiency and reliability. While roads is the popular mode of transporting the bulk of goods along the Central Corridor, it  takes trucks four days to travel down the Central Corridor while it takes a train only two. Moreover, by shifting heavy transport from the roads onto the railway, Tanzania can extend the life of her roads.

Besides, a shift in to rail transport will result in emerging industries and prospective mining projects also increasing the volume of goods transported by rail. These mining projects include gold, nickel, copper and uranium projects in Tanzania, as well as other projects farther inland in Burundi, Rwanda or possibly Uganda. 

For example,just a single project, the Mkuju River project, could raise Tanzania's demand for Railway services in Tanzania. This project will make Tanzania the world's second-largest producer of uranium  producing 140,000 tons of uranium per year. 

Apart from improving existing railroads, Tanzania also plans several notable expansions of its railroad network that will either extend into new areas or relieve pressure on the Central Railway Line. One of these projects would extend the Central Corridor's railways into Musongati, Burundi, which would also create a better connection with the Democratic Republic of the Congo's Kivu provinces. 

Another section of railroad is planned to run between Tanga, Arusha and Musoma running parallel to the border with Kenya. From Musoma on the banks of Lake Victoria, existing ferry connections would offer a direct link with Kampala in Uganda.  Although the Tanga -Musoma line is not part of the central Corridor, it would be able to ease pressure on the  Port of Dar-Es-Salaam, a critical component of the Central Corridor infrastructure.

 The Port of Dar-Es salaam is a critical constraints of  Central Corridor. Delays at the port, which is operating near its capacity, can last an average of three or four days. Other constraints along the corridor, such as customs checks at border posts, can easily delay travel times by three quarters of an hour -- or in some places, such as Kabanga along the Tanzanian-Burundian border, by an entire day -- but these are still well below the average delays noted in Dar es Salaam.

Lags in development and in construction of new facilities limit the port's ability to keep up with traffic. The lack of deep-water berths is one of the results of this underdevelopment. 

Another berth is being constructed at the port, but the area around it is very congested because it is located near the central business district. The unavailability of land behind the berths severely limits the port's future expansion. Other plans have been proposed, such as the development of the port of Maruhubi on the island of Zanzibar as a dedicated container terminal, which would relieve a considerable amount of pressure currently on Dar es Salaam. 

The Chinese are also breaking ground on the Bagamoyo port project located north of Dar es Salaam that could become a world-class port facility and involve road and rail connections to the Central Corridor.

While most of the Central Corridor operates well below its capacity, extensive refurbishing projects are needed to improve performance. Increasing the capacity of the port of Dar es Salaam -- the main bottleneck in the Central Corridor infrastructure -- will also be necessary.

 Several solutions to these challenges are available, but funding is often difficult to secure and this casts doubt on the feasibility of these projects. However, growing economic activity, both in the primary sectors and in low-end manufacturing in different countries around Lake Victoria, could make these projects along the Central Corridor more important.

Wednesday, 8 January 2014

EA Securities Exchanges 2014: A year of the Bulls?

 Launching trading of a new listing at NSE
THE  NAIROBI SECURITIES Exchange was the top African performer in 2013. The MSCI emerging Market index placed NSE’s dollar adjusted return at 43.58 per cent. Another analyst, the Africa Capital Group places NSE’s return at 43.70 per cent.

Whatever the case, NSE posted a huge rate of return. The market is capitalised at US$2.3 billion and some of its blue-chip scripts are cross-listed in other bourses in east Africa. This is the largest market capitalisation in east Africa, consequently, the movement of its muscle is also felt in the regional bourses. 

This year, it is expected to pull along those bourses as it surges forward. The other three bourses, namely, Dar-Es-salaam stock Exchange, the Uganda Securities exchange and the Rwanda stock exchange did not feature in the MSCI global Emerging Market index, being nascent markets.

However, according to the ACG index, they are good performers in Africa with returns higher than S&P 500. The index shows that the Uganda Securities Exchange posted 33.3 per cent. DSE performed below S&P rate, posting a 25.5 per cent rate. The S&P 500 index stood at 29.6 per cent. This leads to the question which way east African bourses in 2014? Will they be bulls or bears?

My Prognosis: We are looking at bulls for 2014. Here are my reasons. To start with, the region’s GDP is expected to post a 6.2 per cent growth rate in 2014. But Kenya, which has been the drag in the region’s otherwise fast paced growth, appears set to post anything above 6.0 growth rate in 2014. This would push the region’s growth rate up-perhaps to 6.5 -7.0 per cent.

Why Do I say this? Sentiment on the Kenyan economy is still positive following last year’s peaceful election and transition to the new government. Political risk is thus receding to the back burner. The signs that the case facing the Kenyan President at the International criminal Court could collapse only stokes the fires in the positive territory.
Inflation in the region has also been contained at below ten percent. And safe for a major economic shock, external or internal, inflation is likely to remain within single digits range for much of 2014.

 The discovery of fossil fuels in east Africa, and especially Kenya has spawned new interest in investm ent firms with an interest in Oil, infrastructure. These are the only firms that can invest some debt or equity in the prospecting firms since the prospectors are not yet listed at the local bourses.

Further, Kenya has joined the ranks of middle income countries with a GDP per capita above $1025. Kenya’s GDP per capita is expected to be between $1040 and $1047. In 2012Kenya’s GDP per capita weighted in 2001 dollars was US$991, says the Africa Development bank. In 2013, her GDP growth rate estimated at between 5.0 and 5.4 percent. This means that Kenya’s GDP per capita has risen has surpassed the entry level of $1025.  

This means that listed companies are gearing for better times as economic growth creates more customers. Analysts in Nairobi expect a number of the listed companies to report double digit growth in profits due growth in activity.

East Africa and the COMESA block are the largest market for Kenyan manufactured exports. Consequently, Kenya Companies, especially in the retail trade and commercial banks are aggressively expanding into the regional markets. One of the expansion strategies is to list in the regional bourses.  Companies such as Kenya Commercial Bank, Equity Bank, Kenya Airways, Nation Media Group, East Africa Breweries and Uchumi Super markets have already listed in the bourses such as DSE, USE and RSE.
At the NSE itself, a new round of listings is expected as companies seek cheap capital to arm their war chests as they seek to expand in the region. Once listed at NSE, listing at the secondary market in east Africa is not expensive.

The listing of Kenya companies into these markets has helped increase activity at the local bourses. Being generally blue chip companies, demand for the script is very high. That is why Kenyan Listed companies are pricey in the east African bourses. Despite this, they are also the most sought after companies because of their generous dividend policies. They also contribute to driving activity in the local bourses.

Consequently when NSE sneezes, others catch a cold. And when it runs they run. The expected bullish year at the NSE coupled with growth in the other economies is east Africa will keep bourse activity on the positive territory for 2014.