👋 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 dollar shortages in Tanzania, the $238.8m G2G fuel payment, and Kenya’s depreciating shilling.
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Tanzania Dollar Shortages
Gold to the Rescue: Last week, the Bank of Tanzania (BoT) announced that it was embarking on the purchase of gold through the Domestic Gold Purchasing Program in a bid to bolster foreign exchange reserves. Tanzania’s central bank is set to buy gold from domestic miners and traders using the Tanzanian shilling, which has so far shed over 7.5% of its value against the US dollar this year.
“Tanzania has been holding US Dollars as its only forex reserve, which has been causing a lot of problems in our economy because when anything happens at the global scale such as energy prices, US monetary policies, or geopolitics, that affects the USD/TZS exchange rate. Bringing the US dollars into the equation will provide a mechanism to sell gold and bring in the dollar when there is a shortage.”
SSC Capital CEO, Salum Awadh
“Tanzania’s move to acquire gold domestically, we hope, will bolster foreign exchange reserves by expanding its hold of physical gold. When the BoT procures unrefined gold within the country, it introduces a tangible asset that can be used to uphold the national currency and ensure more international transactions .”
Exodus Advisory CEO, Ramadhan Kagwandi
Acquisition Timeline: The Bank of Tanzania has already procured over 410 kilograms and plans to acquire an additional 6 tonnes by the end of 2023. This is expected to diversify the stock of forex reserves, and as a result, the government has embarked on the adjustment of mining policies to catalyse gold production and iron out market inefficiencies.
“After BoT decided it will indulge in this initiative, there have been policy adjustments, regulations and some incentives that will be provided to local miners. One of them is guaranteeing these local miners with loans that they can use during their extraction processes and also ensuring that these refineries have the infrastructure and necessary arrangement whereby these local miners could sell their gold smoothly.”
Exodus Advisory CEO, Ramadhan Kagwandi
Future FX Play: Part of the programme is the strategic acquisition of more foreign currency by Tanzania in future by disposing off the gold in the international market in exchange for the much-needed US dollars:
“The decision to bolster foreign exchange reserves through the purchase of gold is underpinned by two key factors. First, gold is renowned as a reliable store of value. Secondly, a considerable portion of the acquired portion of the acquired gold will be strategically sold in the international market to generate foreign exchange which can then be allocated to support the needs of importers within the country.”
Exodus Advisory CEO, Ramadhan Kagwandi
Kenya’s Cabinet Secretary responded to a question in Parliament last week on Kenya pursuing the acquisition of gold, just like Tanzania, to bolster forex reserves. Here is what he had to say:
“But they will still face the issue of moving into a point of sale to convert it into a convertible currency. The whole issue is that what you do with your portfolio choice is very important. What we can do here is to provide information on how you can deal with your portfolio choice in certain circumstances.”
Cabinet Secretary for National Treasury, Prof. Njuguna Ndung’u
State of Tanzania’s Reserves: As at the end of August 2023, Tanzania’s stock of foreign exchange reserves stood at $5.2B, equivalent to 4.7 months of import cover against the East African Community’s convergence zone benchmark of 4 to 4.5 months.
How Tanzania Got Here: In March 2023, media reports indicated that Kenyan firms struggling to source US dollars locally were sourcing the currency in neighbouring countries, especially Tanzania. Amid the reports, Tanzania’s President Samia Suluhu noted the country had adequate reserves, and in April, BoT’s senior economist Ulrick Mumburi pointed out that there were ample US dollar reserves:
“We have a fair share of foreign-currency reserves including US dollars. It is above the reserve margin by about 4.8%.”
On 31st May 2023, the BoT issued new forex directives, effective 1st June 2023, requiring all forex transactions above $1M per transaction in the retail market to be at all times traded within the interbank FX market prevailing quotes. Barely a week after this, BoT’s Economic Research and Policy Director acknowledged a shortage of foreign exchange:
“I, first of all, admit that there is a shortage of foreign exchange, but this has been caused by external factors, which are beyond the control of many countries. There is a decline of foreign exchange reserves, however, that is not a crisis as the level remains sufficient to cover 4 months of imports.”
On 20th June 2023, BoT issued a notice emphasizing the directive to quote the prices of goods and services in local currency. In July, challenges from dollar shortages started reverberating, impacting $51M in claims by tobacco farmers. Oil marketing companies also attributed fuel shortages to dollar shortages with the exposure through unpaid invoices totalling $747M as of mid-August. Recent measures that Tanzania has taken to address dollar shortages include the introduction of export credit guarantee schemes and gold purchases.
USD 238.8M G2G Payment
Government Honors 3 LCs: Kenya has paid out USD 238.8M for the first three maturing Letters of Credit (LCs) under the government-to-government oil deal. The LCs were issued on 17th March, 3rd April and 24th April this year in lieu of jet A1/DPK and super petrol fuel products.
Financial Update: The escrow account holding US dollars for purposes of payment of LCs has an amount totalling USD 1B, while the account bearing Kenya Shillings has KES 115B (USD 0.8B), bringing the gross amount of money held under the escrow accounts to about USD 1.8B. Here is what the CS for the National Treasury had to say about the G2G deal in parliament last week:
“I appreciate that we have safeguarded the supply and protected ourselves against extreme volatility of the shilling. The amount of dollars we removed from spot trading is a good example. Just imagine those amounts of dollars would have been procured in spot trading. We have prevented ourselves from that expectation.”
Cabinet Secretary for National Treasury, Prof. Njuguna Ndung’u
Status of the G2G Deal: Since its initiation on 10th March 2023, 35 cargoes have been delivered under the arrangement. The government has also extended the deal for another year up to the end of December 2024. Following renegotiation between the government and related parties, the country is also set to get reduced freight and premium for cargo effective September 2023.
September Inflation Up
Highlights: In September, Kenya’s inflation was 6.8%, up 10 bps from August, to mark the third consecutive month in which inflation has been within CBK’s target band of 5% +/-2.5%. The transport index rose the most year-on-year, up 13%, on account of changes in VAT on fuel products and rising fuel prices, while the insurance and financial services index grew the least at 1.4%. Commodity-wise, kerosene rose the most by 36.6% while LPG grew the least at -10.0%.
Upcoming MPC: The CBK's Monetary Policy Committee (MPC) is set to sit on 3rd October 2023. In its last sitting in August, the MPC held the central bank rate constant at 10.5% despite a 60 bps decline in August's inflation print. The Kenya Bankers Association has called for a moderate tightening in the monetary policy stance.
“We argue that a further (moderate) monetary policy tightening would support measures taken previously to tame inflationary pressures and rising inflationary expectations, cool off credit demand (and supply) while averting a sharper build up in non-performing loans, help achieve a moderation in the trend depreciation of the exchange rate, all for enhanced macroeconomic stability.”
Across the Region: Uganda’s annual headline inflation for the year ending September 2023 fell by 80 bps to 2.7%, a 21-month low.
Kenya’s Depreciating Shilling
Adjustment Process: In the week, while responding to questions by Members of Parliament on the depreciating shilling, the Cabinet Secretary for the National Treasury pointed out that the continued depreciation of the Kenyan Shilling against the US Dollar is part of an adjustment from the previous policy actions:
“It is not a free-fall. It is a process of adjustment from previous mistakes. And we have to accept when mistakes happen. The current account deficit was running high, consuming foreign savings. What gives in is the price. Every time the exchange rate depreciates, it changes the relative price structure of any economy.”
Cabinet Secretary for National Treasury, Prof. Njuguna Ndung’u
3 Years to Turnaround: According to Prime Cabinet Secretary Musalia Mudavadi, the current run on the shilling and other worsening economic metrics is similar to 1993 when the country was under Structural Adjustment Policies by the World Bank and the International Monetary Fund amid an economic downturn.
“The scenario we are living through now is more or less a replica of what we were going through in 1993. We had inherited an economy that had been devastated. Aid had been terminated. We were in severe debt. Inflation was running high. The shilling was getting a beating. The way we are getting now. Prices of commodities were spiralling. We are exactly there. So, the cost of living was bad. So is it now. To get out of it, and I said it in Parliament, it's going to take us, at a minimum, maybe three years. Because we are seeing debt that we have never seen before.”
Prime Cabinet Secretary, Musalia Mudavadi
FX Losses Impact Unga: In the financial year ending 30th June 2023, Unga Group reported its largest single-year loss totalling to KES 959.38M from a KES 311.36M profit in FY 2022. Finance income fell by 23.6% to KES 31.4M, while finance costs were up 3X to KES 764.4M, equivalent to 3.3% of revenues [FY 2022: 1.4%]. The effects of exchange rate changes on cash flows stood at KES 68.6M, up 8.4X from 2022.
“Revenue increased by 33% driven by high prices of raw materials and finished goods. Loss from continuing operations increased due to the depreciation of the Kenya Shilling and the inability to secure an adequate supply of US dollars causing significant forex losses and interest expenses.”
Deals, Mergers and Acquisitions
🤝 NCBA to Acquire AIG: NCBA Group, the third largest banking group in East Africa, announced its intention to acquire 100% of AIG Kenya Insurance Company Limited. NCBA has held a minority shareholding in AIG Kenya for over 18 years.
💸 NOC Cash Injection: The National Oil Corporation of Kenya (NOCK) will receive an investment of KES 5B from a non-equity strategic partner as it enters the final phase of its revitalisation plan. The strategic partner is expected to pump in KES 2B to rebrand and renovate all the 100 NOC pump stations across the country and another KES 3B for fuel stocks.
⚖️ Incentro Africa vs. Twiga Foods: Incentro Africa, a Kenyan technology company, has sued Twiga Foods, an agriculture technology company that sources produce from farmers and delivers it to urban sellers, for insolvency. Incentro is seeking liquidation of Twiga Foods to recover KES 39M owed for the installation of Google Cloud Services. Twiga Foods has denied the allegations and has gone to court under a certificate of urgency seeking to stop the potential liquidation.
🔴 Sendy Under Administration: The Sendy Group of Companies, comprising Sendy Kenya Freight Limited, Sendy Limited, Sendy Store Limited and Sendy Kenya Marketplace Limited, was placed under administration on September 20, 2023. Peter Kahi of PKF Consulting (K) Limited was appointed as the administrator.
Markets Wrap
NSE: In Week 39 of 2023, Home Afrika was the top-performing stock, up 9.7% to KES 0.34. Car General was the worst-performing stock, down 20.7% to KES 25.65. The NSE 20 index fell by 1.4% to 1,508.8 points, the NSE 25 fell by 2.8% to 2,473.7 points, and the NASI index fell by 3.8% to 95.2 points. Equity turnover went down 53.7% to KES 513M while bond turnover went up 205.1% to KES 44.9B. Month-on-month, East African Portland Cement was the top-performing stock, up 18.97% to KES 7.4. Car and General was the worst-performing stock, down 34.15% to KES 25.65.
Treasury Bills: The weighted average interest rate of accepted bids for the 91-day, 182-day, and 364-day were 14.8206%, 14.9499%, and 15.0544% respectively. The total amount on offer was KES 24B with the CBK accepting KES 4.5B of the KES 13.7B bids received, to bring the aggregate performance rate to 56.91%. The 91-day and 364-day instruments recorded 275.19% and 18.41% performance rates, respectively.
Treasury Bonds: Across the tap sale on FXD1/2023/002 and FXD1/2016/010 treasury bonds, total bids received at face value were KES 2.6B and KES 815 M. The CBK accepted bids totalling KES 2.6B and KES 763.2M bringing the weighted average rate of accepted bids to 17.5% and 17.9%, respectively. On aggregate, the performance and acceptance rates were 34.5% and 34%%, respectively.
Eurobonds: In the week, yields were mixed across the 6 outstanding papers.
KENINT 2048 rose the most week-on-week, up by 7.7 bps to 12.376%, while KENINT 2024 declined the most, falling by 54.4 basis points to 17.838%. The average week-on-week change stood at -17.67 bps.
KENINT 2024 rose the most on a year-to-date (YTD) basis, appreciating by 523.5 bps while KENINT 2048 rose the least at 155.2 bps.
Prices were mixed, with KENINT 2027 recording the most gains at 1.5% to 85.147. KENINT 2048 fell the most at 0.6% to 68.424. YTD, KENINT 2044 fell the most at 12.1%, while KENINT 2024 was the only bond whose price appreciated, rising by 0.3%. The average price change week-on-week and YTD was -0.08% and 0%, respectively.
Market Gleanings
👮| KRA’s Deploys Revenue Officers | The Kenya Revenue Authority(KRA) this week deployed 1,400 new Revenue Service Assistants (RSAs) across the country to enhance customer support. The RSAs will be stationed at tax service offices and will provide assistance to taxpayers with compliance with tax regulations.
🔴| Penalties on Data Breaches | The Office of the Data Protection Commissioner (ODPC) has fined 3 data controllers, Mulla Pride Ltd, Casa Vera Lounge, and Roma School for violating data privacy rights. Mulla Pride was fined KES 2.97M for sending threatening messages, Casa Vera Lounge KES 1.85M for posting a reveller’s image without consent, and Roma School KES 4.55M for posting minors’ pictures without parental consent. The ODPC plans to conduct 40 compliance audits this fiscal year.
📡| Safaricom introduces Cloud Services | Safaricom has launched a revamped cloud computing platform and services to help businesses in Kenya digitize their operations, offering flexibility and resilience in the ever-changing environment. The new cloud services, hosted in data centres in Nairobi and Kisumu, are powered by VMware technologies.
✈️ | KQ increases flights to London | Kenya Airways is increasing its flights to London to 14 times weekly, effective October 29, 2023, with a morning flight (KQ100) and an evening flight (KQ102) daily. KQ will be deploying its Boeing 787 Dreamliner on the route.
💸| Rwanda’s Maiden Sustainability Linked Bond | The Development Bank of Rwanda last week launched its debut Sustainability-Linked Bond on the Rwanda Stock Exchange. The 7-year bond and targets to raise $24.8M (RWF 30B). The auction is set to close on 13th October 2023 and this initial issuance is part of a $124M (RWF 150B) Medium Term Note programme. Last month, NMB Bank also launched a 10-year multi-currency $400m (TZS 1T) medium-term bond under a green bonds initiative.