African revival shifts east
Comment of the Day

April 28 2015

Commentary by Eoin Treacy

African revival shifts east

Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:

Among the oil producers, support for reforms that proved elusive when revenues were booming may now be forthcoming. Last month’s election of Muhammadu Buhari in Nigeria on a strong anti-corruption platform could prove to be an opportunity in this regard. Lower oil revenues are intensifying the momentum to diversify the oil economies, particularly in Angola and Nigeria.

?Most countries in Africa are energy importers and will benefit from lower oil prices. Many are also largely producers of soft commodities, which should be less sensitive to the slowdown in capital spending in China.

On balance, we think that the region’s centre of economic gravity will shift towards the less resource-intensive countries of east Africa, including Ethiopia, Kenya, Mozambique, Tanzania, and Uganda. They are economically more diverse and beginning to form a relatively large and well-integrated regional market. Investment flows, including from China, have already begun to shift in this direction.

These countries likely stand a better chance of delivering the structural transformation that will be needed to create jobs. This will be critical as half of the one billion new workers set to join the global labour force over the next twenty-five years will do so in frontier Africa.

Eoin Treacy's view

Here is a link to the full report

There is no doubt that the run up in commodity prices has been of benefit to African countries not least farmers since agriculture continues to account for the majority of employment. As the above report highlights falling oil prices represent an opportunity for energy importers particularly in East Africa. In many respects, this is a story from the last decade. Africa’s demographics are what is likely to animate investor interest over the next few decades. 

A consideration not mentioned in the above report is the impact loose monetary policy has had on the region. At the present time US Dollar denominated Kenya B+ rated 4-year bonds yield 4.8%, Rwanda B+ rated 8-year bonds yield 6.26% and Ethiopia B rated 9-year bonds yield 6.53%. These yields are highly competitive with domestic US B rate bonds which currently trade in the region of 5.5%. Lower borrowing costs have been a major benefit to these countries while Uganda and Tanzania both enjoy the privilege of issuing debt in their own currencies. 

As much as the prospects for these countries have improved with the political environment stabilising, one could not consider these bonds cheap. There is no evidence that yields are about to rise but it would overoptimistic to think that they will remain so low when Western interest rates begin to trend higher. 

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