East

Africa:
Growing Interest in Investment Opportunities

Report by Sharon Obuobi

East Africa: Growing Interest in Investment Opportunities

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East Africa: Growing Interest in Investment Opportunities

Contents
I. II. Regional Overview
a. East Africa Community 3

Investment Climate
a. Projections and Trends b. Inflation 4 5

III.

Investment Opportunities
a. Increasing Investment Competitiveness for Oil b. Information, Communication, and Technology 6 7

IV.

Investment Risks
a. Inflationary Pressures b. The Role of the EAC in Political Risk c. Growing political uncertainties for investors 7 8 8

V.

East Africa Common Market Potential

a. b. c. d. Achievements Challenges Job Fears Benefits in Trade 9 9 10 10

VI. VII.

Recommendations for developing stronger investor confidence Appendix

a. b. c. d. e. f. g. Member Countries of Regional Groupings Africas Distribution of Resources Natural gas in Africa Operators in East Africa Total Investment by Country Internet Users and Mobile Subscriptions in EAC EAC Common Market Development

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East Africa: Growing Interest in Investment Opportunities

Regional Overview
East Africa Community
The East African Community (EAC) is the regional intergovernmental organization of the Republics of Kenya, Uganda, the United Republic of Tanzania, Republic of Rwanda and Republic of Burundi with its headquarters in Arusha, Tanzania. The EAC is fastest-moving trade bloc in Africa at the moment. It introduced a common market in July 2010 with the hopes of enhancing trade and economic growth in the east. However critics say that the impact will be gradual, as many laws still need to be harmonized, and Tanzania has preserved some opt-outs. The EAC also plans to fast track the introduction of a single currency by 2012, but given the need to harmonize fiscal and monetary policy, critics suggest that 2015 may be a more realistic deadline. According to the EAC, intra-EAC trade grew by 40% between 2005 and 2009. Ugandas exports to Kenya increased more than tenfold from USD15.5 Million in 2004 to USD172 Million in 2009, while Tanzanias exports to Kenya over the same period nearly tripled, from USD 95.5 Million to USD 300 Million. This pattern is expected to be enhanced by the Common Market, which came into effect in July 2010. This increased trade and investment among the EAC Partner States has broadened prospects for economic growth and development.

East Africa: Growing Interest in Investment Opportunities

Investment Climate
Projections and Trends
East Africa is forecasted to be the fastest-growing region in Africa. The Economist Intelligence Unit predicts that although Kenya has no natural resources, it is the key financial and business hub, and the Kenyan economy is expected to grow by 5-6% from ongoing development and reforms. Across the border, Ugandas discovery of oil will boost development and growth, and the country will join the oil club in a few years.

Key mineral producers like Tanzania, will also perform well, as will strong agricultural economies like Ethiopia. Africa will become an increasingly important food supplier to global markets. Countries without major resources but with a strong reform record, such as Rwanda, will also join the ranks of high growth achievers.

East Africa: Growing Interest in Investment Opportunities

Inflation
According to the IMFs Regional Economic Outlook, there has been a sharp increase in inflation in some east African countries as shown below:

Across the EAC region, consumer price inflation was predicated to average 8.5% percent in 2011 compared with 10.2% percent in 2012. Higher food and fuel prices have contributed to the surge in inflation. Although the number of countries in which food inflation is currently above 10 percent has increased in recent months, the number has remained well below the level of nearly 35 countries in which this was observed in 2008.

East Africa: Growing Interest in Investment Opportunities

Investment Opportunities
In Recent News: Increasing Investment Competitiveness for Oil
Financial Times: Big oil groups join scramble for east Africa: By Guy Chazan, March 12, 2012 Statoil set the oil industry abuzz late last month when it announced it had found large volumes of natural gas off the coast of Tanzania, confirming east Africas reputation as one of the energy worlds most promising new frontier. Statoil had lockdown facilities on all its rigs and support vessels to keep staff safe in the event of a pirate attack, while a small flotilla, operated by security contractors and Tanzanian navy personnel, guards the drilling site. The threat of piracy might loom large, but it has not prevented a new scramble for east Africa, led by some of the worlds biggest oil companies. Suddenly Mozambique and Tanzania, which until recently did not even feature on the world energy map, have become some of the gas industry's hottest real estate. Royal Dutch Shell and PTT Exploration, the state-controlled Thai energy group, launched rival offers for Cove Energy, a small Africa-focused oil and gas explorer with an 8.5 per cent stake in a big gas field in Mozambique. Two state-owned Indian groups, GAIL and ONGC, have also expressed an interest in bidding for Cove, though an announcement by the Mozambique authorities last week that they might impose a capital gains tax on the sale of the London-based group could deter potential bidders. The biggest finds were offshore Mozambique, by Anadarko Petroleum and Cove, and Eni of Italy. Their two fields combined could contain up to 60tn cubic feet of recoverable resources of gas nearly as much as Kuwaits entire reserves. That should be enough to turn Mozambique into a key exporter of liquefied natural gas, or LNG, to China and Indias fast-growing economies. And with the region still relatively unexplored, there could be plenty more where that came from, analysts say. Fewer than 500 wells have been drilled in east Africa, compared with some 20,000 in the north and nearly 15,000 in the west of the continent, according to explorer Afren. The large LNG plant that Anadarko has proposed building there will cost about $25bn, more than twice the countrys gross domestic product. Mozambique is one of the poorest countries in Africa, and if it gets this right, it could be one of the richest, says Mr Ashby-Rudd at Standard Bank. Anadarko has announced it is looking to sell some of its stake in the Mozambique field, and Cove put itself up for sale in January. As the majors pile in, the pace of drilling is picking up. Morgan Stanley expects 23 wells to be drilled off Kenya, Tanzania and Mozambique this year, almost double the number in 2011. Eastern sub-Saharan Africa has a lot of potential to grow quickly, and create a lot of value for us, says Enis Mr Descalzi. Its a very exciting moment, both for us and the countries were in. See Appendix, figures C for Natural gas predictions in Africa and D for a map of mentioned Operators in East Africa 6

East Africa: Growing Interest in Investment Opportunities

Information, Communication and Technology (ICT)

The EAC has identified Information and communication technology (ICT) is an increasingly priority area of the EAC Common Market in its pursuit of economic growth and development among partner states. The ICT is critical towards socio-economic and political developments in the region. In addition, ICT is considered as a channel through which the EAC common market will improve global access of people and competitiveness of goods and services from the region. Appendix D shows the growth in internet use and mobile subscriptions in East Africa. Kenya is identified as the country with the largest number of users and subscriptions followed by Uganda and Tanzania. Although Rwanda and Burundi recorded relatively low figures, increasing internet use and mobile subscriptions have been reported. However the total EAC internet use increased significantly from about 2.1 to 6.75 million in Rwanda and 9.7 to 39.7 million in Burundi, both from 2005 to 2008.

Investment Risks
Along with the positive reports and prospects for the majority of countries in sub-Saharan Africa who are set to sustain fairly healthy growth rates in 2011 and 2012, there are still some investment risks that must be considered. The drought in east Africa and the surges in food and fuel prices are causing considerable difficulties in other parts of the sub-Saharan African region, particularly to the urban poor. According to the Economist Intelligence Unit, the other more potent threat to the regions economic prospects is the debt overhang in many advanced economies that is threatening to significantly slow down global growth further in the coming months.

Inflationary pressures
According to the IMF, recent inflation observations for east African countries point to inflationary pressures which are increasing to worrying levelsnearly 40 percent in Ethiopia, and over 16 percent in Kenya and 21 percent in Uganda. As explained in the Regional Economic Outlook, the surge in inflation in these countries points to the dangers of delaying the monetary policy response to shocks. Similarly, the failure to shift fiscal policy from the expansionary footing on which it was placed during the downturn in 200910 to a more neutral stance consistent with debt sustainability considerations is eventually going to be even more detrimental to sustaining high growth and development. Although elections so far in the election-heavy year of 2011 have had much less economic impact than feared, political factors remain an important risk within the region. Much like in other situations worldwide, financial systems are vulnerable to both global and domestic pressures.

East Africa: Growing Interest in Investment Opportunities

The Role of the EAC in Political Risk

The EAC believes that democracy is critical in the achievement of sustainable economic growth and development. It explains, that the greatest hindrance to democratic consolidation in EAC is the perennial conflicts within the horn of Africa and the great lakes region, terrorism and piracy threats including the proliferation of small arms and influx of refugees into the region. The EAC is documenting its participation in initiatives to improve peace and stability in the region with a view to increasing economic development prospects. These include peace and security missions in Somalia and Democratic Republic of Congo; the Sudanese Comprehensive Peace Agreement (CPA), the Great Lakes region, and the Intergovernmental Authority on Development (IGAD) initiatives through which security and stability of the greater Eastern Africa region will be pursued. Within the EAC, Partner States are envisioning the formation of the East African Political Federation to advance socio-economic and political development among the five Partner States in line with AU aspirations.

Growing political uncertainties for investors

FDI inflows correlate inversely with the levels of political risks associated with any country. The political risk indicator is a composite of diverse issues covering governability, socioeconomic environment, ethnic tensions, constitutes components. The sum total of the components indexes rankings indicates whether a country is of high or low risk politically. On the basis of the International Country Risk Guide (ICRG) indicators, the higher the score, the lower the risk. Given that country specific scores between 0 to 49.5 per cent are associated with very high risk; 50 to 59.5 per cent is high risk; 60 to 69.5 per cent is moderate risk and 80 to 100 per cent is very low risk, the EAC has recognized three of its states that have been ranked under the ICGR system. Uganda, Kenya and Tanzania have registered gradual but steady increases during the period under review. For the period 2006-2010:

Uganda was ranked 55- 56 Tanzania was ranked 62- 64 Kenya was ranked 56- 58.
On the basis of these ratings, the EAC believes that there is room for improving governance, rule of law and socio-economic issues in the region in order to improve investment conditions in the region due to the realization that high political risk negatively affects economic performance of a country or region and in particular investment flows.

East Africa: Growing Interest in Investment Opportunities

East Africa Common Market Potential

According to the East Africa Community, the key achievement under the Common Market has been the successful conclusion of the negotiation, signing and ratification of the EAC Common Market Protocol. The EAC explains that the strategic thrust of the CM Protocol has been that of enhancing and institutionalizing the guaranteed provisions in the Protocol through harmonization of policies, legal and regulatory framework and establishment of supportive institutions to facilitate private sector investments, efficient and effective service delivery and wide stakeholder involvement.

Achievements
In terms of the achievements, the EAC has stated that, in addition to the Partner State autonomous liberalization the SAPs and the WTO offers; the preparatory process for the implementation of the EAC Treaty has resulted in the achievements of: Gradual currency convertibility and macro-economic convergence Adoption of common travel documents, work permits and fees for education, tourism, etc Common negotiating frameworks Substantial progress in harmonization of academic and professional qualifications Free movement of capital and harmonization of transport facilitating instruments.

The EAC testifies that this has also resulted in increased cross border student exchange, alternative methods of mobilizing additional development resources from the stock markets, joint sporting activities including interuniversity sports, free movement of natural persons and labour.

Challenges
A number of challenges stand in the way of realizing the full benefits of the Common Market. These include: Inadequate institutional, national and regional level capacities to domesticate regional policies and information access Low levels of awareness across Partner States Inappropriate legal and regulatory frameworks, continued nationalistic tendencies, weak private sector, differences in education systems, cultural diversities, language barriers, differences in level of economic development including limited participation of the various stakeholders Weak capacities of implementing agencies

East Africa: Growing Interest in Investment Opportunities Inadequate safeguard measures and dispute settlement mechanisms Incomplete harmonization of examination and certification Inappropriate labour policies and legislation Weak urban planning policies and disparities in intra-regional trade.

Job Fears
Some member states are concerned that they might have to cope with an influx of better-trained Kenyan workers. The concern over an inflow of migrant labour, especially from Kenya, is shared in other countries in the region. In an interview for the BBC, Jacqueline Mkindi, the executive director of the Tanzania Horticultural Association whose members produce fruit, flowers and vegetables for export said, "Free movement of labour should be encouraged, but to a certain level - not to deprive local people from accessing local jobs. If you have a large number of Tanzanians losing jobs - then people will not feel okay with the common market." Frederick Masiga, business editor for the Daily Monitor newspaper in the Ugandan capital, Kampala was also interviews and was quoted saying, "most Ugandans think their jobs will be taken over by their neighbour, Kenya. It's a quite understandable view, because so many Kenyans are already established in Uganda. Some Ugandans feel that once the borders are opened and you get people flowing across the border and looking for jobs, they are going to be out-competed in the labour market." Thus the challenge for the EAC will be the regulation of migrating labour from partnering countries, in order to avoid an increase in local unemployment.

Benefits In Trade
Despite the worries about migrant labour, most businesses support the move to a common market and are keen to see an end to the delays and costs of getting their goods across borders. Consumers hope that this will resolve challenges like the difference in operation hours between Kenya and Tanzania. The common market aims to build on this - to enable the free movement of people, capital and services and abolish import duties. The hope is that member states will adopt a common currency by 2012, allowing them to move towards a political federation.

See Appendix E for the breakdown of the Common Market projected development stages

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East Africa: Growing Interest in Investment Opportunities

Recommendations for developing stronger investor confidence

Due to the high level of increased investment competition for East Africas oil and natural gas, the pressure to ensure stronger investor confidence in this area seems reduced. Some recommendations to develop this further would be to: Reinforce profitability of investment projects Communicate the EACs dedication to a politically safe and economically healthy environment Communicate the economic sustainability of FDI investments Communicate the confidence of European, and South African banks in investment opportunities (See Africa Investment Outlook)

For applicable, practical information on mitigating the risks of doing business in east Africa, the IFC has published a detailed report entitled, Doing Business in the East African Community. This report will be provided along with this research report. For information on Key Considerations, please see the Key Considerations section in the Africa Investment Outlook research report. 11

East Africa: Growing Interest in Investment Opportunities

Appendix
A. Member Countries of Regional Groupings

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East Africa: Growing Interest in Investment Opportunities

B. Africas Distribution of Resources

C. Natural gas in Africa

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East Africa: Growing Interest in Investment Opportunities

D. Operators in East Africa

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East Africa: Growing Interest in Investment Opportunities

E. Total Investment by Country

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East Africa: Growing Interest in Investment Opportunities

F. Internet Users and Mobile Phone Subscription in EAC

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East Africa: Growing Interest in Investment Opportunities

G. EAC Common Market Development

Development Objective: To fully implement the EAC Common Market Protocol (CMP)

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East Africa: Growing Interest in Investment Opportunities

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East Africa: Growing Interest in Investment Opportunities

Diagrams in-text
A. Real GDP Growth Forecasts "GCC trade and investment flows: The emerging-market surge." Economist Intelligence Unit. (2011): n. page. Print. B. Consumer Prices Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011) C. Africa GDP vs world GDP "GCC trade and investment flows: The emerging-market surge." Economist Intelligence Unit. (2011): n. page. Print.

Diagrams in Appendix
A. Member Countries of Regional Groupings Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011) B. Africa: Key Resources "Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit. (2012): n. page. Print C. Natural Gas in Africa Chazan, Guy. "Big oil groups join scramble for east Africa." Financial Times 12 Mar 2012, n. pag. Print. D. Operators in East Africa Chazan, Guy. "Big oil groups join scramble for east Africa." Financial Times 12 Mar 2012, n. pag. Print. E. Total Investment by Country Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011) F. Internet Users and Mobile Phone Subscription The East African Community. 4th EAC Development Strategy. Arusha: , 2011. Print. G. EAC Common Market Development The East African Community. 4th EAC Development Strategy. Arusha: , 2011. Print.

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East Africa: Growing Interest in Investment Opportunities

Other Sources
"Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit. (2012): n. page. Print "GCC trade and investment flows: The emerging-market surge." Economist Intelligence Unit. (2011): n. page. Print. Chazan, Guy. "Big oil groups join scramble for east Africa." Financial Times 12 Mar 2012, n. pag. Print. The East African Community. 4th EAC Development Strategy. Arusha: , 2011. Print. ONeill, Dominic. "Investment Banks Eye the Last Frontier: Africa." Euromoney. 00142433 (2011): ABI/INFORM Global; ABI/INFORM Trade & Industry; ProQuest European Business. Web. 24 Mar. 2012. "Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011). Print.

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East Africa: Growing Interest in Investment Opportunities

Disclaimer This publication contains general information only, and Sub-Saharan Consulting Group is by no means of this publication, rendering professional advice or services. Consult a qualified professional before making any decisions or taking actions that may affect your finances or business. Sub-Saharan Consulting Group 2012 Designed and written by Sharon Obuobi
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