Market Atlas Review: Politics Moving Markets


Every fortnight in partnership with Market Atlas, Ventures Africa brings you data, insight, and analysis on changing market conditions across the continent. 

Nigeria: Golden opportunity for the new Buhari Administration

The much anticipated handover of power in Nigeria to Ret. General Buhari took place on Friday May 29 2015. The new administration inherits a country that is bereft with formidable governance and financial challenges.

Over the last year the Nigerian Naira has depreciated by 22% against the US Dollar, partially due to financial pressures stemming from the 45% drop in oil prices over the same period. The recent stability in crude oil prices is a welcome development that provides some respite to a country that depends on oil for 70% of its government revenue.

Naira Dollar Chart

Notwithstanding the challenges it faces, the Buhari Administration has a great opportunity to make good on a number of campaign promises that would improve the political and financial governance of the country. He would be judicious to rationalize a civil service of 1.2 million people that absorbs 30% of the national budget, and overhaul a system that leaves only 12% of the budget for capital expenditure.

Tackling corruption would yield savings to the nation. A handful of subsidy programs centered on the oil industry have led to waste and abuse to the tune of billions of dollars for the nation’s assets. In September of 2014, Arunma Oteh, the director general of the Securities and Exchange Commission in Nigeria estimated that over $140 billion of illicit financial flows left Nigeria between 2002 and 2011.

The Buhari administration needs to set a strong tone in its first few weeks in office. The steps the administration takes in its first 100 days will be telling of what to expect over the next 4 years, and go a long way to determining our investment thesis on Nigeria going forward.

Kenya: Geopolitical risks in Kenya continue to exacerbate capital flight

The Kenyan Shilling has depreciated by about 6% against the USD since the Garissa attacks on April 2, 2015. A number of clashes between Al-Shabaab and Kenyan government forces continue to act as reminders of the somewhat tense security situation in the country. The East Africa Community crisis originating from Burundi has affected the economies of Rwanda, Tanzania, Uganda, and Kenya, Specifically large listed equity companies in Kenya with expansion ambitions into the smaller economies. Market Atlas has observed a steady trend of outflows from the Nairobi Stock Exchange over the last few months.

Chart 1: Relative performance of the Kenyan Shilling to the Kenya 20 Index (Source: INET BFA Expert Platform)
Chart 1: Relative performance of the Kenyan Shilling to the Kenya 20 Index (Source: INET BFA Expert Platform)

We believe the heightened geopolitical challenges in Kenya will continue to dampen investor sentiment and favor Nigeria in the short term. Nigerian equities are more attractive on a fundamental basis relative to Kenya (see table below). The wave of positive sentiment on the back of a successful election in Nigeria, and the firming up of oil prices will continue to support improving investor sentiment of Nigeria over Kenya in the short-term.

Table 1: Relative P/E Ratios of leading Kenyan and Nigerian banks (Source: INET BFA Expert Platform)
Table 1: Relative P/E Ratios of leading Kenyan and Nigerian banks (Source: INET BFA Expert Platform)

Namibia: Contagion in the Electricity crisis in the Southern Africa Region

A slew of mixed reports from various government sources in Namibia paint a delicate situation for the country’s electricity supply. Namibia, like some of its neighbors, imports a good amount of its electricity from some its neighbors. Namibia’s case seems like a replay of the challenges facing South Africa’s Eskom power utility.

The inability of the electric utilities to meet rising demand will continue to be a challenge for the region onto more reliable supply comes online. Over $12 billion worth of power projects are in development in Mozambique and they could go a long way to addressing the growing needs in the region. In the meantime the region will likely continue to see intermittent power outages that will have a material impact in investment returns in the region.

South Africa: Prevailing headwinds weighing on Economy

Over the last two weeks Fitch and S&P reaffirmed their ratings on South Africa at BBB and BBB- respectively. Both ratings keep South Africa at investment grade but the outlook from both ratings agencies are negative leaning.

South Africa continues to struggle with challenges with its electricity supply, looming threats of mining strikes, fiscal and current account deficits, and lackluster GDP growth projections that hover around 3%. It’s more likely than not that further downgrades could be in the future for South Africa unless meaningful structural adjustments are made.

Ghana: Cocoa production forecast foreshadow more challenges

A number of sources including Reuters have downwardly revised their forecasts for the 2014/2015 Cocoa season. This is not good news in light of the sizeable current account deficits Ghana has been running.

Cocoa represents 20% of Ghana’s exports and a drop in production will continue to put pressure on the country’s current accounts and the cedi exchange rate.


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