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East & Central Africa

Africa Monitor
Vol 7 Issue 3 March 2013

Business Monitor Internationals monthly regional report on political risk and macroeconomic prospects

KENYA

This months top stories

Poll And Investor Confidence To Boost Economic Growth

BMI View: We maintain our view that Kenyan economic growth will accelerate in 2013 as improving macroeconomic conditions and the passage of elections bolster investor and consumer confidence. The major risks to this outlook stem from the elections and a recurrence of inclement weather which has hit regional economies in the recent past.
Third quarter GDP data released by the Kenyan National Bureau of Statistics (KNBS) confirm our view that economic activity gathered momentum in 2012. Coming in at 4.6% y-o-y, real GDP growth has been on an upward trajectory since bottoming out at 3.2% in Q112. We believe growth will continue to accelerate into 2013 and maintain our forecast that the economy will expand by close to 6.0% over the year as a whole (compared to an estimated 4.5% full-year growth in 2012). Underpinning this momentum will be an improvement in consumer and investor sentiment that will come after elections, which we expect to be peaceful, in early March. Confidence will also be boosted by a healthy macroeconomic environment comprised of low inflation and falling interest rates. Although weak demand in Europe will weigh on the external sector, this will be offset by relatively robust growth outlooks for Kenyas trade partners in Africa. Expenditure Outlook Private Consumption Outlook: The recovery in agriculture in 2012 will boost the incomes of many Kenyans who rely on the sector for their livelihood. Purchasing power will also be improved by lower average inflation in 2013 relative
...continued on page 2

Sudan: Al-Bashir Plays To Hardliners

BMI View:President Al-Bashirs grip on power is showing signs of strain, including an apparent coup plot in late November and persistent rumours about his health, which could increasingly drive a hard-line policy stance and postpone the resolution of various internal and external military conflicts.
page 5

Tanzania: Economic Headwinds Set To Subside, But Risks Remain

BMI View: Headwinds which led to a slowdown in growth in Q312 and a pause in disinflation in December should prove short-lived and we are optimistic on Tanzanias prospects in 2013, forecasting growth of 7.1%. However, we note that wide fiscal and current account deficits and low foreign exchange reserves mean that the economy is susceptible to negative shocks.
page 6

Regional: Trade And Investment Between India And Africa Booming

page 8

Oil Outlook
135 130

UGANDA

125 120 115

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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

Bank Holds Rate Over Currency And Inflation Risks

110 105 100 95 90 85

KENYA
...continued from top of front page

RISK SUMMARY
POLITICAL RISK

Foreign Ownership Laws Are Not Retroactive

Kenya's Attorney-General Githu Muigai said in early January that new regulations requiring foreign mining firms in the country to sell 35% shares to locals would not be applied retroactively. The regulations, which were gazetted by the environment and mineral resources minister, Chirau Ali Mwakwere, in September 2012, have been opposed by foreign mining firms. London listed gold miner Goldplat said it is halting expansion, citing the imposition of the law and operational difficulties at the mine. Australian Base Resources also had three mining licences in the Coast Province cancelled by the ministry, with officials claiming the firm has not developed the sites over the last 15 years.
Our short-term political risk rating is 51.3.

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

Source: KNBS, BMI

Growth Accelerates In Q312

Kenya's economy grew by 4.6% y-o-y in Q312, up from 3.5% in Q212 and 4.0% in Q311. Looking at a breakdown of the Q312 figures, it was agriculture which, making up around one-fifth of the economy, was the main driver of the improving economic performance. The sector expanded by 6.9% y-o-y in the third quarter, a significant improvement over the 2.0% expansion in the H112. The construction sector, on the other hand, was an underperformer, expanding 0.6% y-o-y and eclining .0% in seasonally adjusted quarteron-quarter terms.
Our short-term economic rating is 44.0.

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

Source: KNBS, BMI

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

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Firm To Offer Faster Internet

Kenyan internet service provider AccessKenya plans to capitalise on rising demand for bandwidth with the help of its latest network optimisation. It aimsto offer faster internet speeds to subscribers over the next 12 months, according to AccessKenya group network manager, Cyril Oluoch. The process, which was initiated in lateDecember 2012, involves converting all wireless base stations to fibreoptic cable links to enhance the bandwidth capacity by more than 80%. The upgrade is part of a plan to boost internet connectivity and offer versatile Wide Area Network solutions to customers.
Our business environment rating is 41.5.

Source: KNBS, BMI

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

BUSINESS ENVIRONMENT RISK

Source: CBK, BMI

poses risks to agricultural production and to macro stability via the currency and inflation.

EAST & CENTRAL AFRICA MARCH 2013

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KENYA
ECONOMIC OUTLOOK

Bright Prospects Ahead For Banking Sector In 2013

BMI View: The Kenyan banking sector is in a healthy position to expand strongly during 2013, owing to low non-performing loans, effective cost management and falling policy interest rates. We believe total assets will expand by 17.0% during 2013, driven by a 20.0% increase in private sector credit. The introduction of new products, following collaboration between the telecoms and banking sectors, will add impetus to the positive outlook.
The Kenyan banking sector navigated difficult macroeconomic conditions during late 2011 and 2012 relatively easily, with many of the major banks reporting profit increases despite sector-wide slowing credit growth. The continued strong profit performance was largely down to effective cost management. Furthermore, according to data from the Central Bank of Kenya (CBK), non-performing loans remained low (4.1% of the total in October 2012) despite a surge in borrowing costs. The resilience it showed during 2012 has left the sector in a healthy position to benefit from vastly improved macroeconomic conditions, which should see the economy and Kenyan banks perform strongly in 2013. Credit Growth Turning The Corner The latest data from the CBK put total
DATA & FORECASTS
BMI View: After the Kenyan central bank reduced the benchmark lending rate by 150 basis points to 9.50% on January 10, we believe there will be 300bps of total reductions during 2013, implying a yearend rate of 8.00%. The authorities will
2010 Population, mn 4 Nominal GDP, US$bn 5 GDP per capita, US$ 5 Real GDP growth, % change y-o-y 6 GDP KES nominal growth, % change y-o-y 6 Consumer prices, % y-o-y, eop 1,7 Lending rate, %, eop 6 Real lending rate, %, eop 2,8 Exchange rate KES/US$, eop 9 Goods exports, US$bn 5 Goods exports, % change y-o-y 5 Goods imports, US$bn 5 Goods imports, % change y-o-y 5 Balance of trade in goods, US$bn 5 Current account, % of GDP 5 Foreign reserves ex gold, US$bn 10 Total external debt stock, US$mn 12 Total external debt stock, % of GDP 13 Total external debt stock % of XGS 13 Short-term foreign debt, % of total 13 40.5 32.19 795 5.8 7.9 4.5 4.0 -0.5 80.70 5.2 15.1 11.5 21.2 -6.3 -7.8 4.0 8,678.8 27.0 97.5 8.0 2011 41.6 31.86 766 4.4 10.9 18.9 18.0 -0.9 85.07 5.8 10.2 14.8 28.2 -9.0 -13.9 4. 9,373.1 29.4 91.5 8.5

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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MARCH 2013 EAST & CENTRAL AFRICA

 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

Talks Between Government And Rebels Make Little Progress

BMI View: Talks between the Democratic Republic of the Congo and the M23 rebels, who have destabilised the countrys poorly governed East, are breaking down. We believe a return to armed confrontation is increasingly likely. That said, BMI maintains our view that a negotiated solution is inevitable in the long term.
The fighting in North Kivu may have paused, but government and rebel negotiators meeting in Kampala seem no closer to a solution to the long-running instability in the eastern Democratic Republic of the Congo (DRC). Unless a breakthrough is made soon, BMI believes a return to fighting between the M23 rebels and DRC forces is increasingly likely, with the rebels using the threat of further violence to gain more concessions. M23s capture of Goma, a major city in the eastern DRC, forced Kinshasa into negotiations with the rebels. Talks have been held on and off since December 9 in neighbouring Uganda under the banner of the International Conference on the Great Lakes Region. Kinshasa had previously refused direct negotiations with the rebels, and remains sceptical of a process that includes Uganda and Rwanda, both of which are alleged to have supported M23's rebellion.
DATA & FORECASTS
BMI View : High demand for capital goods and imported food and fuel will keep the DRC's current account surplus wide over the coming years. We estimate that the shortfall was worth 10.3% of GDP in 2012, and predict that it will reach 12.1% of GDP in 2014. Given the country's low import cover, we believe that the DRC's balance of payments position is highly precarious
2010 Population, mn 2 Nominal GDP, US$bn 3 GDP per capita, US$ 3 Real GDP growth, % change y-o-y 3 Fiscal revenue, CDFbn 4 Fiscal expenditure, CDFbn 4 Budget balance, CDFbn 4 Budget balance, % of GDP 4 Consumer prices, % y-o-y, ave 5 Consumer prices, % y-o-y, eop 5 Exchange rate CDF/US$, ave 6 Exchange rate CDF/US$, eop 6 Current account, US$bn 7 Current account, % of GDP 7 Foreign reserves ex gold, US$bn 8 Import cover, months g&s 1,8 Total external debt stock, % of GDP 9 66.0 13.12 199 6.5 4,035.0 3,678.7 258.7 2.2 24.6e 9.8e 905.82 915.13 -1.5 -11.7 1.0 1.4 30.6 2011 67.8 15.69 232 6.9 3,991.3 4,463.4 -472.1 -3.3 15.6 16.7 919.26 910.82 -1.6 -9.9 1.1 1.2 29.4 2012e 69.6 18.87 271 7.3 4,875.5 5,517.5 -642.0 -3.7 10.0 7.0 928.45 919.93 -1.9 -10.3 1.1 1.1 28.1 2013f 71.4 22.20 311 7.7 5,716.6 6,541.0 -824.4 -4.0 8.0 9.0 937.73 929.13 -2.6 -11.8 1.2 1.1 26.3 2014f 73.3 25.68 350 6.1 6,686.9 7,824.8 -1,137.9 -4.7 9.0 9.0 947.11 938.42 -3.1 -12.1 1.3 1.0 25.0

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

IGE Expands Mining Plans

Swedish diamond firm IGE has decided to move forward with two new diamond mining projects in the DRC, expanding its investment in the world's third largest diamond producer. The firm was drawn to the two locations, Tshikapa River and Longatshimo River, by rich diamond deposits and low operating costs. The projects have a combined verified resource base of approximately seven million carats of rough diamonds. IGE has already invested US$6mn in production costs at its operations in the DRC and is committed to expanding its exposure to the politically troubled country.
Our short-term economic risk rating is 23.1

BUSINESS ENVIRONMENT

Legal Firm Expands Into DRC

Portugal's Miranda Correia Amendoeira & Associados, one of the country's leading law firms, has decided to expand its African operations to include the DRC. The firm's new Kinshasa office, a dual venture with local MBE-CONSEIL, will link businesses in the country with a legal network including offices in Angola, Equatorial Guinea, Gabon, Mozambique, and Europe. The expansion of the DRC's legal services sector should help encourage international investment in the country by providing advice to help firms enter a legal system that is widely seen as complex and dysfunctional.
Our business environment rating is 26.0.

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

EAST & CENTRAL AFRICA MARCH 2013

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SUDAN
POLITICAL OUTLOOK

RISK SUMMARY
POLITICAL RISK

Al-Bashir Plays To Hardliners

BMI View :President Al-Bashir's grip on power is showing signs of strain, including an apparent coup plot in late November and persistent rumours about his health, which could increasingly drive a hard-line policy stance and postpone the resolution of various internal and external military conflicts.
President Omar al-Bashir, who has had surgery abroad twice and has been in power since a bloodless coup in 1989, has survived challenging times before, but his regime is under growing strain due to a self-reinforcing confluence of domestic and external factors. His politically centralised regime faces three key sources of opposition: popular protests calling for progressive reform, a coalition of rebel movements under the umbrella of the Sudan Revolutionary Forces (SRF) and, increasingly, from hard-line elements in his own power structure. All these sources of opposition have gained in strength over the last few years, owing largely to one common denominator the secession of the oil-rich south of the country. The loss of territory and economic decline generated by secession have also strengthened armed opponents on one side, and emboldened military hawks within the Sudan Armed Forces (SAF) on the other. It is against this backdrop that the former head of Sudan's National Intelligence & Security Service (NISS), Salah Gosh, was arrested in late November, accused, alongside 12 others,
DATA & FORECASTS
BMI View: Sudans inflation declined to 44.4% y-o-y in December 2012. Disinflation will continue in 2013 due to base effects and an expected improvement in the security environment. Our end-2013 headline inflation forecast is 20.0%.
2010e 2011e 2012e 2013f 2014f

Demilitarised Zone Created

Sudanese President Omar Hassan al-Bashir and his South Sudanese counterpart Salva Kiir agreed in early January to set up a demilitarised zone along the disputed border between the countries. The timeframe for implementation of the deal, which was brokered by African Union (AU) mediator Thabo Mbeki, was not given. The AU had called the summit to reduce tensions, following months of often unproductive talks between the neighbours. Agreement on a border and how oil revenues will be shared are outstanding issues more than 18 months after South Sudan became independent.
Our short-term political risk rating is 24.6.

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

Sudan Secures Chinese Loan

Sudan has secured a US$1.5bn loan from state-run China Development bank. The loan, which is repayable after a five-year grace period according to Sudanese media, will go towards bridging the authorities' budget shortfall and will provide an important source of foreign exchange for the country, which remains starved of hard currency. The country has been struggling with an economic crisis since South Sudan became independent, taking with it around three-quarters of Sudan's pre-succession oil production. China is Sudan's largest trade partner after Gulf oil producers and is the biggest foreign investor in the Sudanese and the South Sudanese oil industries.
Our short-term economic rating is 20.2.

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.

BUSINESS ENVIRONMENT RISK

Dam Project Complete

Work on expanding the wall of the Roseiris dam in south eastern Sudan was completed in late 2012 and the enlarged dam was inaugurated at a ceremony in January 2013. The expansion of the wall doubles the dam's capacity to 7.4 billion cubic metres, which will improve its hydroelectric power generation and agricultural irrigation capabilities. The US$441.5mn project, which was carried out by a Chinese firm over four years, was financed by Gulf investors and aims to enhance farmland exports and attract more Gulf investment.
Our business environment rating is 26.5.

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MARCH 2013 EAST & CENTRAL AFRICA

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 Headwinds Set To Subside, But Risks Remain

BMI View: Headwinds which led to a slowdown in growth in Q312 and a pause in disinflation in December should prove short-lived and we are optimistic on Tanzanias prospects in 2013, forecasting growth of 7.1%. However, we note that wide fiscal and current account deficits and low foreign exchange reserves mean that the economy is susceptible to negative shocks.
The Tanzanian economy lost some momentum in Q312, when it expanded by 6.5% y-o-y in real terms, down from 6.9% in Q212 and 7.1% in Q112. Although a detailed breakdown of the Q312 figures has not yet been made available, a summary provided by the National Bureau of Statistics (NBS) shows a relatively subdued performance by agriculture was a major factor. The sector accounts for less than one-quarter of the economy and expanded by only 4.4% y-o-y. Subdued agricultural output has also been reflected in a pause in disinflation. Annual price growth came in at 12.1% in December 2012, the same level as a month earlier. It was the first time in 11 months that annual inflation had not declined from one month to the next. The major reason for the interruption of the disinflationary trend was food prices which increased by 3.1% in month-on-month terms. The good news for Tanzania is these headwinds should be short-lived. From an output
DATA & FORECASTS
BMI View: In 2013 the Tanzanian shilling should remain stable, although we expect the unit to depreciate slightly. However, high levels of domestic demand for hard currency and limited official foreign currency reserves mean the risks are weighted firmly to the downside and we expect significant depreciation in the event of a negative shock to the external accounts.
2010 2011 2012e 2013f 2014f

ECONOMIC RISK

Gold Output Down In 2012

Gold production from African Barrick Golds mines in Tanzania declined in 2012 as a result of operational difficulties, according to a statement issued by the company in January 2013. Total output for the year was 626,212 ounces, a 9% decrease on the 688,278 ounces produced in 2011. Full-year sales also fell by 13% to 609,252 in 2012, down from the 2011 total of 699,539 ounces. However, the CEO, Greg Hawkins, noted that output improved later in the year with Q412 production growing by 13% y-o-y and 22% q-o-q. According to the statement, he is cautiously optimistic that this positive momentum will continue in 2013.
Our short-term economic rating is 46.9.

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.

BUSINESS ENVIRONMENT RISK

Termination Rates Reviewed

Tanzanian telecoms regulator, the Tanzania Communications Regulatory Authority (TCRA), said it is considering lowering termination rates for mobile services. The regulator proposed cutting the rates from an average of TZS112 (US$0.06) per minute to TZS35 (US$0.02) per minute. The regulator plans to reduce the termination rates to TSZ27 (US$0.01) by 2018. The new figures are based on recommendations, following a study by UK-basedconsultancy PricewaterhouseCoopers. Lower termination rates would lower the costs of calls between subscribers from two different networks, lowering the revenue earned by the receiving network.
Our business environment rating is 39.0.

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.

EAST & CENTRAL AFRICA MARCH 2013

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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

Army Closes In On Resistance

Following a renewed push to extinguish the threat from the Lord's Resistance Army, there are signs Ugandan forces are finally closing in on the group's elusive leader, Joseph Kony. In late January it was announced that a former bodyguard of Kony's, apparently known as Brigadier Binani, was killed just over the border with the Central African Republic, in the town of Djema. A field commander named Dick Olum told reporters that he believes the development was a strong indication that 'success is in our grasp'.
Our short-term political risk rating is 56.7.

ECONOMIC RISK

Oil Blocks Auctioned

In an effort to expand the potential productive capacity of its nascent oil and gas sector, authorities in Uganda will soon auction off 13 blocks for oil and gas exploration, according to the country's junior energy minister, Peter Lockeris. The blocks will be auctioned once a key piece of legislation, regulating the sector, has been signed into law. Uganda's Albertine rift basin is thought to have some of the largest hydrocarbons reserves in East Africa. The authorities estimate total crude reserves total about 3.5bn barrels.
Our short-term economic risk rating is 48.8.

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

MTN Plans LTE Network

South Africa-based multinational mobile telecommunications company MTNs Ugandan subsidiary has confirmed plans to deploy a high-speed LTE network in a few months. The company intends spending about US$70mn on the expansion of its network infrastructure, which will support mobile subscriber growth and allow for the launch new products and services. MTN Uganda has brought around 81 new Base Transmission Sites to new coverage areas and deployed nearly 2,800km of fibre backbones to deliver committed business solutions to SMEs and corporate enterprises.
Our business environment rating is 40.2.

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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MARCH 2013 EAST & CENTRAL AFRICA

Regional REGIONAL

ECONOMIC OUTLOOK

Trade and Investment Between India And Africa Is Booming

BMI View: Indias rapidly growing economy will see its trade and investment in Sub-Saharan Africa intensify over the coming years. In contrast to Chinas statebacked, resource-focused model, Indias relationship with the region is more nuanced and its prospects hinge more on private than state involvement. While likely to remain second best (or worse) in the hunt for Africas resources, Indias geographical and cultural ties with the region and its consumer-focused commercial interests create the potential for a more evenly balanced relationship.
Energy Concerns Power One-Sided Trade The explosion in trade between India and Africa over the last few years is one of the starkest (if not the most instructive) indicators of the intensifying economic links between the two markets. Since 2002, Africa's trade surplus with India has ballooned from around US$1.1bn to US$17.3bn in 2011. This has been driven primarily by India's soaring demand for energy, as the country's rapidly expanding power consumption and poorly functioning domestic power sector have seen fuel imports from Africa skyrocket over the last five years. With BMIs Power team forecasting Indian electricity consumption to grow at a rate of over 6% per annum over the next decade and persistent domestic power shortages, we expect energy security to remain a key priority for New Delhi in its Africa strategy and remain the biggest single dynamic driving Indo-African trade. The import picture is more varied and reflects, among other things, the strong geographical and historical links between the two markets, as well as the sub-region's bright economic outlook. This is illustrated by the notable showing of East African countries among the region's top importers of Indian goods, with Kenya, Tanzania and Mauritius placed 3rd , 4th and 5th respectively. Putting direct trade to one side, BMI believes Indian investment into Africa's resource sector will continue to belie its size and requirements. At the heart of the matter will be India's lack of hard cash an essential ingredient given the highly capital-intensive nature of resource extraction in Africa. Compared to China's whopping US$3.2trn in foreign reserves (according to BMI estimates), India's cash supplies are far more modest (at around US$274.3bn in 2011) and the latter's persistent current account deficit is likely to see these run down further over the coming years. India Brings Value-Added Benefits Moving away from resources, we believe
Energy Shapes Trade Picture
SSA Trade With India, As % Of Total Trade

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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Source: IMF DOTS, November 2012

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).

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