East Africa rising

by Charles Robertson, Renaissance Capital, Reuters and CNBC Africa 0

While the biggest African economies exhibit little or no growth, and acute exchange rate tensions, many might overlook the continued boom in East Africa, with Ethiopia, Kenya, Rwanda, Tanzania and Uganda all still expected to grow by 5-8% in 2016- 2017, according to the IMF. But some are concerned that this growth is coming at too great a cost in terms of large fiscal and current account deficits. They question the sustainability of this growth, pointing to the lack of manufacturing, the reliance on agriculture or foreign aid, and wonder how enough jobs can be created to keep the lid on potential political instability.

East Africa looks like Korea in 1960

What we show in this piece is that all of the above could also be said of Korea in 1960, when manufacturing was small, agriculture represented 40% of GDP and exports were a feeble 3-5% of GDP. Yet crucially, 27.5% of children were attending secondary school, which allowed Korea to escape poverty within a generation. All bar nine countries in Africa exceed that level today.

Demographics were positive like Africa today. The government was committed to boosting investment, but probably had not reached the 29% of GDP level that is the (unweighted) current average of Ethiopia, Kenya, Rwanda, Tanzania and Uganda. Yes, Korea was running a large current account deficit during the 1960s, as it had too few domestic savings, but during their initial growth surge, deficits of around 10% of GDP were normal for all the most successful middle income countries. Investment-led growth is an ugly duckling before it matures.

But where is the industrialisation?

What we show here is that much of Africa (but especially East Africa) is ripe for industrialisation, and there are signs it has begun.

In 2012, just four of the 14 SSA countries we focus on were self-sufficient in cement. Today we think it is at least 10. Twelve of the 14 countries have seen electricity production rise by 30-131% over 2008-2013 against population growth of 15-21% and further capacity is under construction. New rail lines are connecting Nairobi and Addis Ababa to the ports of Mombasa and Djibouti respectively. What we need to see next is a shift into low technology manufacturing such as textiles. Exports of these represent just 1% of GDP for Kenya or Cote d’Ivoire and 0% for another 12 countries (curiously, the value of Kenya textile exports is double that of Ethiopia). But Bangladesh exports textiles worth 14% of its GDP, and sells more in a month than all 14 African countries combined can export in a year. Yet in in the coming five years, we think SSA will compete with South Asia to capture market share from Vietnam as it moves up the valued-added curve, gradually discarding a $44bn export generating sector.

Below reveals the latest growth rates.

Tanzania

Tanzania’s government has set an economic growth target of 7.5 percent in 2017, compared to an estimate of 7.2 percent this year, and plans to hike spending in the 2017/18 fiscal year by 11.5 percent to 32.9 trillion shillings ($15.1 billion).

The Tanzanian economy grew 7 percent last year, driven by transport, construction, communications and financial sectors.

Africa’s fourth-largest gold producer has vast deposits of natural gas, coal, diamonds, uranium and gemstones. But 70 percent of the population rely on agriculture for a living and many have not benefitted from Tanzania’s rapid economic growth.

“The macroeconomic objectives of the government … are to attain gross domestic product growth (GDP) of 7.5 percent in 2017, followed by 7.9 percent in 2018,” Finance and Planning Minister Philip Mpango said in a presentation to parliament seen by Reuters on Wednesday.

Mpango said the government was targeting a fiscal deficit, including grants, of not more than 4.5 percent of GDP in the medium term.

Domestic revenues in 2017/17 fiscal year were expected to climb to 32.9 trillion shillings, up from 29.54 trillion shillings in 2016/17, he said.

Government spending over the next fiscal year will focus on infrastructure projects, education, health and water projects, Mpango said.

“The government expects to borrow $900 million from external commercial sources and 4.434 trillion shillings from domestic sources,” he said.

Rwanda

The IMF said on Wednesday Rwanda’s economy was forecast to grow at 6.2 percent in 2017, slightly up from this year’s projection of 6 percent and that the rate would accelerate to 6.6 percent in 2018. 

Kenya

Kenya’s economy is expected to grow by 5.9 percent in 2016, the World Bank said on Monday, unchanged from an earlier forecast and up from actual growth of 5.6 percent last year.

Agriculture, tourism, and increased foreign direct investments will drive growth, the bank said.

“This is a relatively robust performance against an average growth of 1.7 percent forecast for Sub-Saharan Africa in 2016,” the bank said in its latest economic update for Kenya.

“While all sectors contributed … the agriculture and services sectors have been the primary drivers of growth, thus far in 2016.”

The World Bank predicted that Kenya’s economy will grow by 6 percent in 2017 – also unchanged from its March update – and 6.1 percent in 2018.

In 2015, attacks from Somalia’s al Shabaab militants hit Kenya’s tourism sector, reducing foreign exchange earnings.

Next year, Kenya will hold presidential elections, pitting incumbent President Uhuru Kenyatta against several challengers, likely to include opposition leader Raila Odinga. In the wake of the 2007 vote, the country plunged into violence after Odinga’s supporters said the election was rigged.

The bank said risks to growth included the upcoming elections, which will also select national lawmakers and regional government representatives.

“On the domestic front, these (risks) include delays to fiscal consolidation, adverse weather developments, and potential uncertainties associated with the run-up to 2017 elections that could lead to a wait-and-see attitude by investors,” the bank said.

The recent introduction of caps on commercial bank lending rates could also pose a risk, the report said.

“If fiscal consolidation is delayed, particularly due to election-related spending, increased government spending may crowd out private sector investments and lead to overheating of the economy resulting in high inflation.”

The government forecasts Kenya’s economy will grow 6 percent in 2016 and by 7 percent a year in the medium term.

The bank said Kenya’s public debt to gross domestic product ratio had risen to 55.1 percent in 2015/16 (July-June) from 42.1 percent in 2012/13 due to an increase in development spending, especially on infrastructure.

The bank said debt levels were sustainable, but urged caution.

“With debt levels over 50 percent of GDP, and fiscal deficits well above the medium term 4.5 percent target, the fiscal policy space is fast eroding and margins for further debt accumulation are narrowing,” it said. 

 

East Africa looks like Korea in 1960What we show in this piece is that all of the above could also be said of Korea in 1960, when manufacturing was small, agriculturerepresented 40% of GDP and exports were a feeble 3-5% of GDP. Yet crucially, 27.5% of children were attending secondaryschool, which allowed Korea to escape poverty within a generation. All bar nine countries in Africa exceed that level today.Demographics were positive like Africa today. The government was committed to boosting investment, but probably had notreached the 29% of GDP level that is the (unweighted) current average of Ethiopia, Kenya, Rwanda, Tanzania and Uganda. Yes,Korea was running a large current account deficit during the 1960s, as it had too few domestic savings, but during their initialgrowth surge, deficits of around 10% of GDP were normal for all the most successful middle income countries. Investment-ledgrowth is an ugly duckling before it matures.But where is the industrialisation?What we show here is that much of Africa (but especially East Africa) is ripe for industrialisation, and there are signs it has begun.In 2012, just four of the 14 SSA countries we focus on were self-sufficient in cement. Today we think it is at least 10. Twelve of the14 countries have seen electricity production rise by 30-131% over 2008-2013 against population growth of 15-21% and furthercapacity is under construction. New rail lines are connecting Nairobi and Addis Ababa to the ports of Mombasa and Djiboutirespectively. What we need to see next is a shift into low technology manufacturing such as textiles. Exports of these representjust 1% of GDP for Kenya or Cote d’Ivoire and 0% for another 12 countries (curiously, the value of Kenya textile exports is doublethat of Ethiopia). But Bangladesh exports textiles worth 14% of its GDP, and sells more in a month than all 14 African countriescombined can export in a year. Yet in in the coming five years, we think SSA will compete with South Asia to capture market sharefrom Vietnam as it moves up the valued-added curve, gradually discarding a $44bn export generating sector.Our East Africa conference feedbackWe also provide feedback from our 2nd Annual East Africa Investor Conference. We are encouraged by Rwanda’s completion ofnew hotels, its conference centre and airline expansion, while the new IMF deal should reassure debt investors. We are uncertainabout the impact of the interest rate caps on Kenyan growth, but suspect it will drive down government bond yields and mightnudge the country away from consumption to investment-led growth after the 2017 elections. We are impressed by the 15 years ofstrong growth in Tanzania, where telecom IPOs and a new eurobond might attract new investor interest. Perhaps most interestingof all, currencies in Rwanda, Tanzania and Uganda have depreciated to fair or slightly cheap levels, while Kenya’s FX reserveshave reached record highs. Risks remain of course, but we believe these countries warrant investor attention.