In late 2015, GTR and Rabobank gathered a group of East African trade financiers and traders to discuss what business is like on the ground.
- David S Ohana, group managing director, KenolKobil
- Andrew Jones, CEO East Africa, Louis Dreyfus Commodities
- Arnold Minderhoud, senior investment manager agribusiness, FMO
- Julians Amboko Oyombe, senior research analyst, Stratlink Global
- Oscar Kang’oro, head of oil & gas, East Africa, CFC Stanbic Bank
- Jaap van Luijk, regional head, Eastern Africa, Nedbank
- Jan de Laat, managing director, trade & commodity finance, Rabobank (chair)
- Ritesh Shah, chief representative officer, Rabobank Kenya
De Laat: How would you describe the state of the East African economy?
Oyombe: At the top of everyone’s minds right now is how the currencies are performing. We have seen how the Zambian kwacha has been seriously battered. It is now about 96% down year on year. The Ethiopian birr is doing excellently, but with due regard to the fact that that the economy is fundamentally different from a number of the other economies in the region: it is more state‑controlled and closed. We are currently seeing the Kenyan shilling at 102.7 units of exchange to the greenback – we have seen a lot of intervention from the central bank.
Coming to Kenya’s fiscal environment, we have all seen in the press how, in one way or another, funds are not being adequately accounted for. There are a lot of questions around how the Eurobond proceeds were put to use. This year, we have maintained our outlook as struggling. We see growth being anything between 5% and 5.5%. We saw some very rosy projections from the IMF. I think they are overly optimistic and, recently, we have seen the World Bank downgrade its forecast as well.
Mozambique is one of those economies that has taken the region by storm. 2010 was when they had their offshore discovery and you can naturally see that the impact just shot up: a huge percentage of that FDI inflow goes into the natural gas sector. From a political standpoint, they had an election in 2014 and, for an economy as young as Mozambique, we think they did remarkably well in terms of their democratic standing. It is one of those markets that we believe will continue to take a top spot, in terms of growth prospects and investment, alongside the likes of Rwanda and Ethiopia, which are emerging fast in this region.
Speaking of Ethiopia, what we believe is that the country is gradually stealing the thunder from more established markets like Kenya in the Eastern African region. You will have seen recently that it became the first country in Sub‑Saharan Africa to launch a light‑rail mass‑transit system. Growth is likely to remain high. We are projecting about 9‑10% this year. From a political standpoint, they just came from what we may say was a heated election but, unlike the one in 2010, it was a lot more peaceful. A key outlook for this year is to expect inflation to continue trending upwards. They have been hit by a protracted dry spell and food supplies are down a bit, so you have seen inflation down at about 11% on that cycle for the region.
Going to Uganda, the Bank of Uganda has been very aggressive in terms of supporting the shilling, which has not done very well this year. We have seen monetary tightening about six times now in just one year. From a private sector standpoint, we expect the rising cost of credit to drag the economy a bit. Politically speaking, this year is election year for Uganda, which will be quite interesting. It is one of those countries in Africa where the constitution has no term limits and we are seeing a lot of clamour being generated by political luminaries for a change of administration.
In Rwanda, the economy is in rebound. In 2013/14, we had some serious deceleration from about 8% growth to 4.6%. The reason was that a section of development partners withheld funding from the country, because of the alleged involvement of the government in eastern Congo in the conflict. We have seen Q1 and Q2 economic growth averaging about 7% and a number of investment development partners are reported to have resumed disbursing donor support. 2017 will be an election year and we have seen the Supreme Court has cleared the way, in a sense, for incumbent President Paul Kagame to contest for a third time, never mind the controversy that surrounds it. In the short term, it has given a sense of stability and continuity of policy, in terms of outlook, but long term it elicits many questions about the preparedness of Rwanda for greater transition.
Tanzania is a nation in transition. They just came from elections and we have seen CCM clinching the top position again, so we will be looking at it from that perspective. Economically speaking, the Tanzanian shilling has not done well. We do expect strong growth in sectors like manufacturing, transport and communications, which will continue to support the kind of growth we have seen in Tanzania, historically.
De Laat: There was an article published recently by the IFC about the negative outlook of the East African economy. GDP growth has been revised and reviewed. The expectation is that it will not grow as fast as everybody was expecting, with GDP growth of 4‑7%. It will be more in the range of 3‑4%. Every day, there are publications about Africa, but I would like to know at this stage, what we, as the people on the ground doing business and facing challenges every day, think about the economy, independent of the figures?
Ohana: If you listen to what has been said, it is like we need to rush and invest in Ethiopia. Do not do it. If you lock in money there, you cannot get it out. The banking industry needs audit reforms. I know they are working on it, but whatever you se,e there are manufactured numbers. There is growth because there is nothing there, but the moment you invest you cannot take out a penny. They simply do not approve LCs.
Generally, I agree with the rest of the countries, but let us be clear: Africa today, from outside, should be less attractive. There are a lot of challenges.
In Tanzania, we are reviewing our future. There is nothing there. It is almost an environment in which you are unable to make money if you behave. By ‘behave’, I mean pay taxes to the government. Half of the imports there are duty‑free. It is impossible to compete. You need to become a thief to make money, coupled with corruption and what we are used to.
Kenya is a challenge to me, but it is a very sound market. I know that it will recover in the exchange and in its fiscal policy. We are used to these things and, knowing the politics of Kenya, we have a system that is sometimes a bit slow, but we know how to clean our system. For me, Kenya is in a downward trend, but it is a very promising market.
The highlight of everything I am experiencing in East Africa is Rwanda. I am the market leader there with about 60 service stations in Rwanda. The courts are in order; there is no corruption there. Everyone must comply with the rules. The president there is a chief executive. He really calls the shots. He participates. He attends meetings. He is not a guy who is detached from the industries. Burundi also has a great future. Slowly, it is following Rwanda’s systems and it is great.
Jones: We have managed relatively well to export coffee out of Ethiopia. That business stays strong. It is one of the largest originations of coffee and produces a very well-respected coffee. I believe that a lot of people are getting involved and the profile of the country is rising. Yes, it is a difficult country in which to work. It is difficult if you, as a foreign national of a foreign company, want to go in there and open operations, but we are seeing a lot of companies going in there and setting up representative offices. There is a belief that there is going to be a big requirement for foodstuffs there.
While it is a difficult environment in which to work, we remain positive about Ethiopia. When and if they check whether there are ruling party changes there, the news of how they wish to run the country and how they might be slightly less suspicious of the outside world, there will be massive opportunities, in our sphere at any rate.
In Uganda, we originate coffee and import palm oil, so we see both sides of the fence. The macro survey suffered a lot this year and, as far as the exports for coffee go, it is difficult to tell, because we have not seen the main season. It seems that everybody is very interested in that region and that we have seen a lot of investment because, in Uganda, there is no auction system or it is not regulated as we see in Kenya. You set up your buying stations, get out into the bush and buy very close to the origin, quite literally having relationships with farmers.
Where we are seeing the biggest challenges is in infrastructure, as in getting products out from warehouses down to the port and out. A lot of people are coming in there and setting up coffee mills and storage facilities.
I also feel that, when things settle down in that part of the world, in the DRC and South Sudan, we will see an uptick in the economy. It is a kind of entrepôt for that region and, on top of that, has a lot of land that has not been exploited yet. If any of you go driving around further up country, as I sometimes do, you will see corn, other cash crops and tobacco being grown on the side of the road but, if you go inside, once you have got past about 1 or 2 kilometres, it is bush again. There are vast tracts of land available and we are starting to see people opening up farmland there. There was a lot of talk five or six years ago of people opening up farmland in Africa. People seem to be prepared to invest in production and also in upscaling capacity for the actual processing of small agricultural commodities.
We see that a lot in places like Lira, where people are setting up silo systems and crushing plants. It is not massive; it is not going to change the whole of global agricultural commodity flows, but it will have a macro benefit to the smaller farmers who are looking to realise and stimulate cash revenue earnings. I think we will see that Uganda will become more of a production area.
There are some big players in Tanzania. There are the Bakhresas and the METLs of this world, and they control and hold the agri‑businesses in that country. More recently, we are starting to see the Chinese company Wilmar moving in there – it has bought a refinery there. They have spent some good money and I believe it is all part of their pan‑African strategy to handle one commodity. It is looking like they want to have a brand that they can push across the continent, because not only do we see them buying up operations down in South Africa, but we have also seen them having very close relationships with palm oil processors in Kenya and obviously into Tanzania. If you go into West Africa right now, they have JVs right around the coastline there too.
Kenya is highly competitive. It is the driving force behind production for the region, and it is going to stay that way. Kenya is going to be the production hub for the region, once customs are harmonised and we start to see products moving more freely. The processors, being millers or refiners, are very good at their jobs in this part of the world. In some ways, they seem to have embraced technology and have moved on to increase capacity more so than their neighbours. That is the reason why, going forward into the next five, six or seven years, we are going to see Kenya become the processing hub for East Africa. Grain and product will shift across borders, coming in from Tanzania and Uganda. It will then be processed in Kenya and shifted back out into the region. If you think about the evolving markets, such as the DRC, it makes sense to have this hub in the region and it will be Nairobi.
Drilling down further into Kenyan production, we see the coffee crop slipping away each year. It is still a recognised crop with a good story to tell in speciality markets. It will be there for a period of time, but it all really depends on when coffee producers can stop selling their land and feel that there is long‑term viability in continuing to grow the crop. While we have real estate expansion around Nairobi, people will continue to sell off drips of land which used to grow coffee.
Van Luijk: One small difference I have with Ethiopia is that, from experience in my previous life, we were probably the largest trade finance institution in Ethiopia, together with one of our German competitors. There is some sort of system where banks have to apply for forex before they issue LCs. Ethiopians are very proud people and one of the first things they say to you is: ‘We are the only country in Africa that has never defaulted on a transaction.’ That is purely because of the way the system works. I know that companies that operate there have difficulties getting money out of the country, because the country has been suffering from a chronic shortage of forex forever. That is also a given.
I agree on Rwanda. I go to Kigali and it is an amazing place. It is probably the easiest city in East Africa to meet with government officials; they will always see you, regardless of the time of day. It is one of the few countries where you can have ministers’ names in your telephone. I agree corruption is non‑existent. Things seem to work. They have a system in Rwanda where most of the large corporates are government‑owned with some kind of outside interest, but everything rolls back into the government, which is very positive.
I share some of the concerns about what is happening with the president’s third term but, from talking to people on the ground, the vast majority of Rwandese want it, in contrary to some other countries like Angola, Zimbabwe and others.
In Uganda, you have the issue of a lot of hype about the oil. Of course, with the fall in oil prices that hype has disappeared, so it is not going to happen. To talk about the IFC and World Bank reports, one of the things that people underestimate is the secondary economy. All these people who sell their produce on the road, in the little holes in the wall where you can buy fruit, vegetables and the likes, although outside of the tax net, somehow contribute to economic growth, in my view. I think there is an official economic growth rate of 5% to 6%, then you have the unofficial growth rate, which would probably be higher if you took this secondary economy into consideration.
Nairobi remains strategically important. It is the only airport where you can travel into Africa within five hours. You cannot do that from Johannesburg or Lagos airport. Yes, KQ has issues, but I am sure they will work their way around them. I agree that Kenya will continue to be the main hub in Africa. It will have its wobbles, but I have been doing business there since 1997‑98 and I have seen all these previous hiccups before and every time the country comes out stronger. We all know that the main issues, among others, are corruption and tax evasion. Those are the two main issues holding back some development. In Tanzania things happen slowly: this can be contributed to the socialist hangover that still prevails in that economy.
Kang’oro: If you look at the budgets coming out of Kenya’s Jubilee Government, they have been very aggressive and growing year on year. Although tax collections have also been growing, they have not done so at the same pace as government spending. That is beginning to creep in, so you are seeing a tightness in government spending with the rate of collection not keeping up. Government payments are being delayed and some things have been wiped out of the system, creating uncertainty in the business environment.
We have seen a return of volatility in Kenya. For many years, the level of volatility of all the key metrics – exchange rates and interest rates – had reduced considerably and that allowed a great deal of business planning. You could not undertake long‑term projects with the kinds of interest rates you are seeing in the market now, unless you have partners like FMO that can give you long‑term dollar liquidity. Volatility actually has a massive impact on investment and is a challenge. It is a challenge for Kenya, because a lot of investors have become used to a period of relative stability.
If you look at Tanzania, its main challenge is fiscal balance. With the donors withdrawing a lot of funding from Tanzania, the government has not had that fiscal flexibility to spend, even in the run‑up to the election. What you find in Tanzania is a lot of the contractors are struggling, even though the economy is growing, because Tanzania has a lot of positive forward momentum in the wider economy, but the key people interacting with government are seeing severe constraints in liquidity, especially in the energy sector.
If you take TANESCO and all the gas producers, those key pillars of the economy, once facing liquidity issues, have ripple effects constraining growth in the economy. We have had some cement producers that have serious challenges getting power to their plants, which is a function of government not paying its bills to TANESCO and not paying for subsidies on time, so power generation cannot take place on time. There are things in Tanzania that are blocking real growth in the economy. Anyone who has ever run an operation in Tanzania will tell you that the legal system, bureaucracy within government, and fraud and corruption within government departments and even within corporate organisations are a major cost of doing business. If you ask investors sitting in Tanzania what the most painful part is, it is the difficulty of running your day-to-day operation.
De Laat: Arnold, are you mainly looking at the long-term future?
Minderhoud: We have a long‑term view on our investments, which is an important goal of any development bank. Especially in Africa it’s difficult to predict what the market will be like five years from now.
A nice example I would like to mention, talking about Rwanda, is a project we executed together with the government of Rwanda, IFC and CDC. The company, called Africa Improved Foods, will produce fortified food for the World Food Programme. The deal was structured with the support of the Clinton Health Access Initiative, which was involved in the whole AIDS problem of East Africa. They decided to move into malnutrition, and the reason they started in Kigali is only because they were able to co-operate with the government of Rwanda. In Tanzania I know the company Mohammed Enterprises. It is a local company, but it has 500 expats. It shows how dependent a country like Tanzania still is on skilled employees.
De Laat: There is one point that I would like to bring to the table. There is this point about the evaluation of currencies, which I have to admit is giving some reason for headaches, especially our head office and the risk managers there. Angola recently announced a US$1.5bn bond. Kenya will do the same. On the other hand, you have devaluating currencies, which seem to have come to a standstill in Kenya. In what way has that impacted your business and how are you going to see that as a risk for the future development of business?
Kang’oro: To give you some context, because I have worked for this international bank for the last 18 years, in this market, banks would never lend you foreign currency if you did not have direct foreign currency receivables, so export proceeds. That was a policy among the banks, because they obviously thought that that was irresponsible lending. As savers naturally discovered, once markets were liberalised and anyone in Kenya could open a US dollar account, people tended to save in US dollars, because they are looking for the same hedge. The banks started to fill up with what we call local dollars, so dollars generated in the local economy that you have to deploy.
Over time, as markets stabilised, you found that, even though we as bankers expect a 7% slide in currencies every year – that is what the interest rate differential suggests – over time the currencies in East Africa became pretty stable, so people were comfortable in dollars. The level of dollar lending has been growing over the past 10 years. A lot of banks are exposed and a lot of grants are exposed. They have become used to taking this risk, with the view that, over a period of time, they either come out even or better off with the dollar cost. In Tanzania, dollar lending is somewhere near 70% to 80% of all the lending you find in international banks. It is a difficult practice, but it is also very difficult to wean both the banks and the borrowers off that.
Until you can bring the interest rate differential down, and it happened for about four years between 2004 and 2007, when Kenya’s interest rates were sitting between 3% and 5%, all of a sudden you saw people switching off dollar lending and behaviour starting to change. Once the differential drops below 5%, you will see people naturally moving towards borrowing shillings. The minute the differential widens to what it is now, if a customer can borrow between either Libor plus 5% or at 22%, they will obviously choose the former and just take a bet on the difference.
Ohana: What we are facing now is an extreme situation in Kenya. I am not surprised, because I know they will take the currency of the exchange to the level required. In my view, it will be below 100. For executives in Kenya, if you need a view of your oil prices and to manage it in line with the inventory, you should do that in dollars. It should be proactive management, in and out, as the central bank and the government take decisions. It is not something you do for the long term. Every three or four months, you must check your view of the dollar and the shilling. That is what we are doing.
It also depends on the state of the company. Three or four months ago in Zambia, where we are sitting on cash, I told them to convert all the kwacha to dollars, but we did not do it. For a short period, within two months, we bought US$600,000 and made a US$140,000 exchange gain. It keeps depreciating now but, when I visited there recently I gained a view and bought in a few purchases. The average was 9.3 kwachas to the dollar. We sold at 12, exited and locked the exchange gain. We came out with a US$140,000 realised exchange gain. Kenya must do that today. If you do not do it, you will lose money.
You always have a bit of risk, but keep it small, because who knows what can happen tomorrow?