Standard - African Markets Revealed Sep 2010

African Markets Revealed — September 2010
Index
African markets
3
Coming in from the cold
Angola
12
Out of the woods?
Botswana
16
Fiscal pressures set to persist
Côte d’ Ivoire
20
A step closer to general elections?
Democratic Republic of the Congo

24
Easing interest rates
Egypt
28
Getting back into its stride
Gabon
32
Economic diversification on the agenda
Ghana
36
Sovereign downgrade is behind the curve
Kenya
40
Economic growth could gather momentum
Malawi
44
Growth driven by agricultural production
Mauritius
48
Stepping up the response to economic headwinds
Mozambique
52
Strong GDP growth continues
Namibia
56
Mining sector on the mend
Nigeria
60
Loose fiscal policy drives up bond yields
Republic of the Congo
64
Oil prices support macro outlook
Senegal
68
Signs of recovery despite structural imbalances
South Africa
72
Feeling the effects of a fragile global recovery
Tanzania
76
Gearing up for elections
Uganda
80
Focus turns to elections
Zambia
84
Rising yield rates could rekindle carry attraction
Fixed Income Research

Stephen Bailey-Smith* Henry Flint* Samir Gadio* Michael Keenan*

+44-20-3145-6964 +27-11-378-7202 +44-20-3145-6774 +27-11-378-7246
Stephen.Bailey-Smith@standardbank.com Henry.Flint@standardbank.co.za Samir.Gadio@standardbank.com Michael.Keenan@standardbank.co.za
Phumelele Mbiyo* Atusaye Mughogho* Dmitry Shishkin* Seamus Vasey*

+27-11-378-7236 +27-11-378-8152 +44-20-3145-6963 +27-11-378-8151
Phumelele.Mbiyo@standardbank.co.za Atusaye.Mughogho@standardbank.co.za Dmitry-Shishkin@standardbank.com Seamus.Vasey@standardbank.co.za
2
African markets: coming in from the cold
• The global environment is becoming increasingly supportive of flows back into African markets, as the search for
yield thaws the illiquidity premium.
• We are not advocates of a double dip global recession and deflation. We rather see a soft landing in global eco-
nomic growth from a very restrained removal of monetary and fiscal expansion.
• EM growth out-performance will probably attract increased investment inflows, especially as global interest rates
are likely to remain lower for longer.
• EM currencies are expected to continue outperforming G4 currencies, even given an eventual return of EUR/
USD downside as the soft data releases switch back to the EU from the US.
• We are constructive on oil prices, seeing a high of around USD95 pb in 2010 and above USD100 pb in 2011.
• We continue to favour African FX carry trades against G4 in GHS, EGP, AOA and even NGN given the higher
rate on offer further down the curve.
• We are reasonably happy being moderately long duration in KES, GHS, ZMK, UGX, EGP, ZAR and possibly
even NGN after the recent back up in yields.
• We remain constructive on the African macro equity story and still expect some strong multi-month returns fol-
lowing a fairly frosty performance over the last four months.
• We would lighten up on Gabon and possibly Ghana Eurobond positions after their recent solid out-performance.
We still like Senegal, the lesser-spotted Republic of Congo and we are starting to see value in Côte d’Ivoire.
cant negative influence on global growth. In many ways,

Global growth: double-dip mist is lifting
the fiscal austerity has been imposed by the market as
the yield required to lend to EU governments rose. The
Our default position on global growth since mid-2009 has
ensuing increase in debt servicing costs also undermines
been that it will outperform expectations. The position
the government’s ability to spend on other things that
was motivated by the overly bearish view that has hung
arguably have a more direct impact on economic growth.
over the market, especially in Europe and America, since
the financial crisis in 2008. The view served us well in the The bearishness on global growth was additionally fu-
period through to end-Apr 10, at which point we felt the elled by signs that the US consumer was turning less
usefulness of the stance declined substantially following
Figure 1: IMF economic growth forecasts
an extended period of broad based upward revisions in
growth expectations. During May and Jun 10, we once 10.0
again found our bullish growth stance questioned by the
market as it grappled with the prospect of a double dip in
G4 economic growth. Our bullish default position came 6.3
back into its own in Jul 10 as the double dip growth ex-
pectations lifted in line with improving risk appetite. After
2.5
being again questioned in Aug 10, the soft-landing global
growth scenario appears to be winning through in Sep 10
and we are happy to subscribe to it in coming months.
-1.3
The roots of the double dip concerns come from several
issues linked to expected de-leveraging. Perhaps the
most critical during May and Jun 10 were concerns over -5.0
European government de-leveraging via fiscal tightening. 2008 2009 2010 2011 2012 2013 2014 2015
Such tightening was seen as too early and likely to un- Developed Emerging World
dermine the region’s economic growth and have a signifi-
Source: IMF
3
confident and employment creation was proving elusive. EM decoupling

Another piece of the bearish growth picture came from
concerns over the measures taken in China to slow eco- We have never advocated de-coupling as an argument
nomic and particularly credit growth there. for EM asset out-performance. If anything, EM econo-
mies are increasingly integrated into the global economic
Interestingly, in the middle of the double-dip growth con-
system. The financial crisis in the developed world
cerns in Jul the IMF published their revised World Eco-
clearly had huge knock on influences for EM, mainly
nomic Outlook in which they revised up their expectations
through financial channels. But this is not the same as
for global GDP growth in 2010 to 4.6% from 4.2% in Apr
arguing that emerging economies cannot continue to
10. Their expectations for 2011 remained unchanged at
flourish if growth in the developed world is subdued. We
4.3%. The IMF revised down EU growth forecasts 0.2pps
believe it most certainly can. Indeed, the major issue the
to 1.6% in 2011, revised up US growth forecast 0.2pps to
markets are grabbling with is how far the healthy growth
3.3% in 2010 and 0.3pps to 2.9% in 2011. Meanwhile,
in emerging economies can assist the developed econo-
they revised down Chinese growth 0.5pps to 10.5% in
mies during what is likely to be an extended period of de-
2010 and down 0.3pps to 9.6% in 2011. However, EM
leveraging and subsequent low growth. We continue to
growth was revised up 0.5pps to 6.8% in 2010 and down
advocate that the self-reinforcing dynamism being dem-
0.1pps to 6.4% in 2011.
onstrated by emerging economies will be sufficient to
Although it is possible that the IMF are now behind the prevent a double dip in global growth and inflation.
curve in being too bullish on global growth, we see the
Our view is broadly in line with that of the IMF. They are
chance of a double dip in global economic growth as ex-
looking for developed economies to grow on average by
tremely low. Indeed, we are reasonably happy to run with
around 2.4% y/y over the next 5-y, they expect emerging
the IMF’s recent estimates, albeit with the risks to some
economies to grow an average of 6.2% y/y over the
downward revision.
same period, producing global growth of average 4.4% y/
Orderly de-leveraging y. Accordingly, while emerging economies account for
32.7% of current global GDP (in USD terms) in 2009 (up
We continue to adhere to the argument that the inevitable from 20% in 2000), this proportion will increase to 38.7%
developed economy de-leveraging will be extremely in 2015. Basically, while a little less than a third of global
closely managed in an attempt to make it occur as orderly GDP, emerging economies are expected to produce
as possible. Basically this means that fiscal and especially around half of global GDP growth. If these expectations
monetary stimulus will only be removed into an environ- are extrapolated forward, emerging economies will pro-
ment of reasonable investor and consumer confidence. duce more than developed economies by around 2028.
The consensus view, that we broadly share, that G4 inter-
est rates will probably stay low for longer, sits in line with
Emerging market bubble
the orderly de-leveraging argument.
Figure 2: EU high yield versus Emerging market spreads Figure 3: EM’s share of global growth increasing
1,400 %
90
1,100
70
800 50
500 30
200 10
Feb-08 Oct-08 May-09 Jan-10 Aug-10 1990 1993 1996 1999 2002 2005 2008 2011 2014
EUR high yield crossover EMBI plus Developed Emerging
Source: Bloomberg, Standard Bank Research Source: Bloomberg, Standard Bank Research
4
Figure 4: Emerging versus developed equity performance Figure 5: EM FX volatility versus VIX index
Jan 09 = 100 90
250.0
202.5 68
155.0 45
107.5 23
60.0 0
Oct-06 Oct-07 Sep-08 Aug-09 Jul-10 Oct-05 Dec-06 Feb-08 May-09 Jul-10
MSCI EM MSCI DM MSCI Frontier VIX EM FX Volatility
Source: Bloomberg, Standard Bank Research Source: Bloomberg, Standard Bank Research
We also continue to argue that the poor growth outlook frontier markets performance is still lagging relative to
in developed economies and the increased levels of wider EM since the lows reached in early 2009. Africa,
household savings will foster larger investment flows to being at the far end of the frontier curve, has lagged the
outperforming emerging markets. The caveat to these re-bound even further.
flows will be the extent of the increase in fiscal dis-
Part of the issue is related to liquidity. The problems of
saving.
not being able to get out of illiquid assets during the fi-
Inflows into developed countries (particularly the US) nancial crisis continues to result in a substantive pre-
from emerging countries will continue to slow and possi- mium being applied to illiquid assets by global investors.
bly reverse on a net basis. Second, frontier markets are still viewed as something of
a complimentary trade (offering yield pick up) during peri-
The larger investment inflows into emerging markets will
ods of solid risk appetite. The relatively shaky risk senti-
push up asset prices adding to the virtuous growth and
ment so far in 2010 has meant frontier market trades
asset price out-performance spiral. We are reasonably
have remained relatively marginal.
confident that these flows will play a key role in creating
EM asset bubbles in due course, but this is likely to un- Skittish risk sentiment to continue
fold on a multi-year basis.
The out-performance of EM equities over the last year, A great deal of the shaky risk sentiment seen in 2010
relative to developed markets is part of a self-reinforcing comes from an underlying concern that 2009’s asset
cycle of increasing investment flows into EM which is price rebound was built on an unsustainable increase in
likely to persist as a multi-year trend. The EM out- fiscal and monetary policy. Clearly much of the double
performance is clearly demonstrated by the MSCI EM dip economic growth outlook comes from similar con-
equity performance since the crisis, versus the MSCI DM cerns.
equity market performance over the same period. That Have we seen the end of these concern? Absolutely not.
said, most of the EM equity out-performance was during But we suspect that we may take a respite from them for
2009. Actually year-to-date in 2010, while MSCI DM is a while as it seems that the market is presently overly
down 3.2%, MSCI EM is up a modest 1.4%. pricing the tail risk from another serious period of market
dislocation and ensuing double dip deflation. In some
Frontier market bias: search for yield
ways the sharp upside correction we saw in risk appetite
during July has used up some of our positive expectation
Over the same period, the MSCI Frontier equity index
for H2:10, although Aug’s negative sentiment made the
was up 4.2% and MSCI Africa was up 12.2%. The ex-
northern summer months somewhat more of a sideways
pectation that there would be significant catch-up from
move.
frontier markets (especially those in Africa) during 2010
has played out moderately well as indicated by the per- Part of the positive sentiment was fostered by the seem-
formance of the respective equity markets. That said, the ing disconnect between strong US company earnings
5
Figure 6: USD/EUR versus average W Europe CDS spread Figure 7: Major versus EM currencies in USD terms
0.90 200 Jan 09 = 100

115.0
155
107.5
0.80
110
100.0
0.70
65 92.5
0.60 20 85.0
Jan-09 May-09 Aug-09 Dec-09 Apr-10 Aug-10 Sep-04 Feb-06 Aug-07 Jan-09 Jun-10
USD/EUR Average CDS spread USD vs developed USD vs emerging
Source: Bloomberg, Standard CIB Global Research Source: Bloomberg, Standard CIB Global Research
and the pessimism on the economy. Indeed, some 75% once any perceived deflationary concerns have re-
of the S&P500 companies reported earnings above mar- scinded. With fixed income instruments having rallied
ket expectations. There is also strong evidence that hard in recent months, we are looking for something of a
these companies are sitting on substantial cash re- rebound switch-trade back into equities, probably in a
serves, which has to be a fairly positive indicator for post-northern hemisphere summer holiday rally in Sep
valuations. Cash-rich companies can either buy back 10. We have a target of 1,200 on S&P500, but the index
stock, invest in future growth or pay large dividends. needs to break resistance at 1,130 first.
Moreover, at some point these companies will have to
start re-investing, which is a vital part of rebuilding em- International currency outlook
ployment and consumer confidence.
The other key part of our global outlook depends on USD
Debt bubble forming developments. Although EUR/USD has been the key
global FX cross arguably for some time, its importance
Global risk sentiment certainly seems to still favour fixed for risk sentiment took on new impetus since late 2009
income. While high beta equity markets in EM and DM as potential questions around debt sustainability in
have struggled in 2010, fixed income has rallied hard. Europe took hold. As Figure 6 shows, average Western
Moreover, this is not just US treasuries, which are the Europe CDS spread changes have been a key driver of
natural safe haven focus. Indeed, fixed income and EUR/USD for much of 2010, although the importance
credit, even sub-investment grade credit, have generally appears to have waned somewhat in recent weeks.
outperformed equities during 2010. Indeed, as part of the
Our house view is that EUR/USD is heading back to par-
search for yield we suspect that going forward dividend
ity at some point in the next 6-12 months. But that this
yields rather price earnings ratio will become an increas-
multi-month trade has been interrupted at present by a
ingly important factor driving investment decisions. That
combination of initially overly short EUR positioning and
said, the sharp decline in global yields should also have
the relative strength of growth indicators moving back in
a positive impact on equity valuation in so far as the risk
favour of the EU versus the US. As these are expected
free rates used in the discount factors have declined.
to reverse towards the end 2010, we could see Eurozone
It certainly seems that at present the asset class of concerns resurface and EUR/USD to resume its down-
choice, for the clearly ample global liquidity to find a side momentum. Importantly, such a move is likely to be
home, is fixed income. Indeed, the creation of excess associated with more negative risk sentiment.
liquidity to prevent a deflationary spiral taking hold has
been a key feature of our bullish post-crisis stance. It is a EM currencies: strong and consistent
solid theme supporting our soft landing for global growth
expectation. Moreover, we continue to expect the inter- The second key currency theme regards the expected
national authorities to push and pull the liquidity lever out-performance of EM currencies versus DM currencies
appropriately, only removing monetary accommodation Against the developed countries the USD is up 2.4%
6
Figure 8: US Treasury yield (10 year) Figure 9: Commodity price development
20 Jan 09 = 100
350.0
15
277.5
10
205.0
5 132.5
0 60.0
Jun-78 Apr-86 Feb-94 Dec-01 Sep-09 Oct-06 Oct-07 Sep-08 Aug-09 Aug-10
UST 10-yr CRB Index Gold Oil
Source: Bloomberg, Standard CIB Global Research Source: Bloomberg, Standard CIB Global Research
YTD in 2010, while against the emerging countries it is breached. With US Treasuries still seen as the ultimate
down a modest 0.4% YTD. Moreover, not only has EM risk-free rate, these historically low yields have proved
currencies outperformed DM currencies against the USD, extremely constructive for fixed income assets since Apr
they have also been less volatile. The 25-d vol on EM 10. That said, as already argued, lower risk free rates
currencies was 3.6% on 8 Sep, while the 25-d vol on DM are also supportive of improved equity valuations.
currencies was 8.0%. The average YTD was 5.1% for EM
currencies and 8.8% for DM currencies. EM monetary policy
The recent reduction in EM FX volatility is also noticeable Just as economic growth between EM and DM is diverg-
when one compares the volatility of key high beta EM ing, so is monetary policy, with a number of EM central
currencies against the USD (see Figure 5) with the VIX banks already started upon monetary tightening. Inter-
index (S&P500 volatility index). The argument here is that estingly, we still believe that the focus on deflation in the
EM currencies are starting to detach from more traditional developed economies will likely lead a number of EM
indicators of global risk sentiment. central banks to leave monetary policy too loose for too
long, with the potential for rates to back up quite aggres-
Interest rate outlook
sively at some stage in the future. We suspect this will
prove more of an issue next year rather than in 2010. In
Our global interest rate outlook has also altered a little in
the meantime, the long duration trade across high beta
recent months. When it comes to monetary policy in the
EM has been given an extra lease of life, that we sus-
US we have been in the “low for longer” camp for some
pect will last for most of the remainder of 2010.
time. But we have pushed out the expectations of the re-
moval of monetary accommodation even further and the Constructive on commodity prices
expectation of interest rate hikes to at least the back end
of 2011. The decision by the US Fed at its Aug FOMC Commodity prices on average are still some way from
meeting to re-invest maturing agency debt and agency their highs in early Jan 10, but they are up from May 10
mortgage backed securities in longer-term Treasuries, left lows and are still significantly above Feb 09 multi-year
monetary policy neutral rather than allowing a moderation lows. Undoubtedly commodity prices have been under-
in the quantitative easing strategy. mined in 2010 by USD strength and concerns about
Not surprisingly, this FOMC change proved extremely weaker economic growth. Although we can see both of
constructive for US Treasuries and we saw an extension these issues undermining commodity prices on a multi-
of the bull flattening that has been seen in recent month. month basis, we remain pretty constructive.
The US 10-y Treasury yield rallied to 2.41% (on 25 Aug First, we are buyers of the soft landing in global growth
10) and is probably likely to test the Dec 08 lows of argument, with key emerging economies continuing to
around 2.0% and possibly even make new lows before produce significant upside demand for commodities.
the present multi-year declining trend channel is finally Second, with interest rates extremely low and high beta
7
Figure 10: US Treasury yield (10 year) Outlook for African currencies
Jan 09 = 100
120.0 Our relatively neutral view on African currencies against
the USD in our May publication proved reasonably accu-
rate. Our AF10 currency index was flat versus the USD,
107.5 but was down a modest 1.6% against the EUR. On a
YTD basis, the AF10 was down 9.4% against the USD
and up 1.7% against the EUR.
95.0
When the returns against the forward curve are consid-
ered (Figure 11), the African currencies faired better but
82.5 were still among the worst performers among a group of
EM currencies in the 4-m since early May. To some ex-
tent the starting point distorts the story, as it captures the
70.0
aggressive weakness against the USD seen by African
Nov-06 Oct-07 Sep-08 Aug-09 Aug-10
currencies in May. Indeed, on a 3-m basis African cur-
USD/AF10 EUR/AF10
rencies have generally delivered positive returns against
the USD.
Source: Bloomberg, Standard CIB Global Research
Interestingly, while the AF10 has been relatively weak
against the USD YTD, this is not because of an overt
commodities like oil, gold or copper trading more like cur- deterioration in BOP. Indeed, FX reserves have gener-
rencies, we believe the appeal of commodities as invest- ally been increasing suggesting that there has been con-
ment assets will continue to be a key driver. certed policy towards allowing some weakness. Cer-
tainly, this sits comfortably with the broader policy stance
Our core view on oil is for it to trade to a high of USD95 of accommodative monetary and fiscal policy. Clearly
pb in coming months from a previous high of USD87.0 pb adopting relatively loose external monetary conditions
and a present price of USD76.0 pb. Importantly, this assists the growth drive presently in place. Certainly few
would provide an average price on front-month WTI of of the African currencies we look at appear expensive at
around USD85 pb in the rest of 2010, which would be this point.
extremely supportive for most oil exporters, but without
placing massive additional inflation pressure into the sys- Broadly speaking we are constructive on African curren-
tem. We are looking for oil prices to trade above USD100 cies on a multi-month basis. First, with the exception of
pb in 2011 and average around USD92 pb, with the possi- SA they generally look cheap relative to their historical
bility that the volatility of the prices could be less marked values, on a real effective basis, against their BOP fun-
than in previous years. damentals or compared to the performance of non-
African EM currencies. Second, we believe that the pol-
Figure 11: FX carry trade return since last publication in May
15.0
10.0
5.0
0.0
-5.0
Colombia
Turkey
Israel
Mexico
Tanzania
Peru
Malaysia
Zambia
Nigeria
Czech
Indonesia
Poland
Ghana
Chile
Uganda
Russia
Egypt
Philippines
Mauritius
Hungary
Brazil
Kenya
Korea
South
Angola
Botswana
Africa
4-m FX versus USD 4-m carry Total 4-m return

Source: Bloomberg, Standard Bank Research
1. Note AF10 is Botswana, Egypt, Ghana, Kenya, Mauritius, Nigeria, South Africa, Tanzania, Uganda and Zambia.
8
icy bias for cheaper currencies is running out of steam as sion to cut the repo rate by another 50 bps to 6.0% and
we move out of a dis-inflationary phase. Third, we are leaving the policy stance relatively neutral means that
relatively benign on EUR/USD in coming months, al- there are probably some last vestiges of yield compres-
though we suspect the bias is towards a weaker EUR on sion to come. Yet the multi-month risk/rewards are proba-
a 6 to 12-m trajectory as EU wide risk concerns resurface. bly towards lightening up on duration.
Fourth, we are reasonably happy that global growth will
Despite much of the positive price action in Ghana’s curve
soften relatively modestly undermining trade flows. Fifth,
having occurred in Q1:10, we were reasonably construc-
we see a large investor bid for EM currency carry trades
tive over the last four months and after some global risk
in coming months as equity caution lifts only moderately
related jitters, we have seen some further moderate yield
and duration concerns start to bite. Sixth, our global out-
compression along the curve. On the back of our con-
look remains supportive for commodities, which will
structive GHS and inflation view we believe that there is
broadly benefit Africa, but will particularly benefit its oil
still some further gradual yield compression to come in
producers.
coming months.
In terms of attractive carry trades, we continue to favour
Kenya’s bond curve has been the star performer over the
heavily managed currencies with strong BOP positions
last four months. We were relatively neutral on the curve
and high yields. These are broadly found among Africa’s
having seen some impressive yield compression already.
hydro-carbon producers.
However, the market seemed happy to take the curve
We remain confident that USD/NGN will continue to trade down to extra-ordinarily low levels given the combination
in a reasonably tight range around 150 on a multi-month of extremely benign inflation and excess liquidity. While
basis. The extremely low rate on offer at the short-end we do not see the curve selling off aggressively in coming
make the carry trade potential limited at present, but the months, we see further yield compression as modest and
back up in longer bond yields means there may be some limited to longer dated paper. As such, we continue to
interesting opportunities presenting themselves in coming favour a roll-down trade funded in the short-end.
months.
Indeed, we see potential for roll-down trades in Uganda,
The solid fundamental C/A story and the significant inter- Tanzania and Zambia, with the possibility of further bull
est rates on offer continues to make USD/AOA an attrac- bear rotation as in Kenya.
tive proposition. Moreover, there appears to be a shift in
Nigerian yields have backed up significantly in the last
strategy to allow some AOA appreciation in line with the
four months and the yield curve has become much
positive C/A fundamentals. Market access continues to
steeper. The 20-y bonds is now at 11.6% and the 5-y at
be extremely limiting.
9.0%. These are now approaching more normal levels for
We still believe the EGP carry trade offers value, funded an economy with inflation in low double digits. These
against a EUR/USD basket. Indeed, we suspect that the yields are also approaching levels that once again start to
authorities have drawn a bit of a line around 5.70 and that look attractive.
there is some catch-up relative to the historic relationship
We are also reasonably constructive on duration in Egypt,
with EUR/USD moves.
after the short-end rallied with global investor appetite and
Of the non-hydrocarbon economies, we continue to favour has started to drag down the longer-end, which is being
short USD/GHS positions despite the sharp reduction in supported by a neutral to possibly easing monetary policy
interest rates. bias.
Milking the bond duration dregs From equity underperformance to out-

performance
As with the broader local EM fixed income market, a clear
We have been very constructive on African equities during
trend in African local rates is difficult to discern. In many
2010. Key to our view was the expectation that a number
ways local currency duration trades have been the asset
of them would rebound strongly in order to catch up with
class of choice by investors over the last four months.
the strong performance in other EM equities during 2009.
Certainly, the continued downside in yields across G4 has
We saw the rebound as part of the shift to more illiquid
fostered a very positive environment to push local rates
frontier markets as the search for yield progressed and
across the globe even lower.
risk appetite recovered from the nervousness installed
Nowhere is this better seen than in South Africa, where during the 2008 financial crisis.
foreign inflows into the bond market have been a major
Our expectations materialised nicely in the months to
source of recent ZAR strength. The 9 Sep 10 MPC deci-
9
early May, but have waned in the interim months. Nigeria Figure 12: US Treasury yield (10 year)
was down 12.5%, Ghana down 5.9%, Egypt down 3.6%
Jan 09 = 100
and Kenya up 3.5%. MSCI Africa was down 7.6%, while 250.0
MSCI EM was up 4.6%.
In many ways, we are fans of the lagged correlation with 197.5

the higher beta EM markets, with the rebound seen in
MSCI EM in Jul and early Sep not really filtering through
to the African markets yet. We still believe it will and ex- 145.0
pect to see the still positive YTD appreciation in these

markets (excluding Egypt) to be added to in coming 92.5
months.
We are perhaps most constructive on Nigeria which de- 40.0

spite being one of the best performing equity markets Nov-06 Jul-07 Apr-08 Dec-08 Aug-09 May-10
YTD, still show plenty of upside potential. We target 1,200
Egypt Nigeria Kenya
for the benchmark NGSE-30 by year-end and 1,500 by Ghana MSCI EM
the end of 2011, implying upside of almost 20% and
50.0% respectively from its current level of 1,002 in early Source: Bloo mb erg, Standard CIB Glob al Research
Sep 10.
ment for EM credit and the increasing search for yield
First, Nigeria’s strong economic growth backdrop and most of Africa’s Eurobonds have performed well in recent
easy monetary conditions provide solid backdrop for equi- months, especially Gabon’17 and Ghana’17.
ties. Second, Nigeria is still some 64% from its highs and
Gabon’s Eurobond (USD1bn; 8.2%; rated BB-) yield fell to
has lagged broader EM and other African market perform-
5.6% on 8 Sep, a record low, and the spread with equiva-
ance (especially Kenya). Third, Nigeria, like the rest of
lent US treasuries declined to 295 bps. The new low
SSA ex-South Africa remains relatively undiscovered with
spread places it in the middle of the EMBI Global universe
an underweight holding by Global Emerging Market
which has a spread of around 291 bps presently. At such
(GEM) funds. Fourth, valuations, earnings growth and
levels, and despite the technical support from the informal
profitability are attractive. According to our estimates the
amortisation structure, we see limited price upside from
market is trading at a Dec 11 P/E of 8.3x and a dividend
here.
yield of 6.1%. In Table 1 we have identified the 10 Nigeria
equities we expect to outperform in coming months. Ghana’17 (US$750m; 8.5%; rated B by S&P and B+ by
Fitch) have also rallied, with the yield retreating to 5.9%
African Eurobond outlook on 8 Sep, from 8.6% on 25 May, and its spread ebbing to
329 bps, from 549 bps, in the same timeframe.
In line with the relatively favourable global risk environ-
Table 1: High conviction Nigeria equity picks
Market Cap Price (Cents, Target Price Upside/

Stock Sector Rating Price (N) Target Price (N)
($m) $) (Cents,$) Downside
Oando plc Oil & Gas BUY 746 41.37 82.49 62.05 123.73 99%
Flour Mills Consumer BUY 794 47.93 91.00 71.90 136.50 90%
Fidelity Bank plc Banking BUY 435 1.56 2.85 2.34 4.28 83%
Diamond Bank plc Banking BUY 608 4.27 7.81 6.41 11.72 83%
Skye Bank plc Banking BUY 529 4.73 7.72 7.10 11.58 63%
Dangote Sugar Refinery Consumer BUY 1,309 10.90 17.67 16.35 26.50 62%
Dangote Flour Mills Consumer BUY 579 11.40 18.00 17.10 27.00 58%
UACN Prop. Dev. Co. plc Infrastructure & Building BUY 436 12.47 18.00 18.70 27.00 44%
Guaranty Trust Bank plc Banking BUY 2,391 10.27 14.66 15.40 21.99 43%
First Bank of Nigeria plc Banking BUY 2,744 8.47 11.47 12.70 17.20 35%
10
Interestingly, Ghana’s downgrade by S&P in late Aug has that the presidential election scheduled for late Oct, will
had no negative effect on the Eurobond, suggesting to actually take place after five or six previously announced
some extent that global liquidity, macro and risk condi- elections were cancelled. If the election is to proceed with-
tions rather than domestic metrics remain the key drivers. out major political dislocation, then the bond looks ex-
That said, it may also be taken as the dwindling influence tremely attractive in relative terms. The bond offers an
of ratings in many situations. Although it is difficult to see attractive yield pick up at 11.5% and a spread of 783 bps
substantial further yield compression from here we do over US treasuries. Moreover, the step-up nature of the
expect the release of the upward GDP revisions, that are coupon payment means they are relatively small
long overdue, to make the market more comfortable with (USD58m a year) versus total revenue projected at
the present pricing. USD4bn for 2010. Apart from the political environment,
Côte d’Ivoire’s current macro economic risk metric is actu-
Senegal’s 5-y Eurobond (US$200m; 8.75%; rated B+) has
ally reasonably supportive
also advanced in Q3:10. After trading up to a yield of
10.1% in Mar, the bond fluctuated in the 7.8%-9.6% range RepCongo’29 (USD477.8m; 3%; not rated) has also re-
between Apr and May, and currently yields 7.8%. The mained relatively flat at around 9.3% between early Jun
spread over US treasuries tightened some 114 bps be- and Sep, while the spread with US treasuries actually
tween 2 Jul and 6 Sep to around 627 bps. As such, Sene- widened to 671 bps, from 641 bps over the same period.
gal still offers some 351 bps of yield pick up over the The poor performance probably reflects the substantial
EMBI Global spread even as Senegal has outperformed illiquidity of the bond. Certainly its risk metric looks solid:
the index. It also continues to give up some 179-256 bps we are looking for a sizeable fiscal surplus of around
of yield to comparable issuers such as Ghana, Gabon and 26.0% of GDP in 2010 and for GDP growth to outperform
Sri Lanka. Despite the bond’s relative illiquidity we are in the region of 8.7%. We would be buyers of the lesser-
looking for some additional spread compression from spotted RepCon’29 on any sightings of a 9.0% plus yield
Senegal’14 in coming months. Moreover, the potential for handle.
the government to offer a switch auction of the bond, roll-
Looking forward we expect the Nigerian government to
ing it into a larger USD500m issue in 2011 should add to
sell a USD500m Eurobond by end-Nov. The bond is likely
the bond’s attraction.
to be well received given the current international search
Côte d’Ivoire’s international bond (US$2.3bn; 2.5%; not for benchmarked sovereign high yield and price extremely
rated) due 2032 has underperformed its African and EM tightly, probably between Gabon and Ghana.
peers. The bond was issued as a result of the restructur-
It is also possible that Angola, after getting its rating and
ing of six defaulted bonds and is currently the largest
finally auditing its arrears, will bring its Eurobonds to mar-
Eurobond in the African debt universe (ex SA). It has per-
ket in coming months.
formed poorly as foreign accounts that held the defaulted
bonds have utilised rallies to take profit, preventing a size-
able rally in the instrument.
A sustained turnaround in Côte d’Ivoire’32 is probably

conditional on a sharp reduction in political risk. It seems
Figure 13: African Eurobond spread continue to narrow
%
2,950
2,250
1,550
850
150
Nov-06 Oct-07 Sep-08 Sep-09 Aug-10
Senegal Cote d'Ivoire Gabon Ghana GTB FBN Congo Rep
11
Angola: out of the woods?
Quarterly indicators
Q1:09 Q2:09 Q3:09 Q4:09 Q1:10 Q2:10 Q3:10f Q4:10f Q1:11f Q2:11f Q3:11f Q4:11f
GDP (% y/y) pa 1.3 1.3 1.3 1.3 6.7 6.7 6.7 6.7 8.3 8.3 8.3 8.3
CPI (% y/y) pa 13.5 13.7 13.7 13.7 13.1 13.7 14.0 13.5 13.2 13.0 12.5 12.0
M3 (% y/y) pe 73.6 56.6 32.0 23.0 20.0 22.0 24.0 26.0 28.0 30.0 32.0 34.0
CA/GDP (%) pe -5.2 -5.2 -5.2 -5.2 11.3 11.3 11.3 11.3 9.5 9.5 9.5 9.5
FX reserves (USD bn) pe 13.2 12.1 12.8 12.6 13.8 15.5 15.5 16.0 16.5 17.0 17.5 18.0
Import cover (months) pe 7.1 6.5 6.9 6.7 7.9 8.8 8.8 9.1 8.8 9.0 9.3 9.6
3-m rate (%) pe 15.0 15.5 15.8 23.7 20.0 19.0 18.0 17.0 16.0 15.0 14.0 14.0
1-y rate (%) pe 15.0 10.3 10.0 20.4 25.0 25.0 21.0 20.0 19.0 18.0 17.0 16.0
USD/AOA pe 75.0 78.0 85.0 89.5 92.3 92.3 90.0 90.0 90.0 90.0 90.0 90.0
REER pe 626.1 635.5 645.0 612.8 582.1 590.9 599.7 608.7 617.9 627.1 636.5 646.1
NEER pe 29.6 30.8 33.5 35.3 36.4 36.4 35.5 35.5 35.5 35.5 35.5 35.5
USD/AOA vol (20 day) 2.8% 0.9% 0.0% 3.8% 3.1% 0.2% 4.2% 0.5% 0.5% 0.5% 0.5% 0.5%
Notes: pe — period end; pa — period average; na — not available
Source: Banco Nacional de Angola, Angola Ministry of Finance. Standard Bank Research
Political risk: limited ahead of 2012 elections Election results
With Angola’s de facto one party system, the key political Presidential election (1992) Party % of
votes
issue has been succession to 68-year-old MPLA
party leader and President, José Eduardo dos Santos. José Eduardo do Santos MPLA 49.57
Such risk has been removed somewhat by the new con-
Jonas Malheiro Savimbi UNITA 40.07
stitution, passed by parliament on 21 Jan 10. The consti-
tution allows for a system similar to South Africa, where António Alberto Neto PDA 2.16
the president is the leader of the majority party rather Holden Roberto FNLA 2.11
than elected by independent vote. The president is lim- Legislative election (2008) % of votes Seats
ited to two five-year terms, but dos Santos’ 31 years al- Movimento Popular de Libertação de Angola 81.73 191
ready in power do not count. The next parliamentary (MPLA)
election is in 2012 and we expect the MPLA to maintain União Nacional para a Independência Total de 10.38 16
its majority and for dos Santos to remain its leader. Inter- Angola (UNITA)
estingly, dos Santos appears relatively serious about Frente Nacional de Libertação de Angola (FNLA) 1.13 3
reining in malpractice by public officials and parliament
Partido de Renovação Social de Angola (PRS) 3.10 8
has passed a bill allowing for those caught to be more
easily prosecuted. Source: Comissao Nacional Eleitoral
GDP growth: building a non-oil growth path Composition of GDP
The latest government estimates agreed with the IMF y/y

suggest that GDP growth was a modest 0.7% y/y in 2009 25.0%
as a 5.2% decline in the oil sector undermined strong

growth of 8.2% in the non-oil sector. The official budget
16.3%
estimates for 2010 have also been revised down to 6.7%
y/y, with 5.0% oil sector growth and 7.8% non-oil sector
growth. Growth nearer to 8.3% y/y is envisaged in 2011 7.5%
on the back of another solid performance from the oil
sector, but more importantly, the increasing contribution
from the non-oil sector, which will continue to be lifted by -1.3%
considerable infrastructure investment. Improving road,

rail, ports, airports, water and telecoms infrastructure will
-10.0%
clearly benefit all sectors of the non-oil economy, but will 2005 2006 2007 2008 2009 2010
perhaps be most important in revitalising Angola’s once-
GDE Netex Real GDP
prosperous agricultural sector.
Source: Banco Nacional de Angola, Standard Bank Research
12
Angola
Balance of payments: back into surplus BOP developments
BNA official FX reserves increased to around USD15.3bn USD m

in Jul 10 from a low of USD12.0bn in Jan 10. However, 50,000
FX reserves accumulation has been flat since Apr and

was down from a high of USD15.65bn in May. The lack- 25,000
lustre accumulation is surprising, given the BNA’s desire
to rebuild reserves and to clear the C/A surplus. We ex- 0
pect a C/A surplus of around USD8.7bn or 11.3% of GDP
in 2010 and a similar figure for 2011. The key drain on -25,000
FX reserves has been the government’s decision to start
paying down the USD6.8bn of contractor arrears, with an -50,000
estimated USD1.28bn being disbursed to smaller compa- 2004 2006 2008 2010f
nies in Jul 10. Although these arrears will remain a drain,
Trade balance Services
we still anticipate a rise in official FX reserves, given the
Income account Transfers
solid C/A picture, likely strong FDI inflows and foreign
Current account
investor interest in Eurobond issuance, and possibly
even the opening up of the local debt market. Source: Banco Nacional de Angola, Standard Bank Research
Fiscal policy: dealing with arrears and subsidies Central government budget
We do not yet have the breakdown of the early Aug 10 % of GDP 2009e 2010f 2011f
revised budget, but it does appear that the government
Total revenue (+ grants) 35.2 43.5 41.7
has made progress in better understanding its balance
sheet. The identified arrears of USD6.8bn were almost - oil 22.2 33.5 31.7
twice those assumed by the government in its IMF re-
view. The new budget is expected to deliver a surplus of Total expenditure 45.0 38.0 34.8
1.2% of GDP (presumably prior to arrear payments). It is
- current 30.8 24.6 22.6
based on an oil price assumption of USD65.32/bbl, which
is still well below the YTD average of USD76.7/bbl and - interest 1.5 2.0 1.1
thus should offer some room for fiscal out-performance.
Moreover, in early Sep 10, the government raised petrol - transfers 8.5 4.1 3.8
and diesel prices at the pumps by 50% and 38%, respec-

- development 14.1 13.4 12.2
tively, in an attempt to reduce transfers (subsidies) which
accounted for 8.5% of GDP in 2009. The reforms are Overall balance (- arrears) -9.8 5.6 6.9
also key to progress in reforming Angola’s downstream
Source: Angola Ministry of Finance, Standard Bank Research
oil sector.
Monetary policy: modest easing bias Inflation and interest rates
The easing bias in rates we had expected to develop in 32 %

H2:10 has started to materialise, with the reference 91-d
bill rate falling to 17/18% from 24/25% during H1:10. We
anticipate a further reduction in rates, albeit at a fairly 24
moderate pace. Perhaps most important is our expecta-
tion of AOA stability and/or strength. It was the authori-
ties’ desire to support confidence in the AOA that fos- 16
tered the need for higher rates in the first instance. M3
money growth also remains extremely modest by histori-
cal standards at just 14.3% y/y in Jun 10, while M1 was 8
down to 9.1% y/y. Inflation, meanwhile, has remained in
its unusually stable 13-14% range, which has now per-
0
sisted since Oct 08. While we are tempted to say the
Nov-06 Oct-07 Sep-08 Jul-09 Jun-10
risks are to the downside from a stronger AOA, the sharp
CPI y/y 91-d T-bill Rediscount
hike in fuel prices in Sep 10 is likely to have a knock-on
higher price effect through many parts of the economy. Source: Banco Nacional de Angola, Standard Bank Research
13
Angola
Bond curve outlook: modest bull flattening Changes in yield curve
Our expectation in the May AMR edition that cash rates YTM %
30.0
would drop proved appropriate, with the curve falling by
400-500 bps along its length. Although rates have
backed up a bit since Jul’s lows, we are still reasonably 25.0
confident that there is more yield compression likely in
coming months, with some modest bull flattening. First,
the AOA is expected to be stable or stronger. Second, 20.0
the need to issue bills for deficit financing purposes is
declining and the government is set to register a fiscal
15.0
surplus ex-arrears. Third, inflation is likely to remain be-
nign and monetary policy easing should continue. Cer-
tainly, if the planned issuance of AOA bonds material- 10.0
ises, this will place downward pressure on cash yields. 28-d 63-d 91-d 182-d 364-d
Similarly, we anticipate a Eurobond issuance in coming
3m forecast May-10 Aug-10
months now that a BB- rating has been achieved and the
government has made progress in auditing its liabilities. Source: BNA, Standard Bank Research
FX outlook: USD/AOA risk to the downside USD/AOA: forwards versus forecast

Our expectation back in May that the USD/AOA would USD/AOA
stabilise around 95 proved overly conservative. In fact, 115
USD/AOA stabilised around 92.5 and since 19 Aug has
shifted lower to around 90 at the time of writing. We are
104
looking for the unit to stabilise around this level, although
we acknowledge the risks are now towards a move even
further south. Certainly, the C/A fundamentals support a 93
stronger AOA, but to be fair, they have done so for some
time. The turning point is one of confidence in the AOA
and some regulatory changes which make it harder for 81
banks to sit long USD. Net open position limits are being
reduced and FX deposits can no longer be extended to
meet reserve requirements. There is also the issue of 70
policy, with the IMF sponsoring reforms to enable the FX Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
rate to be more market responsive. In an environment of History Forw ards Forecast
a C/A surplus and solid financial inflows, such a policy
should foster AOA appreciation. Source: Reuters, Standard Bank Research
Money supply growth: historically low Oil earnings and FX reserves
170.0 10.0 22.0
130.0 7.5 16.5
5.0 11.0
90.0
2.5 5.5
50.0
0.0 0.0
10.0 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10
Aug-01 Oct-03 Dec-05 Feb-08 Apr-10 Oil earnings per month (USD bn) LHS
M3 y/y FX reserves (USD bn) RHS
Source: Banco Nacional de Angola, Standard Bank Research Source: Reuters, Standard Bank Research
14
Angola
Angola: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Population (million) 14.5 14.6 14.8 14.9 15.0 15.2 15.3
Nominal GDP (AOAbn) 2,475 3,627 4,627 6,374 5,786 7,059 8,471
Nominal GDP (USDbn) 30.6 45.2 59.5 85.0 70.7 77.4 94.1
GDP / capita (USD) 2,113 3,094 4,024 5,704 4,711 5,095 6,152
Real GDP growth (%) 20.6 18.6 20.3 13.4 1.3 6.7 8.3
Oil production capacity ('000 bpd) 1,247 1,427 1.698 1.906 1.837 1.900 2.016
Central Government Operations
Budget balance / GDP (%) 9.1 14.4 10.9 8.8 -9.8 5.6 6.9
Domestic debt / GDP (%) 21.2 16.7 16.0 17.8 27.3 21.8 19.7
External debt / GDP (%) 5.0 5.0 9.9 15.2 14.9 12.2 9.2
Balance Of Payments
Exports of goods (USDbn) 24.1 35.6 44.7 63.1 38.6 57.3 60.5
Imports of goods (USDbn) 8.4 8.8 13.7 21.0 22.4 21.0 22.6
Trade balance (USDbn) 15.8 26.8 31.1 42.1 16.2 36.3 37.9
Current account (USDbn) 5.1 12.4 9.7 5.6 -3.7 8.7 9.0
- % of GDP 16.8 27.4 16.3 6.6 -5.2 11.3 9.5
Capital & Financial account (USDbn) -3.3 -3.7 -6.3 -0.7 -1.6 -5.3 -9.0
- FDI (USDbn) -1.5 -0.2 -1.8 -0.9 -1.6 1.4 1.7
Basic balance / GDP (%) 11.8 26.9 13.2 5.5 -7.5 13.0 11.3
FX reserves (USDbn) pe 3.2 9.3 11.2 17.5 12.6 16.0 18.0
- Import cover (months) pe 4.6 12.7 9.8 10.0 6.7 9.1 8.5
Sovereign Credit Rating

S&P NR NR NR NR NR BB- BB
Moody’s NR NR NR NR NR NR NR
Fitch NR NR NR NR NR BB- BB
Monetary & Financial Indicators

Consumer inflation (%) pa 23.2 13.4 12.3 12.3 13.4 13.6 12.8
Consumer inflation (%) pe 18.5 12.2 11.8 13.0 13.7 13.5 12.0
M3 money supply (% y/y) pa 52.7 69.2 42.9 74.4 58.1 24.5 30.0
M3 money supply (% y/y) pe 59.2 27.8 45 93.1 23.0 26.0 34.0
BNA discount rate (%) pa 95 16.8 18 19.6 24.8 25.0 18.0
BNA discount rate (%) pe 95 14 18 19.6 30.0 20.0 16.0
3-m rate (%) pe 11.2 6.3 14.1 14.6 15.0 17.0 14.0
1-y rate (%) pe na 9.53 14.0 14.5 20.4 20.0 16.0
USD/AOA pa 87.2 80.4 77.7 75.0 81.9 91.2 90.0
USD/AOA pe 80.8 80.3 75.0 75.0 89.5 90.0 90.0
REER pa 422 503 563 603 630 595 632
NEER pa 25.8 27.7 28.5 29.4 32.3 36.0 35.5
Notes: pe — period end; pa — period average; na — not available; nr — not rated
Source: Banco Nacional de Angola, Angola Ministry of Finance, Standard Bank Research, Bloomberg
15
Botswana: fiscal pressures set to persist
GDP (% y/y) pa -13.8 -0.2 -10.9 10.7 36.4 10.5 14.2 1.8 2.5 3.3 4.5 5.5
CPI (% y/y) pa 12.1 8.5 6.4 5.9 6.1 7.5 7.3 8.2 8.9 9.4 9.1 8.5
M3 (% y/y) pa 12.5 5.4 0.9 -4.1 3.6 7.8 9.9 12.2 17.8 20.5 22.8 24.4
CA/GDP (%) pe -8.9 -5.4 -3.9 -3.5 -2.5 -2.9 -3.1 -3.3 -2.5 -1.7 -1.3 0.6
3-m rate (%) pe 11.4 10.3 8.2 8.2 7.2 7.2 7.2 7.2 7.3 7.3 7.3 7.3
5-y rate (%) pe na na na na 7.5 7.6 7.9 8.1 8.5 8.7 8.8 8.8
USD/BWP pe 7.73 6.78 6.58 6.61 6.77 7.06 7.10 7.15 7.45 7.30 7.32 7.35
REER pe 102.3 101.2 100.9 100.8 100.7 101.5 102.6 103.3 103.7 104.6 104.9 105.6
NEER pe 174.5 160.8 159.0 159.7 157.8 158.2 159.3 163.4 165.6 166.1 166.8 167.2
USD/BWP vol (20 day) 19.0% 11.7% 9.4% 15.4% 8.0% 9.5% 13.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Source: Bank of Botswana, CSO, Standard Bank Research
Political risk: BDP hamstrung by infighting Election results (2009)
Investor interest lies in whether a seemingly stronger Legislative election Seats % of votes
opposition, coupled with instability in the ruling party, will
Botswana Democratic Party (BDP) 45 52.9
sway the government’s attention away from the country’s
economic challenges. At this stage, it seems that growth Botswana National Front (BNF) 6 22.8
remains the government’s top priority and we believe that Botswana Congress Party (BCP) 4 19.9
prospects of an early election are slim. Following the
Botswana Alliance Movement (BAM) 1 2.2
formation of the Botswana Movement for Democracy
(BMD) party, the opposition now has 16 seats in parlia- Botswana People’s Party (BPP) 0 1.1
ment, the highest in Botswana’s post-independence his-
New Democratic Front (NDF) 0 0.1
tory, after 4 members of the BDP defected to the BMD.
MELS Movement of Botswana 0 0.1
We thus expect pressure on the BDP to mount as the
opposition tries to capitalise on the current infighting Independents 1 0.9
within the BDP, which President Khama believes is Total 57 100
’destroying’ the party. Source: Independent Electoral Commission
GDP growth: growth to rebound Composition of GDP
Following the rebound in GDP growth to 36.4% y/y in y/y

20.0
Q1:10 (10.7% y/y in Q4:09), we have revised our GDP
growth outlook for 2010 from 5.5% y/y to 15.7% y/y. The
rebound in growth this year is likely to continue being led 11.3
by a revival in mining production, following mine closures
in 2009 due to the global financial crisis. Increased min-
2.5
ing activity will in turn likely boost investment expenditure
in the mining sector. Investment spending will also be
buoyed by infrastructure development in the energy sec- -6.3
tor. Faltering US growth poses downside risks to the min-
ing sector’s revival. We expect Netex to remain at the -15.0
mercy of US growth prospects and non-mining GDP to 2000 2002 2004 2006 2008 2010f
continue being robust. The authorities’ accommodative
PCE GCE GFCF
policy bias is likely to stay in place for at least the me-
Stocks Netex GDP
dium term which should continue to support PCE.
Source: Bank of Botswana, IMF, Standard Bank Research
16
Botswana
Balance of payments: C/A under pressure Current account developments
In light of a faltering developed-world growth recovery, USD m

3,000
we have downwardly revised our C/A outlook. We expect
the C/A to remain under pressure in 2010, registering a
deficit of 3.3% of GDP (-3.5% in 2009). In our view, the 1,950
trade account will weigh heavily on the C/A. Diamond
exports will probably remain muted for the remainder of 900
2010 due to weak global demand. Furthermore, we ex-
pect strong outward service and income-related pay-
ments also to weigh on the C/A. We believe the capital -150
account will receive a boost from FDI into the mining sec-
tor and external loans to finance part of the budget defi- -1,200
cit. However, these flows are likely to fall short of financ- 2004 2006 2008 2010f
ing the C/A deficit. As a result, we expect FX reserves to
Trade Services Income
remain under pressure for the rest of the year and to de-
Transfers C/A
cline to USD7.6bn (22.5 months of import cover) by end-
2010. Source: Bank of Botswana, IMF, Standard Bank Research
Fiscal policy: fiscal pressures to persist Central government budget

% of GDP 2009/2010 2010/2011
Fiscal pressures are set to persist as diamond revenues
remain below pre-recession levels due to the faltering US Total revenue 31.2 27.2
economy. The World Bank in Aug 10 recommended that
Total expenditure 46.3 39.3
Botswana cut its public sector by 25% to ensure fiscal
sustainability. The authorities are reluctant to dip further - wages 12.2 12.0
into their accumulated savings even as fiscal pressures
- interest 0.3 0.5
persist. Government deposits with the BOB declined to
BWP19.8bn in May 10 from BWP25.2bn at the start of - development 16.2 12.2
the year. Given this reluctance, we expect the govern- Overall balance (- grants) -15.5 -12.5
ment will rely mainly on a combination of domestic and
Overall balance (+ grants) -15.1 -12.2
external borrowing to finance the budget deficit. In addi-
tion to this month’s bond auction proceeds, the govern- Net external borrowing 0.5 0.3
ment still has to receive the remaining USD500m tranche
Net domestic borrowing 14.6 11.8
of the USD1.5bn AfDB loan to bolster its coffers. If fiscal
pressures deteriorate further, another sovereign credit Donor support (grants and loans) 0.4 0.3
rating downgrade could be on the cards. Source: Ministry of Finance
Monetary policy: accommodative policy stance Inflation and interest rates

Our inflation forecast foresees a rising trajectory over the %, y/y
20.0
coming 9-m. We expect inflation, which declined to 7.0%
y/y in Jul 10 from 7.7% y/y in Jun 10, to climb higher to
end the year at 8.5% y/y. Thereafter, we see inflation 15.0
pushing even higher to peak at 9.6% y/y in Jun 11 before
subsiding somewhat by year-end to 8.3% y/y. Food and
10.0
transport are likely to remain the key drivers of inflation.
BWP weakness in coming months should also fuel infla-
tionary pressures. Our view continues to be more bearish 5.0
than that of the BOB, which sees inflation returning to
within the 3%-6% objective range as early as Q2:11. De-
0.0
spite inflation still being well above the objective range for
Jan-05 May-06 Oct-07 Feb-09 Jul-10 Dec-11
a prolonged period, we do not anticipate a tightening bias
Inflation Low er bound
from the central bank at least until H2:11. With growth
remaining below-trend, boosting economic growth contin- Upper bound Bank rate
ues to be the top-most priority for the authorities. Source: Bank of Botswana, CSO, Standard Bank Research
17
Botswana
Bond curve outlook: bear steepening Changes in yield curve
We expect yields to rise by at least 50 bps over a 12-m YTM

10.00
horizon; we thus recommend investors to remain short
duration in bonds. The rise in yields is likely to be driven
by continued upward inflationary and fiscal pressures. 9.00
With global growth muted, diamond exports are likely to
falter, giving rise to fiscal pressures. These could be re-
solved by either cutting back on expenditure or increas- 8.00
ing domestic and external borrowing. We expect a new
note issuance programme, the details of which are yet to
be finalised by the Ministry of Finance and BOB, to be 7.00
bigger than the previous BWP5.0bn programme. The
authorities plan to present the new programme to Parlia-
6.00
ment in Nov 10. We would expect yields to rise further
91-d 182-d 2-y 5-y 8-y 15-y
were it not for the robust market demand for long-dated
6-m forcast 23-Aug-10 13-Jul-10
paper by pension funds, which are mandated to invest
30% of funds under management in local securities.
Source: Bank of Botswana, Standard Bank Research
FX outlook: weak exchange rate policy bias USD/BWP: forwards versus forecast
We expect USD/BWP at 7.15 by year-end. The USD is USD/BWP

9.0
likely to return to broad-based strength over a 6-m hori-
zon, which should lead to BWP weakness through its
policy link with the ZAR. In any case, the authorities are 8.0
likely to welcome a weaker BWP, given the prevailing
fiscal and trade deficits. The dichotomy between mining
and non-mining GDP, together with upside inflationary 7.0
pressures, present the authorities with a policy dilemma.
Monetary policy tightening could dampen inflationary
6.0
pressures but would also depress non-mining GDP
growth, while leaving trade and fiscal deficits largely un-
affected. Hence, we suspect exchange rate policy rather 5.0
than monetary policy will be used to deal with the current Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
situation. The possibility of another credit rating down-
History Forw ards Forecast
grade due to muted diamond exports strengthens the
case for the authorities to rely on this policy alternative. Source: Reuters, Standard Bank Research
Equity market: diminished upside potential Botswana Stock Exchange
For the remainder of 2010, we expect faltering devel- Index Index

10,400 3000
oped-world growth prospects to limit the upside potential
for both the Domestic Company Index (DCI) and Foreign
Company Index (FCI). However, robust domestic de- 7,950 2250
mand should support both indices somewhat. Accommo-
dative fiscal and monetary policy stances by the authori-
ties will continue to gain traction and should keep local 5,500 1500
business confidence buoyant. We expect the recently
introduced NewGold ETF to attract much investor atten-
3,050 750
tion in the current economic environment. Investors will
be keen to gain gold exposure to hedge against global
financial turmoil, inflation and currency weakness. We 600 0
further expect a flurry of new government bond listings in Jul-05 Jul-06 Jul-07 Aug-08 Aug-09 Aug-10
2011 upon the introduction of a new bond issuance pro-
DCI FCI
gramme.
18
Botswana
Botswana: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (BWPbn) 52.4 65.7 73.5 85.0 86.9 106.9 120.8
GDP / capita (USD) 5,510 6,034 6,429 6,581 6,410 7,721 8,406
Real GDP growth (%) 1.6 5.1 4.8 3.1 -3.6 15.7 4.0
Diamond production (’000 carats) 31.8 34.3 33.6 32.6 17.7 24.0 25.2
Copper-nickel production (tons) 50,400 56,223 49,121 52,086 48,225 53,175 58,631
Beef sales (tons) 17,000 17,500 17,750 18,250 18,725 19,150 21,065

Budget balance / GDP (%) 8.0 10.8 4.8 -6.6 -15.1 -12.2 -7.0
Balance Of Payments
Exports (USDbn) 4.49 4.54 5.06 4.74 3.20 3.60 4.00

Imports (USDbn) 2.71 2.63 3.45 4.52 3.61 4.06 4.35
Trade balance (USDbn) 1.78 1.91 1.61 0.22 -0.41 -0.46 -0.35
Current account (USDbn) 1.58 1.95 1.80 0.69 -0.43 -0.50 0.10
- % of GDP 15.4 17.2 14.6 5.2 -3.5 -3.3 0.6
Financial account (USDbn) -0.09 -0.15 -0.15 0.07 0.97 0.75 0.50
- FDI (USDbn) 0.22 0.51 0.52 0.08 0.08 0.15 0.23
Basic balance / GDP (%) 17.79 21.94 19.32 6.19 -2.87 -2.32 1.97

S&P A A A A A A- A-
Moody’s A2 A2 A2 A2 A2 A2 A2
Fitch nr nr nr nr nr nr nr

M3 money supply (% y/y) pe 14.3 8.9 29.0 22.7 -0.8 12.5 18.7
Policy interest rate (%) pa 14.23 14.96 14.70 15.08 12.20 10.00 10.50
Policy interest rate (%) pe 14.50 15.00 14.50 15.00 10.00 10.00 11.00
3-m rate (%) pe 12.32 12.72 11.97 13.13 8.20 7.20 7.25
1-y rate (%) pe na 11.89 11.42 na na na na
2-y rate (%) pe na na na na 7.42 7.30 7.70
5-y rate (%) pe na na na na na 8.10 8.80
USD/BWP pa 5.18 5.86 6.12 6.83 7.12 7.10 7.20
USD/BWP pe 5.53 6.04 6.03 7.56 6.61 7.15 7.35
REER pa 102.3 100.7 99.1 101.2 101.3 102.3 104.6
NEER pa 117.6 132.7 143.8 161.2 164.6 165.3 167.5
Notes: pe — period end; pa — period average; nr — not rated; na — not available
Source: Bank of Botswana, CSO, Standard Bank Research
19
Côte d’ Ivoire: a step closer to general elections?
GDP (% y/y) pa 4.00 3.80 3.80 3.40 3.10 2.80 2.70 2.50 2.80 3.60 3.90 4.70
CPI (% y/y) pa 5.50 2.21 -1.60 -1.70 -0.10 1.00 2.40 4.40 3.25 2.40 1.70 1.60
M2 (% y/y) pe 4.2 3.3 2.0 17.2 20.9 25.5 19.9 15.4 13.2 11.5 14.5 15.1
CA/GDP (%) pe 6.10 6.50 7.50 8.00 5.30 3.20 1.80 -0.50 -0.60 0.40 0.90 1.40
Import cover (mths) pe 4.1 4.6 4.8 6.1 5.1 5.4 5.6 5.6 5.8 5.9 5.9 6.1
BCEAO Lending Rate (%) pe 4.75 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25
USD/XOF pe 494.3 466.6 448.1 457.3 482.3 523.4 510.6 524.7 655.1 605.3 596.3 589.4
REER pe 106 106 105 106 102 98 99 98 97 96 96 98
NEER pe 103 103 104 104 102 99 98 97 95 94 95 97
USD/XOF vol (20 day) 18.1% 14.3% 6.7% 8.5% 10.3% 11.3% 12.2% 10.0% 10.0% 10.0% 10.0% 10.0%
Notes: pe — period end; pa — period average
Source: IMF, Ministere de l’economie et des finances, Institut National de la Statistiques, Standard Bank Research, Bloomberg
Political risk: voter list finalised Election results (2000)
On 2 Sep, the Ivorian electoral commission announced Presidential election Party % of votes
that it had finalised the voter list, which we see as a posi- Laurent Gbagbo FPI 59.4
tive surprise and potentially a breakthrough in the political
Robert Guï CNSP 32.7
impasse that has marked Côte d'Ivoire's recent history.
Francis Wodié PIT 5.7
We believe rising domestic and international pressure to
end the transition period in the country could not be con- Theodore Mei UDCI 1.5
tinuously ignored by parts of the Ivorian elite. Neverthe-

Parliamentary election Seats % of votes
less, we remain somewhat cautious about the prospects
of an election on 31 Oct, especially given that the contest Ivorian Popular Front (FPI) 96 42.7
has been postponed six times since 2005. Also, it re-
Democratic Party of Côte d’Ivoire (PDCI) 94 41.2
mains to be seen whether the ruling party, the leadership
of the New Forces, and opposition ministers, have a real Rally of the Republicans (RDR) 5 2.2
incentive to organise an election which might jeopardise Ivorian Workers Party (PIT) 4 1.7
their grip on power. The next hot topic, in our view, is Union of Democrats of Côte d’Ivoire
1 0.004
(UDCI)
whether the New Forces need to be fully disarmed prior
to the election as claimed by the ruling party. Source: Cote d’Ivoire Independent Electoral Commission
GDP growth: relative slowdown expected Composition of GDP
We have downwardly revised our growth outlook for 2010 %

to 2.8% y/y, from 3.8% y/y in 2009. The current political 8.0
environment, coupled with the ongoing electricity short-
ages and social tensions, are likely to weigh on growth 4.0
prospects in 2010. Government expenditure is expected
to rise to cover the disarmament of rebel forces and the
0.0
electoral process. Production will probably be hampered
by electricity shortages which affected the economy in
H1:10. GFCF spending is likely to be adversely impacted -4.0
as investors mostly adopt a wait-and-see strategy regard-
ing the political situation. Low-income growth will proba- -8.0
bly curtail PCE. Exports, in the cocoa sector in particular, 2004 2005 2006 2007 2008 2009e 2010f 2011f
should provide support for growth. However, the cocoa
PCE GCE GFCF Inv
industry is likely to be curtailed by a lack of investment
and declining productivity in recent years. Netex GDP
Source: IMF, Standard Bank Research
20
Côte d I’voire
Balance of payments: C/A surplus Current account developments
In our view, the C/A could post a surplus of around 2.5% USDbn
4.0
of GDP in 2010, which would be more modest than the
5.7% projected by the IMF. Indeed, the expected trade
surplus (13.9% of GDP) reflecting above-trend cocoa 2.0
prices between Jan and Aug, coupled with increasing
rubber production and elevated oil prices, will be offset by 0.0
outward service and income payments. Also, declining
cocoa prices in H2:10, and elevated imports of capital
goods, will negatively affect trade metrics. The country’s -2.0
importance to the region should continue to attract some

FDI inflows, but a turnaround is unlikely until an elected -4.0
administration assumes office. Portfolio inflows have re- 2003 2004 2005 2006 2007 2008 2009e2010f 2011f
mained marginal due to low interest rates in WAEMU and
the lack of liquid investable assets on the BRVM. We
Transfers CA
expect FX reserves to climb to USD3.4bn in 2010, 5.6
months of import cover, from USD3.2bn in 2009. Source: IMF, Standard Bank Research
Fiscal policy: deficit set to rise Central government budget
Strong cocoa tax and VAT collections helped mitigate a % of GDP 2008 2009 2010
decline in custom receipts. On the expenditure side,

Total revenue 20.6 19.5 20.1
higher spending to cover shortfalls of the electricity sector
Total expenditure 21.1 21.1 22.1
and pension funds were offset by lower interest payment
on the reduced Paris Club debt. In this regard, the main - wages 6.8 6.8 7.2
concern is that international creditors and donors could - interest 1.8 1.9 1.9
ultimately suspend their support should the political im- - development + transfers 2.9 2.9 3.1
passe persist. The government has continued to clear
Overall balance (- grants) -2.3 -2.2 -2.3
domestic arrears, but structural reforms in public finance
Overall balance (+ grants) -0.6 -1.6 -2.0
appear to have stalled. Extra-costs associated with the
electoral process and electricity subsidies could push the Net external borrowing -1.2 -14.0 -3.4
fiscal deficit closer to 1.6%/GDP in 2010, a modest gap Net domestic borrowing 0.5 1.0 0.6
by WAEMU standards, even as declining cocoa prices Donor support (grants) 1.7 0.6 0.3
since Aug represent an incremental risk factor. Finally, Source: Ministere de l’economie et des finances, Standard Bank Research
the TPCI 7% 2010-17 (XOF62bn) bond could be sub-
scribed by a less sizeable margin than in previous years.
Monetary policy: inflation tilted to the upside Inflation and interest rates
Inflation in Côte d’Ivoire was flat in Jul-Jun, at 1.8% y/y, %

10.0
from 0.9% y/y in May, 0.3% y/y in Apr and negative fig-
ures in Q1. The upward trend reflects a less favourable
base effect in H1:10, which is likely to deteriorate further 6.3
in H2 as inflation was in negative territory a year earlier.
Accordingly, while y/y inflation has averaged 0.6% be-
tween Jan and Jul, we expect it to rise further in the com- 2.5
ing months, and average 1.9% in 2010. The relatively
modest monthly inflation rates recorded since last Jan
-1.3
make a substantial spike in consumer prices in excess of
5% in Sep-Dec 2010 unlikely. Although inflation is also
tilted to the upside in most other WAEMU countries,
-5.0
there is scope to believe that the Central Bank of West Jan-00 Sep-01 May-03 Jan-05 Aug-06 Apr-08 Dec-09
African States will be somewhat reluctant to raise rates
CPI (y/y) ECB refi BCEAO rate
as the priority since last year has been to support the
modest economic recovery in the region. Source: Institut National de la Statistiques, Standard Bank Research
21
Côte d I’voire
Eurobond performance: tied to political outlook Côte d’Ivoire 2032
The performance of the Ivorian eurobond has been rela- Price

65
tively poor in recent months, with the price falling to a low
of 55.0 (11.4%) on 3 Sep, from 61.25 (9.9%) on 4 Apr.
Some international accounts, which held the defaulted
bonds prior to the restructuring, sold the instrument and 60
took profit. We believe a sustainable rally in the eurobond
will be conditional on tangible signs that the presidential
contest will actually go ahead on 31 Oct and that all politi-
cal forces will accept the results. Still, the low coupon 55
(2.5%) implies a marginal risk of default in light of Côte
d'Ivoire's fiscal and macroeconomic metrics. Indeed, the
Ivorian authorities need to repay $58m a year to service 50
the eurobond, while total government revenue is pro- Apr-10 May-10 Jun-10 Jul-10 Aug-10
jected at $4.6bn for 2010. Besides, the external debt ratio
is now close to 49.5%/GDP and tilted to the downside in
the framework of the HIPC and MDRI schemes. Source: Bloomberg, Standard Bank Research
FX outlook: XOF weakness via EUR peg USD/XOF: forwards versus forecast
As a member of WAEMU, Côte d’Ivoire is affected by the USD/XOF

610
CFA peg that sets the EUR/XOF rate at 655.957. We
believe EUR/USD will continue to decline in the medium
term, possibly reaching 1.25 and parity in three and six 558
months, respectively. Consequently, the USD/XOF rate is
likely to depreciate towards 655 or so during the next 6-
m, tracking EUR weakness via the CFA peg. The fore- 505
cast move in USD/XOF will probably lead to some depre-
ciation of the REER and improve external competitive-
453
ness. Still, the Ivorian C/A has been less affected than
those of other WAEMU countries by euro strength in the
past. Besides, we do not expect any change in the EUR/ 400
XOF peg, which has only been adjusted once (in 1994). Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
While FX reserves have gradually increased in recent
years and could reach $3.4bn in 2010, 65% of this
amount is held by the Banque de France. Source: Reuters, Standard Bank Research
Equity market: BRVM tracks SONATEL Bourse Regionale Valuers Mobiliers

The recovery in the BRVM has been modest YTD, with Index
the bourse gaining 10.6% YTD (as of 3 Sep) in local cur- 260
rency terms; still, the composite index is flat in USD
terms. The performance of the index was almost in line
210
with that of SONATEL, which is by far the largest stock
by market capitalisation. Although we believe the BRVM
could still edge up in the short to medium term and catch 160
up with the rally in equities in more developed emerging
markets, downside risks stem for global risk appetite in
the coming months and the likely weakness of the CFA 110
franc next year. Interestingly, the political situation in
Côte d’Ivoire could continue having a limited impact on
60
the BRVM, probably because the most actively traded
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
stock (SONATEL) was listed by a Senegalese company
and given the lack of liquidity of most Ivorian stocks. BRVM composite index

22
Côte d I’voire
Côte d I’voire: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (XOFbn) 8621 9081 9487 10,485 10,999 11,516 12,138
GDP / capita (USD) 824 871 966 1,125 1,128 1,093 986
Real GDP growth (%) 1.80 0.93 1.59 2.30 3.80 2.80 3.2
Oil Production ('000 bbl) 39,936 63,132 53,132 60,297. 58,849, 62,584 66,495
Budget balance (excl. Grants) / GDP (%) -2.8 -2.4 -1.9 -2.3 -2.2 -2.3 -2.8
Budget balance (incl. Grants) / GDP (%) -1.7 -1.8 -1.3 -0.6 -1.6 -2.0 -2.6
Balance of Payments
Exports of goods and services (USDbn) 7.7 8.5 8.7 10.4 10.5 10.6 10.1
Imports of goods and services (USDbn) -5.3 -5.4 -6.1 -7.1 -6.3 -7.4 -7.3
Current account (USDbn) 0.0 0.5 -0.1 0.5 1.7 0.6 0.2
- % of GDP 0.2 2.7 -0.7 1.9 7.0 2.5 0.7
Capital & Financial account (USDbn) -0.4 0.0 0.9 -0.7 -1.4 0.1 0.4
- FDI (USDbn) 0.3 0.3 0.4 0.4 0.8 0.9 0.8
Basic balance / GDP (%) 2.1 4.5 1.1 3.6 10.4 6.4 0.7
S&P nr nr nr nr nr nr nr
Moody’s nr nr nr nr nr nr nr
Consumer inflation (%) pe 2.56 2.04 1.48 8.90 -1.60 4.70 1.80
M2 money supply (% y/y) pe 7.69 10.3 19.6 18.2 17.2 16.5 15.9
BCEAO lending rate (%) pa 4.00 4.25 4.75 4.75 4.25 4.25 4.25
USD/XOF pa 527 522 479 448 462 491 557
USD/XOF pe 556 497 447 467 457 525 589
REER pa 100.0 99.9 101.4 106.9 105.8 99.3 96.8

NEER pa 100.0 99.9 103.3 104.8 103.5 99.0 95.8
Source: Institut National de la Statistique, Ministere de l’economie et des finances, IMF, Standard Bank Research, Bloomberg
23
Democratic Republic of the Congo: easing interest rates

GDP (% y/y) pa 2.5 2.3 3.5 3.8 5.7 6.2 6.6 7.3 7.4 7.5 7.1 7.8
CPI (% y/y) pa 38.0 49.3 38.4 58.8 42.1 26.9 21.6 14.3 12.5 14.1 15.7 20.6
M3 (% y/y) pa 38.3 36.4 35.1 30.7 25.5 26.6 29.9 32.0 33.5 36.2 37.5 38.3
Current account/GDP (%) pe -14.8 -14.2 -13.5 -15.7 -19.7 -21.3 -24.7 -26.9 -26.1 -22.1 -22.5 -24.1
FX reserves (USD m) pe 237 268 876 1001 1092 1056 1075 1105 1140 1210 1150 1195
1 m rate (%) pa 64.8 65 65 70 60.9 38.1 18.1 12.9 12.5 14.7 19.4 27.5
2 y rate (%) pa 729 796 802 891 913 898 902 905 908 909 925 926
USD/CDF pa 131 130 125 128 150 137 150 148 149 150 152 155
REER (Q1:02=100) pa 61 59 52 48 55 50 51 50 51 51 50 48
NEER (Q1:02=100) pa 31.5% 19.2% 8.9% 7.5% 6.3% 7.4% 7.1% 6.5% 7.8% 8.9% 9.5% 10.5%
USD/CDF vol (20 day) 30.7% 7.2% 9.9% 5.9% 5.8% 14.6% 7.5% 9.0% 9.0% 9.0% 9.0% 9.0%
Source: Banque Centrale du Congo, IMF, Standard Bank Research
Political risk: pre-electoral manoeuvring Election results (2005)

% of votes % of votes
While the next presidential contest will only take place in Presidential election 1st round 2nd round
Nov 2011, it is widely assumed that President Joseph
Joseph Kabila Kabange 44.81 58.05
Kabila will seek re-election. We foresee some frictions
Jean-Pierre Bemba Gombo 20.03 41.95
within the ruling coalition, especially between Kabila’s
PPRD and Prime Minister Adolphe Muzito’s PALU. Al- Francois Joseph Mobutu Ngangawe 13.06 -
though the MLC may suffer from the absence of Jean- Other 22.10 -
Paul Bemba (now facing war crime charges in the Legislative election Seats
Hague), veteran opposition leader Etienne Tshisekedi People's Party for Reconstruction & De- 111
has announced he would run. Tshisekedi‘s UDPS was mocracy
the main opposition party in the 1990s, but boycotted the Movement for the Liberation of Congo 64
2005 elections. We expect some discontent at the re- Unified Lumumbist Party 34
gional level after the missed 15 May deadline for provin- 27
Social Movement for Renewal
cial decentralisation. Finally, we note a sizeable shift in
Forces for Renewal 26
regional geopolitics, as DRC-Rwandese relations have
Other 238
recently significantly warmed up, which is positive for the
Total 500
security situation in the volatile east Congo.
Source: Cote d’Ivoire Independent Electoral Commission
GDP growth: positive outlook Composition of GDP
We maintain our forecast for a rebound in GDP growth, % y/y

25.0
to 6.5% y/y in 2010; this will be supported by a structural
breakthrough in public debt management and an im-
proved macro framework. Indeed, as the DRC reached 15.0
the HIPC competition point and is starting to benefit from
significant debt forgiveness, the fiscal space for pro-poor
and investment spending will improve. Accordingly, we 5.0
expect government capital expenditure and infrastructural
development to get a boost. Investment in the mining
sector, rebounding from the slump suffered during the -5.0
global crisis, is likely to pick up. Accommodative mone-
tary policy will probably positively impact consumption
-15.0
going forward. Risks to our view are the possible re-
2002 2004 2006 2008 2010f
course to central bank financing in case of a fiscal slip-
PE GE GFCF Netex GDP
page ahead of the 2011 election as well as a poor busi-
ness climate potentially discouraging foreign investors.
24

Balance of payments: financing the CA deficit Current account developments
We estimate the C/A deficit will widen to 23.2% of GDP in USD m

2
2010 (-14.6% in 2009). Contributing to this is rising out-
ward service and income payments as growth rebounds.
0
Commodity exports should also pick up, as will imports
(driven by the need for infrastructure development). This
will probably leave the trade balance increasingly nega- -2
tive. The BOP is expected to benefit from robust financial
flows, including aid inflows for pro-poor and security re- -4
lated purposes, and FDI. We also expect a pick-up in aid
flows in 2011 to support the forthcoming electoral proc- -6
ess. Still, the jury is out over the prospects of a sustain- 2004 2005 2006 2007 2008 2009e 2010f 2011f
able increase in FDI after First Quantum Minerals’ Trade balance Services
Kolwezi project was taken over and sold by the govern-
Income Transfers
ment and an agreement with Tullow Oil for two explora-
Current account
tions blocks was cancelled. FX reserves will rise slightly
to USD1.1bn by end-2010, from USD1.0bn at end-2009. Source: IMF, Standard Bank Research
Fiscal policy: fiscal prudence on the agenda Central government budget
We think fiscal and monetary discipline and coordination % of GDP 2008 2009 2010
will be maintained in the medium term in the framework
of the PRGF. This was also stressed by Budget Minister Total revenue 18.5 17.8 17.9
Jean-Baptiste Ntahwa in early Aug. The USD12.3bn Total expenditure 22.7 28.7 36.2
debt-relief deal recently secured by the DRC should re-
- Wages 6.9 6.3 6.7
sult in incremental revenues being channelled into infra-
- Interest 3.1 3.2 3.0
structure development and social expenditure. Neverthe-
less, we cannot rule out the possibility of increased mili- - Transfers and subsidies 3.5 3.0 3.1
tary spending should the withdrawal of UN peacekeepers Cash basis balance before int. res. -3.1 -3.0 -12.7
become effective next year, given the threat of conflict in
Domestic fiscal balance -0.3 -3.3 -1.4
the volatile eastern provinces. The potential risk of fiscal
slippage, and ultimately higher inflation, also stem from Net domestic financing 0.9 -0.8 0.0
the general elections scheduled for 2011, in which Presi- Net foreign borrowing 1.8 3.2 5.6
dent Joseph Kabila is likely to stand. Political manoeu-
Donor support (grants and loans) 1.9 9.3 6.1
vres within the ruling coalition ahead of the contest may
translate into increased patronage expenditure. Source: Banque Centrale du Congo, IMF, Standard Bank Research
Monetary policy: BCC eases rates further Interest rates
The BCC has continued to ease interest rates as inflation % y/y

80.0
decelerated, cutting the benchmark rate to 22% (Aug 11),
from 29.5% (July 8), 42.0% (May 10), 52% (April 8) and
60% (March 25). This has been associated with rapidly 62.5
declining treasury yields. Indeed, the yield on the 28-day
T-Bill fell to 28.09% in late July from highs of 70% in
Q4:09. The yield on the 7-day T-bill dropped even further 45.0
to 17.0% (7 Sep). The BCC still targets inflation of 15.0%
y/y at year-end, but some BCC officials now estimate that
consumer prices could fall below the 10% threshold if the 27.5
current CPI trend is sustained. Accordingly, the BCC may

well lower its benchmark rate again in the coming
10.0
months, but we think rates will probably stabilise in the Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10
low-to-mid teens going forward, and potentially rebound
Policy rate Treasury bills 28-d
in H2:11 ahead of the presidential election.
25

Inflation has decelerated sharply Changes in yield curve
% y/y YTM
60.0
40.0
46.3
30.0
32.5
20.0
18.8
10.0
5.0 7-day 28-day
Sep 10 Oct 10 Feb-11 Sep-11
Source: Banque Centrale du Congo, IMF, Standard Bank Research Source: Banque Centrale du Congo, IMF, Standard Bank Research
FX outlook: currency stability USD/CDF: forwards versus forecast
We remain constructive for CDF, and expect the ex- USD/CDF

1,200
change rate to trade in a tight range around 900 in the
medium-term. Given that the authorities are keen on pro-
gressively de-dollarising the economy, exchange rate 1,000
stability will probably be maintained, assuming no unex-
pected exogenous macro shocks which would worsen
the overall BOP balance (-3.2% of GDP in 2010). This is 800
also supported by our core view that the government will
somewhat retain its prudent policies. Also, we think the
600
currency will be positively affected by the debt relief
package and the associated budget implications as well
as the normalisation of monetary conditions. Still, a pos- 400
sible shift in global risk aversion and lower interest rates Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
could outweigh this favourable environment. Besides,
downside risks to the FX outlook stem from a possible
loosening in fiscal policy ahead of the 2011 elections. Source: Reuters, Standard Bank Research
FX reserves marginally tilted to the upside The REER has appreciated
USD m 160
1,200
140
800
120
400
100
0 80
2003 2005 2007 2009 2011f Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
FX reserves
Source: BCC, IMF, Standard Bank Research Source: BCC, IMF, Standard Bank Research
26

Democratic Republic of Congo: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (CDFbn) 3,366 4,005 5,148 6,526 9,734 12,912 15,920
GDP / capita (USD) 125.1 134.6 157.4 206.1 186.6 213.7 252.6
Real GDP growth (%) 6.6 5.2 6.1 6.0 3.0 6.5 7.5

Budget balance / GDP (%) -3.1 -0.1 -0.3 -3.3 -3.3 -1.4 -0.8
Domestic debt / GDP (%) na na na na na na na
Balance Of Payments
Goods exports (USDm) 2.1 2.3 6.1 6.6 3.8 4.5 5.7
Goods imports (USDm) 2.5 2.7 5.3 6.7 5.3 6.4 8.1
Trade balance (USDm) -0.4 -0.4 0.9 -0.1 -1.5 -1.9 -2.3
Current account (USDm) -0.8 -0.6 -0.2 -1.8 -1.8 -3.3 -4.1
- % of GDP -10.5 -8.1 -1.6 -14.2 -14.6 -23.2 -23.7
Financial account (USDm) 0.3 0.1 0.2 1.1 1.0 2.4 3.0
Basic balance -0.4 -0.4 -0.3 -0.6 -0.4 -0.5 -0.6
- % of GDP -5.1 -5.4 -3.6 -4.4 -3.4 -3.2 -3.6
FX reserves (USDm) pe 154 220 184 290 1,001 1,105 1,195

Headline inflation pa 21.5 13.3 20.8 25.5 46.1 26.2 15.8
1-m rate (%) pa 48.8 29.7 29.0 27.6 64.6 37.2 16.0
2-y rate (%) pa na na na na na na na
USD/CDF pa 475 468 557 564 805 905 917
USD/CDF pe 435 530 550 630 907 905 925
REER (02M1=100) pa 115 129 125 123 129 144 150
NEER (02M1=100) pa 103 104 88 98 57 51 49
Notes: pe — period end; pa — period average, nr — not rated
27
Egypt: getting back into its stride
GDP (% y/y) pa 4.2 4.5 4.6 5.0 4.6 5.9 6.1 6.5 6.0 6.5 6.5 6.7
CPI (% y/y) pa 13.5 10.8 9.5 12.6 12.1 10.3 8.5 8.0 7.5 7.0 6.5 7.5
M2 (% y/y) pe 6.9 8.0 7.0 9.5 9.8 10.4 12.0 13.0 14.0 15.0 16.0 17.0
CA/GDP (%) pe -2.16 -2.20 -2.73 0.39 -2.61 -2.45 -2.96 -0.16 -2.26 -3.34 -3.68 0.49
Import cover (months) pe -9.2 -8.1 -8.0 -9.5 -8.6 -8.3 -7.8 -9.2 -8.4 -8.0 -7.4 -9.4
3-m rate (%) pe 10.5 10.3 9.6 9.8 10.0 10.2 9.0 8.0 7.5 7.0 7.5 8.0
5-y rate (%) pe 10.5 10.2 10.2 10.5 12.2 12.5 12.0 11.0 10.5 10.0 9.5 9.0
USD/EGP pe 5.63 5.59 5.48 5.48 5.45 5.69 5.60 5.70 5.75 5.80 5.70 5.80
REER pe 85.0 86.0 88.0 90.0 91.5 93.1 93.0 95.0 96.0 97.0 98.0 100.0
NEER pe 53.0 52.5 51.5 52.0 53.7 54.9 54.0 54.5 54.0 54.0 54.5 55.0
USD/EGP vol (20 day) 5.7% 0.9% 3.5% 2.1% 1.2% 0.7% 0.6% 1.0% 1.0% 1.0% 1.0% 1.0%
Source: Central Bank of Egypt, Central Authority for Public Mobilization and Statistics, Standard Bank Research, Bloomberg
Political risk: Oct 10 parliamentary elections Election results (2005)
As expected, Egypt’s de facto one-party National Democ- Presidential election Party % of votes
ratic Party (NDP) dominated the upper house (the Shura
Mohamed Hosni Mubarak NDP 88.6
Council) election in Jun 10, securing a third of the 264
seats. The NDP won 80 of the 88 seats contested. We Ayman Abdel Aziz Nour Al Ghad 7.6
share the dominant view that the poll provides something Noman Khalil Gomaa Al Wafd 2.9
of a precursor for the larger parliamentary elections
Osama Abdel Shafi Shaltout Al Takaful 0.4
planned for Oct 10 and presidential polls in 2011. We
would be surprised to see a deviation from the 85-90% % of
Parliamentary election Seats
NDP seat share in the parliamentary poll. Indeed, with votes
the opposition coalition (CEOP) still divided and the Mus- National Democratic Party (NDP) 311 68.5
lim Brotherhood constrained by anti-religious party legis-
Independents (Muslim Brotherhood) 88 19.4
lation, the NDP may even increase its hold on power. Yet
New Wafd Party 6 1.3
the key political risk remains the succession of President
Mubarak, who at 82 is expected to stand aside prior to a Independents 24 4.6
scheduled presidential poll in 2011. We still expect his Total 454 100
son, Gamal, to become the next president. Source: Egypt Election Commission
GDP growth: firming up Composition of GDP
Although we do not have the breakdown of GDP for %

Q2:10, the authorities suggest growth was around 5.9% 10.0
y/y and expect it to increase to 6.5% y/y on average in

the coming fiscal year to mid-11. We broadly agree with 6.3
their outlook. The non-deflated data for Q2:10 shows a
solid improvement in the key sectors of tourism, Suez
2.5
transport and oil and gas. The manufacturing sector has
also continued to consolidate. However, construction
growth has decelerated and the retail sector has contin- -1.3
ued to register negative growth, suggesting that the
Egyptian consumer’s confidence remains fairly fragile. -5.0
We are still relatively comfortable that consumer confi- 2003 2004 2005 2006 2007 2008 2009f 2010f
dence will improve in H2:10 in line with asset price up-
PCE GE GFCF
side and still-accommodative fiscal and monetary policy.
Stocks Netex GDP
As such, we expect solid import demand to place down-
ward pressure on GDP from the demand side. Source: Central Bank of Egypt, Standard Bank Research
28
Egypt
Balance of payments: widening surplus Current account developments
The CBE’s FX reserves rose to USD35.28bn in Jul 10 USD m

32,000
from USD34.16bn in Dec 09. The increase points to the
improving BOP position. The improvement in FX re-
serves is also masked by CBE FX deposits at commer- 16,000
cial banks which increased to USD5.68bn in Jun 10 from
USD4.50bn in May and USD1.86bn in Dec 09. The im-
0
provement in the C/A deficit we had been looking for in
2010 failed to materialise in Q1:10. The C/A registered a
USD1.3bn deficit compared to a USD0.99bn deficit in -16,000
Q1:09. Part of the issue was reduced oil exports, which
was corrected in Q2:10. However, trade data for Q2:10 -32,000
also deteriorated, with the 12-m deficit registering Q1 08 Q4 08 Q3 09 Q2 10 Q1 11 Q4 11
USD23.1bn from USD22.3bn in Q1:10. We have revised
Goods Services Transfers
our C/A deficit forecast up to USD4.5bn in 2010 (2.1% of
Income C/A
GDP) and USD5.4bn (2.2% of GDP) in 2011, but con-
tinue to see these easily financed by financial inflows. Source: Central Bank of Egypt, Standard Bank Research
Fiscal policy: election budgeting persists Central government budget
The cash deficit for FY09/10 was around 8.2% of GDP % of GDP 09/10 10/11
(including grants)—slightly lower than the 8.4% budg- Total revenue 22.1 20.6
eted. Expenditure moderated to 30.2% of GDP compared
to 33.8% in FY08/09, but revenue fell to 22.1% from
27.1%, which has provided some private sector stimulus. wages 7.1 6.9
The MT plans to get the deficit down to 3-4% of GDP by interest 6.1 6.6
FY12/13, once the 2011 presidential elections are out of subsidies 8.6 8.4
the way. We suspect this will prove difficult without the
grants 0.3 0.4
government dealing with the issue of subsidies which ate
up 8.6% of GDP in FY09/10 and are likely to be greater Overall balance (+ grants) -8.2 -8.5
than the 8.4% of GDP budgeted for FY10/11. The gov- Net asset position 0.4 -0.6
ernment also postponed the introduction of a new prop-
Net external borrowing 0.2 0.2
erty tax and VAT. Moreover, the servicing of the growing
public sector debt is set to take an estimated 6.6% of Net domestic borrowing 8.4 7.6
GDP in FY10/11 from 6.1% in FY09/10, despite an exten- Source: Egypt Ministry of Finance, Standard Bank Research
sion of government debt’s average maturity structure.
Monetary policy: risks to the downside Inflation and interest rates
Although the CBE’s monetary policy stance has been %

neutral as expected since May’s publication, we suspect 30.0
the risk from a tightening bias has decreased and may
now have shifted towards further easing. We see little
22.5
evidence of inflationary pressures in coming months.
Headline inflation was 10.7% y/y in Jul 10, the same as
Jun 10, but we expect inflation to continue its downward 15.0
trajectory, bringing it back towards the core (non-food)
level (7.1% y/y in Jul). Our dovish inflation outlook ap-
pears to be shared by the CBE, who in its 29 Jul MPC 7.5
comment saw the risks from growth and inflation being
well balanced, with the main uncertainty coming from
0.0
less robust global economic growth. Private sector
Feb-05 Mar-06 Apr-07 Apr-08 May-09 May-10
credit—at 9.5% y/y on a 3-m moving average basis in
CBE lending rate CPI y/y CPI y/y (ex-food)
Jul 10—remains subdued by historical levels and we see
this picking up only gradually going forward.
Source: Central Bank of Egypt, Standard Bank Research
29
Egypt
Bond curve outlook: further yield compression Changes in yield curve
The yield curve has delivered some bull steepening over 14.0
the past few months. We feel that this is likely to sponsor
some bull flattening in coming months. Naturally, the rally
in the short end will pull down the longer-dated yields. A 12.5
large part of the bull steepening has been the re-
emergence of foreign investor interest in the Egyptian
carry trade as the USD/EGP stabilised. But there has 11.0
also been considerable interest in EM duration trade in
recent months, which is likely to extend to the Egyptian
curve, once investors get comfortable with a likely disin- 9.5
flation process in coming months. The risk is that the
growing liquidity through the curve proves insufficient to
8.0
attract foreign investors. The other risk comes from in-
1-m 3-m 6-m 1-yr 2-yr 3-yr 5-yr 7-yr 10-yr
creased government debt issuance (EGP120bn in Q3
3-m forecast 10/05/2010 03/09/10
from EGP117bn in Q2 and EGP115 in Q3:09) and the
bias to extend the average debt maturity structure.
FX outlook: USD/EGP of 5.60 USD/EGP: forwards versus forecast
Our outlook back in May that USD/EGP would head up USD/EGP

towards 5.70 proved appropriate, albeit the move oc- 6.1
curred somewhat swifter than we had anticipated. The

key driver, as usual, was changes in EUR/USD with an
5.9
overlay of trade-weighted policy bias. Interestingly, the
relationship broke down since EUR/USD turned south in
early-Jun, delivering some notable trade-weighted weak- 5.7
ness. It may well be that this was part of a deliberate
policy which has been under discussion with the IMF to
allow more flexibility to prevent excess fixed income in- 5.5
flows. Nevertheless, we suspect there is room for some

trade-weighted gains on a multi-week basis, which
5.3
should see USD/EGP trade back nearer to 5.60. How- Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
ever, in line with our view that there is likely to be another
period of significant EUR/USD downside, we see 5.70
revisited by end-10 and a move to 5.80 during H1:11. Source: Reuters, Standard Bank Research
Equity market: constructive short-term Cairo Stock Exchange
Egyptian equities (as measured by the Hermes index) 100 = Jan 09

280
were up a relatively modest 3.6% in the year to 3 Sep 10.
However, this compared favourably with the relatively flat
YTD performance of the wider MSCI EM index. But 225
Egyptian equities have underperformed since May’s pub-
lication, falling 3.6%, while the MSCI is up 3.7%. How-
ever, we remain relatively constructive looking for a de- 170
gree of catch-up in coming months. At around 13.38x, the
P/E ratio compares reasonably with the S&P500 at 14.6x,
while the dividend yield of 3.8% compares well with 2.0% 115
on the S&P500. We are also constructive on the potential
growth in the economy, with 6.4% forecast for 2011. In
60
addition, we are reasonably constructive on equities glob-
Sep-04 Mar-06 Aug-07 Feb-09 Jul-10
ally in coming months as market valuations shift risk-free
Hermes MSCI EM MSCI Africa
model rates lower and the prospects of a double-dip
global recession are diluted even further. Source: Bloomberg, Standard Bank Research
30
Egypt
Egypt: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (EGPbn) 539 618 744 931 1069 1231 1416
GDP / capita (USD) 1,343 1,518 1,813 2,275 2,578 2,797 3,099
Real GDP growth (%) 6.9 7.0 7.1 6.0 4.6 5.8 6.4
Oil Production ('000 b/d) 655.0 632.0 619.0 639.0 645.0 650.0 650.0
Gas Production (bcm) 34.6 34.6 44.7 46.5 50.0 54.0 55.0

Budget balance (excl. Grants) / GDP (%) -8.50 8.00 -7.10 -8.00 -7.40 -8.50 -8.90
Balance of Payments
Imports of goods and services (USDbn) -39.10 -33.27 -45.26 -56.62 -45.56 -50.60 -54.71
Trade balance (USDbn) -23.03 -12.72 -20.81 -26.77 -22.48 -26.07 -28.36
Current account (USDbn) 2.05 2.51 0.24 -1.33 -3.19 -4.47 -5.39
- % of GDP 2.18 2.32 0.18 -0.79 -1.64 -2.07 -2.21
Capital & Financial account (USDbn) 6.70 -0.02 4.90 6.00 2.70 5.50 4.50
- FDI (USDbn) 5.38 10.04 11.60 7.60 6.10 7.00 8.00
- Import cover (months) pe -6.72 -9.39 -8.40 6.00 -9.01 -8.66 -8.38
S&P B+ B+ BB+ BB+ BB+ BB+ BB+

Moody’s Baa2 Baa2 Baa2 Baa2 Baa1 Baa1 Baa2
Fitch BB+ BB+ BB+ BB+ BB+ BB+ BB+
CBE Lending rate (%) pa 10.93 10.23 10.75 12.13 11.75 10.50 11.00
CBE Lending rate (%) pe 10.75 10.75 10.75 13.50 10.00 11.00 11.00
3-m rate (%) pe 8.50 9.65 7.10 11.84 9.80 8.00 8.00
1-y rate (%) pe 8.70 10.05 7.65 12.20 11.30 11.80 11.00
2-y rate (%) pe 9.10 10.41 7.45 10.35 11.50 12.00 12.00
5-y rate (%) pe 9.20 10.72 8.84 11.75 10.50 11.00 9.00
USD/EGP pa 5.77 5.73 5.67 5.58 5.55 5.61 5.75
USD/EGP pe 5.73 5.70 5.64 5.51 5.48 5.70 5.80
REER pa 73.4 74.1 76.5 87.0 87.3 93.2 97.8
NEER pa 55.9 53.6 51.3 51.4 52.3 54.3 54.4
Source: Central Bank of Egypt, Central Authority for Public Mobilization and Statistics, Standard Bank Research, Bloomberg
31
Gabon: economic diversification on the agenda
GDP (% y/y) pa -0.23 -0.75 -0.18 0.24 4.80 4.10 4.75 5.50 5.50 4.90 5.70 5.85
CPI (% y/y) pa 5.50 4.00 3,4 2.00 2.30 -2.30 1.50 4.80 5.50 6.00 4.80 3.90
Reserve money (% y/y) pe 9.7 4.7 -1.5 -2.9 2.1 0.7 4.5 8.5 9.9 11.5 10.9 13.5
CA/GDP (%) pe 4.8 4.8 5.0 4.8 8.9 8.3 9.4 13.5 11.9 7.9 6.9 6.5
BEAC financing rate (%) pa 4.50 4.50 4.25 4.25 4.25 4.25 4.00 4.00 4.00 4.00 4.00 4.00
USD/XAF pe 494.3 466.6 448.1 457.3 482.3 523.4 510.6 524.7 655.1 605.3 596.3 589.4

Source: IMF, Ministere de l’economie et des finances, BEAC, Standard Bank Research, Bloomberg
Political risk: reforms and recomposition Election results (2009)
Despite failing to obtain an absolute majority in the 2009

Presidential election 2009 Party % of votes
elections, President Ali Bongo Ondimba has asserted
himself and consolidated his power. Ali Bongo suc- Ali-Ben Bongo Ondimba PDG 41.7
ceeded his father, Omar Bongo, who ruled between 1967 Pierre Mamboundou UPG 25.8
and 2009, but he has promised to modernise the country
Pierre Mamboundou UPG 25.2
and initiate key socio-political reforms. We believe the
Zacharie Myboto Independent 3.9
2011 parliamentary elections will be a critical test for the
current administration. While Prime Minister Paul Bi- Parliamentary election 2006 Seats % of votes
yoghe Mba has incrementally come under pressure from
Gabonese Democratic Party (& allies)
Bongo’s top associates for the government’s weak imple- 99 82.5
(PDG)
mentation capacity, it may be tricky for Bongo to replace
Union of the Gabonese People (UPG) 8 6.7
him due to geopolitical reasons. Meanwhile, key opposi-
Gabonese Union for Democracy & Devel-
tion leaders, including Andre Mba Obame, have launched 4 3.3
opment (UGDD)
a new party (Union Nationale). As such, this group could Gabonese Progress Party (PGP) 2 1.7
become one of the two largest oppositions parties, and, 1 0.8
Congress for Democracy and Justice
with the UPG, challenge the ruling PDG’s grip on power.
Source: Gabon Electoral Commission
GDP growth: watch the oil price, production Composition of GDP
We forecast GDP growth of 4.6% y/y in 2010 and 5.5% %

y/y in 2011, assuming no negative oil price shocks. Pre- 7.0
dictably, much of our forecast acceleration in GDP

growth can be ascribed to higher oil prices relative to
4.0
2009 which are likely to support exports. The main down-
side risk is, however, the decreasing trend in oil output in
recent years as Gabon’s production has peaked. Ongo- 1.0
ing exploration works could still help contain the expected
downturn, but the government has vowed to diversify the
economy going forward. We believe the expansionary -2.0
fiscal stance, coupled with relatively robust oil revenues,

should reinforce growth in real disposable income and
-5.0
private consumption as well as government consumption. 2005 2006 2007 2008 2009e 2010f 2011f
Investment spending will pick up as infrastructure pro-
PCE GCE GFCF Net ex GDP
jects materialise ahead of the 2012 African Cup of Na-
tions. Source: IMF, Standard Bank Research
32
Gabon
Balance of payments: benefiting from oil price Current account developments
We expect an improvement in the C/A surplus, to about

% GDP
10% of GDP in 2010. As oil exports account for 75-80% 60
of total exports, we believe the trade balance will be sup-
ported by current and expected commodity prices. Down- 35
side risks stem from the outlook for import demand, es-
pecially in the case of infrastructure goods, and sluggish 10
oil production. The forecast income deficit will be deter-
mined by the usual expatriate remittance outflows, to- -15
gether with dividend outflows. We note that the govern-
ment has moved to diversify the economy in recent -40
months and has announced contracts with Asian compa- 2004 2006 2008 2010f
nies worth $4.5bn. We do not expect a turnaround in Goods Services Income
portfolio inflows, given the lack of tradable assets on the
Transfers CA
BVMAC and low interest rates by EM standards. FX re-
serves could rise to USD2.25bn in Dec 2010, accounting
for 6.7 months of imports, from USD2.0bn in Dec 2009. Source: IMF, Standard Bank Research
Fiscal policy: still expansionary Central government budget
The government increased overall spending by 35.9% to % of GDP 2009 2010

XAF2,096bn in FY2010, leaving a deficit of about 5% of
Total revenue (+ grants) 18.1 23.0
GDP. Of this, oil revenue would amount to XAF940.2bn.
The oil price benchmark (US$66.7/bbl) has been outper- Oil revenue 7.1 12.6
formed, while the exchange rate assumption (USD/XAF
465.5) implies that the marginal utility of every dollar of oil Non-oil revenue 10.9 10.4
revenue has actually improved. However, implementation

difficulties could force the government to cut back on
capital spending. The IMF has also advised reviewing the - interest 2.2 1.6
pace of investment acceleration and improving the effi-
ciency of public spending. Despite the government’s in- Overall balance -4.4 -5.0
tention to trim a bloated civil service, risks of fiscal slip-

Net external borrowing (saving) -0.7 -0.7
pages are still significant ahead of the 2011 parliamen-
tary elections. For example, the authorities agreed in 5.1 5.7
Net domestic borrowing (saving)
late-July to reduce utility prices (gas, water and electric-
ity) and the VAT on utilities in the 2011 budget. Source: IMF, BEAC, Standard Bank Research
Monetary policy: BEAC cuts rates Inflation and interest rates
While the Bank of Central African States (BEAC)’s mone- %

tary stance is influenced by the ECB’s policy course, it
has some flexibility in determining interest rates. In late- 8.0
July, the BEAC cut the benchmark rate by 25 bps to 4%
to support economic growth and boost credit to the real
5.0
economy. Given the structural issues in the eurozone,
further easing by the ECB cannot be ruled out, although it
remains to be seen whether this would impact the BEAC 2.0
rate in the short term. Inflation is likely to remain subdued
across the CEMAC region, which was highlighted by the -1.0
BEAC as it lowered the prime rate. In this regard, inflation
in Gabon was in negative territory in Q2:10 and is mar- -4.0
ginally north of 0% YTD, although we expect some re- Jan-00 Aug-02 Mar-05 Sep-07 Apr-10
bound later this year given still-elevated m/m rates. Also,
ECB refi BEAC rate CPI y/y
the country’s monetary aggregates have been flat or
even contracted in y/y terms in recent months. Source: IMF, BEAC, Standard Bank Research
33
Gabon
Eurobond: record low yields Eurobond spread over UST vs. EMBI+ spread
Gabon’s eurobond has rallied significantly in recent

spread over UST
weeks, with the yield retreating to a record low of 5.6% in
late-Aug. Gabon’s 2017 yield performance has tracked
the average EMBI+ spread in recent months, although 1,500
this has not always been the case, especially during the
1,200
global credit crunch. While further modest yield compres-
sion cannot be discounted—given the current yields to 900
maturity on some comparable bonds (Philippines)— Gabon
600
downside risks stem from the world economic outlook, EMBI
global liquidity conditions and oil prices. Interestingly, 300
Gabon2017 is to some extent a benchmark for the re-
maining SSA (excluding South Africa) eurobonds given 0
its BB- rating. The eurobond collapsed by a less signifi- Jan-08 Aug-08 Mar-09 Oct-09 May-10
cant extent than other SSA bonds in late-2008 and was
the first to trade at a premium in 2009 — we believe this
may have been driven by technical factors. Source: Bloomberg, Standard Bank Research
FX outlook: XAF to track EUR/USD weakness USD/XAF: forwards versus forecast
We expect USD/XAF to be pushed higher by a decline in USD/XAF

EUR/USD. As a member of the CEMAC region, Gabon is 610
affected by the CFA peg that sets the EUR/XAF rate at

655.957. We believe EUR/USD will continue to decline in
558
the medium term, possibly reaching 1.25 and parity in
three and six months. Consequently, the USD/XAF rate
is likely to depreciate towards 655 or so during the next 505
6-m, tracking EUR weakness via the CFA peg. The fore-
cast move in USD/XAF will probably lead to some depre-
ciation of the REER, giving rise to gains in external com- 453
petitiveness. Furthermore, we do not expect any change

in the EUR/XAF peg, which has only been adjusted once
400
(in 1994), at a time when CFA countries displayed sub- Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
stantial structural imbalances. While FX reserves remain
robust, in excess of USD2bn, it is worth noting that 65%
of reserves are held by the Banque de France. Source: Reuters, Standard Bank Research
Net FX reserves: robust, but unutilized Reserve money growth: subdued

USDm % y/y
2,300 35.0
1,700 25.0
1,100 15.0
500 5.0
-100 -5.0
May-00 May-02 May-04 May-06 May-08 May-10 Oct-05 Aug-06 Jul-07 Jun-08 Apr-09 Mar-10
Gabon FX reserves (USDm) M2
Source: IFS, Standard Bank Research Source: IFS, Standard Bank Research
34
Gabon
Gabon: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (XAFbn) 4,570 4,990 5,483 6,622 6,861 7,298 8,067
GDP / capita (USD) 6,049 7,229 8,577 9,663 9,678 8,639 8,295
Real GDP growth (%) 5.49 1.18 5.00 3.18 -0.23 4.80 5.50
Oil Production (k bbls/day) 229 227 225 212 228 230 235

Budget balance (excl. Grants) / GDP (%) 8.36 9.09 8.58 11.43 -4.41 -5.13 -2.1
Budget balance (incl. Grants) / GDP (%) 8.40 9.20 8.58 11.43 -4.41 -5.13 -2.1
Balance of Payments
Imports of goods and services (USDbn) 2.40 2.81 3.30 4.56 4.07 4.20 4.90
Current account (USDbn) 2.05 1.76 2.17 2.45 0.72 1.39 1.13
- % of GDP 24.97 17.50 17.65 17.26 4.78 10.0 8.30
Capital & Financial account (USDbn) -1.82 -1.31 -2.00 -1.82 -0.64 -1.07 -1.05
- FDI (USDbn) -0.28 -0.31 -0.23 0.80 0.82 1.10 1.30
S&P nr nr BB- BB- BB- BB- BB-
Fitch nr nr BB- BB- BB- BB- BB-
Consumer inflation (%) pa 1.20 -1.41 4.88 5.25 3.83 1.58 5.05
Consumer inflation (%) pe -0.40 6.50 5.90 5.60 1.80 5.50 4.00
Reserve money supply (% y/y) pa 28.8 25.2 12.2 7.8 3.5 4.0 11.5
Reserve money supply (% y/y) pe 27.6 16.4 6.9 9.1 -2.9 8.5 13.5
BEAC discount rate (%) pa 5.8 5.5 5.5 5.1 4.4 4.1 4.0
BEAC discount rate (%) pe 5.50 5.50 5.50 4.75 4.25 4.00 4.00
USD/XAF pa 527 522 479 448 462 491 557
USD/XAF pe 556 497 447 467 457 525 589
Source: IMF, Bancaire de Afrique Centrale (BEAC), Standard Bank Research
35
Ghana: sovereign downgrade is behind the curve
GDP (% y/y) pa 4.1 4.1 4.1 4.1 5.5 5.5 5.5 5.5 22.0 22.0 22.0 22.0
CPI (% y/y) pa 20.2 20.5 19.5 17.0 14.1 9.0 10.0 11.0 12.0 11.0 10.0 9.0
M2 (% y/y) pe 26.9 29.2 22.1 21.2 24.5 32.0 35.0 33.0 33.0 33.0 33.0 33.0
CA/GDP (%) pe -9.7 1.9 -13.9 -4.3 -5.1 -5.3 -15.5 -3.8 -1.2 -0.6 -11.5 1.3
3-m rate (%) pe 25.4 25.8 25.0 24.0 20.0 14.0 12.0 11.0 10.0 10.0 10.0 10.0
5-y rate (%) pe 28.0 28.0 28.0 28.0 20.0 16.0 14.5 14.0 13.0 12.0 12.0 12.0
USD/GHS pe 1.41 1.50 1.45 1.43 1.42 1.44 1.43 1.43 1.43 1.43 1.43 1.43
NEER pe 104.0 106.0 109.0 112.0 115.0 115.0 114.0 116.0 118.0 120.0 115.0 112.0
REER pe 205.0 220.0 225.0 231.0 232.0 234.0 229.0 235.0 240.0 245.0 235.0 230.0
USD/GHS vol (20 day) 3.5% 3.0% 3.1% 3.1% 6.3% 2.3% 3.1% 2.5% 2.5% 2.5% 2.5% 2.5%
Notes: pe — period end; pa — period average; na — not available.

Source: Bank of Ghana, Ghana Central Statistical Service, Standard Bank Research, Bloomberg
Political risk: oil sector transparency worries Election results (2008)
S&P’s recent sovereign downgrade of Ghana was partly Presidential election Party % of votes
due to concern over the lack of transparency and a regu-
Second-round run-off
latory framework surrounding the country’s nascent oil
Prof. John Atta-MIlls NDC 50.23
industry. Interestingly, the World Bank’s MIGA has post-
poned giving insurance for the new production facility Nana Akuffo Addo NPP 49.77
pending further due diligence into the contract. There are
Legislative election Seats
also concerns that the government played a major role in
derailing plans by Kosmos to sell its share of the Jubilee New Patriotic Party (NPP) 108
field to ExxonMobil. In addition, the Ghana Petroleum 115
National Democratic Congress (NDC)
Revenue Management Bill has still not been passed into
People’s National Convention (PNC) 2
law, although a draft was released in mid-Mar 10. This
has raised concerns that the regulatory framework will Convention People’s Party (CPP) 1
not be in place in time. Under the terms of its most recent Independent 4
IMF agreement, the government has committed to pass-
Total 230
ing the bill by end-2010, while also submitting a Petro-
leum Regulatory Authority Bill to parliament in Sep 10. Source: Ghana Electoral Commission
GDP growth: upward revisions Composition of GDP

GDP growth was 4.1% y/y in 2009, down from 7.2% in %
2008. The key growth areas were finance (8.7%), crops 20.0
and livestock (8.2%), and mining (8.2%). However, the
strong performance in these sectors was offset by nega-
10.0
tive growth in fishing (-2.3%), construction (-1.7%) and
manufacturing (-1.3%). Using the 1993 weights, we ex-
pect growth to improve to 5.5% in 2010 and then jump a 0.0
significant 22.0% in 2011 as the impact of oil production
comes into the data. Yet the key elephant in the room is
-10.0
the potential sharp (30-40%) upgrade in GDP derived
from the rebasing of the data from 1993 to 2006. Al-
though postponed several times, the release of these -20.0
figures is likely to be by end-Q3:10. Such a change sig- 2006 2007 2008 2009 2010
PCE GCE
nificantly alters Ghana’s risk measures—such as fiscal,
GFCF Netex
C/A and debt ratios, which use GDP as the denomina- Real GDP grow th
tor—and thus the country’s risk rating.
Source: Bank of Ghana, Standard Bank Research
36
Ghana
Balance of payments: improving Current account developments
BOG FX reserves rose to USD3.5bn at end-Jun 10 from USD m

4,000
USD3.3bn at end-Mar 10 and USD3.2bn at end-2009.
The figures indicate a modest surplus in the BOP and we
see a gradual accumulation of further FX reserves going 1,500
forward. The C/A deficit fell to USD1.0bn (6.5% of GDP)
in 2009—a marked improvement from USD3.5bn (26.2% -1,000
of GDP in 2008). We expect a fairly modest deterioration
to USD1.3bn (7.2% of GDP) in 2010, before improving to -3,500
a deficit of USD0.7bn (2.8% in GDP) in 2011. The key to
the improvement will be oil production which will likely -6,000
come on line in Nov 10 and add around USD3.0bn to Q1 06 Q3 07 Q1 09 Q3 10
exports in 2011. We remain constructive on the financing Trade Services
of the deficit in coming months, via a combination of FDI
Income Transfers
and portfolio inflows.
Current Account
Fiscal policy: dealing with arrears Central government budget
S&P’s downgrade of Ghana’s sovereign rating can be % of GDP 2008 2009 2010
attributed largely to concern over government debt sus- Total revenue 32.5 33.3 37.1
tainability. We are slightly more sanguine and suspect
any downgrade should have taken place in 2007 ahead
of the fiscal excesses of 2008. We are reasonably com- - recurrent 22.4 28.1 29.4
fortable with the government’s fiscal consolidation plans, - debt service 3.2 4.9 5.2
which of course phase in oil-sponsored revenues. En-
- development/transfers 21.6 11.2 10.9
couragingly, the fiscal position for 2010 looks broadly on
target in H1:10. The deficit on a commitment basis was
1.9% of GDP in H1:10 compared to a planned 2.5% of Overall balance (+ grants) -14.9 -9.9 -8.0
GDP. The government paid down GHS337.36m in ar- Net external borrowing 5.8 3.6 2.1
rears, which was GHS159m more than targeted, taking
Sale of Assets 4.1 0.0 0.0
the cash deficit to its target of 3.2% of GDP. We expect
Net domestic borrowing 6.7 6.0 5.9
arrears to decline to GHS1.2bn in 2010 from GHS1.43bn
in 2009. We believe the deficit correction to 3.5% of GDP Donor support (grants and HIPC) 5.3 6.0 4.8
in 2012 is still achievable. Source: Ghana Ministry of Finance, Standard Bank Research
Monetary policy: end of easing bias in sight Inflation and interest rates
As expected, the monetary policy easing cycle that %

started in Nov 09 continued over recent months, with 30.0
another 150 bps cut in Jul 10. The cut takes the prime
rate down to 13.5%—a cumulative decline of 500 bps
23.8
since Nov 09. Although we are nearing more neutral terri-
tory, we are still pencilling in a move down to 12.0% by
end-10. Our view is based on a relatively neutral view on 17.5
inflation, which we see in a 9.0-11.0% range for the re-
mainder of 2010 and most of 2011. A key factor under-
pinning our benign inflation view is our expectation of 11.3
further GHS strength/stability. Another is that we believe
domestic demand will remain sluggish for a while. Private
5.0
sector credit extension was a rather modest 4.3% y/y in
Oct-04 Mar-06 Aug-07 Dec-08 May-10
May 10, compared to 43.0% in May 09 and 58.7% in May
91d T-bill CPI y/y BOG Prime rate
08. M3 money growth was c.27.6% y/y in May—around
the same level as in Dec 09.
37
Ghana
Bond outlook: constructive Changes in yield curve
Our expectation of further compression in the local yield 16.0

curve since our May publication proved appropriate; the
curve has even delivered some moderate bull flattening.
We are reasonably comfortable that there is some further 14.8
moderate yield compression still to come. That said, dur-
ing Jun and Jul the picture was not so encouraging and
the 3-yr bond yields increased in line with a deterioration 13.5
in foreign investor sentiment. Foreign participation also
probably explains the relative outperformance since late-
12.3
Jul. Interestingly, we have seen limited impact on local
bonds or the 2017 eurobond from S&P’s downgrading of
Ghana’s sovereign rating in late-Aug. Indeed, Ghana has
11.0
been a strong outperformer in the eurobond universe,
91d 182d 1y 2y 3y
with spreads compressing a significant 200 bps since
3-m forecast 07-May-10 06-Sep-10
late-May compared to 70 bps in EMBI+ spreads.
Source: Reuters, Standard Bank Research
FX outlook: USD/GHS in 1.41-1.45 range USD/GHS: forwards versus forecasts
We have upwardly revised our USD/GHS forecast to 1.43 USD/GHS

for 2010 and 2011 from 1.38 and 1.35. While the GHS 1.70
has outperformed the USD on a forward basis since May,

it underperformed until mid-Jul. Since mid-Aug USD/GHS
1.49
has found a more stable level around 1.43 (1.41-1.45
range) and we see this range being maintained in 2010
and into 2011. The risk to this view comes from a break 1.28
of the range to the downside should the authorities see
risk to their monetary policy goal of maintaining inflation
in single digits. Importantly, Ghana’s positive BOP situa- 1.06
tion suggests the USD/GHS rate will continue to be pre-

dominantly policy determined. The risk is perhaps the
0.85
authorities’ move to a more trade-weighted measure, Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
increasing USD/GHS volatility. The GHS also continues
to be protected by a reasonable interest rate carry and an
ongoing unwinding of FX deposits. Source: Bank of Ghana, Standard Bank Research
Equity market: still bullish Ghana Stock Exchange
Ghana has not outperformed broader EM equities, con- Jan 04 = 100

330
trary to our expectations. While the Ghanaian stock mar-
ket was down some 2.7%, the MSCI EM was up 8.3%.
That said, Ghana is still up 19.6% YTD compared to the 250
MSCI EM being up a more modest 1.4%. Nevertheless,
we remain constructive on the Ghana All Share Index in
coming months and expect it to trade to new highs above 170
7,130. First, Ghanaian equities have performed better
since the BOG cut rates a further 150 bps in late-Jul.
90
Second, the appreciating or more stable GHS has as-
sisted foreign investor confidence in Ghana, which we
also see as broadly constructive equities globally. Third, 10
local T-bill and bonds look relatively less attractive rela- Jul-01 May-03 Feb-05 Dec-06 Sep-08 Jun-10
tive to equities, with lower risk-free rates improving valua-
GSE All-share MSCI EM
tions. Fourth, we expect the upward GDP revisions to
support overall corporate sentiment. Source: Bloomberg
38
Ghana
Ghana: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output

Nominal GDP (GHSbn) 9.7 11.5 14.0 17.3 21.4 24.9 33.0
GDP / capita (USD) 483 553 630 578 627 717 932
Real GDP growth (%) 5.9 6.2 6.3 7.2 4.1 5.5 22.0
Gold production ('000 FO) 2,124 2,120 2,215 2,400 2,550 2,700 2,900
Cocoa bean production ('000 MT) 537 741 620 676 720 740 750
Timber production ('000 CM) 466 455 460 455 465 465 450

Balance Of Payments
Exports of goods (USDbn) 2.8 3.7 4.2 5.3 5.9 7.7 10.8
Imports of goods (USDbn) 5.3 6.8 8.1 10.3 8.1 10.4 13.0
Current account (USDbn) -0.8 -0.8 -1.9 -3.5 -1.0 -1.3 -0.7
- % of GDP -7.2 -6.5 -13.0 -26.2 -6.5 -7.4 -3.1
Capital & Financial account (USDbn) 0.8 0.0 2.3 2.6 2.4 2.5 2.0
- FDI (USDbn) 0.1 0.0 0.9 1.1 0.7 1.1 1.0
Basic balance / GDP (%) -0.8 -6.5 -2.7 -15.3 4.6 0.6 1.3

S&P B+ B+ B+ B+ B+ B B+
Moody’s NR NR NR NR NR NR NR
Fitch B+ B+ B+ B+ B+ BB- BB

BOG discount rate (%) pa 16.8 14.3 12.7 15.4 18.1 15.3 12.0
BOG discount rate (%) pe 15.5 12.5 13.5 17.0 18.5 12.0 12.0
3-m rate (%) pe 11.4 10.7 10.6 24.7 24.0 11.0 10.0
1-y rate (%) pe 16.5 13.5 12.0 21.0 21.0 11.0 10.0
2-y rate (%) pe 17.0 15.2 12.5 20.0 30.0 12.0 11.0
5-y rate (%) pe n/a 14.5 15.0 28.0 28.0 14.0 12.0
USD/GHS pa 0.91 0.92 0.94 1.12 1.36 1.43 1.43
USD/GHS pe 0.91 0.92 0.97 1.28 1.43 1.43 1.43
NEER pa 88.2 85.5 86.5 97.0 107.8 115.0 118.0
REER pa 134.1 138.2 145.8 176.3 220.3 232.5 237.5
Notes: pe — period end; pa — period average; nr — not rated; na — not available. The cedi was rebased in mid 2007 by 10,000. For easier reference
historical data has also been rebased.
Source: Bank of Ghana, Ghana Central Statistical Service, Standard Bank Research, Bloomberg
39
Kenya: economic growth could gather momentum
GDP (% y/y) pa 5.6 1.1 0.5 3.3 4.4 7.0 0.9 2.3 3.3 3.8 4.3 4.9
CPI (% y/y) pa 14.2 10.2 7.5 5.7 4.6 3.7 3.2 3.0 3.4 4.0 4.1 5.2
M3 (% y/y) pe 11.5 13.0 14.8 15.2 15.8 16.5 17.0 16.8 17.3 16.8 15.9 15.5
CA/GDP (%) pe -7.1 -7.2 -7.3 -6.7 -6.4 -6.2 -6.7 -3.9 -3.7 -3.4 -3.2 -3.3
3-m rate (%) pe 8.5 7.0 7.3 6.6 4.9 2.6 2.4 2.8 3.1 3.7 4.3 4.8
5-y rate (%) pe 10.2 10.7 11.2 9.9 8.3 7.0 5.7 5.2 6.5 7.1 7.7 8.1
USD/KES pe 80.1 76.3 75.3 75.7 77.3 81.6 81.2 80.9 82.9 82.5 82.3 82.1
REER pe 147.0 148.0 150.0 149.9 144.6 137.7 139.8 137.8 135.6 137.3 138.9 140.4
NEER pe 81.0 80.0 81.0 80.8 78.5 74.8 78.6 79.4 77.6 81.4 82.4 83.4
USD/KES vol (20 day) 7.5% 7.0% 7.1% 7.0% 3.9% 10.0% 6.5% 7.0% 7.0% 7.0% 7.0% 7.0%
Source: Central Bank of Kenya, Kenya National Bureau of Statistics, Standard Bank Research
Political risk: hurdle cleared Election results (2007)
The campaigning and voting for the referendum on the Presidential election Party % of
constitution held on 4 Aug occurred relatively peacefully.
Although there were some sporadic instances of vio- Mwai Kibaki PNU 47.1
lence, they were not sufficient to mar the entire exercise. Raila Amolo Odinga ODM 46.5
Opinion polls in the period leading to the referendum
Stephen Kalonzo Musyoka ODM-K 5.9
allayed investor fears of a recurrence of the weeks of
violence that followed the 2007 general election, the dis- Others 0.5
puted outcome of which was a spark. The resounding
Parliamentary election Seats
approval of the constitution also eliminated the risk of a
recurrence of the tensions that were triggered by the re- Orange Democratic Movement (ODM) 99
jection of the 2005 referendum. The approval of the con- 43
Party of National Unity (PNU)
stitution does not mean the pre-existing political tensions
Orange Democratic Movement -Kenya (ODM-K) 16
in the unity government will necessarily abate; it has just
eliminated the constitutional referendum as a catalyst for Kenya African National Union (KANU) 14
further problems. For now the government is likely to Total 207
muddle through until the next general elections. Source: Electoral Commission of Kenya
GDP growth: upside risks Composition of GDP
The peaceful referendum will likely ensure that the tour- y/y
ism sector continues to improve over the remainder of 12.0
2010. Likewise, remittances from the Diaspora are likely

to support real income growth. With inflation low, this will 6.0
help to underpin household consumption spending.
Hence, the 3.8% y/y growth rate for 2010 that we are
0.0
forecasting is probably on the low side. Upside risks to
our forecast include the possibility of a stronger contribu-
tion from the agricultural sector. Good rains are likely to -6.0
result in the agricultural sector adding to the growth mo-
mentum, countering the destruction of horticultural prod- -12.0
ucts meant for exports that was occasioned by the can- 2002 2004 2006 2008 2010f
cellation of flights to Europe as a result of the Icelandic
PCE GE GFCF
volcanic eruptions. Moreover, investment spending re-
Stocks Netex GDP
mains robust, boosted by government spending.
Source: National Bureau of Statistics, Standard Bank Research
40
Kenya
Balance of payments: lower oil imports Current account developments
Available data through May 10 shows that, contrary to USD m

5,000
our earlier expectations, the goods trade deficit has not
continued to widen but has actually shrunk. Much of that
shrinkage was due to falling imports, mainly oil, while 2,000
exports have stagnated. Over the remainder of the year,
the C/A is likely to improve somewhat, recording a deficit -1,000
of 3.9% of GDP for the year. The improvement in tourist
arrival numbers is likely to continue over the course of
2010, receiving another boost from a largely incident-free -4,000
constitutional referendum. Having recovered from 2009,

worker remittances have been subdued during H1:10 — -7,000
a pattern likely to be repeated in H2:10. However, the 2001 2003 2005 2007 2009 2011f
lower base of 2009 would still imply a net improvement
Trade Service Income
y/y, despite a stable q/q trend. FX reserves, at
Tranfers C/A
USD3.75bn in May (3.9 months’ import cover), are likely
to rise to USD4.17bn in Dec (4.5 months’ import cover). Source: Central Bank of Kenya, Standard Bank Research
Fiscal policy: broadly expansionary Central government budget
Fiscal policy remains broadly expansionary, with a deficit % of GDP 2009/2010 2010/2011
of 6.8% of GDP budgeted for FY2010/11 — marginally Total revenue 22.4 24.9
higher than the 6.6% achieved in FY2009/10. The
FY2010/11 budget is predicated on an increase in reve-
nues to 24.9% of GDP from 22.4% previously. Clearly, as wages 6.8 6.6
the economy continues to recover, fiscal revenues are interest 2.5 2.7
likely to improve as well. But what is striking about the
development 10.3 10.9
increase in the revenue-to-GDP ratio is an expectation on
the part of the government that efficiencies in revenue Overall balance (- grants) -8.0 -8.2
collection will underpin this increase in revenues. Hence, Overall balance (+ grants) -6.6 -6.8
revenue collection may turn out to be smaller than budg-
eted for, implying that either expenditure will be reduced
or the deficit will be larger than anticipated. While this Net domestic borrowing 3.9 3.8
could have prompted the government to accelerate the
Donor support (grants and loans) 4.1 4.5
process of issuing a Eurobond, we suspect there will be
greater domestic issuance instead. Source: Kenya Ministry of Finance
Monetary policy: turning neutral Inflation and interest rates
Although inflation ticked up to 3.6% y/y in Jul from 3.5% %

y/y in Jun, it is likely to drop below 3.0% y/y in Q3:10. 22.0
However, this will probably be the bottom in the current
cycle, with a rising trend likely to be established into
16.5
Q1:11. Our current forecast envisages inflation ending
the year at 3.1% y/y and rising to 5.4% y/y by Dec 11.
The wild card remains food inflation, which has been 11.0
subdued recently, averaging 4.7% y/y since the begin-
ning of the year. Perhaps the increase to 4.6% y/y in Jul
from 3.8% y/y in Apr is a sign that food inflation has bot- 5.5
tomed out. But barring a drought that would constrain
food supply in the region, we do not expect strong food
inflation pressures to arise. Needless to say, there is no 0.0
imperative for the CBK to hike rates just yet. But some Jan-07 Nov-07 Sep-08 Jun-09 Apr-10
withdrawal of the excess liquidity the CBK has injected is CPI y/y 91-day T-bill rate Central bank rate
likely; reserve money is about 16.5% above target.
Source: National Bureau of Statistics, Reuters
41
Kenya
Bond curve outlook: further bull flattening Changes in yield curve
The bull flattening of the curve over the past 4-m was far YTM
stronger than we had expected. The rally at the long end 11.0
of the curve could persist some more. Robust demand for
long-term paper is likely to keep long-term rates relatively
8.5
flat. But rates at the short end of the curve appear to
have hit the floor, with some upside likely as we move
into 2011. The CBK has allowed reserve money to rise 6.0
by close to KES30.0bn above target (about 16.5%), a
situation that is unlikely to continue. Hence, as the CBK
withdraws some of that excess liquidity, it will simultane- 3.5
ously put a floor under short-term rates. Furthermore, the
government is likely to issue more domestic paper as it
1.0
finances the budget deficit. But the CBK’s accommoda-
3-m 1-y 3-y 5-y 7-y 9-y 11-y 15-y
tive policy bias coupled with still-subdued inflation devel-
6-m forecast 28-Apr-10 30-Aug-10
opments imply that there won’t be much upside pres-
sures even on short-term rates just yet. Source: Reuters, Standard Bank Research
FX outlook: depreciation bias USD/KES: forwards versus forecasts
A factor that may have led to the injection of excess li- USD/KES
quidity in the banking system, manifesting itself in re- 85.00
serve money staying above targeted levels, is the desire

of the CBK to arrest the appreciation of the KES. Inter-
78.75
vention by the CBK could only abate if USD/KES were to
start heading higher. Even then, chances are that the
CBK would switch to buying EUR rather than USD if 72.50
EUR/KES were to continue declining. Thus far, the CBK
has been successful at not only stabilising the trade-
weighted KES but also engineering a depreciation of the 66.25
REER. Our calculations show that the REER declined by

8.4% between Dec 09 and Jun 10. Although decreasing
60.00
inflation helped in bringing this about, the CBK kept the Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
NEER depreciating. Without CBK intervention, the USD/
KES rate would decline towards 75, but we are now tar-
geting 82.5 on a multi-month basis. Source: Reuters, Standard Bank Research
Equity market: catching up to EM Nairobi Stock Exchange
The NSE has made up most of the ground lost to broader Jan 06 = 100
190.0
EM and frontier markets, a trend likely to continue over
the rest of this year. The positive momentum the market
received from strong corporate earnings continued to 155.0
drive the market higher over the past 4-m period. The
market also probably received a boost from portfolio in-
flows. Surprisingly, investor sentiment, both domestic and 120.0
foreign, remained buoyant, seemingly unfazed by the
possible dislocation that could have been caused by the
85.0
referendum. Of course, opinion polls showing increasing
support for the constitution as the poll date neared
helped. Foreign investor interest in the market improved, 50.0
even though global economic growth seemed to be sput- Jan-06 Mar-07 Apr-08 Jun-09 Aug-10
tering. It appears that Africa-focussed investors have
differentiated the possible impact of slowing developed NSE 20 MSCI EM
market economies, with a still-bullish outlook for EM.
Source: Reuters
42
Kenya
Kenya: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (KESbn) 1,416 1,622 1,826 2,100 2,352 2,524 2,732
GDP / capita (USD) 538 624 735 783 779 800 823
Real GDP growth (%) 5.8 6.4 7 1.6 2.6 3.7 4.1
Tea production ('000 tons) 328.0 310.0 369.0 346.0 305.0 340.0 356.0
Coffee production ('000 tons) 47.7 50.5 52.2 38.7 55.0 58.0 62.0

Budget balance (excl. Grants) / GDP (%) 0.5 -2.6 -1.4 -7.6 -8.0 -8.2 -8.4
Budget balance (incl. Grants) / GDP (%) 2.8 1.0 1.4 -5.0 -6.6 -6.8 -7.1
Balance Of Payments
Exports (USDbn) 3.5 3.5 4.1 5.0 5.9 6.1 7.3
Imports (USDbn) 5.6 6.8 8.4 10.7 11.5 11.2 12.9
- % of GDP -1.34 -2.27 -3.80 -6.63 -6.67 -3.94 -3.26
Financial account (USDbn) 0.77 0.89 2.23 1.17 2.44 1.58 2.05
- FDI (USDbn) 0.02 0.05 0.73 0.10 0.80 0.68 0.72
Basic balance / GDP (%) -1.23 -2.04 -1.12 -6.31 -4.04 -1.82 -1.11
- Import cover (mths) pe 3.8 4.3 4.9 3.2 4.0 4.5 4.8

S&P B+ B+ B+ B B+ BB- BB-
Fitch nr nr B+ B+ B+ BB- BB-

Policy interest rate (%) pa na 9.8 8.5 9.2 7.8 6.7 6.1
Policy interest rate (%) pe na 10.0 8.8 8.5 7.7 6.3 6.0
3-m rate (%) pe 8.1 5.7 6.9 9.0 6.6 2.8 4.8
1-y rate (%) pe 10.0 8.7 8.5 8.8 8.0 3.1 5.4
2-y rate (%) pe 10.5 10.2 9.2 9.8 8.5 3.4 6.0
5-y rate (%) pe 12.7 11.2 9.9 10.5 9.9 5.2 8.1
USD/KES pa 75.0 72.0 67.0 70.4 77.2 78.7 81.4
USD/KES pe 75.0 69.6 63.8 79.5 75.7 80.9 82.1
REER pa 109 118.0 123.0 142 149.2 139.9 143.2
NEER pa 87.2 85.9 85.4 84.2 80.8 78.3 80.7
Notes: pe — period end; pa — period average, nr — not rated; na — not available
Source: Central Bank of Kenya, Kenya National Bureau of Statistics, Standard Bank Research
43
Malawi: growth driven by agricultural production
GDP (% y/y) pa 8.2 6.7 7.4 6.5 6.8 5.3 6.0 5.1 5.8 6.3 6.8 6.7
CPI (% y/y) pa 8.8 8.9 7.8 7.4 8.1 7.8 7.5 6.7 6.1 5.6 7.4 7.5
M2 (% y/y) pa 28.5 20.9 15.5 18.9 23.7 25.8 29.4 31.1 28.6 22.1 18.9 21.6
CA/GDP (%) pe -16.8 -18.3 -17.6 -18.5 -16.4 -17.9 -17.2 -18.1 -17.7 -18.3 -18.0 -18.4
3-m rate (%) pe 13.5 11.0 9.1 7.2 7.3 7.2 7.6 7.2 7.0 7.5 7.6 7.8
3-y rate (%) pe 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3
USD/MWK pe 141 140.6 141.2 142.5 147.5 150.8 151.3 155 158.0 160.0 162.1 167.3
REER pe 138.1 107.0 103.5 108.3 113.7 105.7 104.1 103.8 102.5 101.5 100.7 98.2
NEER pe 114.4 98.3 94.7 93.0 91.3 94.9 93.1 92.3 91.2 90.4 89.7 87.5
USD/MWK vol (20 day) 0.0% 0.0% 0.0% 3.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Source: Reserve Bank of Malawi, National Statistical Office, Standard Bank Research
Political risk: looming row with donors Election results (2009)
President Bingu wa Mutharika reacted strongly to a re- Presidential election Party % of votes
port prepared by the Malawi Vulnerability Assessment
Committee, an organ of SADC. The committee reported Bingu wa Mutharika UDF 66.0
that up to 1m people in Malawi would require humanitar- John Tembo MCP 30.7
ian assistance due to poor crop yields caused by a dry
Walter Chibambo PETRA 0.8
spell in the country’s southern region. This claim came as
the government was praising the efficacy of its agricul- Stanley Masauli RP 0.8
tural input subsidy programme, a programme that has Parliamentary election Seats
boosted maize output sufficiently to lead to a surplus and
Democratic Progressive Party (DPP) 114
the commencement of maize exports to Zimbabwe. The
president threatened to expel donors and close down Malawi Congress Party (MCP) 26
newspapers reporting stories about food shortages. If the 17
United Democratic Front (UDF)
food shortfall were to materialise as predicted in the re-
port, the humanitarian response could be hindered, espe- Others - mainly independents (32) 37
cially as the country has been dogged by allegations of Total 193
corruption for many years. Source: Malawi Electoral Commission
GDP growth: marginally lower forecast Composition of GDP
The onset of a purported La Niña event could lead to %

25.0
errant rainfall patterns, resulting in disruptions to agricul-
tural output. Hence, we have adjusted our GDP forecast
marginally lower, to 5.8% y/y in 2010 from 6.2% y/y previ- 13.8
ously. The heavily agrarian economy, with agriculture
comprising about 34.0% of total GDP, has undoubtedly
benefited from favourable rainfall patterns in the past few 2.5
years. The strength of agriculture’s contribution to GDP
can also be partially attributed to increased productivity
-8.8
as a result of the government-financed agricultural input
subsidy programme. Likewise, attempts to attract farmers
from other SADC countries have supported agricultural -20.0
production and will probably continue to boost private 2001 2003 2005 2007 2009 2011f
investment spending. Additionally, with inflation low, con-
PCE GCE GFCF NetEx GDP
sumer spending is likely to remain buoyant.
Source: National Statistics Office, IMF, Standard Bank Research
44
Malawi
Balance of payments: medium-term challenges Current account developments
The campaign to eliminate the blending of tobacco with USDm

300
other substances could have far-reaching consequences
for the country’s BOP in the medium term. The campaign
was initiated under the WHO’s Convention on Tobacco -50
Control, with the Canadian government spearheading the
implementation of the convention’s recommendations. -400
The practice of blending tobacco with other substances is
intended to make it taste better. The WHO’s ban would
affect burley tobacco, Malawi’s predominant crop variety. -750
The near-term outlook for the BOP remains precarious,

given the likelihood of a surge in oil prices and the uncer- -1,100
tain capacity of donors to live up to their pledges. Hence, 2004 2005 2006 2007 2008f 2009 2010f 2011f
despite a requirement to the contrary in the ECF pro-
gramme, it appears inevitable that the BOM will continue
Transfers C/A
rationing FX, but FX reserves are likely to fail to rise ma-
terially above 2m of import cover. Source: IMF, RBM, Standard Bank Research
Fiscal policy: at risk from European austerity Central government budget

% of GDP 2009/2010 2010/2011
The implementation of the FY2010/11 budget could be
severely compromised if the austerity programmes in Total revenue 25.2 26.0
Europe are implemented. The Finance Minister has al-
ready admitted that possibility, and indicated that budget
cutbacks would be inevitable. The ECF programme the - wages 5.6 5.6
government agreed with the IMF was based on an ex-
- interest 2.8 2.9
pectation of a higher level of external inflows than was
reflected in the FY2010/11 budget. Hence, some of the - development 9.6 10.1
performance criteria in the ECF programme, particularly Overall balance (- grants) -13.5 -12.2
regarding the amount of net domestic debt repayment,
may need to be revised. Indeed, the extent of the exter-
nal shock coming from the consequences of the Euro- Net external borrowing 2.7 1.4
pean debt crisis could even result in an augmentation of Net domestic borrowing -0.9 -0.4
the current ECF programme.
Donor support (grants) 11.7 11.1
Source: IMF, Ministry of Finance
Monetary policy: easing bias Inflation and interest rates
The stable inflation outcomes in recent months finally %

prompted the RBM to cut the bank rate by 200 bps at the 40.0
beginning of Aug, bringing the rate to 13.0%. Thanks to

subdued inflation, which has averaged 7.9% y/y thus far
31.3
this year, chances are that the RBM will have an easing
bias in the months ahead. The RBM seems to believe
that low inflation readings are likely to persist. Non-food 22.5
inflation, registering 9.9% y/y in Jul, remains elevated.
However, with oil prices having lingered in a USD80 -
USD90/bbl range since the beginning of the year, the 13.8
transport index has been growing at an average of 14.2%

y/y since Feb. Barring a devaluation of the MWK or a
5.0
sharp rise in oil prices, only a marked increase in food Jan-04 Aug-05 Apr-07 Nov-08 Jul-10
inflation brought on by a bad maize harvest could lead to
Bank rate 91-day Inflation
upside pressures on headline inflation.
Source: National Statistical Office, RBM
45
Malawi
Bond curve outlook: bullish parallel shift Changes in yield curve
T-bill rates are likely to decline over the coming 6-m, un- YTM
derpinned by the combination of low and stable inflation 21.0
as well as an easing bias by the RBM. We do not expect

the 91-d rate to move much, though. The 91-d rate is 17.0
currently about level with the inflation rate, leaving little
scope for it to fall much further. In any event, the 91-d
rate fell on its own in Q4:09, while the 182-d and 273-d 13.0
rates remained sticky around current levels. The extent of
the moderation in inflation is likely to lead to a 70 bps - 90 9.0
bps decline in the 273-d and 273-d rates. Interbank rates
rose to an average of 14.8% in Jul from 12.9% in Jan.
However, since the RBM reduced the bank rate, they 5.0
have consistently declined, reaching 12.1% on 24 Aug. 91-d 182-d 273-d 3-y
07-May-10 20-Aug-10 6-m forecast
Source: RBM, Standard Bank Research
FX outlook: marginal USD/MWK upside to 155 USD/MWK: forwards versus forecasts
The MWK still appears likely to be devalued over the USD/MWK

175
coming 18 months, but the extent of the devaluation will
probably be less than our earlier expectations. The RBM
tightened FX regulations, a probable sign that FX is still 161
in short supply. The importation of and payment for all
goods with a value in excess of USD50k, as well as all
services, shall with effect from 1 Sep 10 require the prior 148
approval of the RBM, supported by documentary proof.
Regardless of the current supply demand situation for
134
FX, a condition of the granting of the ECF was the elimi-
nation of the difference between the official rate and the
rate charged by foreign exchange bureaux, and the elimi- 120
nation of queues for foreign exchange. The latest regula- Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
tory tightening of FX controls may achieve this adminis-
tratively, by disqualifying some imports, rather than via a
marked depreciation of the MWK. Source: Reuters, Standard Bank Research
Equity market: trending sideways Malawi Stock Exchange
The market’s low liquidity and capitalisation, and the Index

country’s foreign exchange control regulations have en- 6,800
sured that the Malawi Stock Exchange is largely decoup-

led from global equity market developments. The All
5,600
Share Index has stagnated since Feb 2009, trending
broadly sideways in that period, despite the swings ex-
perienced in more liquid emerging and frontier markets. A 4,400
cursory look at the market suggests that equities are
trading at relatively attractive valuations. As of 20 Aug 10,
domestic companies were trading at a weighted P/E ratio 3,200
of about 8.0x and a dividend yield of about 4.6%. With

little to attract foreign investors, the market will continue
2,000
to rely on domestic drivers. There does not appear to be Jan-07 Nov-07 Oct-08 Sep-09 Aug-10
sufficient local investor interest that would see the market
MSE
trend markedly higher over the remainder of 2010.
Source: Malawi Stock Exchange, Standard Bank Research
46
Malawi
Malawi: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (MWKbn) 326 396 465 565 660 730 816
GDP / capita (USD) 228 228 252 296 335 336 342
Real GDP growth (%) 2.4 8.2 7.9 9.7 7.2 5.8 6.4
Tobacco production ('000 tons) 145.3 155.1 110.7 194.7 135.0 130.0 138.0
Tea production (million kgs) 38.0 38.9 39.2 40.5 40.2 41.3 43.5
Balance Of Payments
Exports (USDbn) 0.514 0.543 0.709 0.859 1.079 1.265 1.717

Imports (USDbn) 1.024 1.039 1.254 1.338 1.613 1.816 2.337
- % of GDP -25.5 -24.1 -21.6 -16.4 -17.8 -17.4 -18.4
- FDI (USDbn) 0.027 0.030 0.032 0.034 0.036 0.054 0.062

Fitch nr CCC+ B- B- B- B- B-
3-m rate (%) pe 24.44 17.14 10.16 13.38 7.15 7.20 7.80
USD/MWK pa 116.3 136.0 140.0 140.5 141.5 150.9 161.2
USD/MWK pe 123.8 138.7 138.7 140.6 142.5 155.0 167.3
REER pa 100.0 99.0 97.3 113.7 109.8 108.6 108.4

NEER pa 100.0 90.5 88.0 101.9 96.2 94.3 89.6
Notes: pe — period end; pa — period average, nr — not rated; na — not available
Source: IMF, National Statistical Office, RBM, Standard Bank Research
47
Mauritius: stepping up the response to economic headwinds
GDP (% y/y) pa 2.6 2.9 3.1 3.8 4.1 4.7 4.8 5.3 5.2 5.1 5.0 5.5
CPI (% y/y) pa 4.9 3.3 1.3 0.7 2.4 2.5 2.5 3.7 3.7 4.0 4.5 4.1
M2 (% y/y) pe 15.0 12.5 8.3 8.1 7.9 9.4 11.4 12.7 13.1 13.8 13.6 13.4
CA/GDP (%) pe -2.7 -12.9 -8.7 -7.9 -7.7 -7.2 -6.9 -6.7 -7.2 -7.6 -7.3 -7.2
3-m rate (%) pe 6.3 4.6 4.5 4.7 4.2 3.2 2.4 2.6 2.5 3.6 4.2 4.7
5-y rate (%) pe 10.0 8.8 8.7 8.5 8.7 7.1 7.1 7.2 6.3 6.8 7.1 7.6
USD/MUR pe 33.00 32.00 30.50 30.35 29.60 32.00 31.20 32.40 30.10 29.10 31.85 33.05
REER pe 108.0 108.5 107.5 107.0 99.2 89.5 96.8 96.1 104.0 106.8 98.4 95.5
NEER pe 74.0 74.0 73.0 72.0 66.3 59.8 65.7 65.6 72.0 74.6 69.0 67.4
USD/MUR vol (20 day) 28.9% 12.9% 9.3% 39.1% 23.2% 14.9% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%
Source: Bank of Mauritius, Mauritius Central Statistics Office, Standard Bank Research, Bloomberg
Political risk: settling down Election results (2010)
The new administration has not wasted time in formulat- Legislative election Seats % of votes
ing a response to the crisis facing the country due to
weak external demand. It appears as if the government Alliance de L’avenir (PTR-PMSD-MSM) 45 49.7
has realised that the euro area debt crisis, coupled with
Alliance du Coeur (MMM-UN-MMSD) 20 42.0
weak growth in the UK, could dampen Mauritius’ eco-
nomic performance for years to come. Thanks to unity Rodrigues Movement (MR) 2 1.0
within the government and a lack of discord between the
Others 3 -
Finance Ministry and BOM, the new administration, within
Total 70 100
100 days of being sworn into office, managed to craft a
programme to restructure the economy. At present it Source: Mauritius Electoral Commission
does not appear to have a significant budget impact, but
it is likely to inform budgetary allocations in coming years.
Given the coalition nature of the country’s politics, and
the closeness of the May 10 election results, addressing
the country’s economic challenges was a political impera-
tive for the government.
GDP growth: restructuring the economy Composition of GDP
The euro area debt crisis that has led to the adoption of y/y
15.0
fiscal austerity measures in some countries, together with
the slowdown in UK economic growth, has prompted the
Mauritian government to adopt another stimulus pro- 8.8
gramme. The new programme goes beyond merely bol-
stering growth in the face of waning external demand; it
2.5
also seeks to shift goods and services exports away from
Europe and towards other emerging markets, particularly
Asia. The impact of the programme on growth is likely to -3.8
materialise only in the medium term. We have revised
our 2010 GDP growth forecast to 4.7% y/y down from -10.0
5.1% y/y previously. Although domestic demand has 2005 2006 2007 2008 2009 2010f 2011f
been robust, boosted by strong government and invest-
PCE GE Stocks
ment spending, weak external demand is likely to leave
Netex GFCF GDP
net exports still weighing on GDP growth.
Source: Bank of Mauritius, Standard Bank Research
48
Mauritius
Balance of payments: under pressure Current account developments
Developments in the trade balance during Q2:10 point to USDm

600
a deteriorating C/A balance. Imports have been robust,
bolstered by strong investment and government spend-
300
ing. Meanwhile, goods exports have been stagnant, re-
sulting in an average trade deficit of MUR5,680m 0
(USD177.5m) per month. This indicates that the C/A defi-
cit could be in excess of USD630m (6.7% of GDP). With- -300
out strong tourist arrivals, which showed an average
7.0% y/y growth in the first six months of 2010, the C/A -600
deficit would have been even larger. Whereas FDI in-
flows have been strong thus far, portfolio flows have dis- -900
appointed. In Q1:10, there were net portfolio outflows of Q2:05 Q1:06 Q4:06 Q3:07 Q2:08 Q1:09 Q4:09
USD87m, mostly comprising equity outflows. These have Services, income & transfers
probably persisted as the SEMDEX index has been Trade balance
C/A
range-bound since then. We expect FX reserves to rise
to USD2.5bn (6.6 months of imports) by end-2010. Source: Bank of Mauritius, Standard Bank Research
Fiscal policy: financing economic restructuring Central government budget

% of GDP 08/09 Jul-Dec 2009 2010
The measures introduced as part of the fiscal stimulus
were due to expire at end-2010. By then the government Total revenue (+ grants) 22.1 20.9 19.8
had expected GDP growth to be self-sustaining. How-
ever, although the stimulus has evidently gained traction,
with robust growth in infrastructural spending, the govern- - interest 4.0 3.3 3.0
ment has been forced to formulate a different strategy to
- wages 5.9 6.0 5.6
deal specifically with the prospect of prolonged external
demand weakness from Europe. The new programme is Overall balance (- grants) -5.1 -6.7 -5.3
budgeted to cost MUR12.0bn, but only MUR2.0bn will be
Overall balance (+ grants) -3.9 -4.4 -4.1
financed directly by the government. The bulk of the bal-
ance, MUR5.0bn, will come from the private sector, with Net external borrowing 2.0 3.1 1.4
the rest coming from an acceleration of projects under
the public sector investment programme and public cor- Net domestic borrowing 1.9 1.4 2.3
porations. The new strategy will probably play a major Donor support (grants) 1.2 2.3 1.2
role in the allocation of future government expenditure.
Source: Mauritius Ministry of Finance, Standard Bank Research
Monetary policy: still accommodative Inflation and interest rates
The governor of the BOM has cautioned that the easing %

cycle may end. However, we doubt that a tighter policy 15.0
stance is imminent. To be certain, inflation is rising with

more upside likely in the next 18 months. However, infla-
11.0
tion is still at very low levels. Although the trend is rising,
inflation has stagnated over the past five months, averag-
ing 1.8% y/y, with only the clothing and footwear compo- 7.0
nent of the index recording annual growth rates in excess
of 5% in that period. Our forecast now envisages inflation
reaching only 3.9% y/y by year-end, and nudging up to 3.0
4.1% y/y in Dec 11. Naturally, upside risks from a poten-

tial rise in oil prices remain the dominant risk, which is
-1.0
likely to be exacerbated by an exchange rate policy that Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Jul-10
favours a bias towards a weaker MUR.
CPI y/y Bank rate
Source: Bank of Mauritius, Standard Bank Research
49
Mauritius
Bond curve outlook: continued bull flattening Changes in yield curve
Yields have continued to decline, with the 91-d yield YTM

reaching 2.4% on 20 Aug 10. With the BOM likely to re- 9.0
tain an accommodative policy stance, and inflation likely
to remain very low, we expect a bull flattening of the
7.3
curve over the next 6-m. Most of the recent auctions for
both T-bills and T-bonds have been oversubscribed, indi-
cating that the market’s interest rate expectations have 5.5
shifted markedly lower over the past 6-m. Furthermore,
growth is still low, hence the BOM is unlikely to be suc-
cessful at shifting the market’s interest rate expectations. 3.8
Although the governor has indicated that the outlook for
monetary policy is starting to look uncertain, with
2.0
chances of monetary tightening equal to those of further
3-m 6-m 1-y 2-y 3-y 4-y 5-y
monetary easing, the subdued inflation outlook is likely to
curb that sort of talk. Moreover, fostering growth is a pol- 6-m forecast 20-Aug-10 07-May-10
icy priority right now, not curbing inflation. Source: Reuters, Standard Bank Research
FX outlook: engineered MUR upside likely USD/MUR: forwards versus forecasts
The BOM is likely to continue attempting to engineer a USD/MUR

40.0
weaker MUR, with USD/MUR probably reaching 33.0
over the next 6-m. The MPC’s policy focus remains firmly
on growth, given that inflation pressures are still muted 36.3
and external demand has not recovered sufficiently. The
BOM’s resolve to weaken the MUR on a trade-weighted
basis was tested between mid-Jun and mid-Aug when 32.5
the USD depreciated against a broad set of currencies. In
response, the BOM conducted highly publicised interven-
28.8
tions in the FX markets on three occasions in the past
two months, buying both USD and EUR. Already the
MUR has trended above 30.5, after falling below 29.5 in 25.0
mid-Aug from over 33.0 in mid-Jun. Naturally, the rally in Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
MUR since mid-Jun was sufficiently widespread to result
in a c.6.4% appreciation on a trade-weighted basis, bol-
stering the need for BOM intervention. Source: Bank of Mauritius, Standard Bank Research
Equity market: waiting for a breakout Mauritius Stock Exchange
The upsurge in the SEMDEX that we were expecting 15 Mar 2009 = 100
materialised over the past 4-m, with the index rising 6.8%
270.0
since the end of May. However, the increase in the index
was still disappointing, and the index remains mired in
215.0
the same trading range that has been in place since Oct
09. In addition, even with this latest increase the index
has still underperformed the 9.0% rise in the broader 160.0
MSCI EM. Some bearish sentiment surfaced recently in
the local market, fanned by disappointing earnings from 105.0
tourism-exposed counters. Despite an improvement in
tourist arrivals, listed hotel groups have recently reported 50.0
disappointing earnings results. Of course, the market Jan-06 Feb-07 Apr-08 Jun-09 Aug-10
may view the recent increase in tourist arrivals as unsus- SEMDEX MSCI EM
tainable, given the prospect of restrictive fiscal policies in
Europe — the origin of most tourist arrivals.
Source: Bloomberg
50
Mauritius
Mauritius: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output

Nominal GDP (MURbn) 185.3 206.3 235.5 264.9 274.8 295.4 322.8
GDP / capita (USD) 4,896 5,237 6,035 7,443 7,005 7,331 7,661
Real GDP growth (%) 2.3 5 5.4 5.4 3.1 4.7 5.2
Sugar production ('000 Tonnes) 574 512 471 500 515 520 522
Tourist arrivals ('000) 735 772 907 930 890 926 962
Balance Of Payments
- % of GDP -5.32 -9.38 -5.88 -10.47 -7.87 -6.71 -7.18
- FDI (USDbn) -0.01 0.10 0.30 0.40 0.30 0.25 0.30
Moody’s Baa2 Baa1 Baa1 Baa1- Baa1- Baa2 Baa2
1
BOM policy rate (%) pa 10.20 12.10 10.50 7.38 6.25 6.38 7.75
BOM policy rate (%) pe1 11.50 13.00 8.00 6.75 5.75 7.00 8.50
3-m rate (%) pe 6.84 11.68 9.11 8.90 4.70 2.60 7.65
1-y rate (%) pe 7.84 12.37 10.20 9.20 5.50 3.45 7.87
2-y rate (%) pe 7.50 12.38 10.30 9.80 6.20 4.50 8.30
5-y rate (%) pe 8.95 13.21 10.60 11.00 8.50 7.20 9.15
USD/MUR pa 29.40 31.45 30.96 28.06 31.13 31.48 32.66
USD/MUR pe 30.45 32.78 29.25 31.29 30.35 32.40 33.05
REER pa 89.0 88.4 93.5 110.2 107.0 96.1 99.3
NEER pa 78.4 73.2 72.1 78.9 72.0 65.6 68.1
Notes: pe — period end; pa — period average; nr— not rated

1) The Lombard rate was replaced by a new policy reference rate (repo rate) in Dec 06
Source: Bank of Mauritius, Mauritius Central Statistical Service, Standard Bank Research, Bloomberg
51
Mozambique: strong GDP growth continues
GDP (% y/y) pa 6.3 6.3 6.3 6.3 6.5 6.5 6.5 6.5 6.9 6.9 6.9 6.9
CPI (% y/y) pa 5.3 3.4 1.6 2.7 6.3 12.1 16.6 16.9 15.9 12.6 9.8 7.9
M3 (% y/y) pe 24.0 26.0 28.0 31.5 28.0 25.0 23.5 20.0 20.0 21.0 21.0 22.0
CA/GDP (%) pe -12.5 -12.5 -12.5 -12.5 -16.1 -16.1 -16.1 -16.1 -15.3 -15.3 -15.3 -15.3
3-m rate (%) pe 10.9 10.9 9.6 9.5 9.5 13.0 13.4 14.5 13.8 13.0 12.3 11.5
1-y rate (%) pe 12.1 12.2 11.0 11.0 11.0 14.1 14.5 15.5 14.8 14.0 13.3 12.5
USD/MZN pe 28.1 26.8 29.0 30.2 34.6 34.3 37.0 40.0 42.5 44.2 43.8 45.0
REER pe 93.8 92.4 84.0 88.8 87.3 86.9 86.4 86.1 86.1 86.1 86.1 86.1
NEER pe 49.1 49.3 44.5 45.5 45.3 44.9 44.5 44.0 44.0 44.0 44.0 44.0
USD/MZN vol (20 day) 42.3% 6.9% 24.9% 28.4% 32.7% 4.7% 16.7% 6.5% 6.5% 6.5% 6.5% 6.5%

Source: Bank of Mozambique, Mozambique Ministry of Finance, Standard Bank Research, Bloomberg
Political risk: managing credibility Election results (2009)
Disputes over the Oct 09 elections continue. Renamo Party

% of
Presidential election votes
believes that ruling Frelimo is systematically taking over
the state apparatus by allocating public sector employ- Armando Guebuza Frelimo 75.01
ment and social and developmental expenditure, which
Afonso Dhlakama Renamo 16.41
favours Frelimo supporters. These claims have been
Daviz Simango MDM 8.59
denied by Frelimo, but the debate continues. No sooner
has the dispute with donors been settled than the Bachir
drug scandal emerged, threatening relations with the US Legislative election % of votes Seats
and allies. Mr Bachir, who is a significant businessman in

Frente de Libertação de Moçambique (Frelimo) 74.66 191
Mozambique and a member and financial backer of ruling
Frelimo, has been listed by the US as an international Resistência Nacional Moçambicana (Renamo) 17.68 51
drug trafficker. Consequently, businesses with US inter-
ests are limiting dealings with Mr Bachir. Already, Bar- Movimento Democrático de Moçambique (MDM) 3.93 8
clays Bank and local BCI Bank have closed branches in

Others 3.73 0
buildings owned by Mr Bachir. The government has yet
Source: National Elections Commission
to respond formally to this issue.
GDP growth: solid performance in difficult times Composition of GDP
We expect real GDP growth to register 6.5% y/y in 2010, % y/y

following the 6.3% y/y recorded in 2009. The risk is for 12.0
our target to be breached to the upside, given that the
economy reportedly expanded by 9.5% in H1:10. Contrib- 7.0
uting to solid growth have been countercyclical monetary
and fiscal policies. Investment in mega-projects have
also supported growth. However, the export-focussed 2.0
nature of these projects hinges on a sustained recovery
in global demand, the evidence of which is not yet clear. -3.0
From the demand side, PCE will continue to benefit from
rising domestic demand backed by accelerating domestic
economic activity, while GE and GFCF should remain -8.0
2003 2005 2007 2009f 2011f
solid. An improvement is also expected in Netex as re-
PCE GE GFCF
covering global demand (albeit gradual) boosts exports.
A key risk is imports, which have remained strong, espe- Stocks Netex GDP
cially oil imports.
Source: Bank of Mozambique, Standard Bank Research
52
Mozambique
Balance of payments: stabilising Current account developments
The aluminium price recovery has stalled since Apr 10 on USD bn

3.0
account of an unconvincing global recovery. At end-Aug,
prices were up by around 13% y/y compared to 50% y/y
at end-Apr. Despite lacklustre aluminium price perform- 1.5
ance, exports are expected to benefit from projects
reaching completion. Imports (particularly oil) will remain
0.0
strong due to investment in mega-projects and increased
domestic demand. We expect the trade deficit to narrow
marginally. However, an increase in outward dividend -1.5
payments associated with mega-projects is expected to
erode any CA gains. Thus we expect the CA deficit to
-3.0
widen to 12.92% of GDP in 2010 from 12.52% in 2009.
2005 2006 2007 2008 2009e 2010f 2011f
Reserves have largely been flat around USD1.8bn and
while the import bill continues to grow against the back- Trade balance Services & income
drop of subdued export growth, we believe it will be diffi- Transfers Currrent account
cult for the authorities to significantly build reserves. Source: Bank of Mozambique, Standard Bank Research
Fiscal policy: strong development focus Central government budget

Fiscal policy will likely remain relatively accommodative % of GDP 2009e 2010f 2011f
in 2010 and 2011 and thereafter is expected to be more
Total revenue (+ grants) 26.7 25.9 25.7
constrained. We maintain that a measured approach will
be followed in policy tightening in line with the domestic Total expenditure 32.2 30.4 32.0
and global economic recovery. Revenue in 2010 is ex- - wages 8.8 8.6 8.2
pected to benefit from higher grants, stronger economic
- interest 0.5 0.5 0.5
growth and improved tax collection. Grants are expected
to rise to USD26.9bn (32% of revenue) in 2010, increas- - development 12.8 13.2 13.0
ing further to USD32.8bn (34% of revenue) in 2011. De-
velopment expenditure is forecast to amount to 13.2% of
GDP in 2010. A narrower budget deficit (+ grants) of Overall balance (+ grants) -5.4 -4.5 -6.4
4.5% of GDP is expected in 2010 (vs. a deficit of 5.4% of Net external borrowing 5.0 4.1 5.8
GDP in 2009). In line with its IMF PSI, the government
intends to finance the deficit through an increase in do-
mestic and non-concessional external borrowing. Grants 9.4 8.3 8.6
Source: Mozambique Ministry of Finance, Standard Bank Research
Monetary policy: strong surge in CPI a concern Inflation and interest rates
Consumer price inflation continues to accelerate, driven %
by the removal of fuel subsidies, administrative price in- 20
creases and a weaker MZN against the USD and the
ZAR. The ZAR is highly significant as South Africa is a
15
major source of imports. CPI jumped to 16.11% y/y in Jul
10 from 1.12% y/y in Aug 09. The 12-m moving average
rate (a key focus for authorities) rose to 6.8% y/y in Jul
10
and we expect this to jump to 13.0% y/y in Dec 10,
breaching the government’s target to maintain this rate in
single digits. Government reacted to accelerating inflation 5
by hiking its Standing Lending Facility (SLF) rate by
300bps to 14.5% in stages since Apr 10, while it also
increased its intervention in the money market to contain 0
reserve money. Despite these efforts, we believe the Jan-05 Apr-06 Jul-07 Oct-08 Jan-10
BOM is underestimating inflationary pressures and once CPI Maputo BOM SLF 91-d T-bill
these manifest themselves interest rates will have to rise
Source: Bank of Mozambique
further.
53
Mozambique
Bond curve outlook: 5-y FRN launched Changes in yield curve
Market interest rates have adjusted higher in response to %

accelerating inflation. Yields across the curve have 17.00
shifted higher, exceeding our forecast made in May.
15.50
Treasury bill rates, which had been slow to respond,
have jumped across the board by around 300bps (in line
14.00
with BOM policy rate tightening). As mentioned in the
Monetary Policy section, we believe that the BOM is un- 12.50
derestimating the upward inflationary pressure. In line
with this view, we see the BOM raising interest rates by 11.00
at least another 100bps, with an associated increase in
yields by end-2010. The first tranche of USD150m 5-yr 9.50
floating rate T-bonds was issued at the start of Sep.

8.00
USD45m was on offer at 50bps above the average T-bill
91-d 182-d 364-d 5-y
rate. Early indications are that the 15.0% yield on offer
did not prove sufficient to fill the offer. Dec-10 Apr-10 Sep-10
FX outlook: renewed USD/MZN upside USD/MZN: forwards versus forecast
Upward pressure on USD/MZN intensified in Aug, push- USD/MZN

ing the currency pair sharply north to 38.50 from 26.5 a 50.0
year earlier. Against the ZAR, MZN reached a high of
close to 5.30 over the same period. This upward pres-
42.5
sure is mainly related to increased import demand, par-
ticularly for oil. To alleviate FX pressure, the BOM an-
nounced that it will foot the total oil import bill until end- 35.0
2010, which is likely to be an estimated USD250m. This
measure should ease upside pressure on USD/MZN in
the market somewhat, although it will clearly exert down- 27.5
ward pressure on FX reserves. Already, MZN has come
off its earlier highs against the USD and ZAR. At current
20.0
levels, we believe MZN weakness has gone too far in
Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
correcting for previous MZN overvaluation and that the
authorities will continue to provide support to stem ag- History Forw ards Forecast
gressive MZN weakness from current levels. Source: Bank of Mozambique, Standard Bank Research
Equity market: remains underdeveloped FX reserves: moving sideways

The predominant securities listed on the Bolsa de USD m
Valores de Moçambique are still bonds rather than equi- 2,000
ties. The exchange, which began operations in 1999, has
not prospered, with most companies looking to raise fi-
1,500
nance through the exchange by issuing bonds rather
than shares. Government privatisation of state-owned
entities remains the only viable avenue for increased 1,000
equity issuance.
500
0
Jan-05 Nov-06 Sep-08 Jul-10
Fx reserves
54
Mozambique
Mozambique: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Population (million) 20.5 21 21.4 22 22.6 23.1 23.6
Nominal GDP (MZNbn) 150.0 181.9 209.9 245.9 269.4 322.0 381.5
GDP / capita (USD) 313.4 464.3 412.4 442.7 394.8 348.5 359.1
Real GDP growth (%) 8.4 8 7.2 6.8 6.3 6.5 6.9
Balance Of Payments
Current account (USDbn) -0.64 1.45 -0.79 -1.18 -1.12 -1.30 -1.30
- % of GDP -9.99 14.82 -8.91 -12.11 -12.52 -16.15 -15.33
Capital & Financial account (USDbn) 0.35 -1.42 0.86 1.19 1.44 1.10 1.25
- FDI (USDbn) 0.11 0.15 0.43 0.59 0.88 0.90 0.85
Basic balance / GDP (%) -8.36 16.40 -4.06 -6.08 -2.66 -4.97 -5.31

S&P B B B+ B+ B+ B+ B+
Fitch B B B B B B B
BOM discount rate (%) pa 11.8 17.6 16.5 15.0 13.0 13.5 14.0
BOM discount rate (%) pe 13.8 17.5 15.5 14.5 11.5 15.5 12.5
3-m rate (%) pe 10.0 16.0 14.8 14.0 9.5 14.5 11.5
1-y rate (%) pe 11.5 16.5 15.0 14.2 11.0 15.5 12.0
USD/MZN pa 23.31 21.0 21.2 24.5 27.7 35.1 42.5
USD/MZN pe 23.35 18.66 23.78 25.3 30.2 40.0 45.0
REER pa 94.4 91.8 91.2 92.3 91.0 86.8 87.20
NEER pa 62.7 54.9 51.9 50.1 46.1 44.6 45.10
Source: Bank of Mozambique, Mozambique Ministry of Finance, Standard Bank Research, Bloomberg
55
Namibia: mining sector on the mend
GDP (% y/y) pa -0.8 -0.8 -0.8 -0.8 3.8 3.8 3.8 3.8 4.5 4.5 4.5 4.5
CPI (% y/y) pa 11.5 9.6 7.4 6.9 6.1 4.7 4.4 4.5 4.7 5.3 5.7 5.9
M2 (% y/y) pa 11.2 8.0 1.3 6.3 10.1 4.3 12.8 13.0 13.3 14.6 14.8 15.0
CA/GDP (%) pa 2.7 2.7 2.7 2.7 -1.1 -1.1 -1.1 -1.1 -0.4 -0.4 -0.4 -0.4
FX reserves (USD bn) pa 1.44 1.64 1.96 1.85 1.73 1.61 1.65 1.69 1.73 1.77 1.82 1.86
3-m rate (%) pe 9.7 7.6 7.3 7.4 7.2 6.92 6.60 6.6 6.7 6.7 6.7 7.2
5-y rate (%) pe 8.8 8.9 8.7 8.8 8.70 8.53 8.1 8.1 8.2 8.2 8.2 8.7
USD/NAD pa 9.9 8.5 7.8 7.5 7.5 7.5 7.5 7.7 7.9 7.9 7.8 7.8
REER pa 87.5 90.2 91.7 92.0 94.2 93.9 93.6 93.3 93.0 92.7 92.4 92.1
NEER pa 90.1 92.7 94.4 94.5 96.6 96.5 95.9 95.3 94.7 94.1 93.5 92.9
USD/NAD vol (20 day) 26.0% 17.9% 14.6% 15.7% 9.0% 13.6% 9.2% 9.2% 9.2% 9.2% 9.2% 9.2%

Source: Central Bank of Nigeria, National Bureau of Statistics, Budget Office of the Federation, NNPC, IMF, Standard Bank Research
Political risk: opposition coalition? Election results (2009)

% of
Presidential election Party
Despite attempts by opposition parties to challenge the votes
legality of the Nov 09 national election results, the over- Hifikepunye Lucas Pohamba SWAPO 75.25
Hidipo Hamutenya RDP 10.91
whelming victory by the incumbent SWAPO has ensured
Katuutire Kaura DTA 2.98
business as usual and policy continuity. Policy focus con- Kuaima Riruako NUDO 2.92
tinues to be land redistribution, black economic empow- Justus Garoëb UDF 2.37
erment and job creation. The next test for SWAPO politi- % of
Legislative election Seats
cal support will come during regional and local authority votes
elections, taking place on 26 to 27 Nov 10. The elections South West African People's Organization (SWAPO) 54 74.29
will be particularly interesting if progress is made towards Rally for Democracy and Progress (RDP) 8 11.16
Democratic Turnhalle Alliance of Namibia (DTA) 2 3.13
a much-talked about opposition coalition. We still expect National Unity Democratic Organization (NUDO) 2 3.01
SWAPO political dominance to continue for some time United Democratic Front (UDF) 2 2.40
yet. A key challenge for the government in the next two All People’s Party (APP) 1 1.33
years will be consolidating its finances. Applying counter- Republican Party (RP) 1 0.81
cyclical fiscal policies at a time when SACU revenue is Congress of Democrats (COD) 1 0.66
South West Africa National Union (SWANU) 1 0.62
falling sharply will be a test for government’s resolve to
Appointed members 6
fiscal discipline. Total 78
Source: INEC
GDP growth: recovery is gaining traction Composition of GDP

We now expect economic growth to recover to 3.8% y/y y/y %
in 2010 (previously 3.9% y/y), following the contraction of 20.0
0.8% y/y in 2009. A further recovery in the mining sector
is an important factor in our improved growth outlook for
10.0
2010. Already, diamond production is 102% up in H1:10
compared to H1:09, while uranium production is up by
51% over the same period. From the demand side, the 0.0
economy is expected to benefit from stronger PCE on
account of accommodative monetary and fiscal policies.
GFCF is expected to continue benefiting from infrastruc- -10.0
ture investment, which bodes well for the construction
sector. Netex, a main drag on growth in 2009, is showing
-20.0
a promising performance on the back of increased mining
2005 2006 2007 2008 2009 2010
production. A continued global economic recovery will be PCE GE GFCF
a key determinant in the actual GDP outcome for Na- Stocks Netex GDP
mibia as will be a solid performance in South Africa.
Source: Bank of Namibia, IMF, Standard Bank Research
56
Namibia
Balance of payments: falling SACU revenues Current account developments
The recovery in exports (especially mining) should sup- USDm

1,600
port a narrowing trade deficit. However, the projected
NAD2bn drop in SACU receipts in 2010 will have nega-
tive consequences for the CA. We forecast a CA deficit of 800
1.1% of GDP in 2010 (a 2.7% surplus in 2009). Inward
FDI will continue to compensate for outward portfolio
0
flows, but there is no escaping the impact of falling SACU
receipts. Already, FX reserves have come under pres-
sure, falling to USD1.6bn in Jul 10 from USD2.1bn in Oct -800
09. A key factor for the BOP moving forward will be the
USD/NAD exchange rate (see FX outlook section). A -1,600
weaker NAD could benefit the BOP in that it could bolster 2005 2006 2007 2008 2009f 2010f 2011f
exports and stimulate tourism receipts, with positive con- Services, income & transfers
sequences for the CA balance and reserves. A weaker Trade balance
Current account
NAD could, however, make imports more expensive—
which would be negative for consumption and inflation. Source: Bank of Namibia, Standard Bank Research
Fiscal policy: fiscal consolidation required Government budget
From the 2010/11 budget, it is clear that fiscal policy is to % of GDP 2009/10 2010/11
remain accommodative for longer than anticipated. De- Total revenue (+ grants) 27.6 23.5
spite the improved outlook for revenue on account of the
recovery in the mining sector, it will fall short of the budg-
eted expenditure. The result is a widening budget deficit - operational 22.3 23.3
(+ grants) to 6.6% of GDP in 2010/11 from a deficit of
- capital 5.1 5.5
1.5% in 2009/10. The widening deficit will mostly be fi-
nanced by increasing domestic issuance of T-bills and T- - interest 1.5 1.3
bonds. According to the MTEF, government will gradually Overall balance (- grants) -1.9 -6.9
withdraw its countercyclical policy from 2010/12 as reve-
nue recovers. Given the sharp decline in SACU revenue,
the government might find it difficult to consolidate its Net external borrowing 1.4 1.8
finances. It might have to look to alternative sources of
Net domestic borrowing -1.3 5.3
revenue or cut back on spending. It could also accelerate
its privatisation programme to alleviate pressure on its Donor support (grants) 0.3 0.3
finances. Source: Namibia Ministry of Finance, Standard Bank Research
Monetary policy: easing not over yet Inflation and interest rates
Despite Namibia's CMA membership, which calls for %

close alignment of monetary policy to South Africa, the 15.0
BON has opted for a level of autonomy by applying policy
differently from South Africa in recent years. For in- 11.3
stance, the BON has not lowered interest rates to the
same extent as the SARB as it believes that underlying
consumer demand is stronger in Namibia than in South 7.5
Africa. Namibia’s policy rate got stuck at 7.0%, while SA’s
fell to 6.5% and the SARB is expected to cut by another
3.8
50bps at the Sep 10 MPC meeting. Recent thinking from
the IMF suggests there is room for Namibian rates to fall
to South African levels. Nevertheless, we suspect that 0.0
given the subdued inflation environment in both countries Jan-04 Mar-06 May-08 Jul-10
the BON will allow Namibian rates to fall by 50bps
NCPI BON bank rate SACPI SA repo rate
(assuming South African rates are cut at the Sep MPC),
leaving the 50bps gap for some time yet. Source: NBS, Reuters, Standard Bank Research
57
Namibia
Bond curve: foreign vs. local valuations diverge Changes in yield curve
The high degree of financial market integration with %

11.0
South Africa and co-ordinated monetary policy means
that Namibian yields generally follow SA trends. The driv-
ers responsible for a solid bond market performance at
9.8
the start of 2010 have intensified. Elevated foreign buying
remains pivotal in driving SA’s bond curve. SA macro
conditions have provided a favourable backdrop to flows, 8.5
including lower inflation; a stronger and more stable ZAR;
improved supply dynamics; low real MM rates; and pro-
gressive uncertainty surrounding alternative asset class 7.3
returns, especially equities. Despite these improvements,

locals remain sceptical of both the outright level and flat-
6.0
ness of the bond curve. A material adjustment in local 91-d 182-d 365-d 3-y 9-y 15-y
perceptions around structural inflation in SA would be
Jul-10 Dec-10 Jan-10
necessary to sustain current levels, especially if foreign
demand were to normalise or even reverse. Source: Reuters, Standard Bank Research
FX outlook: NAD weakness expected in H2:10 USD/NAD forwards versus forecast
The NAD is pegged to the ZAR on a 1:1 basis under the USD/NAD
CMA agreement; this is unlikely to change soon. Recent 12.0
ZAR strength has mainly been a function of strong for-
eign appetite for SA bonds and broad broad-based USD
10.3
weakness. The prospect of renewed SARB accommoda-
tion and widespread industrial action in SA has been
largely ignored by ZAR bulls. The sustainability of ZAR 8.5
strength hinges on global sentiment and more specifically
the search for yield (i.e. carry trade). If risk aversion re-
emerges due to global growth concerns, the USD could 6.8
regain favour due to its perceived safe-haven status and
EM currencies, such as the ZAR, will come under selling
5.0
pressure. The prospect of renewed risk aversion, com-
Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
bined with narrowing interest rate and GDP differentials,
a widening CA deficit and increased FX accumulation
lead us to believe that the ZAR will weaken in H2:10. Source: Bloomberg, Standard Bank Research
Equity market: DIR in the spotlight again Namibia Stock Exchange
The Namibian Stock Exchange (NSX) comprises mostly All share Local index
dual-listed (FTSE or FTSE/JSE) shares, with Anglo 1,400 200
American representing 50% of market cap. Its 7 listed

local companies constitutes <1% of total market cap. The 160
1,050
NSX All Share Index is closely correlated with the FTSE/
JSE. The LCI, which is less exposed to global market 120
influences, has benefited from regulation forcing local 700
asset managers to hold 35% of their portfolios in domes- 80
tic companies. However, the LCI will come under pres-
sure if changes are made to the domestic investment 350
40
requirement (DIR) as advocated by the IMF who is con-
cerned about the resulting risk-taking by domestic institu-
0 0
tions. It remains to be seen whether the Namibian mone- Jan-02 Nov-04 Sep-07 Jul-10
tary authorities, who have in the past played down the
All share Local companies
IMF’s concerns, will make any changes to the DIR.
Source: Ecowin, Standard Bank Research
58
Namibia
Namibia: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (NADbn) 46.2 54.0 62.1 74.0 80.0 86.9 95.5
GDP / capita (USD) 3,700 3,879 4,432 3,612 5,077 5,269 5,606
Real GDP growth (%) 2.5 7.1 5.5 4.2 -0.8 3.8 4.5
Budget balance (excl. Grants) / GDP (%) -3.6 -0.3 4.2 5.2 1.6 -1.8 -6.9
Budget balance (incl. Grants) / GDP (%) -3.4 -0.2 4.3 5.3 1.7 -1.5 -6.7
Balance Of Payments
Exports (USDbn) 2.5 3.1 3.6 3.1 4.4 5.2 6.3
Imports (USDbn) 2.7 2.9 3.7 3.7 5.5 6.4 7.4
Trade balance (USDbn) -0.2 0.2 -0.1 -0.6 -1.2 -1.2 -1.0
Current account (USDbn) 0.4 1.1 0.9 0.2 0.3 -0.1 0.0
- % of GDP 5.4 14.0 10.1 2.2 2.7 -1.1 -0.4
Financial account (USDbn) -0.5 -1.0 -0.7 -0.1 -0.3 -0.2 -0.2
- FDI (USDbn) 0.4 0.4 0.7 0.6 0.6 0.8 0.8

Fitch BBB- BBB- BBB- BBB- BBB- BBB- BBB-
BON bank rate (%) pa 7.1 7.7 9.6 10.3 8.5 6.8 6.5
BON bank rate (%) pe 7.0 9.0 10.5 10.0 7.0 6.5 6.5
3-m rate (%) pe 7.0 8.0 9.8 11.3 7.4 6.6 7.2
5-y rate (%) pe 8.8 9.2 9.9 7.3 8.8 8.1 8.7
USD/NAD pa 6.4 6.8 7.1 8.3 8.4 7.6 7.8
USD/NAD pe 6.4 7 6.9 9.9 7.5 7.7 7.8
REER pa 94.9 92.6 89.8 86.1 90.4 93.8 92.5
NEER pa 97.8 95.2 92.7 89.6 92.9 96.1 93.8
Source: Central Bank of Nigeria, NBS, Budget Office of the Federation, NNPC, IMF, Standard Bank Research
59
Nigeria: loose fiscal policy drives up bond yields
GDP (% y/y) pa 5.01 7.45 7.3 7.67 7.36 7.69 6.60 6.50 6.90 7.00 7.20 7.50
CPI (% y/y) pa 14.3 12.6 10.8 12.6 14.9 14.0 12.8 12.4 12.5 13.2 11.9 12.4
M2 (% y/y) pa 28.1 15 9.8 19.5 17.7 21.5 22.2 22.9 23.1 24.9 25.3 29.2
CA/GDP (%) pa -3.2 7.5 9.9 13.2 12.8 13.3 12.5 11.8 12.5 12.7 12.9 12.4
FX reserves (USD bn) pe 47 43.3 40.9 42.4 40.3 37.4 36 36.2 37.5 38.3 40.2 41.2
3-m rate (%) pe 3.5 3.6 3.6 3.5 1.2 2.5 2.9 3.4 3.8 4.5 5.0 5.8
5-y rate (%) pe 10.5 9 8.5 7.4 4.3 7 9.6 10.2 10.4 10.6 10.8 11.0
USD/NGN pa 147 155 150 150 150 150 150 150 150 150 150 150
REER (Q1:04=100) pa 124 127 130 132 133 135 137 138 138 138 140 140
NEER (Q1:04=100) pa 102 108 110 108 110 110 111 112 111 112 112 111
USD/NGN vol (20 day) 15.2% 3.9% 8.0% 10.7% 3.8% 2.3% 2.5% 3.0% 2.8% 2.7% 2.9% 3.0%
Source: Central Bank of Nigeria, National Bureau of Statistics, Budget Office of the Federation, NNPC, IMF, Standard Bank Research
Political risk: election date set Election results (2007)

Presidential election Party % of votes
With the death of President Yar Adua (5 Mar 10), VP
Umaru Musa Yar’dua PDP 70.0
Goodluck Jonathan was sworn in as President. His abil-
ity to enact significant reforms prior to fresh elections is Muhammadu Buhari ANPP 18.6
limited, but his key priorities are to sort out corruption, the Atiku Abubakar AC 7.2
energy sector, security in the delta and deliver a credible Patrick Utomi CPP 1.2
election. He allegedly announced to a conference of state
governors his intention to stand in the next presidential Legislative election House of Reps. Senate
contest, scheduled for 22 Jan 11. This may be problem-
PDP 263 87
atic, however, because of the gentleman’s agreement on
power rotation between the north and south in the ruling ANPP 63 14
PDP. Meanwhile, former military ruler Ibrahim Ba- AC 30 6
banginda and ex Vice President Atiku Abubakar have
Other 4 2
said they would seek the PDP’s nomination. The PDP is
likely to remain the dominant political force, but internal Total 360 109
frictions or splits cannot be ruled out in the period leading Source: INEC
to the elections.
GDP growth: solid performance in sight Composition of GDP
The NBS estimates that growth reached 7.5% in H1:10, %

and we project growth to average at least 7.0% y/y in 25.0
2010, from 6.9% y/y in 2009. While these figures appear
somewhat inflated, we note that agriculture continues to
15.0
perform well and oil-growth is likely to be positive for the
first time in several years. Indeed, crude production in
H1:10 averaged 1.98m bpd vs 1.78m bpd in H1:09, and 5.0
that y/y differential could be sustained in H2:10. We also
expect solid oil prices to support strong public sector re-
current spending ahead of the next general elections, -5.0
although the level of execution of capital spending may
be somewhat weak as in recent years. The strong fiscal
and monetary stimulus should filter through to private -15.0
consumption and investment spending, but downside 2004 2005 2006 2007 2008 2009e 2010f 2011f
risks come from a prolonged downturn in lending and PCE GE GFCF Netex GDP
political uncertainty.
60
Nigeria
Balance of payments: C/A provides support Current account developments
The decline in FX reserves to USD36.0bn (12.4 months USD bn

80
of import cover), in early Sep 10 from USD42.4bn in early
2010, has occurred despite significant trade and C/A
surpluses since mid 2009. This mirrors the depletion of 50
the ECA and relatively weak NGN confidence. Based on

production of 1.85m bpd, we estimate the C/A breakeven 20
oil price was USD55/bbl in 2009. We expect oil prices to
average USD80/bbl in 2010 and crude oil production to -10
increase to 2.05m bpd, resulting in a C/A surplus of
around USD25bn or 12.6% of GDP. Meanwhile, FDI -40
flows declined to USD5.8bn in 2009, from USD6.8bn in 2003 2005 2007 2009e 2011f
2008, and should rebound slightly this year. While this Trade Services
highlights the relative inelasticity of FDI vs equity and Income Transfers
debt flows, we see portfolio inflows being somewhat tilted
Current Account
to the upside amid a correction in long-dated bond yields
and a revival in foreign interest in the stock market. Source: NBS, NNPC, IMF, Standard Bank Research
Fiscal policy: significantly expansionary Government budget

% of GDP 2008 2009 2010
The government will most likely maintain its expansionary
Expenditure 10.9 10.6 14.7
fiscal stance ahead of the 2010 elections. On 22 Jul, a
NGN445bn (USD3bn) supplementary budget for the fis- Recurrent expenditure 5.9 6.6 7.2
cal year was approved by parliament. The extra spending Capital expenditure 2.8 2.3 5.2
includes a sizeable increase in wages for civil servants, Statutory transfers 0.7 0.6 0.6
doctors and professors. However, on the revenue side, Service debt 1.6 1.1 1.7
the 2010 budget assumptions were revised downward, Supplementary budget 2.9 1.4 1.5
notably the benchmark oil price (USD60/bbl, from Total expenditure 13.8 12.0 16.2
USD67/bbl) and the oil production target (2.2m bpd, from
Oil price assumption (US$/bbl) 59 45 60
2.35m bpd). The 2010 budget stands at NGN4.43tr
Oil production assumption (m bbl) 2.45 2.29 2.20
(USD29.3bn), of which recurrent expenditure and capital
expenditure amount to NGN2.14tr and NGN1.56tr, re- Exchange rate assumption 117 125 150
spectively and is up 42.9% y/y. In this regard, credit ex- Budgeted FG Revenue 13.2 13.6 20.2
tension to the public sector could remain robust and has Domestic debt 9.7 12.6 13.1
increased drastically in recent months, reaching 57.4% y/ Fiscal deficit -2.3 -3.0 -5.5
y and 48.3% y/y in Jul 10 and Jun 10. Source: Budget Office, IMF, Standard Bank Research
Monetary policy: private sector credit contracts Inflation and interest rates
While we think the current loose monetary policy will ulti- %

25
mately be (gradually) reversed by the CBN as credit met-
rics improve in line with a banking sector recovery, this
shift may actually take relatively longer than initially ex- 18
pected. Indeed, the growth rate in credit to the private
sector fell to a record low of 9.8% y/y in Jul 10, from
10
18.1% y/y in Jun 10. Private sector credit extension also
contracted 2.9% YTD. Accordingly, AMCON's role will
also be critically important in order to clean up the finan- 3
cial system and improve risk perception across the
board. We estimate inflation should remain close to an -5
average of 13% y/y during the remainder of 2010 in the Jan-06 Dec-06 Nov-07 Oct-08 Sep-09
framework of the reweighted CPI basket because of the
neutral base effect this year. Although real interest rates Headline inflation Food inflation MPR
are now substantially negative, inflation will probably not
affect CBN policy decisions in the near future. Source: NBS, Reuters, Standard Bank Research
61
Nigeria
Bond curve outlook: long dated yields to rise Changes in yield curve
We continue to see the risks as still biased towards some YTM

bear steepening in the curve in coming months. Indeed, 15
the primary market yield on the 20-y bond jumped to
11.0% on 21 Aug, from 10.0% in Jul and a low of 7.0% in
11.25
Apr (the secondary market yield reached 11.6% as of 6
Sep). Also, the primary market yields on the 5-y and 3-y
bonds increased to 9.25% and 7.54% on 21 Aug, from a 7.5
previous 8.85% and 7.48%, while short-term rates have
increased marginally or even declined on 25 Aug. This 3.75
distortion reflects systemic excess liquidity at the short
end and the increased aggregate fixed income issuance
0
needed to finance the 2010 fiscal gap at the longer end 91d 182d 1y 2y 3y 5y 10y 20y
of the curve. Furthermore, the series of expected state
and corporate bonds may further reinforce the aforemen- 10-Mar-10 3-Sep-10 6-m forecast
tioned trend, although this could be relatively mitigated by
the launch of the USD500m Eurobond in Nov 10. Source: Reuters, Standard Bank Research
FX outlook: USD/NGN to remain steady USD/NGN: forwards versus forecast
We see USD/NGN trading in a relatively flat range be- USD/NGN

170.0
tween 148-152 in the medium term. Key to this USD/
NGN stability remains the CBN’s willingness and ability to
preserve such a policy since 2009. Still, the strong C/A
155.0
surplus (12.6% of GDP in 10) has not fostered a sizeable
build in FX reserves YTD. On the contrary, reserves de-
clined to a low of USD36.0bn on 2 Sep, from USD42.4bn 140.0
in early 2010. This is explained by the draw down on the
ECA (now standing at less than USD500m), the moneti-
sation of the huge fiscal expansion and a broader lack of 125.0
local NGN confidence. Concern about the political envi-

ronment is adding to the story, while low interest rates
110.0
and a delayed rally in the NSE have continued to under- Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
mine support for the NGN from portfolio inflows. Down-
side risk stems from the fiscal policy outlook, as a weaker
NGN would boost oil revenue. Source: Bloomberg, Standard Bank Research
Equity market: delayed rally still likely Nigerian Stock Exchange
The Nigerian Stock Exchange has been one of the best 100 = Jan 05
performing stock exchanges in the world YTD. The 340
benchmark NGSE-30 has risen 18.1% in USD terms
YTD (1,013.81 on 30 Aug 2010). We expect this perform-
263
ance to continue, targeting 1,200 for the benchmark
NGSE-30 by year-end (18.4% upside) and 1,500 by the
end of 2011(48.0% upside). Indeed, Nigeria is the emerg- 185
ing market and African laggard in terms of the equity
market returning to pre-crisis highs – still 64% off its pre-
crisis peak. Also, Nigeria, like the rest of SSA ex-South 108
Africa, remains relatively undiscovered with an under-
weight holding by Global Emerging Market funds. Finally,
30
valuations, earnings growth and profitability are attrac-
tive. The market is trading at a Dec 2011 P/E of 8.3x and
NSE MSCI EM MSCI Africa
a dividend yield of 6.1%.
Source: CBN, Standard Bank Research
62
Nigeria
Nigeria: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (NGNbn) 14,572 18,565 20,678 23,842 24,794 29,877 35,733
GDP / capita (USD) 785 997 1110 1328 1074 1261 1478
Real GDP growth (%) 7.2 6.1 6.3 6.0 6.9 7.0 7.2
Real Non-oil GDP growth (%) 8.6 9.4 9.8 9.0 8.3 5.7 7.6
Oil production (mbpd) 2.51 2.36 2.15 2.35 1.83 2.05 2.15
Bonny Light reference price (USD pb) 55.29 65.27 74.6 89.0 65.1 80.0 92.0

Budget balance / GDP (%) * -1.1 -2.4 -1.2 -2.3 -3.0 -5.5 -4.3
Balance Of Payments
Exports (USDbn) 53.1 57.4 66.6 84.1 51.0 68.6 73.5
Imports (USDbn) 25.4 22.6 30.4 36.9 32.0 35.0 37.0
Current account (USDbn) 9.1 38.6 31.2 42.3 11.5 25.0 30.0
- % of GDP 8.2 26.7 19.0 21.0 6.9 12.6 12.6
Financial account (USDbn) 2.2 -13.8 2.7 -13.3 1.9 4.1 9.2
- FDI (USDbn) 1.7 4.9 6.0 6.8 5.8 6.2 7.5
FX reserves (USDbn) pe 28.3 42.3 51.5 53 42.4 36.2 41.2

S&P nr nr BB- BB- BB- BB- BB
Fitch nr nr BB- BB- BB- BB- BB

Core inflation (%) pa 8.9 12.8 9.3 5.1 9.2 12.5 11.3
Food inflation (%) pa 23 6.9 2.3 16.0 14.9 14.5 13.5
M2 money supply ( %y/y) pe 16.0 39.9 30.6 58.2 17.5 23.3 28.7
3-m rate (%) pe 10.8 15 7.2 8.5 3.5 3.4 5.8
1-y rate (%) pe 13.6 10.2 9 9.4 5.6 4.5 6.2
2-y rate (%) pe 14 14 8.6 8.6 6.7 8.5 10.0
5-y rate (%) pe 9.6 11.5 8.3 10.2 11.0
USD/NGN pa 131.3 128.7 125.8 118.5 148.9 150.0 150.0
USD/NGN pe 129.0 128.3 118.0 132.6 149.6 150.0 150.0
REER pa 118.4 126.9 127.5 131.5 128.3 135.8 139.0

NEER pa 102.9 104.8 107.5 113.3 107.0 110.8 111.0
Source: Central Bank of Nigeria, NBS, Budget Office of the Federation, NNPC, IMF, Standard Bank Research
63
Republic of the Congo: oil prices support macro outlook
GDP (% y/y) pa 7.6 4.8 5.1 5.8 7.8 9.2 9.1 8.70 8.10 7.80 7.20 7.40
CPI (% y/y) pa 13.1 4.0 1.7 2.1 2.9 8.2 7.1 5.2 4.8 3.4 2.7 3.5
M3 (% y/y) pa 34.4 31.6 23.2 20.8 18.5 18.9 20.0 31.8 34.9 32.2 31.0 28.9
Trade balance GDP (%) pa 61.9 57.3 43.5 31.3 55.6 53.5 51 48.8 59.7 65.1 65.8 62.2
FX reserves (USD m) pa 3832 3792 3752 3712 3846 3981 4115 4250 4300 4375 4450 4675
BEAC financing rate (%) pa 4.25 4.25 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00
USD/XAF pe 494.3 466.6 448.1 457.3 482.3 523.4 510.6 524.7 655.1 605.3 596.3 589.4

Source: BEAC, IMF, Standard Bank Research
Political risk: Sassou Nguesso firmly in charge Election results
The political environment has stabilised following Presi- Presidential election (2009) % of votes
dent Denis Sassou Nguesso’s re-election in 2009, but Denis Sassou-Nguesso (PCT) 78.6
tensions may rise ahead of the 2012 parliamentary elec- Joseph Kignoumbi Kia Mboungou (Ind) 7.5
tions. In his speech preceding Congo’s 50th year of inde- 7.0
Nicephore Fylla de Saint-Eudes (PRL)
pendence, Sassou Nguesso announced that his key pri-
Mathias Dzon (ARD) 2.3
orities would be to boost infrastructure development, es-
Joseph Hondjouila Miokono (Ind) 2.0
pecially in the failing power sector, alleviate poverty and
consolidate national unity. While the Congolese opposi- Legislative election (2007) Seats
tion appears to have been somewhat marginalised in

Congolese Labour Party (PCT) + allies 88
recent years, two factions of the former ruling party
UPADS decided to merge in Sep. Also, ex-President and Pan-African Union for Social Democracy 11
UPADS historical leader Pascal Lissouba did not exclude
Union for Democracy and the Republic 1
returning to Congo, although this would be conditional on (UDR)
amnesty being granted to all his top associates. Finally, Independents 37
we do not expect any significant spike in violence in the Total 137
Pool region the near future.
Source: Republic of Congo Electoral Commission
GDP growth: driven by the oil sector Composition of GDP
A rebound in oil output, to over 350k bbls/day by end- % y/y

2010, from just over 300k bbls/day in 2009, would con- 20.0
tinue underpinning GDP growth over the next two years.
We expect GDP growth to accelerate to 8.7% y/y in 12.5
2010, which would make the Congo the fastest expand-
ing SSA economy, and 7.6% y/y in 2011, from an esti-
mated 5.8% y/y in 2009. Ongoing oil field development 5.0
should continue to support investment spending, with FDI
into the sector remaining relatively robust. Higher oil
-2.5
revenues would support government spending, both cur-
rent and investment. Private consumption spending is
likely to accelerate as well, providing a further boost to -10.0
aggregate demand. Meanwhile, it is worth noting that the 2006 2007 2008 2009f 2010f 2011f
non-oil economy is growing at a slower pace than the oil
PE GE GFCF Netex GDP
sector, which highlights the evident lack of structural di-
versification and sensitivity to exogenous shocks.
64
Republic of Congo
Balance of payments: impressive trade metrics BOP developments
The current level of oil prices guarantees a significant % y/y

trade balance surplus as oil accounts for close to 90% of 22.0
total export earnings; aggregate imports could rebound
depending on the outlook for infrastructure good imports.
13.0
As in most SSA oil-producing countries, services and
income outflows will counter the impact of the increasing
trade surplus, with payments elevated due to oil field 4.0
development. While our forecast is that the C/A surplus
will rise to 2.5% of GDP in 2010, from an estimated 0.8%
-5.0
in 2009, downside risks emanate primarily from the oil
price. Ongoing oil field development implies that FDI in-
flows are likely to remain elevated, even as they boost -14.0
machinery imports. We expect FX reserves to rise to 2006 2007 2008 2009 2010f 2011f
USD4.25bn (13.1-m of goods and services imports) by PE GE GFCF
Netex GDP
year-end. Overall, the trajectory of the BOP position re-
mains heavily dependent on the oil price path. Source: IMF, Standard Bank Research
Fiscal policy: sizeable surpluses Central government budget
The sizeable debt relief granted in early-2010 % of GDP 2008 2009 2010
(USD3.7bn) under the HIPC initiative and MDRI should Total central govt. revenue 52.2 46.0 50.4
support macroeconomic stability. While there has been
Total central govt. expenditure 24.5 27.8 24.5
noticeable progress in terms of multilateral and Paris
Club debt cancellation, debt forgiveness from countries of - Recurrent 13.6 13.6 11.2
the former Soviet Bloc (USD1.5bn) may be more com- - Interest 1.6 1.3 1.0
plex to secure. The IMF stressed in early Sep that the
- Development/transfers 9.3 13.0 12.3
country had achieved fiscal consolidation in excess of
programme targets and initiated reforms in public finan- Central govt. balance (inc. grants) 27.7 18.2 26.0
cial management and the management of oil resources. Central govt. balance (exc. grants) 28.1 18.6 26.6
This is despite a 25% hike in the public sector minimum
Net domestic borrowing (saving) -7.0 -16.0 -19.0
wage next year. Broadening the tax base will remain a
Net external borrowing (saving) -2.2 -0.9 0.4
critical component of any structural reforms, given the
magnitude of the non-oil primary deficit, in our view. Even Grants (inc. HIPC) 0.4 0.5 0.7
so, the substantial fiscal surplus expected in the medium Non-oil primary deficit (% non-oil GDP) -43.2 -40.9 -30.5
term significantly mitigates any risk of sovereign default.
Source: Ministre des Finances , IMF, Standard Bank Research
Monetary policy: accommodative stance Interest rates
The Bank of Central African States (BEAC)’s monetary %

stance is influenced by the ECB’s policy course, but it 20.0
has some flexibility in determining interest rates. In late

July, the BEAC cut the benchmark rate by 25 bps to 4%
12.5
to support economic growth and boost credit to the real
economy. Given the structural issues in the eurozone,
further easing by the ECB cannot be ruled out, although it 5.0
remains to be seen whether this would impact the BEAC
rate in the short term. Inflation is likely to remain subdued
across the CEMAC region, which was highlighted by the -2.5
BEAC as it lowered the prime rate, but the Congo may be

an outlier in this regard. Indeed, inflation stood at 5.8%
-10.0
y/y in March, and we believe it could peak at 9.0% y/y in Jan-00 Aug-02 Mar-05 Sep-07 Apr-10
May, and gradually recede to 4.9% y/y in Dec.
ECB refi BEAC rate CPI y/y
Accordingly, real interest rates are likely to remain nega-
tive this year. Source: BEAC, IMF, Standard Bank Research
65
Republic of Congo
Eurobond: delayed catch-up Eurobond yield
While RepCongo2029 has continued to somewhat track spread over UST

the EMBI and global risk perception in recent months, 1,750
trading was more erratic and the yield compression less
linear. We note that RepCongo had lagged the rally in
1,363
other SSA eurobonds in 2009; as such, the yield com-
pression through 2010 may have been a delayed catch-
up effect. This would make sense as the eurobond is 975
significantly illiquid and generates few trades; in fact, the
yield reached its low in Q1:09, at a time when other SSA
and frontier market bonds had already started to gradu- 588
ally recover. Secondary market trading and international
appetite are also constrained by the size of RepCon-
200
go2029 (US$477.8m), a marginal step-up coupon and
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
the lack of a sovereign rating. The bond provides some
Rep Con EMBI
yield pick-up at 9.4% (3 Sep), but it is unlikely to deliver
sizeable price appreciation going forward. Source: Bloomberg, Standard Bank Research
FX outlook: further XAF weakness in sight USD/XAF: forwards versus forecast
We expect USD/XAF to be pushed higher by a decline in USD/XAF

EUR/USD. As a member of the CEMAC region, the Re- 610
public of Congo is affected by the CFA peg that sets the

EUR/XAF rate at 655.957. We believe EUR/USD will
558
continue to weaken in the medium term, possibly reach-
ing 1.25 and parity in three and six months. Accordingly,
the USD/XAF rate may depreciate towards 655 during 505
the next 6-m, tracking EUR weakness via the CFA peg.
The forecast move in USD/XAF will probably lead to
some depreciation of the REER, giving rise to gains in 453
external competitiveness. Furthermore, we do not expect

any change in the EUR/XAF peg, which has only been
400
adjusted once (in 1994), at a time when CFA countries Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
displayed substantial structural imbalances. While FX
reserves have reached USD3.8bn, it is worth noting that
65% of those are held by the Banque de France.
FX reserves: tilted to the upside Effective exchange rates: real appreciation
USDm 135
4,000
3,000 121
2,000
108
1,000
94
0
Dec-00 Apr-03 Aug-05 Dec-07 Apr-10
80
Rep Congo FX reserves (USDm) Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: BEAC, IFS, Standard Bank Research Source: BEAC, IFS, Standard Bank Research
66
Republic of Congo
Republic of Congo: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (XAFbn) 3,242 4,043 3,664 4,613 5,130 5,875 6,533
GDP / capita (USD) 1,808 2,213 2,127 2,785 2,922 3,068 2,875
Real GDP growth (%) 7.80 6.20 -1.60 9.20 5.80 8.70 7.6
Oil production (k bbls/day) 246 270 224 249 304 355 378

Budget balance / GDP (%) 17.9 17.3 11.5 28.1 18.6 25.2 26.7
Domestic debt / GDP (%) na na na na na na na
Balance of Payments
Goods exports (USDm) 4,868 6,078 5,833 8,452 7,870 10,125 11,785
Goods imports (USDm) 1,273 2,006 2,639 2,393 2,980 3,880 4,330
Trade balance (USDm) 3,596 4,071 3,193 6,059 4,890 6,245 7,455
- % of GDP 58.5 52.6 41.7 58.8 48.5 52.2 63.6
Current account (USDm) 652 128 -1490 652 80 298 241
- % of GDP 10.6 1.7 -19.5 6.3 0.8 2.5 2.1
Financial account (USDm) -106 -115 428 1,790 1,451 630 700
Basic balance 546 13 -1,062 2,442 1,531 928 941
- % of GDP 8.9 0.2 -13.9 23.7 15.2 7.8 8.0
FX reserves (USDm) pe 732 1,842 2,175 3,872 3,712 4,250 4,450

Headline inflation pa 3.1 6.5 2.7 7.4 5.4 5.8 3.6
1-m rate (%) pa na na na na na na na
2-y rate (%) pa na na na na na na na
USD/XAF pa 527 522 479 448 462 491 557
USD/XAF pe 556 497 447 467 457 525 589
Source: Ministre des Finances, BEAC, IMF, Standard Bank Research
67
Senegal: signs of recovery despite structural imbalances
GDP (% y/y) pa 1.8 1.4 1.2 1.9 2.5 3.4 3.6 3.9 4.2 4.0 4.3 4.4
CPI (% y/y) pa 1.8 -0.4 -3.0 -2.4 -0.6 0.1 2.8 4.5 3.0 2.0 1.5 1.2
M2 (% y/y) pe 6.2 8.5 8.0 9.0 13.4 12.9 12.7 15.1 14.6 14 14.3 15.1
CA/GDP (%) pe -9.0 -9.3 -9.5 -9.7 -9.5 -9.1 -9.6 -9.5 -9.9 -10.2 -10.1 -9.3
Import cover (mths) pe 4.4 5.9 6.0 6.3 6.3 6.0 6.3 6.3 6.0 5.7 6.0 6.3
BCEAO Lending Rate (%) pe 4.75 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25
USD/XOF pe 494.3 466.6 448.1 457.3 482.3 523.4 510.6 524.7 655.1 605.3 596.3 589.4
REER pe 104 104 105 105 104 101 100 99 97 95 96 98
NEER pe 103 103 104 104 102 99 98 97 95 94 95 97
USD/XOF vol (20 day) 18.1% 14.3% 10.5% 10.5% 9.0% 12.8% 11.7% 10.4% 15.5% 13.2% 9.5% 11.9%
Political risk: Wade candidate in 2012? Election results (2007)
President Abdoulaye Wade (84) recently announced that Presidential election (25 Feb 07) Party % of votes
he would seek a third term in 2012 and denied he had Abdoulaye Wade PDS 55.9
any intention of putting his son in place before he goes,
Idrissa Seck RP 14.9
as claimed by the opposition. Karim Wade’s political am-
Ousemane Tanor Dieng PS 13.5
bitions suffered a setback last year when he stood in
local elections for Dakar, a traditional ruling PDS strong- Moustapha Niasse AFP 5.9
hold. The PDS’s resounding defeat by the opposition % of
Parliamentary election (3 Jun 07) Seats
coalition reflects growing antagonism towards the party’s votes
leadership. Meanwhile, persistent power cuts have re- Parti Democratique Senegalais (PDS) 131 69.2
sulted in street protests; besides its economic cost, SE-
Parti Socialiste (PS) 0 0
NELEC’s inability to meet consumption may ultimately
have a negative impact on the government’s credentials. Rewmi Party (RP) 0 0
Still, we note that Senegal was one of the first SSA coun- Alliance des forces de progress (AFP) 0 0
tries to restore multi-party politics in 1976, which, along Total 150 100
with a relatively mature institutional framework, should
Source: Senegalese Electoral Commission
mitigate long-run political risks.
GDP growth: growth set to rebound Contribution to GDP (%)

2008 2009e 2010f 2011f
After averaging 2.5% y/y and 1.6% y/y during 2008 and
Agriculture 1.3 0.6 0.7 0.8
2009, respectively, we expect GDP growth to rebound to
Livestock and hunting 0.1 -0.2 0.2 0.2
3.4% y/y in 2010. Such levels are still rather low com- Forestry 0 0 0 0.1
pared to SSA peers. Two key constraints recently identi- Fishing 0 -0.1 0 0
fied by the IMF include the vulnerable energy sector and Mining 0 0 0 0.1
the financing constraints that limit the fiscal room for ma- Fat and oil products -0.1 0 0 0
noeuvre. More generally, growth remains sensitive to Utilities 0.2 -0.1 -0.2 0
Construction 0 -0.2 0.3 0.5
global demand. For example, the important tourism sec-
Manufacturing -0.7 -0.5 0.6 0.6
tor is vulnerable to negative developments in the EU. Yet
Commerce 0.6 -0.8 0.2 0.2
there are encouraging signs in terms of industrial activity, Transport & comm 0.9 0.2 0.4 0.4
especially in the key phosphate and cement industries. Education 0.2 0.2 0.1 0.2
We also note some turnaround in credit to the private Health 0.2 0.3 0.2 0.1
sector which accelerated to 13.4% y/y in Mar 10, from a Other services -0.1 1.7 0.5 0.7
low of 5.0% a year earlier. Investment spending, particu- Public Administration -0.1 0.5 0.4 0.3
larly in infrastructure and the mining sector, remains im- GDP 2.5 1.6 3.4 4.2
portant for the long-term growth outlook, in our view. Source: Senegalese authorities, Standard Bank Research
68
Senegal
Balance of payments: sizeable C/A deficit Current account developments
Senegal’s C/A deficit is now well above the WAEMU and USDmn
1,650
SSA averages, and could reach around 9.4% of GDP in
2010 (and exceed 10%, excl. grants). This is compared
to a WAEMU convergence criteria of 5.8% (excl. grants). 525
Such a trend continues to reflect the lack of a diversified
export base, and a sizeable trade deficit, despite a some- -600
what balanced services position and positive current
transfers. Furthermore, we think tourism will struggle and
the import intensity associated with some large infrastruc- -1,725
ture projects also represents a downside risk to the C/A

outlook. Despite a downward trend, we expect a robust -2,850
financial account, with FDI accelerating to around 2005 2006 2007 2008 2009e 2010f 2011f
USD115m in 2010. The other large funding source is aid Trade Income
either via project grants (USD205m) or official project Services Transfers
Current account
finance, but portfolio flows will most probably remain mar-
ginal as in most WAEMU countries. Source: IMF, Standard Bank Research
Fiscal policy: violating convergence criteria Central government budget

% of GDP 2008 2009 2010
Senegal’s fiscal metrics have consistently been at odds
with WAEMU convergence criteria in recent years. The Total revenue 21.8 21.7 21.9
fiscal deficit was slightly higher than expected at around
5.1% of GDP in 2009 and above the regional median.
- wages 5.9 6.1 6.3
Revenues fell short mostly due to tax arrears from public
enterprises (mainly SENELEC). Current expenditure was - interest 0.6 0.7 0.8
higher than expected at 16.5% of GDP, but capital invest- - subsidies + transfers 5.6 4.8 3.9
ment was lower at 10.5% of GDP. The settlement of ad-
ditional arrears could push funding to 7.3% of GDP in
2010. Meanwhile, the government will target a 4% me- Overall balance (+ grants) -4.6 -5.1 -4.9
dium-term deficit target in the framework of the IMF- Net external borrowing 3.8 4.1 3.0
sponsored programme. The authorities intend to reduce
current expenditure, but also tap the WAEMU debt mar-
ket on a more regular basis going forward. Still, it re- Delays settlement -1.4 -1.6 -0.5
mains to be seen to what extent fiscal consolidation may Donor support (grants) 2.4 3.0 2.3
be successful ahead of the 2012 presidential election. Source: Senegalese authorities, Standard Bank Research
Monetary policy: interest rates on hold Inflation and interest rates
Inflation has continued to accelerate, reaching 2.3% y/y %

in Jul 10, from 1.3% y/y in Jun 10 (inflation had been 10.00
negative until May 10). This suggests the deflationary
trend between H2:09 and Jan-May 10 has come to an
6.25
end. Inflation for the remainder of the year will probably
rise faster in Senegal than WAEMU, but average CPI is
unlikely to exceed 1.7% in 2010. Still, the BCEAO will 2.50
probably be reluctant to hike the benchmark rate
(4.25%), given the modest regional economic recovery.
Besides, the real interest rate differential between the -1.25
euro and CFA zones remains favourable and the BCEAO
has raised the discount rate only twice in the 2000s: by
-5.00
25 bps to 4.25% in Aug 06 because the ECB had drasti-
Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10
cally tightened monetary conditions, and 50 bps to 4.75%
CPI y/y Money Market rate Discount rate
in Aug 08 as WAEMU inflation converged to 10%.
Source: Institut National de la Statistiques, Standard Bank Research
69
Senegal
Eurobond outlook: yield pick-up still attractive USD Senegal 8.75% 22 Dec 2014 bond
Senegal’s debut 5-y eurobond (USD200m; 8.75% cou- bps

pon; rated B+) performed well in Q3:10. After trading up 810
to a yield of 10.1% in Mar 10, the bond fluctuated in the
7.8%-9.6% range between Apr 10 and May 10, and cur-
rently yields 7.8%. The spread over US treasuries tight- 663
ened some 114 bps between 2 Jul and 6 Sep to around

627 bps, while EMBI Global has tightened around 61 bps 515
to 276 bps. As such, Senegal still offers some 351 bps of
yield pick-up over the EMBI Global spread. Senegal’s
spread compression has relatively outperformed that 368
seen in EMBI Global. Despite the liquidity differential, we
are still looking for some rally in Senegal 2014, assuming
220
positive global risk sentiment, as it continues to give up
Dec-09 Jan-10 Mar-10 May-10 Jul-10
179-256 bps of yield to comparable issuers, such as
Senegal Dec 14 Spread EMBI spread
Ghana, Gabon and Sri Lanka. Senegal plans to issue a
second USD300m bond in 2011. Source: Bloomberg, Standard Bank Research
FX outlook: CFA peg provides anchor USD/XOF: forwards versus forecast
USD/XOF continues to track EUR/USD via the CFA peg USD/XOF

which is backed by the French Treasury. We believe 610
EUR/USD will continue to decline in the medium term,

possibly reaching 1.25 and parity over a 3-m to 6-m hori-
558
zon. This would reflect poor growth dynamics in the euro
zone and a subsequent interest rate differential and
negative market sentiment. Consequently, the USD/XOF 505
rate is likely to rise to 655 over the next 6-m. The ex-
pected EUR weakness in the short to medium term will
probably further reduce the level of XOF overvaluation on 453
a REER basis. As such, it is highly unlikely the peg will

be changed, especially as it has been adjusted only once
400
(in 1994) at a time when CFA countries faced significant Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
structural imbalances. We see FX reserves stabilising at
around USD2.1bn in 2010, of which 65% would still be
held by the Banque de France. Source: Reuters, Standard Bank Research
Equity market: BRVM outperforms MSCI Bourse Regionale Valuers Mobiliers
In line with most other African equity markets, we had Jan 02= 100
1,100
been expecting the regional BRVM (based in Abidjan) to
outperform in 2010, having lagged the global rebound in
equities seen during 2009. Both main indices (ICX 10
825
and ICX Composite) were still up 17.4% and 10.6%, re-
spectively, as of 6 Sep 10. Meanwhile, Sonatel
(Senegal’s major telecom provider), which accounts for 550
USD2.6bn of the total market cap of USD6.2bn, was up
10.8% YTD (in XOF terms). This compares to MSCI EM
which was up just 3.2%, the MSCI Global which was 275
down 2.8% and MSCI frontier which was up 3.6%. It was
somewhat more in line with MSCI Africa which rose
0
11.9% (with Nigeria up 12.6%). However, the likelihood
Aug-01 May-03 Mar-05 Dec-06 Sep-08 Jul-10
of XOF weakness could mitigate foreign participation in
ICX 10 ICX Comp Sonatel
the BRVM, especially in the context of intrinsically limited
liquidity. Source: Bloomberg, Standard Bank Research
70
Senegal
Senegal: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (XOFbn) 4582.3 4846.4 5344.3 5,935 5,970 6,278 6,666
GDP / capita (USD) 770 801 938 1,086 1,032 995 908
Real GDP growth (%) 5.6 2.3 4.6 2.5 1.6 3.4 4.2
Phospheric acid (‘000 tons) 504 180.2 234.1 180 260 300 350
Balance of Payments
- % of GDP -7.8 -9.6 -12.1 -10.4 -9.4 -9.4 -9.9
- FDI (USDbn) 0.05 0.11 0.13 0.12 0.98 0.12 0.14
S&P B+ B+ B+ B+ B+ B+ B+
Moody’s nr nr nr nr nr nr B1
Fitch nr nr nr nr nr nr B+
Consumer inflation (%) pa 1.7 2.1 5.8 5.8 -1.0 1.7 1.9
Consumer inflation (%) pe 1.3 4.0 6.1 4.3 -2.2 4.5 2.1
BCEAO lending rate (%) pa 4.00 4.25 4.75 4.75 4.25 4.25 4.25
USD/XOF pa 527 522 479 448 462 491 557
USD/XOF pe 556 497 447 467 457 525 589
REER pa 100.0 99.9 102.7 106.0 104.8 99.6 96.5

NEER pa 100.0 99.9 103.3 104.8 103.5 99.0 95.8
Source: Institut National de la Statistique, Ministere de l’economie et des finances, IMF, Standard Bank Research, Bloomberg
71
South Africa: feeling the effects of a fragile global recovery
GDP (% y/y) pa -0.7 -2.7 -2.2 -1.4 1.6 3.0 2.8 3.3 3.5 3.7 3.8 4.0
CPI (% y/y) pa 8.4 7.8 6.4 6.0 5.7 4.5 3.9 4.2 4.4 5.0 5.4 5.6
M3 (% y/y) pe 12.6 7.5 5.1 1.7 0.9 1.8 2.5 3.0 3.3 4.5 5.0 5.6
CA/GDP (%) pe -6.7 -3.5 -3.1 -2.9 -4.6 -4.4 -4.9 -5.0 -5.3 -5.6 -5.4 -5.3
3-m rate (%) pe 8.8 7.6 7.0 7.2 6.7 6.6 6.1 6.1 6.2 6.2 6.2 6.7
5-y rate (%) pe 8.3 8.6 8.7 8.5 7.9 7.7 6.8 6.7 6.6 6.8 6.9 7.5
USD/ZAR pe 9.9 8.5 7.8 7.5 7.5 7.5 7.5 7.7 7.9 7.9 7.8 7.8
REER pe 90.6 104.2 109.2 108.1 111.3 115.6 114.5 113.0 110.0 109.0 111.0 110.0
NEER pe 57.5 66.0 69.1 70.3 72.4 75.0 74.0 72.0 70.0 69.0 71.0 70.0
USD/ZAR vol (20 day) 26.0% 17.9% 14.6% 15.7% 9.0% 13.6% 9.2% 14.6% 15.7% 9.0% 13.6% 13.6%
Source: South African Reserve Bank, StatsSA, Standard Bank Research, Bloomberg
Political risk: increased tensions Election results (2009)

Presidential election Party % of votes
In April 2009, the ANC won its fourth-consecutive general
Jacob Zuma ANC 65.9
election, but failed to obtain a two-thirds majority which
would have allowed it to unilaterally alter the constitution. Helen Zille DA 16.7
The recent public workers’ strike, which was character- Mvume Dandala Cope 7.4
ised by increasingly bitter exchanges between unions Mangosuthu Buthelezi IFP 4.5
and government, highlights growing tensions between Parliamentary
National election % of votes
the ANC and its tripartite alliance partners Cosatu and seats
the SACP. The ANC is due to hold its National General African National Congress (ANC) 264 65.9
Council from 21 to 24 September. Among the issues to Democratic Alliance (DA) 67 16.7
be discussed will be the contentious mine nationalisation
Congress of the People (Cope) 30 7.4
proposal as well as the possible introduction of a tax on
Inkatha Freedom Party (IFP) 18 4.5
capital inflows to stem rand appreciation. We expect
these discussions to provide an up-to-date guide to the Other 21 5.5
ANC’s most likely future policy direction. Total 400 100

Source: Electoral Commission of South Africa
GDP growth: lingering headwinds Composition of GDP
GDP growth undershot market expectations in Q2:10, % y/y

moderating to 3.2% q/q (saar), after climbing 4.6% q/q in 30
Q4:10. The slowdown came despite hopes that increased
spending during the World Cup would boost growth. Min-
ing production contracted, while manufacturing produc-
15
tion slowed and consumer demand remained muted dur-
ing the quarter. The prognosis for the SA economy re-
mains fragile, given heightened risks of further global
slowdown and the impact of the strong ZAR on the sup- 0
ply-side of the economy. PCE could regain traction on
the back of low interest rates and benign inflation envi-
ronment, but persistently high unemployment levels also -15
pose a downside risk to our 2010 GDP forecast of 2.9% 2000 2002 2004 2006 2008 2010
y/y.
Netex GFCF GCE PCE GDP
Source: SARB, South Africa National Treasury, Standard Bank Research

72
South Africa
Balance of payments: strong portfolio inflows BOP developments
SA’s current account widened to 4.6% of GDP in Q1:10 USD m

from 4.0% in Q4:09. However, this shortfall was once 10,000
again adequately financed by the capital account due to
a strong influx of portfolio inflows. Traditionally, these
0
have been predominantly directed towards the JSE, but
in 2010 their course has been guided by the relatively
high yields offered by the SA bond market. We expect -10,000
continued widening of the current account during H2:10.
Exports are vulnerable to the uncompetitive effects of the -20,000
strong ZAR and fragile global recovery. Imports are ex-
pected to continue recovering gradually and increased
dividend payments to non-residents could also contribute -30,000
to a wider current account deficit. Although there are 2003 2005 2007 2009 2011
some potential FDI transactions, portfolio inflows will Transfers Income
have to remain robust in order to compensate for an ex- Services Trade balance
pected widening of the current account deficit so as to
C/A
avoid a deterioration in SA’s BOP.
Source: South African Reserve Bank, Standard Bank Research
Fiscal policy: bloated wage bill a future problem Central government budget
% of GDP 2008/09 2009/10 2010/11f
With a strong bounce in the first few months of 2010 and
a helpful boost from the Soccer World Cup, revenue col- Total revenue 29.8 27.3 28.4
lection in FY 2010/11 has been running steadily ahead of Total expenditure 30.8 35.0 34.6
original government projections. Standard Bank esti- -wages 10.1 11.3 11.2
mates currently see a ZAR30-40bn gross tax revenue
-interest 2.5 2.6 2.9
overrun for the full year; this would be 4.6%-6.2% more
-development 11.6 12.6 14.1
than budgeted. However, with renewed growth uncertain-
ties (domestically & globally), National Treasury is Overall balance -1.0 -7.6 -6.2
unlikely to announce any changes to the prevailing bor- Net external borrowing -0.2 0.5 0.5
rowing requirement until the Medium-Term Budget Policy Net domestic borrowing 1.5 6.9 5.7
Statement on 27 October. On the expenditure front, the Source: South Africa National Treasury, Standard Bank Research
only real threat lies with a bloated civil service wage bill. Note: ‘Development’ spending includes health, education & housing and
The danger is that the revenue surplus is dipped into; if community amenities.
so, without material future budget adjustments, this could
prove fiscally problematic from next year onwards.
Monetary policy: 6.0% repo delivered Inflation and interest rates
After cutting unexpectedly in March, the SARB main- % y/y, %

tained the repo rate at 6.50% at the May and July mone- 20
tary policy meetings. Despite the vulnerability of the do-
mestic recovery, inflation risks were seen as evenly bal- 15
anced and a stable monetary stance was deemed appro-
priate. Since the July MPC meeting, domestic data flow 10
has shown a weakening recovery, disinflation has proven
to be much stronger than anticipated and external fragili- 5
ties have escalated. In light of this, the MPC chose to
lower the repo rate by 50 bps on 9 September. This was
0
in line with market expectations. The SARB did suggest,
however, that “the scope for further downward movement
(5)
is seen to be limited…”. However, further weak data flow
Jan-00 Aug-02 Mar-05 Oct-07 May-10
and continued disinflation due to the rand’s strength may
yet prompt another cut. CPI Repo PPI
Source: South African Reserve Bank, StatsSA
73
South Africa
Bond curve: foreign vs. local valuations diverge Changes in yield curve
The same drivers responsible for a solid performance of nacq

the bond market in the first few months of the year have 10.2%
intensified. Indeed, the familiar theme of elevated foreign
buying of local debt remains pivotal in driving SA’s bond
curve. Local conditions have provided a favourable
8.8%
macro backdrop to such flows, including: lower inflation;
a stronger and more stable currency; probable improved
supply dynamics; low real money market rates; and pro-
gressive uncertainty surrounding alternative asset class 7.4%
returns, especially equities. But despite these improve-
ments, locals remain sceptical of both the outright level
and flatness of the bond curve. A material adjustment in
local perceptions around structural inflation in SA would 6.0%
likely be necessary to sustain current levels, if foreign 1-yr 5-yr 9-yr 13-yr 17-yr
demand were to normalise or even reverse. Aug-09 Aug-10 Aug-11
FX outlook: ZAR unlikely to strengthen further USD/ZAR: forwards versus forecasts
Rand strength in recent months has mainly been a func- USD/ZAR

tion of a strong foreign appetite for SA bonds, although 9.0
broad-based dollar weakness has contributed towards
ZAR appreciation. Renewed SARB accommodation and
8.0
widespread domestic industrial action has been largely
ignored by ZAR bulls. The sustainability of ZAR strength
hinges largely on global sentiment and more specifically
7.0
the search for yield (i.e. carry trade). If risk aversion re-
emerges due to global growth concerns, the dollar could
quickly regain favour, given its perceived safe-haven
6.0
status, and emerging markets such as SA could sell-off.
The prospect of renewed risk aversion, combined with
narrowing interest rate and GDP differentials, a widening 5.0
current account deficit and increased reserve accumula- Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
tion lead us to believe that the ZAR will weaken during
H2:10. History Forw ards Forecast
Equity market: JSE still stuck in a range Johannesburg Stock Exchange vs. Dow Jones
Index Index
The JSE has continued to exhibit a high correlation with
US equity markets in recent months and as a conse- 31,000 14,000
quence local equities have oscillated within a relatively
narrow range. Even though foreigners have shown a
distinct preference for SA bonds, non-residents have still 27,000 12,000
managed to buy R24.6bn worth of SA equities this year
and have thus once again become significant sharehold-
ers (almost half) of the overall JSE. The prospect of an- 23,000 10,000
other SARB rate cut and some attractive valuation met-
rics, combined with the fact that SA bonds have already
19,000 8,000
rallied dramatically in recent months could ensure that
SA equities regain some favour into year-end. However,
the risk to such an improvement remains with the rela-
15,000 6,000
tively dismal global and domestic economic outlook,
Jan 09 Jul 09 Jan 10 Jul 10
which could prevent equities from becoming the asset
class of choice over the medium term. JSE All Share DJ Industrial Ave. (rhs)
74
South Africa
South Africa: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Population 47.3 47.9 48.5 48.8 49.1 49.1 49.0
Nominal GDP (ZAR bn) 1,571 1,767 2,017 2,284 2,408 2,500 2,520
Nominal GDP (USD bn) 246.8 261.1 286.0 276.6 285.9 331.1 321.4
GDP/capita (USD bn) 5,212 5,444 5,891 5,632 5,760 6,744 6,560
Real GDP growth (%) 5.3 5.6 5.5 3.7 -1.8 2.9 3.2

Budget balance/GDP (%) -0.5 -0.3 0.7 -0.4 -4.9 -6.5 -5.0
Domestic debt/GDP (%) 30.2 28.1 24.4 22.6 27.2 30.0 31.7
External debt/GDP (%) 4.4 4.5 3.8 4.3 3.7 3.8 3.9
Balance of Payments
Exports of goods and services (USD bn) 67.58 78.36 89.47 98.05 78.02 72.85 76.53
Imports of goods and services (USD bn) 68.74 84.75 97.85 106.40 80.47 92.72 82.91
Trade balance (USD bn) -1.16 -6.39 -8.39 -8.34 -2.45 -19.87 -6.38
Current account (USD bn) -8.56 -13.86 -20.50 -19.58 -11.47 -15.56 -16.39
C/A % of GDP -3.5 -5.3 -7.2 -7.1 -4.0 -4.7 -5.1
Financial account (USD bn) 11.98 15.77 21.77 11.64 12.55 19.96 16.03
Net FDI (USD bn) 5.71 -6.59 2.73 12.15 4.14 6.63 5.11
Basic balance/GDP (%) -1.15 -7.83 -6.21 -2.69 -2.56 -2.70 -3.51
FX reserves (USD bn) pe 18.60 23.08 29.63 30.62 32.48 35.00 35.60
Import cover (months) pe 4.6 4.5 4.6 6.1 5.8 5.7 5.5

S&P BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+
Moody's Baa1 Baa1 Baa1 Baa1 A3 A3 A3
Fitch BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+
Monetary & financial indicators

SARB policy rate (%) pa 7.1 7.6 9.6 11.6 8.4 6.5 6.1
SARB policy rate (%) pe 7.0 9.0 11.0 11.5 7.0 6.0 6.5
3-m rate (%) pe 7.5 7.1 9.2 11.3 7.2 6.1 6.7
1-year rate (%) pe 7.1 7.0 9.2 11.2 7.1 6.2 7.3
2-year rate (%) pe 7.2 7.1 8.9 10.8 7.6 6.2 7.4
5-year rate (%) pe 7.9 7.4 8.6 9.6 8.5 6.7 7.5
USD/ZAR pa 6.4 6.8 7.1 8.3 8.4 7.6 7.8
USD/ZAR pe 6.4 7.0 6.9 9.9 7.5 7.7 7.8
REER pa 112.5 108.9 105.1 92.4 103.0 113.6 110.0
NEER pa 91.8 87.3 78.3 65.4 65.7 73.3 70.0
Source: South African Reserve Bank, South Africa National Treasury, Standard Bank Research, Bloomberg
75
Tanzania: gearing up for elections

GDP (% y/y) pa 5.6 5.2 7.1 6.7 7.1 6.9 6.5 6.6 7.0 6.7 7.3 7.8
CPI (% y/y) pa 13.1 11.4 11.7 12.5 9.8 8.2 6.1 5.4 5.1 4.8 4.5 4.4
M3 (% y/y) pe 14.4 19.0 19.5 18.4 19.1 24.6 26.4 27.6 28.3 29.5 31.2 33.9
CA/GDP (%) pe -12.6 -11.9 -11.1 -7.5 -7.2 -7.4 -7.6 -7.7 -8.0 -7.6 -7.7 -7.8
3-m rate (%) pe 12.4 5.6 3.0 6.1 2.4 3.0 2.9 2.4 2.6 2.9 3.2 3.5
5-y rate (%) pe 15.0 16.6 13.5 13.5 13.8 9.5 9.7 8.6 8.3 8.0 7.8 7.5
USD/TZS pe 1,328 1,313 1,311 1,340 1,358 1,470 1,540 1,590 1650 1645 1630 1,625
REER pe 179.4 172.2 150.3 145.7 149.6 152.5 158.6 171.3 180.3 179.6 178.9 178.1
NEER pe 201.5 189.0 169.4 169.0 187.5 189.9 193.6 197.9 203.5 203.0 202.4 202.0
USD/TZS vol (20 day) 16.6% 9.2% 5.9% 5.4% 2.8% 8.6% 5.6% 5.4% 5.4% 5.4% 5.4% 5.4%

Source: Bank of Tanzania, Tanzania National Bureau of Statistics, Bloomberg, Standard Bank Research
Political risk: all eyes on the election Election results (2005)
Investors are likely to focus on the elections set for 31 Presidential election Party % of votes
Oct 10. Early polls indicate that the incumbent govern-
ment will mostly likely retain power, which would not be a Jakaya Kikwete CCM 80.28
surprise, given the CCM’s electoral dominance. The
Ibrahim Lipumba CUF 11.68
CCM retaining power should ensure policy continuity
which is vital, given the economy’s challenges. Following Freeman Mbowe CHADEMA 5.88
the approval of power-sharing provisions in Zanzibar in
% of
Aug 10, chances of post-election violence on the island Legislative election Seats
votes
appear slim. Despite the signing of the Mining Act 2010
Chama Cha Mapinduzi (CCM) 206 70.0
into law, investor confidence in the mining sector has not
faltered as initially feared. In the Survey of Mining Com- Civic United Front (CUF) 19.0 14.3
panies 2010, conducted by the Fraser Institute and cov- Chama cha Demokrasia na Maendeleo
5.0 8.2
ering 51 countries globally, Tanzania was voted third in (CHADEMA)
Africa as the country with the most attractive mining re- Total 232 100
gime. Participants cited political stability among other
Source: National Electoral Commission of Tanzania
reasons.
GDP growth: recovery on track Composition of GDP
Following better-than-expected growth in 2009, we have y/y

15.0
increased our growth forecast for 2010 to 6.8% y/y from
6.5% y/y. Our constructive view is based on the authori-
ties’ continued pursuit of expansionary policies to stimu- 8.8
late growth. We expect this policy bias to remain in place
in the medium term. The rebound in GDP growth is likely 2.5
to be led by government’s capital expenditure focus on
infrastructure development. Government revenues are
expected to be bolstered by the increase in mining royal- -3.8
ties, following the signing of the Mining Act 2010 into law.
Consumption should benefit from the low interest rate -10.0
and inflation environment. Improved farm incomes due to 2000 2002 2004 2006 2008 2010f
increased agricultural productivity should further support
PCE GCE GFCF
PCE. Netex should benefit from a weak TZS, but faltering
Stocks NetEx GDP
global growth poses a risk for Netex.
Source: Bank of Tanzania, Standard Bank Research
76
Tanzania
Balance of payments: C/A deficit to persis Current account developments
Following a better-than-expected C/A deficit (7.5% of USD m

1,300
GDP) in 2009 on the back of an improved trade balance,
we now expect the C/A deficit to widen to 7.7% of GDP in
75
2010. The C/A deterioration is likely to be driven by the
trade account. We expect imports to outweigh exports as
Tanzania imports capital goods for its infrastructure de- -1,150
velopment programme. Infrastructure will probably boost
service and income payments as well, also weighing on -2,375
the C/A. Inward transfers should be subdued as donors
are likely to hold back on disbursements until after the
-3,600
elections. Furthermore, the government expects a 37.2% 2004 2005 2006 2007 2008 2009 2010f 2011f
decline in donor budgetary support to TZS821.6bn in
Trade balance Services Income
FY2010/11. Some donors disbursed funds earmarked for
FY2010/10 in FY2009/10 in a bid to assist the authorities Transfers C/A
to cope with the 2009 recession. We expect FX reserves
to climb to USD3.8bn (5.6m of import cover) by year-end. Source: Bank of Tanzania, Standard Bank Research
Fiscal policy: expansionary fiscal policy bias Central government budget
Following the 2009 recession, the FY2010/11 budget was

% of GDP 2009/2010 2010/2011
highly expansionary with the budget deficit (excluding
grants) increasing to 16.4% of GDP (14.7% of GDP in Total revenue 17.0 17.6
FY2009/10). This served to confirm the government’s
resolve to revive growth. Infrastructure and agriculture Total expenditure 31.8 33.9
were central to the budget. Infrastructure spending, to
- Wages 5.9 6.2
remove bottlenecks in the economy, increased 37.3% to
TZS1.51tr. This has seen the development budget, which - Interest 1.4 1.1
the government plans to finance through a combination
of domestic and external borrowing, rise to TZS1.33tr, or - Development 9.4 11.2
11.2% of GDP in FY2010/11 (9.4% of GDP in Overall balance (- grants) -14.7 -16.4
FY2009/10). Agriculture expenditure increased by 35.5%
to TZS904bn in support of the government’s agricultural Net domestic borrowing 4.1 3.9
initiative, Kilimo Kwanza.
Donor support (grants and loans) 10.6 9.6
Source: Tanzania Ministry of Finance
Monetary policy: continued disinflation Inflation and interest rates
With the economy still recovering from the 2009 reces- %

20.0
sion and the elections a month away, we expect the BOT
to maintain its expansionary monetary policy bias. Disin-
flation thus far this year, which we expect will continue 15.0
through year-end, gives the BOT further scope to main-
tain an expansionary policy bias. Indeed, the magnitude
of disinflation has led us to revise our inflation forecast 10.0
from 7.0% y/y to 5.1% y/y at year-end. We expect food
inflation to continue being the key driver of disinflation in
coming months as food supply remains favourable. Food 5.0
supply will probably get a further boost from favourable
rains and the government’s investment in its Kilimo
0.0
Kwanza initiative. Inflation declined to 6.3% y/y in Jul 10
Jan-04 Aug-05 Apr-07 Nov-08 Jul-10
from 7.2% y/y in Jun 10. Disinflation was spearheaded by
91-day Headline inflation (y/y)
food inflation that decreased to 5.6% y/y in Jul 10 from
7.1% y/y in Jun 10. Source: Bank of Tanzania, Tanzania National Bureau of Statistics
77
Tanzania
Bond curve outlook: bull flattening Changes in yield curve
Over a 6-m horizon we expect rates to continue pushing YTM

15.0
lower. With rates already very depressed at the short end
of the curve, we expect much of the downward drift to
come from the long end of the curve. The predominant 11.3
driving force behind lower rates is likely to be the authori-
ties’ expansionary monetary policy bias in their bid to
resuscitate GDP growth. In our view, this policy bias will 7.5
likely remain in place for at least the rest of the year.
Muted credit extension to the private sector by commer-
cial banks (15.1% y/y in Jun 10 compared to 32.8% y/y in 3.8
Jun 09) coupled with the steepness of the curve should

lead to continued robust commercial bank demand for
0.0
government securities. This in turn is likely to also help
35-d 91-d 182-d 364-d 2-y 5-y 7-y 10-y
pull rates lower. Furthermore, the benign inflation outlook
6-m forecast 11-Aug-10 06-Jul-10
is also conducive for lower rates in the months ahead.
Source: Bank of Tanzania, Standard Bank Research
FX outlook: set to remain above 1,500 USD/TZS: forwards versus forecasts
We are less constructive on TZS strength than before USD/TZS

and now expect USD/TZS to remain above 1,500 for the 1,700
rest of the year. We are targeting 1,590 by year-end, with

risks lying firmly to the upside. We expect USD/TZS up-
1,538
side to be predominantly driven by broad-based USD
strength. Further upward pressure on USD/TZS is likely
to emanate from donors withholding disbursements until 1,375
after the elections. The reluctance of the BOT to use FX
reserves to meet USD demand in the market further
supports USD/TZS upside. The BOT prefers trade- 1,213
weighted TZS weakness, having earlier adopted a weak

exchange rate policy designed to revive economic
1,050
growth. Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
Equity market: increase in government bonds Dar es Salaam Stock Exchange
In line with EM equity markets, the DSE remained rela- Index

1,260
tively flat over the last 3-m. We expect this trend to con-
tinue for the remainder of the year. Subdued market ac-
tivity is likely to be a function of global growth concerns 1,195
which will only be exacerbated by the domestic market’s
illiquidity and the upcoming elections. However, Tanza-
1,130
nia’s growth prospects should support the DSE as com-
pany earnings improve. We expect a flurry of treasury
bond listings, given the government’s expansionary pol- 1,065
icy bias and the probable withholding of disbursements
by donors. In Q2:10, treasury bond listings increased by
1,000
183% to TZS241bn from Q1:10 levels. Following the
Jan-07 Oct-07 Jun-08 Feb-09 Oct-09 Jul-10
elections, we expect parliament to continue with its re-
DSE
view of the Capital Markets and Securities Act. The re-
view in part aims to develop an Enterprise Growth Market
segment on the DSE for smaller businesses. Source: Reuters
78
Tanzania
Tanzania: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (TZSbn) 15,965 17,941 20,948 25,337 29,961 34,200 38,305
GDP / capita (USD) 393 382 441 538 556 557 565
Real GDP growth (%) 7.4 6.7 7.1 7.4 6.2 6.8 7.2
Gold production ('000 Kg) 47.3 39.7 40.2 46.5 48.2 53.6 57.1
Tobacco production ('000 MT) 47.0 52.0 44.0 50.8 58.7 60.0 62.7
Coffee production ('000 MT) 54.0 34.3 54.8 43.1 68.3 50.0 65.2

Balance Of Payments
- % of GDP -6.1 -8.0 -9.4 -13.7 -7.5 -7.7 -7.8
- FDI (USDbn) 0.5 0.6 0.7 0.7 0.6 0.8 1.1

Fitch nr nr nr nr nr nr B-

BOT discount rate (%) pa 15.6 16.0 19.9 14.2 10.1 7.6 8.0
BOT discount rate (%) pe 19.3 20.1 16.4 16.0 3.7 7.6 8.5
3-m rate (%) pe 14.7 14.4 10.2 11.3 6.1 2.4 3.5
1-y rate (%) pe 15.7 15.6 14.3 13.0 8.8 5.4 5.0
2-y rate (%) pe 16.9 18.5 15.0 14.4 10.9 8.1 7.0
5-y rate (%) pe 17.0 15.2 17.8 16.4 13.5 8.6 7.5
USD/TZS pa 1,123 1,251 1,241 1,199 1,325 1,466 1,573
USD/TZS pe 1,150 1,265 1,154 1,318 1,340 1,590 1,555
REER pa 157.6 167.5 170.0 172.4 166.8 169.5 167.6
NEER pa 157.7 171.0 176.0 186.3 179.9 189.9 186.2
Notes: pe — period end; pa — period average, nr — not rated
Source: Bank of Tanzania, Tanzania National Bureau of Statistics, Bloomberg, Standard Bank Research
79
Uganda: focus turns to elections
GDP (% y/y) pa 5.2 5.2 5.2 5.2 7.0 7.0 7.0 7.0 8.8 8.8 8.8 8.8
CPI (% y/y) pa 14.5 12.7 12.9 12.1 8.2 4.9 3.4 4.1 5.3 5.1 3.9 3.3
M3 (% y/y) pe 24.9 25.0 26.1 17.5 21.4 30.2 33.6 35.8 36.3 37.7 38.4 39.3
CA/GDP (%) pe -5.6 -5.2 -4.9 0.4 0.1 -0.4 -0.8 -1.1 -1.3 -1.5 -1.7 -1.6
3-m rate (%) pe 12.8 6.3 6.8 5.5 4.0 4.4 4.6 4.6 4.6 4.8 5.1 5.5
5-y rate (%) pe 14.0 14.1 14.1 14.1 8.8 8.9 9.4 9.2 8.7 8.9 9.5 9.9
USD/UGX pe 2,105 2,055 1,923 1,900 2,080 2,280 2,275 2,290 2,415 2,395 2,390 2,385
REER pa 103.2 113.4 106.8 99.9 100.6 111.5 111.2 111.8 120.3 119.6 119.2 118.6
NEER pa 112.7 126.2 121.5 114.3 118.1 125.4 125.2 126.0 135.3 134.4 134.0 133.8
USD/UGX vol (20 day) 16.2% 17.1% 9.3% 7.9% 10.3% 11.0% 8.3% 7.9% 7.9% 7.9% 7.9% 7.9%
Source: Bank of Uganda, Uganda Central Statistics Office, Standard Bank Research, Bloomberg
Political risk: focus shifts to the elections Election results (2006)
The Feb 11 elections are likely to dominate investor fo- Presidential election Party % of votes
cus over the next 6-m. As we were expecting, in Aug 10 Yoweri Kaguta Museveni NRM 59.3
President Museveni announced his intention to seek a Kizza Kifeefe Besigye FDC 37.4
fourth term in office, following the 2005 removal of presi- John Ssebaana Kizito DP 1.6
dential term limits. His ruling National Resistance Move-
Abed Bwanika Independent 1.0
ment (NRM) will probably endorse him as its presidential
candidate at the party’s conference this month. The 2011 Miria Kalule Obote UPC -
election could be highly competitive, given the discovery Legislative election Seats
of oil in 2006. The NRM should face stiff competition fol-
National Resistance Movement (NRM) 205
lowing the consolidation of the opposition. Some opposi-
Forum for Democratic Change (FDC) 37
tion parties have joined forces to form the Inter-Party Co-
Uganda People’s Congress (UPC) 9
operation (IPC) coalition. Kizza Besigye, who has failed
Democratic Party (DP) 8
to beat Museveni at the previous two elections, is ex-
pected to be picked as the opposition’s presidential can- Other 60
didate. Total 319
Source: The Electoral Commission of Uganda
GDP growth: robust growth still on the cards Composition of GDP
We have revised our growth forecast for 2010 from 7.7% y/y
15.0
y/y to 7.0% y/y. This follows the deeper-than-expected
fall in growth in 2009, coupled with faltering global growth
8.8
prospects. Nonetheless, we remain constructive on
growth and the benign inflation environment underpins
our view. The authorities’ expansionary policy bias, which 2.5
should remain in place until the elections, will continue to
gain more traction. Government’s expansionary fiscal
policy bias will see increased government investment -3.8
expenditure in infrastructure-related projects in the en-

ergy and hydrocarbon sectors, in line with the National -10.0
Development Plan. Expansionary monetary policy will 2001 2003 2005 2007 2009 2011f
continue to buoy credit extension to the private sector PCE GCE GFCF
which should boost PCE and GFCF. A weak UGX and
Stocks Netex GDP
improving regional growth prospects will likely boost
Netex. Source: Bank of Uganda, Standard Bank Research
80
Uganda
Balance of payments: C/A deficit to persist Current account developments
With the C/A deficit widening by 46.2% to USD582m in USD m

2,100
Q2:10 from Q1:10, we maintain our expectation of a de-
terioration in the C/A in 2010. We forecast a C/A deficit of
825
1.1% of GDP in 2010, from a surplus of 0.4% of GDP in
2009. The C/A is likely to be weighed down by the trade
balance. Imports will probably remain robust, supported -450
by the government’s infrastructure development pro-
gramme. Exports, however, should be buoyed by a weak
UGX and improving regional growth prospects, but will -1,725
fail to match imports. Income and service payments are

also expected to add to the widening of the C/A deficit, -3,000
FDI into the hydrocarbon sector should remain robust as 2000 2002 2004 2006 2008 2010f
commercial oil production draws closer. We maintain our
FX reserves forecast for 2010 at USD3.2bn (8.6 months
Transfers C/A
of import cover).
Source: Bank of Uganda, Standard Bank Research
Fiscal policy: managing the oil windfall Central government budget

% of GDP 2009/2010 2010/2011
The FY2010/11 budget was underpinned by the National
Development Plan (NDP). The NDP, launched in Apr 10, Total revenue (+ grants) 15.6 16.0
aims to hoist Uganda to middle-income status by 2015. A Total expenditure 18.6 19.9
key goal of the NDP is infrastructure development. Ac-
- wages 3.8 3.4
cordingly, the FY2010/11 development budget increased
to 7.6% of GDP. Much of this budget is expected to be - interest 1.0 0.9
financed through external borrowing. With the com- - development 7.3 7.6
mencement of commercial oil production drawing closer,
Overall balance (- grants) -5.7 -5.7
investors will likely focus their attention on the develop-
ment of the National Oil and Gas Policy by the MoF. The Overall balance (+ grants) -3.0 -3.1
government wants to ensure that a robust policy frame-
work is in place to prudently manage oil revenues in or-
der to achieve Uganda’s developmental ambitions. As Net domestic borrowing 1.3 1.2
part of this process, the government has amended tax Donor support (grants and loans) 4.5 4.6
legislation in preparation for oil revenues.
Source: Ministry of Finance, Standard Bank Research
Monetary policy: favourable inflation outlook Inflation and interest rates
Our inflation forecast produced in May 10 proved to be 40.0 %
too bearish. We are now more bullish on future inflation,

following the significant disinflation thus far this year.
Inflation dipped further to 3.2% y/y in Jul 10 from 4.4% 28.8
y/y in Jun 10. We expect inflation to continue pushing
lower in Q3:10, bottoming out below 3.2% y/y, on ac-
17.5
count of sanguine food inflation. However, in Q4:10, we
expect inflation to reverse and subsequently accelerate
to 4.6% y/y by year-end. An anticipated increase in elec-
6.3
tion spending should contribute to upward pressure on
inflation. Brent crude oil prices are expected to rise above
USD90/bbl in Q4:10 which should add additional upward -5.0
pressure on inflation. However, a benign inflation envi- Jan-07 Nov-07 Oct-08 Aug-09 Jul-10
ronment in the near term will allow the authorities to
Headline Food 91-day
maintain an expansionary monetary policy bias at least
until after the elections. Source: Bank of Uganda, Uganda Bureau of Statistics
81
Uganda
Bond curve outlook: bull flattening Changes in yield curve
In line with the BOU’s expansionary monetary policy, we YTM %

13.0
expect rates to push lower over a 6-m horizon. In our
view, much of the downward drift will be at the long-end
of the curve, given where long-dated yields are currently. 10.5
We expect positive real returns being offered across the
curve to maintain robust investor demand for government
paper. The bid:cover ratio for T-bills has averaged 3.0 8.0
YTD, compared to 2.9 in the last 6-m of 2009. In addition
to robust demand for government securities, a benign
inflation outlook will also help pull yields lower. We ex- 5.5
pect the BOU’s expansionary monetary policy bias to
remain in place at least until after the election next year.
3.0
91-d 182-d 364-d 2-y 3-y 5-y 10-y
21-Jul-10 25-Aug-10 6-m forecast
Source: BOU, Standard Bank Research
FX outlook: USD/UGX set to push higher USD/UGX: forwards versus forecasts
We forecast USD/UGX to end the year higher at 2,290. USD/UGX

The return of broad-based USD strength over a 6-m hori- 2,600
zon will probably be the main driver of UGX weakness in

coming months. Corporate USD demand and the likeli-
2,325
hood of donors withholding disbursements prior to next
year’s election should provide further impetus for UGX
weakness. A weak UGX should help boost aggregate 2,050
demand through exports. We expect investors to con-
tinue closely watching events surrounding the standoff
between the government and Heritage Oil, regarding the 1,775
latter’s tax liability. Any indications that the dispute is

unlikely to be resolved amicably are likely to weigh on
1,500
investor sentiment. Investor sentiment will also hinge on Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
Al Shabaab terrorist threats. If terror attack threats mate-
rialise and are directed at the oil and/or tourism sectors,
we are likely to see further USD/UGX upside. Source: Bank of Uganda, Standard Bank Research
Equity market: Tullow Oil to cross-list Uganda Stock Exchange
The USE has appreciated by 47.2% (21.4% USD terms) Index

1,130
since Q3:09. Much of this rise we suspect has been on
the back of investor attraction to Uganda’s growth poten-
tial as oil production draws closer. However, for the re- 993
mainder of the year we expect the USE to plateau around
current levels, with risks lying to the downside. Investor
appetite is likely to be muted due to pending elections 855
and faltering global growth prospects. Tullow Oil expects
to cross-list on the USE in October, following the submis-
sion of its application to the Capital Markets Authority in 718
Sep 10. Thus far there are no indications that the tax
dispute between the government and Heritage Oil will
580
derail these plans. If Tullow Oil successfully cross-lists on
Jan-06 Dec-06 Nov-07 Oct-08 Sep-09 Aug-10
the USE, its market capitalisation will top that of the Nai-
USE
robi Stock Exchange. To avoid market distortions, the
USE is likely to create a foreign index. Source: Reuters
82
Uganda
Uganda: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (UGXbn) 17,878 20,166 23,351 28,176 34,166 38,300 43,356
GDP / capita (USD) 370 430 425 471 550 544 577
Real GDP growth (%) 10.0 7.0 8.1 10.4 5.2 7.0 8.8
Coffee production ('000 Tonnes) 158.1 133.1 175.3 211.8 200.3 227.3 249.5
Gold production (Kgs) 5,861 6,921 7,200 7,600 8,100 8,500 8,750
Tea production ('000 Tonnes) 37.7 34.3 44.9 42.8 30.4 33.1 35.7

Balance Of Payments
Current account (USDbn) -0.01 -0.38 -0.47 -0.80 0.06 -0.21 -0.36
- % of GDP -0.1 -3.4 -3.5 -5.7 0.4 -1.1 -1.6
- FDI (USDbn) 0.38 0.64 0.73 0.80 0.60 0.80 1.30

S&P nr nr nr nr B+ B+ B+
Fitch nr nr nr nr B B B

BOU policy rate (%) pa 15.2 14.8 15.8 16.5 12.4 8.0 8.4
BOU policy rate (%) pe 14.5 16.3 14.7 19.4 10.1 8.3 8.5
3-m rate (%) pe 7.70 9.46 8.45 12.50 5.47 4.60 5.50
1-y rate (%) pe 9.94 10.94 13.14 18.45 9.05 6.00 6.80
2-y rate (%) pe 13.27 14.20 12.50 14.78 12.26 8.05 8.80
5-y rate (%) pe 15.12 14.40 13.85 14.07 12.67 9.20 9.90
USD/UGX pa 1,781 1,823 1,716 1,945 2,023 2,210 2,275
USD/UGX pe 1,817 1,740 1,690 1,733 1,900 2,290 2,385
REER pa 100.0 101.8 100.1 100.0 105.6 108.8 119.3
NEER pa 101.4 104.8 103.5 104.7 118.7 123.7 134.1
Notes: pe — period end; pa — period average; nr — not rated
Source: Bank of Uganda, Uganda Central Statistical Service, Standard Bank Research, Bloomberg
83
Zambia: rising yield rates could rekindle carry attraction
GDP (% y/y) pa 4.3 6.4 7.6 6.8 7.1 6.9 6.8 7.2 7.1 6.8 6.5 6.4
CPI (% y/y) pa 14.4 14.4 13.7 11.2 9.8 8.7 8.1 7.6 8.4 9.5 10.0 10.4
M3 (% y/y) pa 25.7 21.1 19.2 8.1 8.9 22.8 25.2 27.4 26.1 22.4 18.4 21.1
CA/GDP (%) pe -7.9 -6.5 -7.5 -7.3 -7.1 -6.4 -6.2 -5.9 -7.2 -8.4 -8.0 -8.2
3-m rate (%) pe 13.9 13.7 15.2 5.0 5.5 6.1 6.9 7.1 7.4 7.9 8.7 9.8
5-y rate (%) pe 19.5 19.0 20.0 17.1 16.9 16.5 16.3 12.8 13.0 13.3 13.1 13.3
USD/ZMK pe 5,580 5,150 4,720 4,662 4,682 5,123 5,003 5,057 5,011 5,149 5,418 5,504
REER pe 119.8 115.6 121.0 122.5 124.5 117.3 118.8 118.7 119.0 118.8 118.2 118.3
NEER pe 96.0 91.3 95.0 94.2 94.0 88.7 89.2 88.1 87.9 87.4 85.1 84.8
USD/ZMK vol (20 day) 11.3% 18.0% 10.2% 9.7% 10.4% 17.9% 13.3% 10.4% 10.4% 10.4% 10.4% 10.4%

Source: Bank of Zambia, CSO, IMF, Standard Bank Research
Political risk: perceptions of abetting corruption Election results
The perceived close association between President Presidential election 2008 Party % of votes
Banda and former President Chiluba continues to embroil Rupiah Banda MMD 40.1
the government in controversy and accusations of abet- Michael Sata 38.1
Patriotic Front
ting corruption. In 2007, a British court ordered Chiluba to
Hakainde Hichilema UPND 19.7
repay some USD58.0m he was accused of stealing while
in office. However, a Lusaka High Court recently ruled Godfrey Miyanda Heritage Front 0.8
that it could not enforce an order issued by a court in % of

Parliamentary election 2006 Seats
votes
another country, seemingly absolving him of wrong-
Movement For Multiparty Democracy 74 46.5
doing. In 2009, a decision by the chief prosecutor not to
appeal Chiluba’s acquittal in another case sparked riots Patriotic Front 44 27.7
and widespread condemnation of the government by the United Democratic Alliance 27 17.0
donor community. These events have created the im-
United Liberal Party 2 1.3
pression that President Banda is interfering with the judi-
Total 159 100
ciary to protect Chiluba. In addition to verbal condemna-
tion, some donors have withheld aid disbursements in Source: Electoral Commission of Zambia
protest.
GDP growth: strong upside Composition of GDP
We have raised our GDP growth forecast to 7.0% y/y in %

2010. In addition to ensuring that mine expansion pro- 7.5
jects would continue, thereby underpinning production

growth, higher copper prices have encouraged further
5.3
copper exploration. Similarly, the global demand for com-
modities remains buoyant, encouraging exploration for
other commodities in the country. Hence, investment 3.0
spending will likely underpin GDP growth as well. Net
exports, supported by a rise in copper exports, will proba-
bly subtract less from GDP this year, possibly becoming 0.8
a net addition to GDP growth in 2011. Even the 6.7% y/y

growth forecast for 2011 may turn out to be conservative,
-1.5
given the amount of new production capacity coming on 2003 2005 2007 2009e 2011f
stream that year. The agricultural sector has grown
GCE PCE GFCF Netex GDP
strongly recently, the resultant maize surplus prompting
the government to start exporting maize. Source: Ministry of Finance, Standard Bank Research
84
Zambia
Balance of payments: strong trade balance Current account developments
The strength of the trade balance, benefiting from the USD m

1,800
high copper price, is likely to limit the C/A deficit to 5.9%
of GDP this year. Cumulatively, the 12-m trade balance
recorded a surplus of USD1.56bn in Jun, having swung 700
from a deficit of USD87m in Aug 09. The swing in the
trade balance, amounting to about 10% of GDP, had no -400
impact on FX reserves, which remained in a USD1.7bn -
USD1.9bn range between Aug 09 and Jun 10. A surge in
-1,500
net service payments, due to the ongoing mineral explo-
ration, mine expansion and development projects proba-
bly partly accounts for the leakage in the BOP. Net in- -2,600
come outflows are probably elevated as well, as mine 2005 2006 2007 2008 2009 2010f 2011f
companies repatriate dividends to off-shore parent com-
panies. Hence FX reserves are likely to rise to USD2.1bn
Transfers C/A
(4.8 months of imports) by Dec 10 from USD1.96bn in
Jul, a smaller increase than we were originally expecting. Source: IMF, Standard Bank Research
Fiscal policy: funding shortfall likely Central government budget
Even if revenues were to perform in line with the budget, % of GDP FY09 FY10
chances are that the government would struggle to fi-
nance the budget deficit. The surge in the copper price Total revenue 15.5 16.3
has probably indirectly boosted revenue collection some-

what through personal income and company income
taxes. However, it is probably customs and excise duty - Interest 1.5 2.1
together with VAT on imports, boosted by the recovery in
imports, that has supported revenues. Meanwhile, net Overall balance (- grants) -6.3 -6.2
domestic borrowing through T-bill and T-bond auctions is
likely to be much lower than the budgeted ZMK1,487bn.
As of Aug, net issuance was about ZMK400bn. Net issu- Net external borrowing 0.8 0.9
ance of paper has declined markedly since Apr, with still-
erratic demand for paper coupled with attempts by the Net domestic borrowing 2.9 2.0
BOZ to keep yields low by rejecting some bids depress-
Donor support (grants) 2.6 3.2
ing issuance. Additionally, donors have been frequently
delaying disbursements in protest against corruption. Source: IMF, Zambia Ministry of Finance
Monetary policy: tightening bias Inflation and interest rates
We expect the BOZ to continue withdrawing liquidity from %

the banking system. Granted, inflation, which declined to 48.0
8.2% y/y in Aug from 8.4% y/y in Jul, appears on track to

fall below 8.0% y/y during Q4:10. The downtrend from 36.0
the 16.6% y/y peak in Dec 08 has not been uniform. Up-
ward food inflation pressures appeared several times,
24.0
intimating the end of the disinflationary trend, only to dis-
sipate soon thereafter. But at 2.9% y/y in Aug, food infla-
tion is about to reach the bottom in this cycle. Even the 12.0
more than doubling of the oil price from the bottom in
early 2009 has not jump-started broader inflationary pres- 0.0
sures. Evidently, food disinflation has been a dominant Jan-04 Mar-05 Jun-06 Sep-07 Dec-08 Mar-10
factor driving headline inflation. But the disinflationary
forces are likely to abate, with upside pressure becoming 91-d Broad money (y/y) Inflation (y/y)
dominant as evidenced by the 25.0% increase in some
electricity tariffs. Source: CSO, Bank of Zambia, Standard Bank Research
85
Zambia
Bond curve outlook: more rotation Changes in yield curve
Yield rates have risen at the short end of the yield curve, YTM (%)
20.5
while falling at the very long end over the past 4-m. We
believe this trend is likely to continue over the remainder
of this year, possibly pushing 91-d yields up by some 200 15.5
bps, while 15-y yields could fall by 185 bps. The possibil-
ity that inflation will be bottoming out calls for some re-
moval of the excess liquidity the BOZ has injected into 10.5
the banking system. The loose policy stance the BOZ
adopted in 2009 seems to have worked. Money supply
5.5
growth, boosted by a surge in demand deposits rather
than foreign currency deposits, jumped to 26.6% y/y in
Jun from a low of 5.4% y/y in Jan. As the BOZ withdraws 0.5
liquidity, short-term rates are likely to push higher. But 91-d 3-Y 5-Y 8-Y 11-Y 14-Y
with inflation likely to remain subdued over the coming 6-
23-Apr-10 20-Aug-10 6-m forecast
m, we expect long-dated T-bond rates to decline further.
Source: Bank of Zambia, Standard Bank Research
FX outlook: volatility to remain high USD/ZMK: forwards versus forecasts
Directionally, 5,200 is the USD/ZMK target in 6-m. Cop- USD/ZMK

per prices at current levels are still decidedly bullish for 5,850
the ZMK. Yet flux in global sentiment still plays a large
role in swaying USD/ZMK. Even intervention by the BOZ
5,125
has had some influence in recent months, causing move-
ments in USD/ZMK to be divorced from copper price
movements. The BOZ would probably prefer to see a 4,400
weaker ZMK on a trade-weighted basis. Yet by our calcu-
lations the NEER is at about the same level as mid-09.
Hence, with tighter monetary policy bias likely to emerge, 3,675
we would expect less BOZ intervention in the months
ahead. As yields rise again, portfolio investors are likely
2,950
to be attracted back to the local rates market, causing a Apr-05 Jul-06 Sep-07 Dec-08 Mar-10 Jun-11
stronger correlation between USD/ZMK and copper
prices to be re-established. The upshot is that USD/ZMK
volatility is likely to remain high in the months ahead. Source: Reuters, Standard Bank Research
Equity market: trending higher Lusaka Stock Exchange
The uptrend in the Lusaka Stock Exchange All Share Index

4,900
Index has been far too modest thus far, amounting to a
4.1% increase since the end of 2009. The case for a
stronger uptrend has been bolstered by negative real 3,825
short-term interest rates. Even though rates have risen at
the short end of the curve, in terms of prospective re-
turns, it still seems highly probable that equities will out- 2,750
perform fixed income over the coming year. This should
encourage a portfolio reallocation process by local inves-
1,675
tors, leading to a bid for equities. While other EM and
frontier markets have risen strongly, the subdued per-
formance of the local market suggests that there are un- 600
dervalued counters in the market. Of course, foreign port- Jan-06 Feb-07 Apr-08 Jun-09 Aug-10
folio investors would face limits like low market capitalisa-
LSE
tion when considering the market.
86
Zambia
Zambia: annual indicators
2005 2006 2007 2008 2009 2010f 2011f
Output
Nominal GDP (ZMKbn) 31,945 38,464 46,195 55,079 64,326 74,338 86,441
GDP / capita (USD) 640 921 958 1178 991 1,149 1,208
Real GDP growth (%) 5.2 6.2 6.2 5.7 6.3 7.0 6.7
Copper production (‘000 tons) 446 497 522 612 698 776 892
Cobalt production (tons) 5,537 4,659 4,885 4,616 5,878 7,421 7,792

Budget balance / GDP (%) -2.6 18.5 -1.2 -2.5 -3.7 -2.9 -3.3
Domestic debt / GDP (%) 19 20.2 19.2 17.2 16.4 15.8 16.5
External debt / GDP (%) 68.7 5.7 5.9 5.2 10 9.8 10.3
Balance Of Payments
Exports (USDbn) 2.25 3.93 4.51 4.96 4.34 6.29 6.60
Imports (USDbn) 2.16 2.64 3.61 4.56 4.21 5.16 5.94
- % of GDP -10.0 -0.7 -8.3 -9.0 -7.3 -5.9 -8.2
- FDI (USDbn) -1.57 -1.59 0.84 0.79 0.83 0.85 0.95
Fitch nr nr nr nr nr nr B-
Consumer inflation (%) pa

18.3 9.1 10.7 12.4 13.5 8.6 9.6
3-m rate (%) pe 15.31 9.12 11.41 13.58 5.05 7.08 9.80
1-y rate (%) pe 17.08 11.14 13.89 18.53 11.83 8.59 10.49
2-y rate (%) pe 19.00 10.55 14.40 16.58 14.40 11.30 12.40
5-y rate (%) pe 24.93 13.58 15.70 18.99 17.07 12.80 13.30
USD/ZMK pa 4,364 3,541 3,966 3,731 5,032 4,900 5,262
USD/ZMK pe 3,340 4,390 3,830 4,785 4,662 5,057 5,504
REER pa 100.0 133.8 126.3 147.3 119.8 121.1 118.6
NEER pa 100.0 126.6 112.9 126.8 94.6 91.4 86.8
Notes: pe — period end; pa — period average; nr — not rated; na — not available
Source: Bank of Zambia, CSO, IMF, Ministry of Finance, Standard Bank Research
87
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African Markets Revealed — September 2010

Democratic Republic of the Congo

Fixed Income Research

Stephen Bailey-Smith* Henry Flint* Samir Gadio* Michael Keenan*

Phumelele Mbiyo* Atusaye Mughogho* Dmitry Shishkin* Seamus Vasey*

African markets: coming in from the cold

cant negative influence on global growth. In many ways,

confident and employment creation was proving elusive. EM decoupling

EUR high yield crossover EMBI plus Developed Emerging

0.90 200 Jan 09 = 100

Figure 8: US Treasury yield (10 year) Figure 9: Commodity price development

Figure 11: FX carry trade return since last publication in May

4-m FX versus USD 4-m carry Total 4-m return

Milking the bond duration dregs From equity underperformance to out-

In many ways, we are fans of the lagged correlation with 197.5

pect to see the still positive YTD appreciation in these

We are perhaps most constructive on Nigeria which de- 40.0

Table 1: High conviction Nigeria equity picks

Market Cap Price (Cents, Target Price Upside/

Source: Bloomberg, Standard Bank Research

A sustained turnaround in Côte d’Ivoire’32 is probably

Figure 13: African Eurobond spread continue to narrow

Senegal Cote d'Ivoire Gabon Ghana GTB FBN Congo Rep

Source: Bloomberg, Standard Bank Research

Angola: out of the woods?

Political risk: limited ahead of 2012 elections Election results

GDP growth: building a non-oil growth path Composition of GDP

The latest government estimates agreed with the IMF y/y

as a 5.2% decline in the oil sector undermined strong

considerable infrastructure investment. Improving road,

BNA official FX reserves increased to around USD15.3bn USD m

FX reserves accumulation has been flat since Apr and

and diesel prices at the pumps by 50% and 38%, respec-

The easing bias in rates we had expected to develop in 32 %

FX outlook: USD/AOA risk to the downside USD/AOA: forwards versus forecast

Money supply growth: historically low Oil earnings and FX reserves

170.0 10.0 22.0

130.0 7.5 16.5

2005 2006 2007 2008 2009 2010f 2011f

Population (million) 14.5 14.6 14.8 14.9 15.0 15.2 15.3

Central Government Operations

- % of GDP 16.8 27.4 16.3 6.6 -5.2 11.3 9.5

- FDI (USDbn) -1.5 -0.2 -1.8 -0.9 -1.6 1.4 1.7

FX reserves (USDbn) pe 3.2 9.3 11.2 17.5 12.6 16.0 18.0

Sovereign Credit Rating

Monetary & Financial Indicators

M3 money supply (% y/y) pe 59.2 27.8 45 93.1 23.0 26.0 34.0

BNA discount rate (%) pa 95 16.8 18 19.6 24.8 25.0 18.0

BNA discount rate (%) pe 95 14 18 19.6 30.0 20.0 16.0

1-y rate (%) pe na 9.53 14.0 14.5 20.4 20.0 16.0

USD/AOA pa 87.2 80.4 77.7 75.0 81.9 91.2 90.0

USD/AOA pe 80.8 80.3 75.0 75.0 89.5 90.0 90.0

REER pa 422 503 563 603 630 595 632

NEER pa 25.8 27.7 28.5 29.4 32.3 36.0 35.5

Notes: pe — period end; pa — period average; na — not available; nr — not rated

Botswana: fiscal pressures set to persist

Political risk: BDP hamstrung by infighting Election results (2009)

within the BDP, which President Khama believes is Total 57 100

’destroying’ the party. Source: Independent Electoral Commission

GDP growth: growth to rebound Composition of GDP

Following the rebound in GDP growth to 36.4% y/y in y/y

In light of a faltering developed-world growth recovery, USD m

Fiscal policy: fiscal pressures to persist Central government budget