The debt stress in the East Africa region affected stock markets and analysts have warned that the situation is likely to worsen in 2019, writes James Anyanzwa
East African stockmarkets faced a difficult year and the situation is unlikely to change in 2019, with analysts citing the region’s increased exposure to foreign debt as a risk.
Global research firm Focus Economics has warned that emerging and frontier markets are at the risk of heightened volatility in their financial and equity markets and a sizeable currency depreciation in 2019, largely due to higher yields in the United States, increase in oil prices and increased exposure to foreign debt.
The firm notes that increased oil prices are putting pressure on some oil-importing countries, worsening their current account positions while higher yields in the US are likely to cause foreign investors to sell off their stocks in African markets.
In Kenya, the performance of the equity market slowed down during the nine months to September 30, with the Nairobi All Share Index shedding 7.73 per cent of its value to 149.67, from 162.21 in the same period in 2017.
The number of deals dropped 13.37 per cent to 72,155 from 83,295.
The Kenya Capital Markets Authority attributed the decline to increased sales by foreign investors due to several factors, among them profit warnings and declining profitability of listed companies. However, foreign investors sold shares worth $67m compared to $111.2m in the same period in 2017, which was an electioneering time.
According to the Kenya National Treasury, the decline in share prices reflected trends in the global equities markets, as investors shifted to bond markets in expectation of a further rise in interest rate in the United States. Analysts at the global advisory firm StratLink said foreign investors sold shares in firms listed on the Nairobi Securities Exchange and those cross-listed at the Ugandan and Tanzanian bourses such as KCB, Equity Bank, Kenya Airways, Jubilee Holdings and Centum Investments.
In Tanzania, the Dar es Salaam All Share Index fell 15 per cent to 2,105.2, from 2,482, with the total number of deals plummeting 94 per cent to 2,107, from 35,032.
This was largely due to the decrease in share prices for five key counters — Tanga Cement Company, Swissport Tanzania, TOL Gases, Tanzania Breweries and Swala Oil & Gas.
In Kampala, the Uganda All Share Index declined 6 per cent to 1,824.81 from 1,718.28, with the number of deals falling by 17 per cent to 1,405 from 1,693 in the same period.
Global rating agency, Moody’s Investor Service, said the growing debt burden in Kenya, Rwanda, Tanzania and Uganda is weighing heavily on their fiscal strength and credit quality.
Kenya has the highest public debt in the region, which is projected to reach 60 per cent of GDP in the next two years.
However, Moody’s expects increase in public debt to be most pronounced in Uganda with an expected rise of 6 per cent to 44.1 per cent of GDP in 2019. Rwanda has had the most rapid accumulation of debt, reflecting a transition in donor support from grants to concessional loans, according to Moody’s.
Stocks performance across Africa
Africa’s capital markets are facing growth obstacles, among them low liquidity, new listings drought and lack of product diversity, a according to a report published in October.
The second edition of the Africa Financial Markets Index showed that despite African countries implementing policies to bolster regional stockmarket integration, capital markets remain fragmented and shallow, compared with those in Latin American and Asia.
The index by Absa Group, the parent company of Barclays Bank, which surveys 20 stockmarkets in Africa, shows low overall liquidity, with 15 countries having equity market turnover of less than 10 per cent of market capitalisation and 10 having bond turnover of less than 10 per cent of outstanding bonds.
The average market capitalisation is just 56 per cent of GDP. Only three countries — South Africa, Botswana and Ghana — have a market capitalisation greater than 100 per cent of GDP while 14 have a lower than 50 per cent capitalisation.
Understanding the threat of Uganda’s growing debt burden
According to documents presented to Parliament by the director for debt management, Stella Wanyera, in Uganda’s public has increased from $10.5b (Shs38.8 trillion) as of December 2016 to $11.1b (Shs41trillion) as of December 2017, which is 38.4 per cent of the country’s gross domestic product.
Wanyera explained that upon the implementation of the Standard Gauge Railway, the country’s debt to GDP ratio will reach 47 per cent, which is close to the red mark of 50 per cent, the maximum recommended for borrowing, beyond which further borrowing becomes unsustainable. In the 2017 Auditor General’s report, it was revealed that more than Shs18 trillion which government had borrowed was lying idle due to delayed implementation of projects for which the money had been borrowed. Uganda’s public debt has been sporadically rising from only $1.9b in the 2008/09 financial year to over $11b currently.
In the 2018/19 budget shs10trillion (32.7 per cent) of the Shs32.7 trillion was allocated towards debt repayment.
Oil prices in the region have had an adverse effect on stock markets.