Commentary: Business opportunities and risks in East Africa June 2021

EAA CEO Toby Latta talks to Tara O'Connor of Africa Risk Consulting about opportunities and risks in the region


Toby Latta, CEO of the EAA, in conversation with Tara O’Connor of Africa Risk Consulting

Toby: Tara, great to be speaking with you. I know we are keen to discuss opportunities in the region today, with plenty going on. However, let’s deal with the elephant in the room first, Covid-19. It has been a turbulent time since the first African Covid cases appeared in Egypt in February last year, with massive downside risks and suppression of growth. What are you saying about how the pandemic continues to impact the region?

Tara: That’s right – while the death rates have remained comparatively low in the region compared to others globally, many countries continue to grapple with the economic and socio-impact of the pandemic. Governments are faced with the now familiar task of balancing restrictions with the risk of new variants. The economic toll has been felt greatly, with public debt soaring, many countries have had to approach creditors to negotiate possible suspension of loan repayments amid a growing default risk.

Kenya exemplifies these difficulties, where the pandemic has exacerbated an already perilous Outlook. Even before Covid-19 the economy was careening towards an inevitable crisis. To stabilize the economy from the impact of Covid-19, the International Monetary Fund (IMF) approved a $2.34 billion three-year financing package to Kenya in April. This is one in a series of large loans the government has taken on during the crisis.

Toby: Despite setbacks, the IMF has forecast growth of 7.6% for Kenya in 2021, which presumably is good news for business?

Tara: I am always wary about attaching too much weight to these macro forecasts. These growth projections are often a far cry from current reality for many Kenyans. There is considerable evidence painting a bleaker picture of the country’s current economic Outlook, with one influential report finding three quarters of people have faced challenges in affording basic needs during the pandemic. This bleak micro-Outlook is likely to have a prevailing impact on the business operating environment over the coming months.

Toby: What factors are further hampering economic recovery?

Tara: I think that there is little doubt that recovery has and could continue to be hampered by the vaccine rollout – both vaccine hesitancy and availability of supply. As many as 44.7% of Kenyans do not want to be vaccinated, according to one survey, although other countries like Ethiopia are more positive. And as we’ve seen low supply levels are currently undermining the momentum of mass vaccination campaigns across the region. If East Africa lags behind with vaccine distribution, many countries in the region that are already on the red lists of countries such as the UK, will remain there. This will have significant detrimental impacts on trade and tourism.

Toby: The pandemic has a lot of dark sides. On the flip side we have seen much innovation and opportunity around the region. For example, I recently read about a Kenyan business Solar Freeze, which pioneered the use of solar-powered chest freezers to help farmers cut post-harvest waste, and re-purposed units to store Covid-19 vaccines.

Tara: Yes, there are so many examples of health-care innovation and ingenuity which were used to put the brakes on the pandemic – some launched from accelerator programmes in the region. Another one that has caught my attention is CheckUPs Medical Centre – which offers remote diagnostic pharmacy services. They partnered with motorcycle riders in Nairobi to deliver pharmaceuticals and telemedicine services to patients in their homes. As a direct result of the pandemic, it is worth highlighting that capital for health tech start-ups in Africa has increased by 257.5% from 2019 to 2020, meaning the sector could be on course to overtake fintech in terms of funding. For a long time, the need to close Africa’s healthcare funding gap has been promulgated, and Covid-19 has presented a catalyst to do just this.

It’s also not just the health-tech sector that’s booming. The pandemic has accelerated digital transformation across multiple sectors, with big strides in automation and disruptive technology. E-commerce is one to watch. There is also a lot of movement in the agri-tech sector. We interviewed Kenya-based Twiga foods CEO Peter Njonjo late last year for our podcast. Their technology allows small, hole-in-the-wall retailers to buy fresh produce directly from farmers and get it in 24 hours, cutting out layers of middlemen and perishing delays and using the latest digital technology to force prices down.

Toby: A big regional risk is instability in Ethiopia. Is there a scenario whereby Tigray dies down and the country holds together? Or is the Outlook bleaker?

Tara: It is by no means clear at the moment. The upcoming election is buffeted by a myriad of crises, both domestic and abroad. Although the conflict is unlikely to severely destabilise the government, it will result in persistent political uncertainty. I think it is clear to say that the conflict has caused a sharp deterioration in the operating environment and the country has seen its investment lustre dimmed. This is disappointing for a country that has become known for building investor confidence.

Will it deter investors completely? No. Nor do I see it impacting Abiy’s liberalisation reforms. Indeed, the expansion and liberalisation of Ethiopia’s banking sector is now happening. Four new banks (Amhara Bank, Tsehay Bank, Goh Bank and Ahadu Bank) have entered the final stage of licensing under the National Bank of Ethiopia (NBE) having met most of the conditions set by NBE to receive a banking licence. Although relatively small scale so far, the expansion of the sector will drive competition and develop banking services available across Ethiopia.

Mobile money services are also poised to transform Ethiopia’s banking sector. State-owned telecoms company Ethio Telecom, which has some 50 million users, launched its plan on 11th May to provide mobile money services to Ethiopians through TeleBirr. The country has also successfully introduced 4G services in the south-west of Ethiopia, showing the Government’s continued commitment to privatisation and an overall positive trajectory from an economic perspective. Therefore, in spite of losing some lustre, I think Ethiopia remains a favourable and unexplored opportunity in the region – particularly for those willing to arm themselves to manage risks.

Toby: Where else are you seeing growing political risk in the region, and how does that sit alongside more positive economic developments?

Tara: I’d focus on two countries. In Uganda, the worrying tactics used by the regime throughout the recent electoral process has led to a considerable cooling of relations between Uganda and its Western allies, with the US imposing a variety of visa and travel restrictions. The EU may follow suit. If relations continue to deteriorate and wider sanctions are imposed, this could begin to stimy investment. But for now it makes little difference to businesses which are seeing “more of the same”.

And in Kenya, the High Court’s blocking of the Building bridges Initiative (BBI) does also raise the stakes, although the Government is now officially challenging the ruling. With elections being held next year, political risk factors will be brought to the fore again and businesses will need to begin to step up monitoring of political developments.

But alongside that there is a lot of positive progress in Kenya and neighbouring countries currently. Notably, Lamu Port opened in Kenya last month where it received its first ship! The port will be supplementary to Mombasa and a competitor to other ports in the region such as those in Sudan, Djibouti and South Africa – it’s a promising phase in Kenya’s plan to become the main shipping hub of East Africa. Kenya also continues to digitise core Government services – including an online system for tax filing and online platforms for registering businesses.

In Tanzania, President Samia Suluhu Hassan has made numerous bold commitments during her first month in power, deviating significantly from her predecessor’s policies. Seeking to make Tanzania a more attractive investment destination, the President reiterated her commitment to developing an effective one-stop shop for investors, which the Tanzania Investment Centre (TIC) is mandated – but has so far failed – to do, simplify the work and residence permit process and to create a predictable tax policy. Suluhu intends to continue Magufuli’s mega-projects, including the standard gauge railway, the Julius Nyerere Hydropower Project and construction of the new airport in Msalato, just outside of the capital, Dodoma. While it is too soon to provide detailed analysis of how Suluhu plans to lead her government and what this may mean for investors in the long term, she has made a number of cabinet reshuffles which analysts are viewing positively.

Toby: Where else do you see the most significant economic developments?

Tara: Renewables is a sector we are seeing some exciting movement in – unsurprising given East African countries have committed to 90% electrification by 2030. It is a very little-known fact that renewable energy already contributes up to 86 per cent of Kenya’s energy, nor is it known that Kenyan renewables expertise is now being exported to the region – notably KenGen’s entry into Ethiopia’s energy sector. Kenya really leads in this area. And its success is drawing in investment from elsewhere in the region. Now Nigerian solar company, Starsight Energy, is expanding into East Africa through an acquisition of 50% of Kenyan business Premier Solar Group, offering its services in Uganda in addition to Kenya. Importantly, Rwanda, Uganda, and Tanzania in particular have made reforms to promote renewables through exemptions from VAT and some import duties, which will continue to attract investment.

Toby: Meanwhile, which of the “old economy” sectors are digging in?

Tara: No pun intended… But there are positive developments for miners. In Tanzania, Suluhu has opened doors to the extractives sector – much maligned under Magufuli – indicating that the Government should step up partnership with mining companies. She noted the need to encourage growth in Tanzania’s nickel, helium and gold sectors. These announcements have stirred the sector’s optimism, seriously dented after Magufuli introduced an increase in royalties, a mandatory government free carried interest, and a ban on the export of mineral concentrate, the latter now overturned.

There has also been some positive movement among the junior exploration companies operating in Tanzania. Australia-based Walkabout Resources, which holds a mining licence for the Lindi Jumbo Graphite Project in southern Tanzania, announced on 13th April that it has secured $20m in debt financing from Tanzania’s CRDB Bank to cover 60% of the project development costs. More predictable and transparent policy may make it easier for exploration companies to raise funds and move into construction, but it will take at least a year to see if Suluhu’s recent overtures will result in increased financing to help diversity the sector.
Furthermore, On 29th April, Suluhu directed the government and oil companies to re-commence and finalise negotiations on the planned $30 billion liquefied natural (LNG) project in Lindi. The government may be hoping to capitalise on the suspension of Mozambique’s Cabo Delgado LNG project, 150km to the south, due to terror attacks. But the threat of instability in the area will make investors wary.

Momentum is also gaining in Kenya’s extractives sector, in both mining and oil and gas. Seen as less prospective than some of its neighbours, the country’s natural resources are seeing speculation of significant potential for gold, mineral sands, copper and coal. Australia-based ASX-listed Base Resources has been a significant miner of heavy mineral sands in Kwale since starting construction of its flagship project in 2011. The sector has faced challenges in recent years, with the mining ministry not having issued or renewed any new mining licences since 2015. The moratorium, introduced by then mining Cabinet Secretary Najib Balala was to stay in place until the government had completed a survey of Kenya’s mineral deposits, now due for completion in June, which could trigger renewed exploration.

Toby: Something that is on the tip of everyone’s tongue when discussing African business is AfCFTA – what progress has been made?

Tara: I remain extremely optimistic about the potential of AfCFTA to stimulate business and also lift millions of people out of poverty. However, the successful implementation of this trade agreement is going to be a long and uphill path – exchange rate misalignment and infrastructural challenges are processes that will take time to overcome. So far, only 31 out of 55 African countries have ratified and few have the procedures required by the treaty in place. However, it’s important to remember that barriers have already been removed – we saw the iconic first shipment of goods under AfCFTA in March by Ethiopian Airlines, DHL and the African Electronic Trade Group. Given the scope and size of the agreement, potential development impacts are likely to be felt almost immediately.

Toby: Which two countries and two sectors are your top picks for investors?

Tara: There have been times I might not have been able to answer that question so straightforwardly! But an easy pick for me – Kenya and Tanzania for countries, and the tech and renewables sectors.

Toby: Conversely, if you get out your crystal ball, where do you fear it’s going to go terribly wrong leaving investors in the lurch?

Tara: While Ethiopia has got problems – the conflict in Tigray and bubbling conflicts in other states – we don’t think it’s going to disintegrate. We believe that East Africa as a whole is a motor for economic growth.