Monthly Highlights: January 2009

•  East Africa suffered on back of weakness in Kenya & Mauritius
•  Nigeria capitulated amid heavy selling pressure and Naira-related weakness
•  Declining commodity prices continue to weigh on mining concerns across Southern Africa
 

East Africa suffered on back of weakness in Kenya & Mauritius

East African equity markets resumed their slide in January with the NSE20 (Kenya) and SEM-7 (Mauritius) falling by -9.15% and -4.21%, respectively. In Kenya, economic uncertainty has taken center stage as reduced tourism, elevated energy prices and rising food prices have forced the government to act decisively in its efforts to bolster the economy. The current crisis will put Kenya’s coalition government to the test as social friction is likely to accelerate in the face of declining national output. It should be noted that Fitch has implicitly signed off on the current regime as the country’s debt rating was upgraded from B+ Negative to B+ Stable in January. In Mauritius, the Central Statistics Office revised its 2009 economic growth forecast from 5.2% to 4.0% as revenues from tourism and textiles are expected to decline meaningfully. Yet despite the negative headwinds, we are encouraged by Mauritian prospects as credit growth remains healthy amid rapidly declining inflation. We advocate an activist approach on the part of government and applaud last month’s Bank of Mauritius decision to cut the nation’s benchmark interest rate by 100bp to 6.75%.

Nigeria capitulated amid heavy selling pressure and Naira-related weakness

West African equity market performance was dreadful as the NSE All Share (Nigeria) plummeted -30.63% on the month. The naira sank to new lows with the official NGN-USD cross-rate breaking N150. On multiple occasions, the inter-bank foreign exchange market saw its trading halted and hours of operation revised as the Central Bank of Nigeria took aggressive measures aimed at stabilizing the naira. Despite recent attempts to mitigate the slide, such a correction is indeed necessary and we advocate a laissez-faire approach on the part of Nigerian policymakers. Ghana is presently coping with currency issues of its own as the newly elected government has openly declared bankruptcy with its predecessors blamed for “raiding the larder”. The GSE All Share (Ghana) declined -2.02% in January as portfolio inflows and remittances have begun to deteriorate. Still, Fitch provided Ghana with a balanced assessment and maintained the country’s B+ Stable rating. Despite the benefits of a countercyclical macroeconomic backdrop (gold exporter/oil importer), Ghana’s twin deficits have now grown to nearly 40% of GDP and are likely to rise further in the months ahead. As such, we remain sanguine on the nation’s medium-term prospects.

Declining commodity prices continue to weigh on mining concerns across Southern Africa

In Southern Africa, commodity-related weakness weighed heavily on mining concerns in nations such as Botswana and Zambia. In Zambia, the LuSE All Share declined by -6.64% as the kwacha continues to depreciate in line with softening demand for its base metal exports. Yet despite the decline in copper prices, we are still looking for approximately 3.5% GDP growth in 2009 as local asset quality is strong and the banking sector remains well capitalized. Shifting to Zimbabwe, the leading opposition party led by Morgan Tsvangirai has agreed to form a coalition government with Robert Mugabe’s Zanu PF and the smaller MDC-M faction. We remain highly skeptical of the proposed coalition government as Mugabe’s influence will likely undermine the long-term viability of any agreement. In addition, the Zimbabwe Ministry of Finance has agreed to the use of multiple foreign currencies for business transactions. While this is a critical first step toward liberalisation of the Zimbabwe Stock Exchange, we remain highly skeptical and await next month’s highly anticipated Monetary Policy Statement for greater clarity on implementation.