Moody's 5th Annual East Africa Summit - Rich.co.ke

Moody’s

th 5

Annual East Africa Summit JULY, 2018

Agenda

08.30

Welcome Address

08.40

Emerging Market Landscape

09.10

Keynote Address

09.30

Fireside Chat: Fiscal consolidation challenges

10.10

Networking & Refreshment Break

10.40

Banking system remains resilient

11.20

Kenyan corporates post-election prospects

12.00

Lunch & Networking

13.00

A tour of East African Community: peer comparison of the region’s credit profiles

13.40

Financing Trade, Infrastructure and Development in Africa: Multilateral Development Banks as catalysts for private sector engagement

14.30

Closing Remarks

Cross Sector: Africa Credit Landscape Sean Marion, Managing Director, Banking EMEA

JULY, 2018

Agenda 1

Credit landscape and growth

2

Evolving financial conditions

3

Politics, tech, climate & demographics

Cross Sector: Africa Credit Landscape, July, 2018

5

1

Credit landscape and Growth

Polling Question What best describes your trade? 1. Asset management 2. Banking 3. Corporate 4. Government 5. Intermediary services

6. Other


7

Moody’s Broad Coverage Serves Global Needs


8

Sovereign: 24 countries + MDBs

Ratings refer to local currency


9

Banking: 50 Institutions in 12 countries

Deposit ratings refer to local currency


10

Corporate: 23 large corporates

* Headquartered in the Netherlands ** Registered in Bermuda and domiciled in Jersey ■ Positive outlook ■ Negative outlook or Ratings Under Review for Downgrade


11

Polling Question What concerns you the most about African credit quality in the short term 1. Geopolitical risks 2. FX volatility

3. Government-related risks (fiscal, political or policy risks) 4. Weaknesses in banking sector’s fundamentals

5. Technology / cyber threats


12

Still below potential, but growth is recovering… Real GDP growth - Rated African countries 5-year average Real GDP growth - Rated African countries (excluding Nigeria and South Africa)

8%

7% 6%

5% 4% 3% 2% 1% 0% 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018F

2019F

Source: Moody’s Investors Service


13

…driven by rising oil and commodity prices, and supportive external conditions Commodity Price Index

Imports Volume Annual Growth Rate (%)

Fuels Primary commodities excluding fuels

140

World Advanced economies Emerging economies

Industrial Production Annual Growth Rate (%) World Advanced economies Emerging economies

5%

130 12% 120

4% 10%

110

3%

8%

100

90

6%

2%

80

4%

1%

70

2%

60

0%

-1% -1%

50

-3%

40 2013

2014

2015

2016

2017

2018

-2%

-5% 2013

2014

2015

2016

2017

2018

2013

2014

2015

2016

2017 2018

Source: CPB World Trade Monitor


14

Growth divergence persists 2010-2017 Namibia South Africa

Ethiopia 10%

2018-19F Rwanda

8%

Ghana

6%

Angola

Tanzania

4% 2%

Republic of the Congo

Senegal

0% Mozambique

Kenya

Nigeria

Uganda

Gabon

Botswana

Mauritius

DRC Zambia



15

Polling Question What concerns you the most about the Kenyan credit quality in the short term? 1. Geopolitical risks

2. FX volatility 3. Government-related risks (fiscal, political or policy risks) 4. Weaknesses in banking sector’s fundamentals 5. Technology / cyber threats


16

2

Evolving financial conditions

Resilient debt issuances and capital flows have supported financial stability Historical trends in African debt issuances by Sovereign, Financial Institutions and Corporates Corporate

Financial Institutions

Sovereign

35

30

USD billions

25 20 15 10

5 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: DeaLogic, as of 25 June 2018


18

Sep 2020

Mar 2020

Sep 2019

Mar 2019

Sep 2018

Mar 2018

Sep 2017

Mar 2017

Sep 2016

Mar 2016

Sep 2015

Mar 2015

Sep 2014

Mar 2014

Target Fed Funds Rate

Sep 2013

Mar 2013

Sep 2012

Mar 2012

Sep 2011

Mar 2011

Sep 2010

Mar 2010

Sep 2009

Mar 2009

Sep 2008

Mar 2008

%

Tightening financial conditions increase funding costs… 4.5

ECB Main Refi Rate

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

-


Cross Sector: Africa Credit Landscape, July, 2018 19

Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18

Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18

Jun 15

Mar 15

Dec 14

Sep 14

Jun 14

Mar 14

Dec 13

Sep 13

Jun 13

Mar 13

Dec 12

Sep 12

Jun 12

Mar 12

Dec 11

Sep 11

Jun 11

Mar 11

Dec 10

Sep 16

-6

Jun 16

-4

Jun 16

-2 Mar 16

1

Mar 16

3

Dec 15

Debt Flows

Dec 15

5

Sep 15

Total portfolio flows in Africa and the Middle East

Sep 15

Jun 15

Mar 15

Equity Flows

Dec 14

Sep 14

Jun 14

Mar 14

Dec 13

Sep 13

Jun 13

Mar 13

Dec 12

7

Sep 12

Jun 12

Mar 12

Dec 11

Sep 11

Jun 11

Mar 11

Dec 10

USD billions

USD billions

…and curb capital flows

Total portfolio flows in emerging markets 55 45 35 25 15 5 -5 -15 -25

Source: The Institute of International Finance

Cross Sector: Africa Credit Landscape, July, 2018 20

Pressures in foreign-exchange markets could also impact creditors… Currency movement against the USD 2015

2016

2017

YTD 2018

20% 0% -20% -40%

Argentina

Turkey

Zambia

Uganda

Tunisia

Tanzania

South Africa

Senegal

Rwanda

Rep. of the Congo

Nigeria

Namibia

Mozambique

Morocco

Mauritius

Kenya

Ghana

Gabon

Ethiopia

Egypt

DRC

Cote d'Ivoire

Botswana

Angola

-60%

Sources: oanda.com, Moody’s Investors Service


21

… in all areas of the economy Impact of currency depreciation

Sovereigns

Banks

» Foreign-currency » Improvement in the borrowers without income current account balance in the same currency » But the burden of struggle to make debt servicing foreignpayments currency debt will increase

» Capital is eroded because of higher risk-weights on foreign-currency loans » Profits fall because of higher loan-loss provisions and lower trade-related business

Corporates

» Cost of servicing unhedged dollar debt obligation rises » High imported operating and capex costs lower operating margins and return on investment » Lower sums repatriated in foreign currency


22

Higher government debt (especially fx) also amplifies risks Foreign Currency Gen. Gov. Debt % GDP

Local Currency Gen. Gov. Debt % GDP

140% 120% 100% 80% 60% 40% 20%

Zambia

Uganda

Tunisia

Tanzania

South Africa

Senegal

Rwanda

Rep. of the Congo

Nigeria

Namibia

Mozambique

Morocco

Mauritius

Kenya

Ghana

Gabon

Ethiopia

Egypt

DRC

Cote d'Ivoire

Botswana

Angola

0%

Note: Left country bar corresponds to 2010 data, while right country bar to 2017 data. Source: Moody’s Investors Service


23

We anticipate volatile but broadly resilient market access to (re) finance future growth Debt maturities Corporate

25

Financial Institutions

Sovereign

USD billions

20 15 10 5

2057

2048

2047

2046

2045

2044

2043

2042

2041

2040

2039

2038

2037

2036

2035

2034

2033

2032

2031

2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

-

Source: DeaLogic, as of 25 June 2018


24

3

Politics, Tech, Climate & Demographics

Political risk is receding in some countries South Africa Cyril Ramaphosa replaced Jacob Zuma boosting institutional strength and investor confidence. Angola Joao Lourenco replaced Jose Eduardo dos Santos in 2017 – too early to call impact

Mauritius, Senegal, Ghana… and to some extent Kenya, Nigeria … have a demonstrated track record of peaceful transition to power and policy continuity


26

Policy: Inspiring models of long-term development Indonesia (Sov) » »

Commodity exporting economy Progressed to investment grade (IG) from B3 in less than 10 years (2003 – 2012)

Common trigger Contained inflation, boosted credit affordability

Philippines (Sov) »

Progressed to investment grade (IG) from B1 in 7 years (2008 – 2015)



27

At this stage, high domestic inflation and interest rates prevail in most African markets Inflation rate (2017)

Rate on 1y Treasury bill

Rate on 5y Treasury bond

Average overall lending rate

50% 40% 30% 20% 10%

Zambia

Uganda

Tunisia

Tanzania

South Africa

Senegal

Rwanda

Rep. of the Congo

Nigeria

Namibia

Mozambique

Morocco

Mauritius

Kenya

Ghana

Gabon

Ethiopia

Egypt

DRC

Cote d'Ivoire

Botswana

Angola

0%

Note: Presenting latest available information. Sources: Bloomberg data, central bank data


28

Mobile phone technology is a key digital tool supporting financial inclusion The size of the circles indicate the banking sector size to GDP

100% Kenya

Mobile account penetration **

80% 52%

Uganda Zimbabwe

60% Cote d'Ivoire

40%

Tanzania

98%

66%

75%

Rwanda

28% 45%

Namibia

Ghana 44%

South Africa

35% 28%

20%

Egypt

11%

DR Congo

115%

0%

127% 0%

Zambia 111%

47% Botswana

Mauritius

120% 281%

25%Nigeria

Tunisia

Morocco -20% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Adults with accounts at financial institution * * The percentage of respondents over the age of 15 who report having an account (by themselves or together with someone else) at a bank or another type of financial institution. Financial institution such as a credit union, microfinance institution, cooperative, or the post office (if applicable), or having a debit card in their own name. ** Mobile money account (%) Source: Global Findex report 2017 – World Bank, International Monetary Fund data, central bank data, Moody’s Investors Service


29

… which has significant benefits for the economy, the banks and businesses Reduces informal economy, increasing the government’s tax base; helps boost private savings and reduces vulnerabilities to shocks

Financial Inclusion

Facilitates increased consumption and helps generate SME investment and employment. Helps boost private savings and reduces vulnerabilities to shocks For banks it creates new business opportunities who can cross-sell banking products, and help reduce costs


30

Africa is the continent most vulnerable to physical climate change

Source: Moody’s Investors Service. For more details see: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1039339


31

Climate change impact follows four primary transmission channels


32

Africa has the youngest population globally Demographic dividend on offer: rising numbers of young workers can boost the economy (although this is partly dependent on health, education and the empowerment of women). Children

Young workers

Prime workers

Older

Europe North America

Oceania Asia LATAM & The Caribbean Africa WORLD 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Note: Age categories as of December 2015 are 0-14 (Children), 15-24 (Young workers), 25-59 (Prime workers) and 60+ (Older). Source: UN World Population Prospects


33

… and the fastest urbanisation Urbanisation creates efficiencies that stem from the opportunities and services the cities can provide to their residents. Africa

Asia

Europe

Latam & The Caribbean

North America

Oceania

4%

3%

2%

1%

2045-2050

2040-2045

2035-2040

2030-2035

2025-2030

2020-2025

2015-2020

2010-2015

2005-2010

2000-2005

1995-2000

1990-1995

0%

Source: United Nations data as of June 2014, Moody’s Investors Service


34

Key messages Six credit themes:

Growth

Financial stability

Political risk

Technology

Growth is accelerating but remains below potential; capital flows are resilient, but risks from rising US interest rates and high government debt; high political risks remain, despite some positive developments.

Climate change

Demographics

Key Africa remains a diverse region, with differing prospects for individual countries and industries – investors buy the Africa long-term story

long-term credit differentiation factor: containment of boom-bust cycle


35

Sean Marion Managing Director – Financial Institutions Group [email protected] +44.20.7772.1056 moodys.com

Keynote Address Dr Patrick Njoroge, Governor, Central Bank of Kenya

JULY, 2018

Sovereign Spotlight: Kenya’s Fiscal Consolidation Challenge Matt Robinson, Associate Managing Director, Sovereign Risk Group Lucie Villa, VP - Senior Credit Officer, Sovereign Risk Group

JULY, 2018

Strong growth outlook Why fiscal challenges persist? Real growth (%)

Contribution to growth (%)

Kenya

B2 median

Household consumption Exports

East Africa median

9

14

8

12

Government consumption Imports

Gross capital formation Real GDP growth

10

7

8 6 6

5 4 4 2 3 0 2

-2

1

0 2010

-4 -6 2011

2012

2013

2014

2015

2016

2017

Sources: Moody’s Investors Service, National Statistical Authorities

2018F

2019F

2020F

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017 2018F 2019F

Sources: Moody’s Investors Service, Haver Analytics

Kenya’s Fiscal Consolidation Challenge

39

Policy effectiveness Is fiscal policy effectiveness lagging? (%, LHS; Kes/USD, RHS) Policy rate - LHS

20%

(Kes billions) Total inflation YoY - LHS

Exchange rate - RHS

110

Own revenues Interest payments

Grants Development spending

Primary recurrent spending Other spending

2,500

18% 105 2,000

16% 100

14%

1,500

12%

95

10% 90

8% 6%

1,000

85 500

4% 80 2%

Sources: Moody’s Investors Service, Central Bank of Kenya, National Treasury

2014/15

2015/16

2016/17

BPS

Budget

BPS

Budget

Actual

BPS

Budget

Actual

BPS

Budget

Actual

BPS

Budget

Actual

BPS

Budget

Actual

BPS

Budget

BPS

Actual

Apr-18

Jan-18

Oct-17

Jul-17

Apr-17

Jan-17

Jul-16

Oct-16

Apr-16

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Jul-14

Oct-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Jul-12

Oct-12

Apr-12

75

Jan-12

0%

Budget

0

2017/18

Sources: Moody’s Investors Service, Central Bank of Kenya, National Treasury


40

Trend in fiscal deficit How to look at the reduction in fiscal defict? (% of GDP)

(% of GDP)

Primary balance

Fiscal balance net of dev. exp. and net lending

Income tax Excise duty Grants Dev. and net lending

Fiscal balance

4%

VAT Other revenues Recurrent primary spending Interest

30% 2% 25% 0%

20%

-2%

15%

10%

-4%

5% -6%

2011/12

2012/13

2013/14

2014/15

Sources: Moody’s Investors Service, National Treasury

2015/16

2016/17

2017/18

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

Expenditures

Revenues

Expenditures

Revenues

Expenditures

Revenues

Expenditures

Revenues

Expenditures

Revenues

Expenditures

-10% 2010/11

Revenues

-8%

Expenditures

Revenues

0%

2017/18



41

Government debt trend Why is Kenya’s government debt particularly concerning? (% of GDP) Bilateral

Multilateral

External private (banks)

T-Bills

Jun-14

Jun-15

Bonds

Other domestic debt

60%

50%

40%

30%

20%

10%

0%

Jun-12

Jun-13

Jun-16

Jun-17

Mar-18



42

Matt Robinson Associate Managing Director Sovereign Risk Group [email protected] +44.207.772.5635

Lucie Villa Vice President – Senior Credit Officer [email protected] +33.153.301.042 moodys.com

Networking & Refreshment Break

Banking system remains resilient JULY, 2018

Panel Discussion: Banking system remains resilient

Sean Marion

Christos Theofilou

Managing Director Financial Institutions Group

Vice President – Senior Analyst Financial Institutions Group

Banking system remains resilient, July 2018

46

Kenyan corporates post-election prospects JULY, 2018

Fireside Chat: Fiscal consolidation challenges

Doug Rowlings

Aly Khan

Vice President – Senior Analyst Corporate Finance Group

CEO, Rich Management

Kenyan corporates post-election prospects, July 2018

48

Lunch and networking

A tour of East African Community: peer comparison of the region’s credit profiles Lucie Villa, VP-Sr Credit Officer, Sovereign Risk Group Daniela Re Fraschini, AVP-Analyst, Sovereign Risk Group

JULY, 2018

Agenda 1. 2. 3. 4.

Economic strength Fiscal strength Institutional strength Susceptibility to event risk

A tour of East African Community, July 2018

51

Polling Question In which East African economy do you expect to see the strongest growth over the next two years?

1 – Kenya 2 – Rwanda 3 – Tanzania 4 – Uganda


52

Growth dynamics to remain robust over the next two years Real GDP growth, % change, y-o-y B-rated median Kenya

Real GDP growth and volatility (%, 2010-17 average)

Tanzania Uganda

Rwanda

Real GDP growth volatility, 2010-17

10.0

6.0

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0

5.0

4.0

3.0

2.0

Uganda Rwanda Kenya Tanzania

1.0

1.0

-

0.0 2010

2011

2012

2013

2014


2015

2016

2017 F2018 F2019

(4.0)

(2.0)

2.0 4.0 6.0 Average real GDP growth, 2010-17

8.0

10.0

12.0



53

Size and diversification support shock absorption capacity All four economies are relatively small in our rating universe, with lower GDP per capita than rating peers (Nominal GDP US$, 2016; GDP per capita PPP, 2016)

GDP per capita, PPP intl

14,000 Sri Lanka B1

Tunisia B2

12,000 Swaziland B2 10,000 Belize B3

Jamaica B3

8,000

Angola B3 Nicaragua B2

6,000

Honduras B1 Cameroon B2

4,000

Tanzania B1

Papua New Guinea B2

Kenya B2

Uganda B2

2,000

Ethiopia B1

Rwanda B2

0 0.0

20.0

40.0

60.0

80.0

100.0

120.0

Nominal GDP US$ billions



54

Fiscal deficits to remain large, driven by development expenditure Fiscal deficit, % GDP Average (2012-17E)

2018F

2019F

8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Kenya

Sri Lanka

Maldives

Ecuador

Uganda

Cameroon Rwanda

B-rated median

Swaziland Tanzania

Nigeria

Honduras

Ethiopia



55

Debt levels have been rising across the region... General government debt, % GDP B-rated median

Rwanda

Tanzania

Kenya

Uganda

70 60 50 40 30 20 10 0 2010

2011

2012

2013

2014

2015

2016

2017

2018F

2019F



56

...while debt affordability has deteriorated Interest payments to revenue, % 25.0

Angola

Interest to revenue, 2017

20.0

Kenya Uganda El Salvador

15.0 Tanzania 10.0

Tunisia Armenia Honduras RwandaB-rated median

5.0

Albania

Nicaragua Cameroon

0.0 0.0

5.0

10.0 15.0 Interest to revenue, 2012

20.0

25.0



57

Institutional challenges constrain the ability to manage rising debt levels

Source: World Bank, Moody’s Investors Service


58

External vulnerabilities remain low, except for Rwanda… Current account balance, % GDP 1 -1 -3 -5 -7 -9 Average 2013-2017

Average 2018-2019F

-11 -13 Uganda

Kenya

Tanzania

Rwanda



59

…with domestic political conditions and liquidity risk being the main drivers Already high gross borrowing requirements will stabilize or increase in 2018-19 (% GDP) 25%

Average 2016-17

Political event risk remains elevated across the region

Average 2018-19F

20% 15% 10% 5%

0% Kenya

Uganda


Rwanda

Tanzania Source: Moody’s Investors Service


60

Lucie Villa Vice President – Senior Credit Officer Sovereign Risk Group [email protected] +33.153.301.042

Daniela Re Fraschini AVP – Analyst Sovereign Risk Group [email protected] +44 (0) 20 7772 1063 moodys.com

Financing trade and development in Africa: Multilateral Development Banks as catalysts for private sector engagement Matt Robinson, Associate Managing Director, Sovereign Risk Group Christopher Bredholt, Vice President – Senior Credit Officer, Infrastructure Finance Group

JULY, 2018

Sub-Saharan Africa’s Infrastructure Needs SSA annual infrastructure financing needs:

$130-$170 billion

$70-100bn financing gap African Development Bank 2018 Outlook

Underdeveloped infrastructure, inability to finance constrains Africa’s GDP per capita

up to

2.6% per year

Boston Consulting Group/ Africa Finance Corporation May 2017 infrastructure report

Financing Trade, Infrastructure and Development in Africa, 4 July 2018

63

Polling Question In which infrastructure financing option do you expect to see most growth in East Africa over the next 2-3 years?

1. Local currency commercial bank lending 2. International commercial bank lending 3. Institutional investment (e.g. pensions funds, asset managers) 4. Multilateral/DFI lending 5. Blended finance 6. Government financing Financing Trade, Infrastructure and Development in Africa, 4 July 2018

64

African infrastructure financing trends by source How to increase private participation and reduce strain on govts? African Govts 90

Donors (ICA members)

MDBs & DFIs

China

Arab Countries

Private Sector

80 70

$ billion

60 50 40 30 20 10 0 2012

2013

2014

2015

2016

Source: Infrastructure Consortium for Africa, 2017

Financing Trade, Infrastructure and Development in Africa, 4 July 2018

65

Ms Vivienne Yeda Apopo Director-General

Agenda

Admassu Tadesse President Chief Executive Officer

Benjamin Mugisha Senior Underwriter

MDBs in Africa: policy environment, infrastructure sector needs, trade finance requirements, market financing conditions, etc. Mobilising private sector investment into East Africa Infrastructure: Lessons learnt from other emerging and developing economies Financing Trade, Infrastructure and Development in Africa, 4 July 2018

66

Matt Robinson Associate Managing Director Sovereign Risk Group [email protected] +44 (0) 207 772 5635

Christopher Bredholt Vice President – Senior Credit Officer Infrastructure Finance Group [email protected] +44 (0) 207 772 1797 moodys.com

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East Africa Summit, July 2018

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