Africa Market Update - April 2015

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MARKET UPDATE – AFRICA | March 2015 We retain our February 2015 view that the shilling is bound to remain weak exchanging within the 90.0 – 93.0 units to the greenback in the near term. over Kenya’s state of preparedness and intelligence response. USA President, Barrack Obama, has however reiterated that he will visit the country in July 2015 in a move that is widely perceived as a much needed vote of confidence in the country’s anti-terror efforts. ECONOMIC OUTLOOK Shilling Trends on Lows Last Seen in 2011 Despite indications that the USD 688.0 Million Precautionary Loan from the International Monetary Fund (IMF) could be helping in propping foreign exchange reserves, the shilling slid to cross the 92.0 units of exchange to the greenback mark on March 16th, 2015. The local unit has been under immense pressure and is now trending on lows last seen in 2011 when steady depreciation was brought about by commercial bank speculation. We retain our February 2015 view that the shilling is bound to remain weak exchanging within the 90.0 – 93.0 units to the greenback in the near term. Foreign Exchange Reserves vs Import Cover Noting that 2014 was a particularly challenging year for the economy with the main export commodities such as tea (21.0% of export earnings) weathering subdued prices and tourism beset by terror risks, investors should anticipate the shilling to remain weak in the near term. Shilling vs USD Exchange Rate Source: Bloomberg, StratLink Africa We project the country’s balance of trade deficit to have widened by about 7.9% yearon-year to USD 8.2 Billion by close of 2014. In 2015, however, the trade balance deficit is likely to decline as the country is cushioned of a high oil import bill following the decline in global oil prices. Manufacturers are also poised to reap from the declining cost of production and boost export competitiveness in the regional market. Trade Balance Deficit Source: Central Bank of Kenya, StratLink Africa Domestic and External Factors to Depress Local Unit We expect the shilling to remain fragile driven principally by two factors: One, the state of the current account and notably a hangover of deterioration of the balance of payments following a challenging year in 2014. Source: World Bank, StratLink Africa 4 | StratLink Africa Ltd. www.stratlinkglobal.com
MARKET UPDATE – AFRICA | March 2015 USA Dollar Rally to Undermine the Shilling The second factor that is likely to undermine the value of the shilling is the strong rally by the greenback. The rally by the dollar has been driven by rising demand for the unit (USD) with 2014 largely characterized by indications of recovery from the recession. Consumer spending in Q4, 2014 rose by 4.2%, 100.0 bps higher than the same period in 2013 5 . Federal Funds Rate: Imminent Raise? The Federal Reserve is widely anticipated to raise interest rates towards the end of Q2, 2015 (June/July). With the USA market potentially becoming more lucrative for savers and investors eyeing government borrowing, we assess that high demand for the greenback is likely to continue thereby undermining the strength of the shilling. DEBT MARKET UPDATE Rising liquidity in the money market has seen fixed income yields trend downwards in the period between February and March 2015. Dealers report that maturities stood at about USD 564.9 Million in March 2015, a marked 73.3% higher than estimates of the January – February 2015 average with minimal reports of a mop up exercise by the Central Bank. Bloomberg BVAL Yields Index Nigeria Uncertainty Promises Dividend Peripherally, an adverse investment climate in Nigeria has also contributed to the downtrend in yields as foreign investors scout for a safer destination in view of the country’s election cycle and fiscal deterioration. We, however, do not expect the downtrend in yields to prolong owing to the uptick in inflation bound to be further aggravated by a protracted dry spell. Further, government borrowing is likely to remain elevated through the remaining period of financial year 2014/15. Infrastructure Bond March 2015 Description Amount Offered (USD Mln) 272.5 Received (USD Mln) 563.1 Performance Rate 206.6% Yield to Maturity 11.7% Coupon Rate 11.0% Source: Central Bank of Kenya, StratLink Africa Inflation in March 2015 stood at 6.3%, 70.0 bps higher than the February 2015 rate. The Energy Regulatory Commission revised upwards petroleum product prices for the period March 14th, 2014 to April 15th, 2015, a move that could further inflict an uptrend on inflation. Inflation Trend With the USA market potentially becoming more lucrative for savers and investors eyeing government borrowing, we assess that high demand for the greenback is likely to continue thereby undermining the strength of the shilling. Source: Bloomberg, StratLink Africa 5 Bureau of Economic Analysis, USA Department of Commerce Source: Central Bank of Kenya, StratLink Africa Central Bank is not reported to have intervened in the market through mopping of liquidity in the money market. We believe this is the principal reason that has seen the interbank rate trend as low as 5.8% in March 2015. www.stratlinkglobal.com StratLink Africa Ltd.| 5
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Africa Market Update - April 2015

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