Economic trends in East Africa draw international investors

Low oil prices and Kenya’s increasing economic activity and strong global market performance is drawing the interest of international investors towards East Africa.

Gyongi King, chief investment officer at Caveo Fund Solutions, has visited the region over five years and has made observations across banking, telecoms and power sectors. Being ‘on the ground’ gives investors insight to make better investment decisions, says King. “There’s lots of opportunity.”

Despite the positive performance of Kenya’s equity markets, there are risks. This includes security (Al-Shabab attacks have heightened tensions), cheap imports (in the cement, cabling and materials sector due to the lack of price competition) and drought impacting the agriculture sector (half of the Kenyan population works in agriculture; the poor rainfall will impact food prices and security).

People are not necessarily keen on traditional banking. They want things that are more easy, convenient, and easily accessible.

Countries in the region are integrated due to trade agreements, with the resulting tax benefits making it easier for capital to flow across borders. There are opportunities in the banking sector, and cement companies are also well positioned for distribution. Rural areas are being urbanised as a result of technology. There is consumer growth and increasing efficiency in markets.

King notes four major trends in the region:

1. Financial inclusion (using technology to formalise banking)

Banks are using technology to draw people into the formal banking sector, which has scope for expansion. Mobile phone network operators like Safaricom have developed mobile money.

Economies are still cash driven. “M-Pesa is three times the volume of [customers that] credit and debit cards [have] in Kenya. It is much better known and used than traditional banking methods,” says King. “People are not necessarily keen on traditional banking. They want things that are more easy, convenient, and easily accessible.”

Safaricom conducts various transactions and collects data on people’s mobile money histories. In this way, mobile money service providers can keep track of customers that the traditional banking sector does not have access to.

However, there are security issues when it comes to mobile banking. A small film can be placed on top of a Safaricom SIM card, creating a double SIM for a phone. This allows consumers to use the airtime rates of a cheaper competitor. Such dual SIMs compromise the security measured put in place by Safaricom and information of transactions can be copied onto the film or second SIM. Safaricom is raising the matter in court.

2. Power – problems differ across the region.

Power is an issue for developing markets but countries have developed unique solutions.

In Kenya, different independent producers rely on renewable energy sources like hydro, wind and steam, says King. Geothermal energy projects in Kenya are proving successful. “It’s one of the few countries in the world that geothermal works and works in bulk,” says King. The Kenyan government’s goal is to increase power generation from 1500MW to 5 000MW by 2017. Despite the country’s abundant power-generation capacity, King says distribution is a problem as there aren’t massive industries like mining to consume power.

In Uganda there is a “greater distribution network” to businesses, but there is no power. The Ugandan government is looking to renewable energy sources like hydro and gas, but at the moment there is no “cohesive solution”. Uganda does not have geothermal energy. There is a low electrification rate, where less than 20% of the population have access to electricity. Household electrification is at 14%, but growing. Distribution points need to be built out to rural areas to urbanise them.

Tanzania has both distribution and generation problems. “It’s all a bit of a mess,” says King. Most businesses have to generate their own electricity because the national grid is unreliable. The country is looking to import gas from the south.

3. Technology is pervasive.

Technology impacts various sectors beyond just banking. There are improvements to the technical capabilities and efficiencies of corporates, businesses, retailers, and logistics companies. For example, Safaricom doesn’t have a mobile banking licence and can’t give loans, insurance policies and other traditional financial services. By partnering with banks like KCB in Kenya, mobile companies can provide different financial products.

4. Traffic – congestion is a constraint in big cities.

“Congestion in Dar es Salaam and Nairobi is on another level,” says King. This is a big constraint as most business activity takes place in those hubs. Poor infrastructure is one of the reasons behind the heavy traffic flow, she says.

Byron Green, managing director at Caveo, says traffic isn’t always a bad thing and indicates there is growth. “It would be much worse to have no cars visible on the road because that means there’s no economic activity,” he explains.

King says currently there’s a lack of alternative transport. For example, the train network is poor. In Kenya, the government has decentralised responsibilities to local councils, so infrastructure development will gain prominence across the country, reaching rural areas faster than in the past.

This article was featured in Finweek magazine.

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