Embracing local partnerships, bridging East Africa’s information gap to unravel the region’s investment potential

Inflation back to single digits and resurgence in growth continues
The region has succeeded in taming the inflation levels from double digit of 30.5 per cent, 19.8 per cent and 19.7 per cent for Uganda, Tanzania and Kenya in 2011 to 5.5 per cent, 5.7 per cent and 8.0 per cent. Inflation seems under control in Uganda with no short term reason for higher inflation unless there is a long spell of dry weather which usually affects food prices. The rise in fuel prices could spell a slight increase in inflation for Kenya and consequently her neighbours Uganda and Rwanda that get fuel from Mombasa. The bid by Tanzania’s power regulator to have power tariffs hiked spells higher inflation figures for Tanzania in the short term. The resurgence in growth is poised to continue at a higher rate projected as high as 6.6 per cent, 5.1 per cent 7.4 per cent and 7.5 per cent for Uganda, Kenya, Tanzania and Rwanda respectively.
Onwards and upwards for the Regional Stock Markets
The regional stock markets are showing great promise as indicated by USD adjusted yield to date returns of 43.7 per cent and 33.2 per cent for the NSE and USE respectively that surpassed even those of the S&P 500 at 29.6 per cent. Tanzania on the other hand posted 25.4 per cent. The Kenyan bourse was boosted by the peaceful elections while Uganda recent activity has increased with the listing of Umeme. Activity should increase in the future with the introduction of the GEM segment which provides an opportunity to list for the smaller companies. It’s an alternative exit strategy for the P.E. deals in Kenya and Uganda where the segment has been introduced.
Deepening debt markets
Last year both Tanzania and Uganda followed in Kenya’s footsteps by issuing 15 year domestic bonds aimed at raising funds favourable to their development plans that have much to do with infrastructure development. The bond offers are a continuation of efforts to lengthen the maturity profile of domestic debt as well as deepening of the financial markets. Rwanda took a different route by issuing a USD 400.0 million Eurobond with Kenya expected to follow suit in the first quarter of 2014. Tanzania is not far behind also planning a sovereign bond offering. The common goal remains developing infrastructure. Some of the projects include; an oil pipeline and refinery, two dams, road projects for Uganda; oil pipeline, standard gauge railway system and refinery while Tanzania has the Mtwara-Dar es Salaam pipeline among other projects.
Private Equity the future of the region’s private sector
The private sector’s role is becoming increasingly more relevant in the region with more companies getting to a level where they could take on private equity investments. As of 2012 private equity accounted for just 13 per cent of the USD 500.0 billion in FDI within the region but this could more than double over the next five years. There are an increasing number of private equity funds in the region. The sectors to look out for include;
Agriculture in the region’s food basket
Endowed with over 18 million hectares of arable land, Uganda alone contains nearly half of the arable land in East Africa but only 5.5 million hectares of this is under cultivation. Most of the farming occurs on traditional subsistence farms with little farm mechanisation and this has continued to dampen food production levels. This sector has not got the required attention especially with the oil discovery despite enabling factors like fertile soils and the two rainy seasons every year.
Kenya’s positioning as a regional ICT hub
Kenya’s dominance using Mobile money has contributed to brightening her prospects as an IT hub. In the 11 months to November 2014, USD 200.0 billion was recorded in Mobile transactions. IBM’s initiative to set up its first African research lab in Nairobi echoes Kenya’s ascendency as an ICT hub for both the region and the continent. More importantly are the plans to set up the Konza Techno City that is known to some as the Silicon Savannah. The laying of the fibre cables and faster internet speeds have made the region an ideal business destination for IT ventures and investors.
Infrastructure; the cornerstone of the regional investment and growth
East Africa’s growth strategy and development plans are largely tied to infrastructure development. Uganda has power projects expected to cost USD 2.4 billion, a USD 2.5 billion refinery project, pipeline and major road projects. Kenya’s standard gauge railway is estimate at USD 5.2 billion has got an oil pipeline project as well. Tanzania’s desire to issue a sovereign bond is tied to infrastructure development as is the Rwanda Eurobond issue. Considered an integral driver of regional development of infrastructure is expected to continue given plans like Vision 2030 for Kenya and Vision 2040 for Uganda.
Oil and gas
Tanzania has 43.1 trillion cubic feet of recoverable natural gas reserves and anticipates that will rise fivefold within the next two years if new finds prove productive. Uganda has got about 3.5 billion barrels in oil reserves while exploration in Kenya suggests not only commercial viability but that the reserves could trounce those in Uganda. Even with production not expected before 2017 for either country, deals in the sector are expected to surge going forward.
Scintillating prospects for the regional mining sector
At a time when global demand for rare earth metals is forecast to rise by 48.0 per cent to 185,000 tonnes by 2015 with experts predicting a shortfall of up to 50,000 tonnes by 2015 and a corresponding jump in prices.
Kenya’s profile as a potential top rare earth minerals producer rose a rung higher after mineral explorer Cortec announced it had found deposits worth USD 62.4 billion. The area also has niobium deposits estimated to be worth USD 35.0 billion on Mrima hill that could make Kenya one of the largest rare earth producers in the world.
Uganda’s mineral find includes; Aluminous clays, yttrium, and rare metals such as gallium and scandium, whose worth stands at USD 370.0 billion in districts of Bugiri, Iganga and Mayuge estimated at 300 million tonnage. The value of the aluminous clays alone is estimated at USD 500.0 billion but to achieve that an additional investment of USD 650.0 million is required given that USD 300,000 has already been spent in the exploration.
The region’s second largest economy also revised its coal reserves to 5 billion tonnes from about 1.5 billion tonnes amidst plans to utilise both coal and gas for power generation.
FMCG sector driven by an expanding middle class 
As consumer tastes and preferences continue to drive demand based on the growing middle class the two leading retail chains continue to jostle for a piece of the market. The region clearly still has a lot of potential as shown by Nakumatt whose turnover that grew from USD 300.0 million in 2006 and to reach circa USD 425.0 million in 2012 (The Standard). Uchumi on the other hand posted revenues of USD 120.0 million in 2010. Uchumi’s sales tripled from 5 years ago from KES 4.0 billion to KES 12.0 billion in the same period
Recently, Kenya’s retail chain store Uchumi Supermarket Limited cross listed on the Uganda Securities Exchange (USE) following clearance from market regulator. That is the second cross-listing in the region after that on Rwanda’s bourse with intentions to cross list on the Dar es Salaam bourse as well. The regional rights issue seeks to raise between USD 17.6 million and USD 29.4 million to grow her regional presence.
Nakumatt on the other hand is set to take over three Shoprite outlets in Tanzania in a transaction estimated at USD 47.1 million that would see her increase her branch network to 34 in the region.
Abraaj also closed a deal with Uganda’s largest pharmaceutical in a sector with a CAGR of 13.0 per cent. Estimates show that by this year the industry may attract expenditure of USD 545.0 million from USD 268.0 million in 2011.
Risk
The presence of the Al Qaeda linked Al Shabaab in Somalia remains a risk to the region as demonstrated by the Kenyan bombing in 2013. However just like with the rest of the world this is a risk that is best mitigated by vigilance because it’s a threat world over. The peaceful Kenyan presidential elections last year however made for reduced political risk that has paved way for investors with performance of the stock market performance as one of the indicators. The lingering ICC question regarding the president and the vice president is a thorn in Kenya’s side.
Uganda’s risk profile seems better than that of her Eastern counterpart with stable macroeconomic indicators in the short term. Inflation is expected to remain stable but could rise as the country draws closer to the 2016 presidential elections that are notorious for heavy government spending and subsequent hikes in inflation.
The entire region is expected to cautiously watch the debt levels especially with the push for a regional monetary union because they could negatively affect the region’s growth prospects.

What’s the holdup?
The real challenges remain poorly family structured businesses, the land question especially for the agribusiness related ventures. Many of the informal businesses are profitable with a lot of potential but lack proper accountability and documentation. No wonder sometimes transactions take more than double the expected duration before they are closed. Private equity firms surely need to learn how to navigate the regional markets. Exit strategies remain a challenge but the GEM segment for the NSE and USE is a step in the right direction.
Way forward
Working in partnership with organisations like the EAVCA among others to better navigate the regional market is a start. In as much as investors can make many beneficial changes to local businesses, more flexibility and better understanding of the business terrain would go a long way in tapping the plentiful opportunities.

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