©2007 deloitte touche tohmatsu. comparing africa with other emerging markets. east africa presented...

©2007 Deloitte Touche Tohmatsu

Comparing Africa with other Emerging Markets.East Africa Presented by

Rosemary Ndiritu

Director, Corporate Finance ServicesDeloitte Consulting Ltd. East Africa

Securitisation & Debt Capital Markets in Africa3 ©2007 Deloitte Touche Tohmatsu

• Africa exhibited real GDP growth of 5.8% in 2006. The main factors supporting this growth performance were strong external demand for oil and other minerals, increased investment in these sectors, and recovery from drought in a few countries.

• East Africa growth supported by Kenya 6.1%, Uganda 5.6% & Tanzania 6.2%; however, all below their targets of 7%.

• Agriculture a backbone of the 3 economies - contributed 24%, 34% & 45% to GDP in Kenya, Uganda & Tanzania, respectively, in 2006.

East African Debt Capital Markets

Macro-Economic Performance

Region 1997– 2003 2004 2005 2006 (p)* 2007(p)* Central Africa 4.2% 10.5% 4.8% 5.0% 3.6% East Africa 3.5% 7.0% 5.6% 5.3% 5.6% North Africa 4.4% 4.7% 4.8% 6.3% 5.6% Southern Africa 2.8% 4.6% 5.0% 6.0% 5.7% West Africa 3.8% 4.9% 4.4% 5.3% 5.5% Total 3.7% 5.3% 4.9% 5.8% 5.5%


• Tightening of the governments’ monetary policies continues unabated, mainly to contain inflation


Macro-Economic Performance

US$ 2002 2003 2004 2005 2006

Kenya 12,914,545 14,638,889 16,143,342 19,193,211 21,185,942

Tanzania 9,758,057 10,282,803 11,351,427 12,586,291 12,783,768

Uganda 5,836,013 6,249,733 6,816,686 8,724,478 9,321,925

2003 2004 2005 2006

KENYA:

Headline Inflation 9.80% 11.62% 10.30% 14.45%

Underlying Inflation 2.65% 3.46% 5.40% 4.32%

UGANDA:



TANZANI A:




• Bond market small with only a handful of issues


Market Character, Structure & Bond Issues

Company I ssue Date

I ssue Amount

Pricing Tenor

Kenya: 1. EADB Aug 2004 US$ 12M Fixed rate 7.5% 7 yrs 2. Mabati Rolling Mills Oct 2002 US$ 15M 91 day T-Bill Rate + 1.25% 5 yrs 3. Faulu Kenya Apr 2005 US$ 7.5M 91 day T-Bill Rate + 0.5% 5 yrs 4. PTA Bank J ul 2005 US$ 12M 91 T-Bill Rate + 1% 7 yrs 5. Athi River Mining Oct 2005 US$ 12M 91 T-Bill Rate + 1.75% 5 yrs 6. Shelter Afrique J an 2006 US$ 3 M 91 day T-Bill Rate + 1% 3 yrs Uganda: UTL Sep 2006 US$ 13.5M 182 day T-Bill Rate + 1.65% 5 yrs Tanzania:

1. EADB May 2005 US$ 12.7M Government 7-year Bond + 0.75% 5 yrs

2. PTA J an 2004 US$ 8.5M

Fixed Rate at 10.45% Floating Rate interest to be based on the most recent 182 day Treasury Bill plus 60 basis points.

3 yrs

3. Barclays Bank 4 J ul 2005 US$ 22.3M

Fixed Rate – 13% Floating Rate 182 day T/Bill plus 30 basis points subject to a maximum of 15% per annum.

5 yrs

4. Standard Chartered Bank

6 J ul 2005 US$ 6.8M

182 day T-Bills plus 0.4% until May, 2010. 180 day T/Bills plus 0.8% basis points until May, 2015)

10 yrs


• Nascent market ignorance & reluctantance to participate in an unfamiliar market

relative ease of bank financing makes debt more attractive

• Lack of credit ratings

would-be issuers do not want their financial information made public

• Rigid Market Regulation

government regulators tend to be merit based rather than disclosure based

credit guarantees & other enhancements often required - adds costs

requirement for bonds be listed & not privately placed a disincentive

• Undeveloped Yield Curves

for government securities on which pricing for corporate issues can be developed - makes pricing of longer term issues on a fixed rate basis difficult resulting in most issues being floating rate issues


Challenges to Bond Market Development


• local currency issuance - becoming more feasible e.g Tanesco (US$ 240M), Entebbe Airport (US$ 40M), Celtel (US$ 75M), Safaricom (US$ 179M)

• emergence of local institutional investor base - pension funds, insurance companies, unit trusts & high net worth individuals - absorbs large issues e.g. in Kenya from US$ 1.9B in 2005 to approx. US$ 2.7B in 2006

• international credit rating of sovereign debt - several countries have for the first time had credit ratings done. e.g. Ghana issued a US$ 750M bond in Sep’07, Guaranty Trust Bank issued a US$ 350M 5-yr bond early ‘07, First Bank launched a 10-year US$ 175M bond in Mar’07, etc. Kenya & Zambia considering sovereign debt issues

• pan-africanisation of businesses - leading to the growth in scale of African companies to the extent whereby they could tap into the international debt markets for financing e.g. Ecobank, KCB, ABSA, MTN/Vodacom, etc.


Recent & Key Emerging Trends


• Banking Sector - in issuance of corporate bonds e.g. Barclays Bank Kshs. 3B

• Infrastructure - need to upgrade the country’s physical infrastructure to support further economic growth. Expected from Government bodies (parastatals like KPLC, KPA, KAA, Kengen, KPC), PPPs (e.g. TEAMS, Nairobi By-Pass roads to be concessioned, RVR), purely private players (IPPs e.g. IPS investment in Tsavo Power - US$ 500M 220MW Bujagali Hydro project in Uganda) & DFI’s (e.g. EIB through the EU-Africa Infrastructure Trust Fund).

• Telecommunications - a pioneer in the issuance of debt on the financial markets e.g. Safaricom, Celtel. Opportunities: proposed construction & landing of fibre optic cables along the Eastern African seaboard, the ongoing privatisations (i.e. Telkom Kenya), licencing of new operators (Econet), etc.

• Supra-National Bodies - established by regional country groupings in order to provide strategic interventions in economic development in the region e.g. PTA Bank, EADB, Shelter Afrique, etc. Have issued bonds in the local capital markets in order to finance their operations in each country; most recent Shelter Afrique (US$ 14M issue)


Sectors to Watch


Although the prospects for off-shore issuance by East African countries are increasing, corporates are likely to remain infrequent issuers on the international market due to:

• Lack of sovereign credit ratings to provide a benchmark in the international market

• Requirement for credit enhancement by international due to perception of African issuers as higher risk

• Foreign currency risk where issuers do not have access to foreign currency revenues to act as natural hedge

• Historically low interest rate differential between local and international interest rates coupled with large local investor appetite which makes local borrowing more effective e.g. in Kenya.

• Small size of issues compared to international norm may not make issuance cost effective


Concluding…

©2007 deloitte touche tohmatsu. comparing africa with other emerging markets. east africa presented...

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