Africa Market Update -December 2014

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MARKET UPDATE – AFRICA | November 2014 Counties such as Machakos are bound to benefit from proximity to Nairobi (64 km away) which eases mobility of labour from the country’s industrial and commercial hub. The county is also likely to benefit, in the long-term, from its investment in infrastructure. County Budget Allocation (USD Mln) Source: National Treasury, StratLink Africa On average, Kenya faces an infrastructure funding deficit of USD 2.1 billion per annum indicating need for both austerity in recurrent expenditure and new funding streams 2 . Select counties are, however, setting the pace in capital spending and could provide lucrative satellite investment hubs in the coming years if the trend is sustained. The Public Finance and Management Act (2012) provides that counties should allocate at least 30.0% of annual budgets to capital spending. Development Expenditure (% of Total Expenditure) the country’s industrial and commercial hub. The county is also likely to benefit, in the long-term, from its investment in infrastructure. (Kenya Chamber of Commerce and Industry identified Machakos as the choice location for establishment of a USD 11.1 million tyre recycling facility). Machakos County Snapshot Source: CRA Estimates, StratLink Africa Revenue Collection Presents Risk We note that the proposed increase in county allocation comes on the back of a projected 44.2% decline, year-on-year, in budget deficit to USD 3.8 billion in 2014/15. This is likely to be based on, amongst other factors, strong performance by the debut Eurobond, out of which USD 1.4 billion is expected to fund infrastructure spending. Budget Deficit (USD Mln) Source: Controller of Budget, StratLink Africa Counties such as Machakos are bound to benefit from proximity to Nairobi (64km away) which eases mobility of labour from 2 World Bank Country Report Source: KNBS, StratLink Africa Fiscal risks are, however, likely to emerge owing to an adverse economic environment in the first half of 2014. Terror risk and delay in signing Economic Partnership Agree- 4 | StratLink Africa Ltd. www.stratlinkglobal.com
MARKET UPDATE – AFRICA | November 2014 ments with Europe slowed down business activity and could manifest in below target revenue mobilization by the government. Further, issuance of an infrastructure bond four months after the Eurobond issuance indicates that government coffers could be cash-strapped. Kenya Revenue Authority has reported that revenue collection for the first half of 2014/15 fell short of target by USD 189.1 million representing a 90.2% performance rate. This comes against a backdrop of a strong 102.9% performance rate in 2013/14. Prospect of Counties issuing Asset Backed Securities: Promise or Peril? The Capital Markets Authority is reported to have prepared a draft policy that will guide sale of Asset Backed Securities by county governments. If it materializes, counties will identify suitable projects and package them as debt securities in raising capital. At the moment, majority of the counties are running high recurrent expenditure that is, in part, driven by fiscal imprudence. In the first quarter of 2013/14, twenty seven counties (out of forty seven) spent no money on development expenditure with a lot of resources channelled towards foreign travel and conferences 3 . Such fiscal indiscipline could present grave risk for investors if counties raise capital through Asset Backed Securities since the likelihood of default cannot be overlooked. Further, financial improbity is still a challenge in the Kenyan environment with a recent government audit indicating the government has been losing up to USD 66.6 million per annum in salaries to non-existent workers. The tap sale has also served to mop up some of the excess liquidity that was rising on the back of net government payments and maturity of term auction deposits. 91 Day T-Bill Accepted Bids (USD Mln) Source: Central Bank of Kenya, StratLink Africa The upswing in the short-term end of the curve, however, indicates rising government appetite for domestic borrowing. Despite government efforts, liquidity remains high in the money market with marginal upward movement in the interbank rate. (From an external debt position, the country returned to the international market by reopening both the five year and ten year issues of the Eurobond with an aim to raise USD 500 million – USD 700 million) Bloomberg BVAL Yields Index In the first quarter of 2013/14, twenty seven counties (out of forty seven) spent no money on development expenditure with a lot of resources channelled towards foreign travel and conferences. Such fiscal indiscipline could present grave risk for investors if counties raise capital through Asset Backed Securities since the likelihood of default cannot be overlooked. DEBT MARKET UPDATE The market continues to be characterized by marginal movement of the yield curve in what fixed income dealers say points at the impact of Eurobond proceeds. However, the issuance of a Tap Sale to raise USD 221.9 million in quick succession to the twelve year infrastructure bond that raised USD 166.5 million augments our view that government appetite for domestic borrowing is likely to be elevated in the coming months. Source: Bloomberg, StratLink Africa The interbank rate was on the downtrend for the better part of the month before starting to exhibit an uptick in the latter phase. 3 Controller of Budget Report January 2014 www.stratlinkglobal.com StratLink Africa Ltd.| 5
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Africa Market Update -December 2014

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