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The East African : December 9th 2013
MONEY AND EQUITY MARKETS DECEMBER 7-13,2013 EXCESSIVE DEBT Go slow on spending, borrowing IMF tells Uganda and Rwanda The two count≥ies ≥isk stoking inflationa≥y p≥essu≥es and pushing up lending ≥ates By PETERSON THIONG’O The EastAfrican spending and appetite for borrowing, the International Monetary Fund has warned, as the countries risk stoking inflationary pressures and pushing up lending rates. In its latest review on the two R economies, the global lender singles out the temptation to overshoot spending plans as one of the biggest risks facing the countries. As such, the central banks will need to closely monitor rising inflationary pressures, adjust the lending policy stance appropriately and keep watch of the currency. Against a background of a re- newed sense of urgency in infrastructure spending, East African nations are increasingly loading more debt into their books, triggering concerns that this could crowd out private borrowers. “Going forward, Rwanda’s fiscal policy will need to focus on domestic revenue mobilisation to finance the authorities’ ambitious development goals. Aligning spending with available resources and judicious selection and financing of investment projects will minimise risks to the budget,” said Naoyuki Shinohara, the deputy managing director and acting chair of the IMF executive board on Rwanda. On Uganda, the IMF said al- though the country remains on track to posting a 6.2 per cent GDP growth, the temptation to overshoot budget especially when funded from local sources could slow down private sector lending and by extension choke out economic recovery. “To support this outlook, the au- thorities have to find the right balance between encouraging growth and avoid crowding out private sector activity by resisting rising spending pressures and strictly adhering to the budget,” said Mr Shinohara. “Tax revenue collection in Uganda remains low by regional standards and needs to improve. This will require a thorough assessment of the tax system to eliminate the numerous exemptions that have outlived their usefulness.” Companies in Uganda are in- creasingly using internally generated funds to finance projects and expansion plans because of the high cost of credit, the latest market survey by the Uganda Investment Authority shows. Borrowers in Uganda are cur- rently paying at least 24 per cent interest on loans while in Rwanda and Burundi, they are being asked for an average of 20 per cent. Banks in Tanzania are charging at least 21 per cent interest on loans. Independent economists say the biggest risks for East African economies is both in the speed at which they are sucking in debt and the projects they are doing. “Our debt curve has been rising steeply over the past five years…but most worrying is that a sizeable amount is going into paying for recurrent spending and even part of what goes into capital projects really doesn’t go into our forex generating sectors like agriculture and tourism,” said Gitau Githogo, a Nairobi-based economist. The IMF further said Uganda and Rwanda will need to also keep a close eye on their budget funding mix to ensure that any new loan commitments do not put unnecessary strain on the country. “It will also be important to strengthen debt management capacity and follow a prudent approach to new borrowing to entrench longterm fiscal and debt sustainability,” said Mr Shinohara. East African nations are increasingly loading more debt into their books, triggering concerns this could crowd out private borrowers. Road works in Kampala. Against a background of a renewed sense of urgency in infrastructure spending, East African nations are increasingly loading more debt into their books. Picture: File Analysts said that the govern- ments will also need to push for more private sector lead projects. “Having more public—private partnership will also help cut project development cost for the government will at the same time enabling it to tap into private sector expertise,” said Urbanus Kioko, an economist at Kenyatta University. According to a debt analysis by the IMF for countries in the region, Kenya, Tanzania and Uganda rank as low-risk countries, with the burdens well below threshold levels for low-income countries. Rwanda carries a moderate risk because stress tests indicated that threshold levels would be breached in the face of external shocks (terms of trade and aid shocks.) The lender recommends a debt to GDP ratio of 50 per cent for low countries, but Kenya is currently operating at 54 per cent, Tanzania 47 per cent, Burundi 36 per cent and Rwanda at 26 per cent. While countries in the region are mainly dependent on multilateral sources of concessional funding, some are turning to international bond markets for Additional sources of finance. Tanzania issued a $600 million seven year note in March, and Rwanda issued a $400 million 10 year Eurobond in April. Kenya plans to issue a $1-2 billion bond early next year. “However, given the fact that such borrowing is considerably more expensive than concessional finance, governments of the region need to put certain limits on such borrowing,” said the UN Commission on Africa in a report titled Tracking Progress on Macroeconomic and Social Developments in the Eastern Africa Region 2012-13. wanda and Uganda will have to keep a close eye on rising Business watch Old Mutual now ready to acquire controlling stake in Faulu Kenya Old Mutual has finalised the regulatory approval process to acquire a controlling stake in Faulu Kenya DTM, a deposit taking microfinance company. The deal will see Old Mutual venture into the country’s fast-growing banking sector, adding to its business which includes trading shares, selling insurance products and offering loans. “This partnership gives our more than 400,000 clients access to affordable insurance services through Old Mutual’s wide range of products,” said John Mwaura, Faulu managing director. Capital Markets Authority to reform sector to attract more investors Kenya’s Capital Markets Authority plans to revise sector regulations so that it can attract more domestic and foreign investors, the industry regulator said last week. Some of the changes expected include a modernised financial market infrastructure to ensure seamless transactions. According to the Capital Markets Master Plan (CMMP) expected to guide capital markets for the next 10 years, the sector should be well positioned to support national economic growth, with a long term goal to adhere to the same regulatory standards as other international capital markets. Tanzania shilling to stabilise further this month, with more dollar inflows expected The Tanzania shilling will stabilise further this month, analysts said, with more dollar inflows expected from tourism and agriculture sectors coupled with year end tax payments. The shilling that traded at 1,625 against the dollar on Monday, had gained muscle to trade at 1,622 on Friday. Elsewhere, analysts said the interest in government bonds across the region was headed for a slide as the year comes to an end. Funds are being directed elsewhere to meet obligations such as taxes, salaries, bonuses, holiday spending and school fees in January. Rwanda stockmarket sluggish as trading in Kenya, Uganda, Tanzania shows resilience 57 The Rwanda Stock Exchange. Picture: File Trading at the Rwanda Stock Exchange slowed over the previous week as that in bourses in Kenya, Uganda and Tanzania showed resilience. Statistics show that the RSE All Share Index lost 0.24 per cent week on week to close at 138.98. The All Share Index shows the changing average value of the share prices of all companies on a stock exchange, a measure of how well a market is performing: The Uganda Stock Exchange All Share Index gained 0.45 per cent to close at 1,609.46 while that on the Dar es Salaam stockmarket gained 11.02 per cent to close at 2,890 over the same period.
December 2nd 2013
December 16th 2013