AN OVERVIEW OF THE ECONOMY (20th – 26th June, 2016)

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EXECUTIVE SUMMARY

This report provides an analysis of the economy in the week of 20th

to 26th

June, 2016. The

report focuses on three different sectors listed below:

Equities Market

Fixed Income

Real Estate

A. EQUITIES MARKET

General performance of the Nairobi Securities Exchange (NSE)

During the week, the Capital Markets recorded mixed performance in the equity markets

while the bond market recorded improved performance as reflected in the leading market

indicators.

Below are some of the notable events of the stock market:

1. The NASI, NSE 25 and NSE 20 Share indices experienced a decline.

2. Market capitalization, which measures shareholders wealth, experienced a decline,

and while the Equity turnover rose by 52.21% on account of substantial increase in

the number of shares traded by 72.84%.

3. The FTSE NSE Kenya 15 index and FTSE NSE Kenya 25 index, which measures the

performance of 15 largest companies by market capitalisation and 25 most liquid

stocks at the NSE underperformed by 1.74% and 1.91% respectively.

4. The real estate market segment had improved activity, with Real Estate Investment

Trust (I-REIT) turnover up 142.95% and deals transacted up by 72.34%.

5. Telecommunication and Technology, Energy and Petroleum and Banking sectors

dominated trading, accounting for 86.40% of the total shares traded.

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Nairobi Business Venture Shares go live and went up by 60% on Day One

During the week on Tuesday, Shoe vendor Nairobi Business Ventures trading as K Shoe

commenced trading on the NSE’s Growth Enterprise Market Segment (Gems).

The company, listed by introduction, offered 23.6 Million shares at a price of Ksh 5

translating to a valuation of Ksh 118 Million. By market closure, the share rose by 60.00% to

settle at Ksh 8.00 on a volume of 1,000 shares.

The company joins HomeAfrica, Kurwitu Ventures, Flame Tree Group and Atlas

Development in the SME segment. The exchange also noted that another SME Company is

expected to list on the GEMS segment this year.

CMA urges small businesses to list on exchange for lower tax

During the week on Wednesday, the CMA called upon small enterprises to take advantage of

the lower corporate tax extended to firms listing by introduction on the NSE.

During a Top 100 forum breakfast held on the same day, the CEO of CMA, Mr. Paul

Muthaura told SME owners that the removal of capital gains tax on listed equity transactions

would also make their companies more attractive to strategic investors if they list on the

small company segment of the NSE.

The same change of regulations that kicked in on January 1 will see firms listing on the NSE

by introduction enjoy a lower corporate tax rate of 25% for 5 years rather than pay the normal

30% rate, an offer previously only enjoyed by those listing through an initial public offering

(IPO).

Listing by introduction means a firm only makes shares tradable as opposed to an IPO where

firms raise funds.

Some of the companies that did not enjoy the lower taxes after listing by introduction

include: Equity Bank, CFC Insurance Holdings, Longhorn Publishers and CIC Insurance.

Companies in the Growth and Enterprise Markets Segment (GEMS) i.e. Home Afrika, Flame

Tree, Atlas Development and Kurwitu Ventures were exposed to the full corporate tax since

they listed before the extension of the break.

In Kenya, the uptake of listing for SMEs has been slow even after the Gems was established;

having lower listing charges and a more simplified listing approval process. Some of the

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challenges limiting their listing include the unwillingness by founders to relinquish control by

going public, as well as a fear of the heightened scrutiny once they go public.

Nation Media Group CEO, Mr Joe Muganda, however, defended the need for more stringent

oversight on the affairs of listed firms, given that these firms often receive investment from

the public, which calls for tighter governance structures to ensure the money is safeguarded

and utilised well. He also said that scrutiny changes the behaviour of companies and forces

organisations to act in a responsible manner. Therefore, companies are under scrutiny

because the media, in playing its public interest role as a watchdog, ensures that it is a

market-maker to facilitate the public to make informed critical financial decisions.

He also added that the listed firms also benefit from higher visibility because of the media

spotlight on listed firms.

Weaker shilling makes life cheaper for Nairobi expatriates

The latest global cost of living report (of 209 cities surveyed) that was published by a New

York-based consultancy, Mecer, shows that Nairobi has experienced a weaker shilling and

lower inflation rate and this has helped it improve its standing on the listing of the world’s

most expensive countries for expatriates. The Kenyan Capital improved 12 places from last

year to stand at position 116, as a weaker shilling increased the purchasing power of

expatriates who are mostly paid in dollars.

Employees of multinational companies and those working for non-governmental

organisations and diplomatic agencies are mostly paid in hard currency such as the US dollar

which they convert to local currency to buy what they need. The Kenyan shilling has shed

10.9% to the greenback since March 2015 when a similar survey was done — meaning

expats are getting more shillings for the same amount of dollars.

The exchange rate-related pay rise points to a growth in the purchasing power of the

expatriates during the period when inflation averaged 6%.

The survey tracks the prices of food, housing, clothes, transport, household goods and

entertainment in dollars for comparison across the world and uses New York as the base city.

This year’s survey was conducted in March and serves as a guide for multinationals and

diplomatic offices in determining allowances of workers in overseas jobs.

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Generally, expatriate life is expensive compared to that of Kenyans with average rent in

Nairobi’s posh estates, popular with the foreign workers, standing at more than Ksh 155,000

a month. A four-bedroom villa in Nairobi’s Ridgeways Estate, which has a clubhouse,

swimming pool and jogging track, for instance, costs Ksh 300,000 per month.

The Kenyan capital is home to the United Nations Environment Programme (Unep),

multinational companies and diplomatic missions whose employees are mostly paid in US

dollars or euros.

The shilling ceded ground to the dollar in the review period due to falling revenues from

tourism — a key foreign exchange earner — and a huge import bill that requires dollars to

transact.

The Kenyan currency hit a low of Sh106 last September compared to Sh91 in March last

year. It is currently trading at Sh101 to the greenback.

A weak shilling has the effect of inflating the dollar, pound and euro-denominated pay of

expats who ultimately find it easier to buy goods and services in the local currency. Such

exchange rate swings means expatriates make big purchasing power gains in local markets

compared to those paid in the local currency.

An expat on a monthly salary of $5,000, for instance, took home an equivalent of Ksh

455,000 in March last year when the shilling was at Ksh 91. That amount would have risen to

Ksh 505,000 this year based on exchange rate fluctuations, or a 10.9% pay increase.

In Africa, Nairobi is ranked the 17th most expensive city while Chad’s N’Djamena and

Angola’s Luanda are the only African cities in the top 10 list of most expensive cities

globally at position nine and two respectively.

Despite the improvement, however, Nairobi kept its dubious distinction as East Africa’s most

expensive city, followed by Kigali (139), Dar es Salaam (174) and Kampala (187).

The improved ranking for the Kenyan capital should in the near term ease pressure for wage

increments on United Nations agencies, diplomatic missions and multinationals companies

with operations in Nairobi.

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It should also help improve the city’s ability to attract and retain foreign investment,

expatriates and tourists.

A weaker shilling also offers multinationals a golden window to negotiate lower dollar

salaries for incoming expatriates, who peg their pay demands on the prevailing cost of living

in the country of posting.

This is especially true for multinationals or agencies that get their dollars from outside the

country and who do not have to suffer the pain of buying dollars at the local rates for

purposes of paying salaries.

Ordinarily, buying dollars at current levels for purposes of paying salaries would increase the

wage bill, thus raising the employer’s costs.

Oil-rich Luanda, which had topped the list in recent years, slipped to position two owing to

the weakening of its local currency. Hong Kong topped the table.

The world’s least expensive cities for expats is the Namibian capital, Windhoek, followed by

South Africa’s Cape Town and Bishkek in Kyrgyzstan, the survey says.

A poll by Economist Intelligence Unit (EIU) that was released in March also said that the

weakening of the shilling had improved the cost of living for expats in Nairobi.

Other than expatriates, exporters should also be enjoying a boost in earnings from the strong

dollar, which could boost the local production of goods, thus creating jobs.

Currency dealers are yet another batch of beneficiaries who have seen the volume of trade

rise as investors bulk up on dollar positions to hedge against further depreciation.

Dealers are often paid commissions above their main salary depending on the volumes of

trade they generate for banks, and some have annual bonuses which are also dependent on

hitting their targets.

Recipients of diaspora remittances are also in line to gain more per dollar.

Kenya’s current account — the difference between the value of exports and imports — deficit

has continued to grow in recent years on a huge import cost compared to a lean export

receipt, piling pressure on the shilling.

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Africa’s richest person bets on oil and gas, loses $3.7 Billion on Naira

devaluation

Africa’s richest person, Aliko Dangote (Nigerian), fortune fell by $3.7 Billion during the

week when the Naira went on a free fall after abandoning its unsustainable peg between 197

and 199 to the dollar.

The Naira is currently trading 281.500 to the dollar. It fell sharply against the dollar by over

40%. This was expected as Nigeria’s economy is bleeding due to the recent drop in oil prices

which has hampered Nigeria that heavily relies on income from oil exports.

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Interestingly, here comes Africa’s richest man (Net worth $13Billion) making a plan to

launch Nigeria’s first private crude oil refinery by 2019. Mechanical completion will be done

2018.

In a Reuters Exclusive, Dangote told Reuters the $12 billion refinery would have a capacity

of 650,000 barrels a day, cornering the market in Africa’s most populous country, where fuel

shortages are a perennial problem.

Until recently, Nigeria was Africa’s biggest crude oil producer but it imports 80% of its fuel

because poor maintenance means its four refineries never reach full output. Its current daily

consumption is 260,000 barrels, according to the International Energy Agency.

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Dangote said the plant, which will include a $2 billion fertilizer unit, was being funded

through “loans, export credit agencies and our own equity”.

Some $3.25 billion had come from local and foreign banks, while the central bank had also

chipped in. The IFC, the private sector arm of the World Bank, has lent $150 million.

Dangote also has plans for a gas pipeline through West Africa. Nigeria has the world’s ninth

largest proven gas reserves, at 187 trillion cubic feet (tcf), but loses half of it to flaring and re-

injection. Despite the new focus on oil and gas, the business magnate said he planned to build

cement plants in Cameroon, Ethiopia, Kenya, Mali, Niger, Nigeria, Senegal and Zambia by

2018. Another plant will open in Congo Republic by September, he added.

A cement plant in Ivory Coast would triple output to 3 million tonnes, up from an initial

target of 1 million, he said, while two new plants in Nigeria would add 6 million tonnes

annually.

“As at now, what we have in operation is almost about 45 million tonnes, so we have just

another 40 million tonnes to go,” he said, affirming an Africa-wide production target of 85

million tonnes a year by 2018.

Dangote is targeting a listing on the London stock exchange ‘within the next year or two.’

3 Year Chart of Dangote Cement (below)

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B. FIXED INCOME

Performance of Treasury Bonds

The bond market segment recorded a 26.79% gain in the volume traded in the week ending

June 23, 2016.

Likewise, FTSE NSE Government Bond Index improved by 0.92%, reflecting slight decline

in the bond secondary market yields.

Performance of Treasury Bills

During the week, the Central Bank of Kenya offered 91-day Treasury Bills for a total of

Kshs.4 Billion. The total number of bids received was 214 amounting to Kshs.5.33 Billion,

representing a subscription of 133.14%. Total bids accepted amounted to Kshs.5.03 Billion.

The market weighted average rate was 7.072%, and the weighted average of accepted bids

which will be applied for non-competitive bids was 7.059% down from 7.161% in the

previous auction.

During the week, the Central Bank of Kenya offered 182 and 364 Days Treasury Bills for a

total of Kshs.12 Billion. The total number of bids received was 189 amounting to Kshs.10.74

Billion representing 179.06% subscription and 107 bids amounting to Kshs.3.45 Billion

representing 57.54% subscription for 182 and 364 days, respectively. Bids accepted

amounted to Kshs.10.27 Billion for 182 days and Ksh. 3.45 Billion for 364 days Treasury

Bills. The weighted average rate of accepted bids, which will be applied for non-competitive

bids, was 9.239% for the 182-day and 10.737% for 364-day Treasury Bills.

Naira devaluation might hit Kenya exchange inflows

The intended devaluation of the Nigerian Naira is likely to see dollar investors pump capital

into Lagos stocks in pursuit of cheap assets at the expense of the Nairobi Securities Exchange

(NSE), a senior economist says.

Renaissance Capital global chief economist Charles Robertson told Bloomberg that in the

medium term, Nigerian investments are set to become more attractive to investors, having

been put off in the past by the currency distortions in Africa’s biggest economy.

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Kenya has on the other hand provided suitable conditions for foreign investors, with a

relatively stable exchange rate, free foreign exchange flow and favourable returns on fixed

income investments.

The Naira devaluation is coming about after removal of exchange rate pegs that held the

official exchange rate of the Nigerian currency at 199 units to the dollar, which coupled with

limits on who could access the forex forced many investors to the black market where the

actual rate rose as high as 350 units.

“A bigger issue for Kenyan stock market or appetite for Kenya assets could be how

successful Nigeria is with the currency transition that has just been announced. If that is very

successful and Nigeria starts to look very attractive you could see money out of Kenya to go

look at those opportunities in Nigeria,” Mr Robertson told Bloomberg.

The controls on access to foreign exchange as a result of the shortage did not help attract

investors as well, given that they required assurances over their ability to move capital at will.

The artificially high exchange rate also hurt investors by limiting the dollar returns on

investments, whereby those forced to the black market to buy dollars on exiting a portfolio

wound up buying at much higher prices than what they had entered at.

The Nigeria stock market has been attracting at best the same level of net foreign inflows as

Kenya’s NSE in recent months in spite of being three-and-a-half times larger in terms of

monthly traded volumes and twice as large in market capitalisation.

Data compiled by Standard Investment bank shows that in April, both Nigeria and Kenya’s

bourses attracted Sh384 million in net foreign inflows, even as Nigeria traded Sh34 billion

worth of shares compared to Kenya’s Sh10 billion. In the whole of last year, the Nigerian

market saw net outflows of Sh38 billion, and Sh91 billion in 2014.

Kenya’s NSE on the other hand saw net outflows of only Sh1.2 billion last year, while 2014

had seen the bourse record net inflows of Sh8.7 billion according to the SIB data.

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What exit from the EU means for British Intellectual rights holders

This article analyses what Brexit means for intellectual property (IP) rights holders in Britain

who seek regional enforcement of rights, now that they have voted to leave the EU.

One of the main principles of the EU Treaty is free movement of goods and people such that

there is even one common currency — the euro.

There are several reasons why most people supported Brexit and that is, the influx of

foreigners within the EU into Britain and also the perceived “barriers” to trade as a

consequence of some of the EU provisions.

The perception is that some of the EU rules are very tough and actually are deemed to be

unattractive by traders.

Since one of the main tenets of the EU Treaty is free movement of goods in the region, then

this brings about a clash with national intellectual property rights.

Some of the rights granted at a national level (that is the UK) include the right to control

distribution, re-sale, importation and exploitation of protected goods.

However, there is a clash between the national IP rights and this EU principle. If a British

trader exercises some of the national rights on a regional level, for example, the right to

control distribution of protected works, then that is contrary to the EU principle of free

movement of goods. Therefore, due to this clash, the national law is overridden by the EU

provisions in some instances.

In other words, a trader in Britain might be forced to relinquish the exercise of IP right within

the EU in some cases. This is what is commonly called the doctrine of exhaustion of rights

and that is where under the EU a resident in a member state cannot exercise IP rights at a

regional level in certain instances.

The IP practitioner’s view, a British trader resident in the EU voted to leave the bloc. A yes

vote for a Brexit by a British IP holder means that one is free to exercise IP rights in the

region without any limitations.

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Some of the limitations imposed under EU include a situation where the IP holder has

consented to the sale or distribution of protected material in a third country. The case of

Deutsche Grammophone versus Metro illustrates this.

The plaintiff was a German copyright holder who sought to exercise its IP right of stopping

the defendant, a French company, from distributing the works in France at a less price than

what the plaintiff was selling the works for.

The plaintiff had, however, through its French subsidiary began distributing the works in

France. Therefore, under the EU principle of exhaustion the German firm was barred against

exercising its national IP right of preventing distribution.

However, despite the limitations placed on national IP enforcement in the region, there are

still some benefits that might have encouraged a British trader to vote against a Brexit as far

as IP is concerned.

As I wrote this column, Britain was holding a referendum as to whether or not it should

remain a member of the European Union (EU) — a regional bloc comprising of many

European countries.

There are obviously issues of conflict of laws between a member state’s national laws and the

bloc’s laws.

In this article I want to analyse what Brexit means for intellectual property (IP) rights holders

in Britain who seek regional enforcement of rights, now that they have voted to leave the EU.

One of the main principles of the EU Treaty is free movement of goods and people such that

there is even one common currency — the euro.

There are several reasons why most people supported Brexit and that is, the influx of

foreigners within the EU into Britain and also the perceived “barriers” to trade as a

consequence of some of the EU provisions.

The perception is that some of the EU rules are very tough and actually are deemed to be

unattractive by traders.

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Since one of the main tenets of the EU Treaty is free movement of goods in the region, then

this brings about a clash with national intellectual property rights.

Some of the rights granted at a national level (that is the UK) include the right to control

distribution, re-sale, importation and exploitation of protected goods.

However, there is a clash between the national IP rights and this EU principle. If a British

trader exercises some of the national rights on a regional level, for example, the right to

control distribution of protected works, then that is contrary to the EU principle of free

movement of goods. Therefore, due to this clash, the national law is overridden by the EU

provisions in some instances.

In other words, a trader in Britain might be forced to relinquish the exercise of IP right within

the EU in some cases. This is what is commonly called the doctrine of exhaustion of rights

and that is where under the EU a resident in a member state cannot exercise IP rights at a

regional level in certain instances.

In my view as an IP practitioner, I would understand why a British trader resident in the EU

voted to leave the bloc. A yes vote for a Brexit by a British IP holder means that one is free to

exercise IP rights in the region without any limitations.

Some of the limitations imposed under EU include a situation where the IP holder has

consented to the sale or distribution of protected material in a third country. The case of

Deutsche Grammophone versus Metro illustrates this.

The plaintiff was a German copyright holder who sought to exercise its IP right of stopping

the defendant, a French company, from distributing the works in France at a less price than

what the plaintiff was selling the works for.

The plaintiff had, however, through its French subsidiary began distributing the works in

France. Therefore, under the EU principle of exhaustion the German firm was barred against

exercising its national IP right of preventing distribution.

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However, despite the limitations placed on national IP enforcement in the region, there are

still some benefits that might have encouraged a British trader to vote against a Brexit as far

as IP is concerned (Article by C Mputhia, Business Daily).

C. REAL ESTATE SECTOR

High land prices lock investors out of industrial property sector

According to Britam Asset Management (BAM), there are high land prices that are locking

out investors from developing industrial properties. BAM estimates that in order for an

investor to get a desired 12% return at current market rates of Ksh 45 per square foot of

industrial space, a developer has to acquire land at Ksh 15 Million an acre.

The asset managers identified industrial property as one of the areas whose rental growth was

accelerating largely due to low supply. Currently, the land prices along Mombasa road and

Eastern Bypass are currently above Ksh 40 Million an acre.

Residential, office and retail rental prices were growing at a slower pace as supply catches up

with demand. Office rent increased by 7% last year compared to 10% in 2013-2014.

Grade A offices in Gigiri fetch the highest average rent at Sh150 per square foot a month

while Karen has the cheapest high-end office space at Sh110 per square foot. Mombasa

Road, which has no Grade A offices mainly due to traffic congestion, has the cheapest office

space around Nairobi at Sh60 per square foot for grade B offices.

The central business district (CBD) also doesn’t have Grade A offices which are classified

based on parking space, road network and building structure.

Corporates have been exiting the CBD due to traffic congestion in preference for Upper Hill,

Westlands, Waiyaki Way, Kilimani and Ngong Road. Rents in CBD average Sh90 per square

foot.

Development of office property picked up in the last five year with BAM estimating 3.8

million square feet will be put on the market this year up from two million square feet last

year. Office space expected into the market this year include Britam and UAP Towers each

with 300,000 square feet and Two Rivers’ 230,000 square feet.

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The uptake of the office space has however been lagging behind supply, signalling the market

could be headed for a peak. Last year uptake was at 1.33 million square feet against a supply

of two million compared to 2014 when the uptake was 1.3 million square feet in a market of

1.7 million square feet.

Occupancy levels in Grade A offices was found to be higher than in other categories as

corporates push to attract the rising middle class with posh layout.

Fusion Capital tests market with Ksh 2.3 Billion REITS offer

Fusion Capital has opened the sale of its development real estate investment trust, commonly

referred to as D-Reit, at Ksh 23 per unit. The real-estate developer aims to raise Ksh 2.3

Billion through the sale of 100 million units in a sale that closes on July 15.

Fusion Capital is raising cash to develop a mixed residential, office and retail project on a six

acre plot in Meru dubbed Greenwood City. Investors in the REIT will require a minimum of

Ksh 5 Million, equivalent to 218,000 units, to participate in the offer which targets fund

managers and high-net worth individuals.

The units of the first D-Reit to be issued in Kenya will be listed at the Nairobi Securities

Exchange on July 28.

A REIT is a unit of ownership in a real estate project allowing retail investors to participate in

the capital intensive sector which has reaped high returns in the last decade.

The project is valued at Ksh 3.7 Billion with the mall taking up the most at Ksh 1.2 Billion.

The firm will spend Ksh 728 Million to develop offices and Ksh 407 Million in residential

units. Fusion estimates it will pay Ksh 308 Million to finance the project, 8.3% of the project.

Professional fees will take Ksh 573 Million which is 15.4% of the estimated cost of the

project.

The company has secured a Ksh 1.4 Billion debt from NIC Bank to bridge the difference

between the REIT size and the estimated cost of the project.

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APPENDICES

https://www.centralbank.go.ke/images/docs/weeklybulletin/2016/Jun/24-6-2016.pdf

http://kenyanwallstreet.com/nairobi-business-ventures-shares-go-live-up-by-60-on-first-day

http://www.businessdailyafrica.com/CMA-urges-small-businesses-to-list-on-exchange-for-

lower-tax/-/539552/3262254/-/mjfft9z/-/index.html

http://www.businessdailyafrica.com/Weaker-shilling-makes-life-cheaper-for-Nairobi-expats/-

/539552/3263084/-/item/2/-/13vy15iz/-/index.html

http://kenyanwallstreet.com/africas-richest-person-bets-on-oil-and-gas-loses-3-7bn-on-naira-

devalation

http://www.businessdailyafrica.com/Naira-devaluation-might-hit-Kenya-exchange-inflows-/-

/539552/3264014/-/10p30xwz/-/index.html

http://www.businessdailyafrica.com/Corporate-News/KQ-plane-sales-and-leases-to-earn-

carrier-Sh11bn/-/539550/3264090/-/item/1/-/mbkj7y/-/index.html

http://www.businessdailyafrica.com/High-land-prices-lock-investors-out-industrial-property-

sector/-/539552/3260580/-/item/1/-/qy903q/-/index.html

http://www.businessdailyafrica.com/Fusion-Capital-tests-reits-markets-with-Sh2-3bn-offer/-

/539552/3263190/-/loex1hz/-/index.html

http://www.businessdailyafrica.com/What-exit-from-the-EU-means-for-British-intellectual-

rights/-/539444/3268682/-/item/1/-/j8ktbw/-/index.html