New President, Same Problems
Debt, cost of living are some of the challenges ahead for the new administration
๐ Welcome to The Mwango Weekly by Mwango Capital, a newsletter that brings you a succinct summary of key capital markets and business news items from East Africa.This week, we cover the challenges ahead for the new administration, IFC buys stake in Safaricom Ethiopia, and ARM joint liquidatorsโ status update.First off, enjoy our weekly business news in memes brought to you by Mwango Capital:
New President, Same Problems
Supreme Court Ruling
On Monday last week, Kenyaโs Supreme Court upheld the election of William Samoei Ruto as President-Elect of Kenya. The Court gave a unanimous ruling on all 9 issues that were before it for determination from the consolidated petition. The ruling paves the way for Rutoโs swearing-in as Kenyaโs 5th President on Tuesday, Sep 13.
โIn unanimity, we make the following orders. The Presidential Petition No. E005 of 2022, as consolidated with Presidential Election Petition Nos. E001, E002, E003, E004, E007 & E008 OF 2022 is hereby dismissed. As a consequence, we declare the election of the 1st respondent as President-elect to be valid under Article 140(3) of the Constitution.โ
Challenges Ahead
Debt: Among the challenges that face the incoming President is public debt, which stood at KES 8.58T as of Jun 2022. By the end of June 2022, the total cumulative debt service payments to external creditors amounted to KES 305.3B. A total of KES 577.661B. or 30.1% of ordinary revenue was expended on domestic and foreign interest. Taming the debt burden will be among the key areas of concern for Rutoโs administration.
Cost of Living: Top on the agenda will be to reduce the high cost of living in the country. Annual inflation currently stands at 8.5%, rising from 5.3% at the onset of 2022. With the prevailing global macroeconomic conditions, the incoming Government might not have many tools at its disposal to combat rising prices save for the good old subsidies.
Economic Transformation: The incoming President has Agriculture Sector reforms high on his agenda. He is set to announce new subsidized prices of fertilizer this week after his swearing-in and has also pointed to a reduction in maize flour prices. President Ruto is set to unveil his cabinet this coming week, a key pillar in the execution and delivery of his Bottom Up Economic Transformation Agenda.
Financing Proposals
In order to tackle financing challenges in the delivery of its manifesto, the incoming Government highlighted various financing measures. These include:
Pending Bills Securitization: William Rutoโs government plans to tackle pending bills by securitizing the outstanding bills subject to verification. As of Jun 2022, the gross outstanding bills of the national government stood at KES 504B.
Road Levy Securitization: A Medium Term Expenditure Framework (MTEF) financial commitment of KES 200B Road Levy Securitization has been laid out to complete all roads under construction and prioritize upgrading and maintenance of rural access roads.
Pension Funds to Finance Housing: The incoming government made a KES 250B financial commitment to fund rural housing and solve settlement challenges. The Settlement Fund to be established to finance these efforts will draw KES 50B from the budget and KES 200B from pension funds.
Nairobiโs KES 150B Green Bond: According to Governor Johnson Sakaja, floating a bond presents the best route for acquiring financing to revamp the cityโs infrastructure. In this regard, the county is mulling floating a KES 150B Green Bond. Nairobi County will become the second county after Laikipia to float a bond in Kenya if the plan sails through. In Jun, the Senate - the body mandated to oversee counties - approved a request by the Treasury Cabinet Secretary to guarantee Laikipiaโs 7-year KES 1.16B Infrastructure Bond.
โThe water and sewerage alone need over Sh20 billion to replace old pipes, install pipes in areas previously unserved, and develop new water sources.โ
Nairobi Governor, Johnson Sakaja
As of the close of trading last week, the total outstanding value of Infrastructure Bonds trading at the Nairobi Securities Exchange was just over KES 1T.
Access a copy of the Kenya Kwanza manifesto here.
ARM Status Update
In a joint liquidatorsโ update to the shareholders of Athi River Mining, they noted that the liquidation of the company was still ongoing and the majority of the realizations that are expected to result in a distribution to creditors of ARM had been completed.
Zero to Shareholders: ARM Cement shareholders learnt harshly that there would be no surplus realizations to make available to them from the liquidation of ARM Cement.
Lessons: This is a gentle reminder that shareholders are always at the bottom of the pyramid when it comes to liquidation. Also, as a creditor, you would rather be a preferential or secured one who recovered 100% and 62% of their claimed amounts respectively.
Next Steps: The Liquidators will continue pursuing an orderly winding up of the affairs of the Company with a view to, eventually, getting it struck off the register of companies. In addition, following the meeting of shareholders of the Company, CMA will proceed to effect the delisting of the Companyโs shares.
Safaricom Ethiopia
IFC Buys Stake in Safaricom Ethiopia: The International Finance Corporation (IFC) is set to invest KES 19B ($160M) in equity in Safaricom Ethiopia. The entry of IFC is seen as a derisking move on the part of Safaricom and reflects an appreciation by the company that the project cannot be undertaken alone. The company also gets some much-needed cash injections to help it grow in a new market:
โThe proposed IFC transaction comprises an up to $160-million equity investment in the Company to help fund โฆ CAPEX requirement. A separate debt package is also being discussed.โ
The acquisition will likely reduce Safaricomโs shareholding - which currently stands at 55.71% - if the valuation stays the same. Other shareholders in the venture include Vodacom Group, Sumitomo Corporation, and British Investment International which have 6.19%, 27.2%, and 10.9% shareholding, respectively.
Forex Regulations Risk? Last week, the National Bank of Ethiopia introduced changes to foreign exchange management in the country. It also introduced new restrictions on the acquisition of foreign loans including a provision requiring foreign investors in the country to have a debt-to-equity ratio not exceeding 60:40 of the foreign capital.
Changes at Absa
Exit Jeremy Awori: It was announced that the CEO and Managing Director of Absa Bank Kenya, Jeremy Awori, is set to step down after a decade at the helm of Kenyaโs sixth largest bank.
โThe Board of Absa Bank Kenya PLC today announces that after nearly 10 years of outstanding leadership, service, and contribution, Jeremy Awori has decided to pursue a career opportunity outside the Absa Group. Consequently, Jeremy will be stepping down as CEO & Managing Director of Absa Bank Kenya PLC on 31 October 2022โ
Jeremy is heading to Ecobank Group, a regional banking group in West Africa with an asset base of KES 3.27T ($27B), more than 32M customers Africa-wide, and a staff count of about 13K.
โEcobank Transnational Incorporated (ETI), the parent company of the Ecobank Group, today announced the current Group Chief Executive Officer, Ade Ayeyemi, will retire after he attains the age of 60, in accordance with ETI policy. The Board of Directors selected Jeremy Awori to succeed Ade Ayeyemi as Group Chief Executive Officer. The relevant effective dates will be communicated in due course.โ
โIt is a great honour to be appointed Ecobank Groupโs Chief Executive Officer. I look forward to consolidating the transformation of Ecobank, a truly pan-African institution full of talented people, while innovating to create value for all Ecobankโs stakeholders. I am humbled by the opportunity to contribute to the continentโs economic development and financial integration with Ecobank Groupโ
Incoming Group CEO, Jeremy Awori
Share Price Performance: In the last decade, Absa stock has generated a total return of 52.08% and a price return of -25.78%. Net Income and Book Value have grown at a compounded annual growth rate of 6.67% and 4.07% to KES 13B and KES 56.4B, respectively.
In Other Banking News
Ethiopia Expansion: Kenyan banks plan to venture into the Ethiopian market as the country opens up some of its key sectors to foreign players. Earlier this month, the Prime Ministerโs Office pointed out that it would be opening its banking sector to foreign investors. Equity Group is targeting expansion to Ethiopia and currently has a representative office in Addis Ababa.
โIt is good to say that we have a rep office in Ethiopia. Ethiopia is 100 Million people if it comes on board and we are really committed that by 2025 every country will be in the top three banks because then it gives us systemic power. It gives us gravitas to negotiate with the government.โ
Equity Group CEO, James Mwangi
KCB Group has had a representative office in the capital since 2015 and is looking to venture further before they start consolidating the business.
โAnd the reason for that is to allow us to understand the local market. It is a market that we will continue to watch very very closely and should local regulations change, and we understand that they are due to change almost imminently based on conversations that I have had, when that happens, yes, it is a market that weโll look at very very closely. We think it is the last frontier that we want to be in before we then start consolidating our business.โ
KCB Group Chairman, Andrew Kairu
NCBA Group is holding back on the Ethiopian market citing political instability.
โEthiopia is the other one where we were quite advanced. We have had to pull back given the political situation in Ethiopia. So I would say that is on hold for us for now. We are looking at a number of other countries as replacements for efforts that we had expended in Ethiopia.โ
NCBA Group CEO, John Gachora
Barclays Exits Africa: Barclays has sold its remaining 7.4% stake(63M shares) in South Africa's Absa Group, exiting an investment the bank made in 2005. The gross sale proceeds from the transaction amount to $620M (ยฃ538M). Barclays - UKโs 3rd largest bank by market capitalization - will be the second lender exiting the continent this year after Standard Chartered Group exited a number of African markets earlier this year.
Debt Markets
Best Weekly Performance in 4 Weeks: In the Eurobond market, yields on the paper due 2024 fell by 283 basis points to 12.099%, while the longer termKENINT 2048 paper fell by 76 basis points to 11.6%. These papers lastly traded at these levels on Aug 9, pointing to some easing in investor sentiment. With regards to Kenyaโs debt pile, the incoming President pointed out that he would not be restructuring any debt. The market action last week is a reflection of investor posture towards the incoming government regarding the debt pile.
โI am not going anywhere near or even having a discussion on restructuring debt. We must pay our debt. We have the capacity to pay our debt.โ
President-Elect, William Samoei Ruto
T-bill Yields Up 355 bps in 2022: In the short-term debt market, the performance rates for the 91-days, 182-days, and 364-day papers were 675.37%, 62.27%, and 34.76%, respectively. On aggregate, received bids totaled KES 36.7B against an offer of KES 24B, bringing the performance rate to 152.9%. The interest rates of the accepted bids were 8.910%, 9.599%, and 9.915%, respectively. Investors continue to pile in the 91-day paper, maintaining their optimism in shorter-term prospects. Yields on the three papers are up by an average of 118 basis points in 2022.
Treasury Bonds Report: Given that Sep 13 was declared a public holiday to swear in Kenyaโs 5th President, the bid closure date for Treasury bonds dated Sep 19 has been rescheduled to Wednesday, September 14th, 2022 at 2:00 P.M.
What Else Happened This Week
โก The Nyoro Effect?: In the year to June 2022, a close ally of the incoming President and MP for Kiharu Constituency, Ndindi Nyoro, tripled his shareholding in Kenya Power to 27.3M shares from 9.1M shares in Jun 2021. It is on Kenya Kwanza's manifesto to revive the power utility.
"I am buying KPLC shares because I know we can fix issues of electricity when allowed to make decisions. It has a lot of sleeping capital which can be used to assist more homes."
Kiharu MP, Ndindi Nyoro
In mid-morning market action today, the demand quantity for KPLC shares grossed 1.5M between the KES 1.70 - KES 1.76 range, against a supply quantity of 0 shares.
๐ Kenya Stanbic PMI: Kenyaโs Purchasing Managers Index (PMI) contracted for the 5th consecutive month in Aug 2022 to reach 44.2 compared to 46.3 in Jul. Disruptions occasioned by the General Election saw output and new orders decline at quicker rates. Purchasing activity fell due to weaker sales and employment fell.
๐ Tz Best Performing Stocks: As of 31 Aug 2022, NMB and CRDB Banks were the best-performing stocks across East Africa and Mauritius. The two stocks were up 43.2% and 42.8% in dollar terms, respectively. I&M Group and Jubilee Holdings were the worst-performing stocks, falling 24.2% and 23.3%, respectively.
๐งพ KPC to Increase Tariffs: The Kenya Pipeline Company (KPC) is planning to increase its transport and storage tariffs as it mulls building a new pipeline from Mombasa to Nairobi by Dec 2024. In the 2021/22 fiscal year, KPC handled 7.6M liters and earned KES 1.35 B from transport, storage, and handling tariffs.
โ KRA Rejects Amnesty Applications: The Kenya Revenue Authority (KRA) has rejected applications from at least 540 firms seeking waivers under the Voluntary Tax Disclosure Programme. KRA has disqualified the firms as the income declared was earned outside the Jul 1, 2015 - Jun 30, 2020, qualifying period.
๐ฌ CMA Extends Kakuzi Investigation: The Capital Markets Authority has expanded the scope of its ongoing investigation of Kakuzi to its Board of Directors after questioning its top executives regarding shifting profits abroad and conflict of interest by its majority shareholder Camellia.
๐ Ethiopia Introduces More Forex Curbs: Last week, the National Bank of Ethiopia rolled out a new set of measures regarding foreign currency used in the country. The measures included cash limits for international travelers as well as rules on forex conversion for people entering the country.
Interest Rate Watch
๐ฒ๐ฟ Mozambique: Monetary authorities in Maputo are set to this week review the implementation of monetary policy and give an interest rate decision. In its July sitting, the central bank held the key benchmark rate steady at 15.25%. Annual inflation in the country is currently at 12.1%.
Charts of the Week
